**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 
 **Form
10 - Q**
 
 **(X)**
    **Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**
      **For
      the quarterly period ended March 31, 2005****or****(
      )**
    **Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934****For
      the transition period from ______________________ to
      ______________________**
 
 
 **Commission
File Number 000-18166**
 
 
 
 **STATE
FINANCIAL SERVICES CORPORATION**
 **(Exact
name of registrant as specified in its charter)**
 
 
 **WISCONSIN**
      (State
      or other jurisdiction of
      incorporation
      or organization)
    **39-1489983**
      (I.R.S.
      Employer identification No.)
 
 
 **815
NORTH WATER STREET, MILWAUKEE, WISCONSIN 53202-3526**
 (Address
and Zip Code of principal executive offices)
 
 
 
 **(414)
223-8400**
 (Registrant's
telephone number, including area code)
 
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X]
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined by Rule
12b-2 of the Exchange Act).
 Yes [X]
No [ ]
 
 As of
May 10 ,
2005 , there were 6,945,472 shares
of Registrant's $0.10 Par Value Common Stock outstanding.
  
  
 **FORM
      10-Q****STATE
      FINANCIAL SERVICES CORPORATION****INDEX****PART
      I - FINANCIAL INFORMATION**Page
      No.Item
      1.
    Financial
      Statements. (Unaudited)Consolidated
      Statements of Financial Condition as of
      March
      31, 2005 (unaudited) and December 31, 2004 (audited)
    3Consolidated
      Statements of Income for the
      Three
      Months ended March 31, 2005 and March 31, 2004
    4Consolidated
      Statements of Cash Flows for the
      Three
      Months ended March 31, 2005 and March 31, 2004
    5Notes
      to Consolidated Financial Statements
    6Item
      2.
    Management’s
      Discussion and Analysis of
      Financial
      Condition and Results of Operations.
    9Item
      3.
    Quantitative
      and Qualitative Disclosures****About
      Market Risk.
    15Item
      4.
    Controls
      and Procedures.
    16**PART
      II - OTHER INFORMATION**Item
      1.
    Legal
      Proceedings.
    17Item
      2.
    Unregistered
      Sales of Equity Securities and Use of Proceeds.
    17Item
      3.
    Default
      Upon Senior Securities.
    17Item
      4.
    Submission
      of Matters to a Vote of Security Holders.
    17Item
      5.
    Other
      Information.
    17Item
      6.
    Exhibits.
    17Signatures
    
    18Exhibit
      Index
    
    19
  
  **Part
I.**  **Financial
Information**
 **Item
1.**  **Financial
Statements.**
 
 **State
Financial Services Corporation And Subsidiaries**
 **Consolidated
Statements of Financial Condition**
 **March
      31,**
      **2005**
      **(unaudited)**
    
    **December
      31, 2004**
      **(audited)****Assets**Cash
      and due from banks
    
    $
    38,208,078
    
    $
    34,864,395Interest-bearing
      bank balances
    
    
    4,318,078
    
    
    5,170,383Federal
      funds sold
    
    
    3,266,013
    
    
    14,968,937Cash
      and cash equivalents
    
    
    45,792,169
    
    
    55,003,715Investment
      securities:Available-for-sale
      (at fair value)
    
    
    363,091,235
    
    
    387,077,866Held-to-maturity
      (fair value of $279,075-2005
      and $279,511-2004)
    
    
    274,915
    
    
    274,947Loans
      and leases (net of allowance for loan and lease losses of $13,293,916-2005
      and $12,347,154-2004)
    
    
    983,592,923
    
    
    922,668,520Loans
      held for sale
    
    
    3,508,915
    
    
    3,129,775Premises
      and equipment
    
    
    32,975,236
    
    
    32,941,598Accrued
      interest receivable
    
    
    5,755,389
    
    
    5,690,553Goodwill
    
    
    36,815,156
    
    
    35,354,252Core
      deposit intangible
    
    
    4,513,744
    
    
    4,642,708Bank
      owned life insurance
    
    
    22,152,386
    
    
    21,920,248Other
      assets
    
    
    8,332,086
    
    
    7,178,719**Total
      Assets**
    
    $
    1,506,804,154
    
    $
    1,475,882,901**Liabilities
      and Shareholders’ Equity**Deposits
    
    
    1,086,960,675
    
    
    1,083,866,755Securities
      sold under agreement to repurchase
    
    
    140,363,795
    
    
    143,723,944Federal
      Home Loan Bank advances
    
    
    67,300,000
    
    
    67,300,000Note
      payable
    
    
    41,590,000
    
    
    15,790,000Subordinated
      debt
    
    
    14,000,000
    
    
    14,000,000Junior
      subordinated debentures owed to unconsolidated subsidiary
      trust
    
    
    30,000,000
    
    
    30,000,000Accrued
      expenses and other liabilities
    
    
    8,086,171
    
    
    4,137,478Accrued
      interest payable
    
    
    2,872,557
    
    
    2,182,398**Total
      Liabilities**
    
    
    1,391,173,198
    
    
    1,361,000,575Minority
      interest in consolidated subsidiary
    
    
    577,737
    
    
    -**Shareholders’
      Equity:**Preferred
      stock, $1 par value; authorized-100,000 shares; issued and
      outstanding-none
    
    
    -
    
    
    -Common
      stock, $.10 par value; authorized 25,000,000 shares; issued9,647,073shares in 2005 and 9,623,301 shares in 2004, outstanding6,924,233and6,900,461shares in 2005 and 2004
    
    
    964,707
    
    
    962,330Additional
      paid-in capital
    
    
    87,294,983
    
    
    86,885,929Retained
      earnings
    
    
    75,865,314
    
    
    73,313,612Accumulated
      other comprehensive (loss) income
    
    
    (1,737,292
    )
    
    1,054,948Unearned
      shares held by ESOP
    
    
    (3,981,303
    )
    
    (3,981,303
    )Treasurystock-2,722,840shares in 2005 and 2004
    
    
    (43,353,190
    )
    
    (43,353,190
    )**Total
      Shareholders’ Equity**
    
    
    115,053,219
    
    
    114,882,326**Total
      Liabilities and Shareholders’ Equity**
    
    $
    1,506,804,154
    
    $
    1,475,882,901
 
 See notes
to unaudited consolidated financial statements.
  
  **State
Financial Services Corporation And Subsidiaries**
 **Consolidated
Statements of Income (Unaudited)**
 
 **Three
      Months Ended March 31,****2005**
    
    **2004****Interest
      income:**Loans
      and leases
    
    $
    15,706,902
    
    $
    12,863,766Investment
      securities:Taxable
    
    
    3,543,599
    
    
    3,461,179Tax-exempt
    
    
    554,028
    
    
    544,337Federal
      funds sold and other short-term investments
    
    
    25,581
    
    
    48,145**Total
      interest income**
    
    
    19,830,110
    
    
    16,917,427**Interest
      expense:**Deposits
    
    
    3,823,757
    
    
    3,185,396Securities
      sold under agreements to repurchase
    
    
    844,662
    
    
    773,278Federal
      Home Loan Bank advances
    
    
    730,148
    
    
    789,391Other
      borrowings
    
    
    1,130,164
    
    
    540,979**Total
      interest expense**
    
    
    6,528,731
    
    
    5,289,044**Net
      interest income**
    
    
    13,301,379
    
    
    11,628,383Provision
      for loan and lease losses
    
    
    528,010
    
    
    600,000**Net
      interest income after provision for loan and lease
      losses**
    
    
    12,773,369
    
    
    11,028,383**Other
      income:**Service
      charges on deposit accounts
    
    
    766,477
    
    
    845,864ATM
      and merchant service fees
    
    
    260,972
    
    
    215,063Security
      commissions and management fees
    
    
    140,775
    
    
    173,139Investment
      securities gains, net
    
    
    146,236
    
    
    219,380Gain
      on sale of loans
    
    
    313,804
    
    
    412,586Bank
      owned life insurance income
    
    
    232,138
    
    
    214,750Other
    
    
    738,485
    
    
    699,011**Total
      other income**
    
    
    2,598,887
    
    
    2,779,793**Other
      expenses:**Salaries
      and employee benefits
    
    
    5,168,426
    
    
    4,366,611Net
      occupancy expense
    
    
    792,177
    
    
    807,932Equipment
      rentals, depreciation and maintenance
    
    
    971,235
    
    
    995,209Data
      processing
    
    
    608,811
    
    
    594,159Legal
      and professional
    
    
    372,787
    
    
    276,372Advertising
    
    
    235,740
    
    
    320,577Delivery
      and postage
    
    
    218,132
    
    
    276,702Telephone
    
    
    174,612
    
    
    174,344Other
    
    
    1,215,115
    
    
    1,219,465**Total
      other expenses**
    
    
    9,757,035
    
    
    9,031,371Minority
      interest in income of consolidated subsidiary
    
    
    50,025
    
    
    -**Income
      before income taxes**
    
    
    5,565,196
    
    
    4,776,805Income
      taxes
    
    
    1,881,059
    
    
    1,535,051**Net
      income**
    
    $
    3,684,137
    
    $
    3,241,754**Basic
      earnings per common share**
    
    $
    0.55
    
    $
    0.48**Diluted
      earnings per common share**
    
    
    0.54
    
    
    0.47**Dividends
      per common share**
    
    
    0.17
    
    
    0.15
 
 See notes
to unaudited consolidated financial statements.
  
  **State
Financial Services Corporation And Subsidiaries**
 **Consolidated
Statements of Cash Flows (Unaudited)**
 **Three
      Months Ended**
      **March
      31,****2005**
    
    **2004****Operating
      Activities**Net
      income
    
    $
    3,684,137
    
    $
    3,241,754Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Provision
      for loan and lease losses
    
    
    528,010
    
    
    600,000Depreciation
    
    
    701,579
    
    
    737,000Amortization
      of premiums and accretion of discounts on investment
      securities
    
    
    195,228
    
    
    138,255Amortization
      of deferred loan fees
    
    
    (294,723
    )
    
    (118,738
    )Income
      from bank owned life insurance
    
    
    (232,138
    )
    
    (214,750
    )Net
      change in loans held for sale
    
    
    (379,140
    )
    
    (18,351,788
    )Increase
      in accrued interest receivable
    
    
    (64,836
    )
    
    (339,738
    )Increase
      in accrued interest payable
    
    
    651,404
    
    
    356,884Realized
      investment securities gains
    
    
    (146,236
    )
    
    (219,380
    )Payment
      to Lakes Region Bancorp’s shareholders for acquisition
    
    
    -
    
    
    (13,416,729
    )Other
    
    
    1,990,061
    
    
    (1,068,110
    )Net
      cash provided by (used in) operating activities
    
    
    6,633,346
    
    
    (28,655,340
    )**Investing
      Activities**Proceeds
      from maturities or principal payments of investment securities
      held-to-maturity
    
    
    -
    
    
    195,000Purchases
      of investment securities available-for-sale
    
    
    (30,628,300
    )
    
    (106,977,310
    )Proceeds
      from maturities and sales of investment securities
      available-for-sale
    
    
    49,779,381
    
    
    80,919,577Net
      increase in loans and leases
    
    
    (34,360,530
    )
    
    (6,710,242
    )Business
      acquisitions, net of cash acquired of $483,000 in 2005
    
    
    (3,088,680
    )
    
    -Net
      purchases of premises and equipment
    
    
    (675,018
    )
    
    (836,679
    )Net
      cash used in investing activities
    
    
    (18,973,147
    )
    
    (33,409,654
    )**Financing
      Activities**Net
      increase in deposits
    
    
    3,093,920
    
    
    23,266,617Repayment
      of notes payable
    
    
    (21,734,537
    )
    
    (16,000,000
    )Proceeds
      of notes payable
    
    
    25,800,000
    
    
    17,200,000Proceeds
      from junior subordinated debentures owed to unconsolidated subsidiary
      trust
    
    
    -
    
    
    14,700,000(Decrease)
      increase in securities sold under agreements to repurchase
    
    
    (3,360,149
    )
    
    23,131,579Minority
      interest in income of consolidated subsidiary
    
    
    50,025
    
    
    -Cash
      dividends
    
    
    (1,132,435
    )
    
    (998,331
    )Purchase
      of treasury stock
    
    
    -
    
    
    (4,158,350
    )Proceeds
      from exercise of stock options
    
    
    411,431
    
    
    517,884Net
      cash provided by financing activities
    
    
    3,128,255
    
    
    57,659,399Decrease
      in cash and cash equivalents
    
    
    (9,211,546
    )
    
    (4,405,595
    )Cash
      and cash equivalents at beginning of period
    
    
    55,003,715
    
    
    78,368,126Cash
      and cash equivalents at end of period
    
    $
    45,792,169
    
    $
    73,962,531Supplemental
      information:Interest
      paid
    
    $
    5,839,000
    
    $
    4,932,000Income
      taxes paid
    
    
    510,000
    
    
    575,000
 
 See notes
to unaudited consolidated financial statements.
  
  **State
Financial Services Corporation And Subsidiaries**
 **Notes
to Unaudited Consolidated Financial Statements**
 **March
31, 2005**
 
 **NOTE
A - BASIS OF PRESENTATION**
 
 The
accompanying unaudited consolidated financial statements include the accounts of
State Financial Services Corporation (the “Company” or “State”) and its
subsidiaries. The Company owns State Financial Bank, National Association (the
“Bank”) and 80 percent of the equity interests of m2 Lease Funds LLC (“M2”). All
significant intercompany balances and transactions have been eliminated. The
unaudited consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles (“GAAP”) for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP for
complete financial statements have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Interim operating results are not necessarily indicative of the
results that may be expected for the year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2004.
 
 **NOTE
B - ACCOUNTING CHANGES**
 
 On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 123 (revised 2004), *Share-Based
Payment* (“123(R)”), which is a revision of FASB Statement No. 123, *Accounting
for Stock-Based Compensation* (“Statement
123”). 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
amends FASB Statement No. 95, *Statement
of Cash Flows* .
Generally, the approach in 123(R) is similar to the approach described in
Statement 123. However, 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. 123(R) is effective for annual reporting
periods beginning after December 15, 2005. The Company expects to adopt 123(R)
beginning on January 1, 2006.
 
 123(R)
permits public companies to adopt its requirements using one of two methods: a
“modified prospective” method, which compensation cost is recognized beginning
with the effective date based on the requirements of 123(R) for all share-based
payments granted after the effective date and all awards granted to employees
prior to the effective date of 123(R) that remain unvested on the effective
date, or a “modified retrospective” method, which includes the requirements of
the modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b)
prior interim periods of the year of adoption. The Company plans to adopt 123(R)
using the modified-prospective method.
 
 As
permitted by Statement 123, the Company currently accounts for share-based
payments to employees using the intrinsic value method of APB Opinion 25 and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of 123(R)’s fair value method will have a significant
impact on the Company’s results of operations, although it will have no impact
on the Company’s overall financial position. The impact of adoption of Statement
123(R) cannot be predicted at this time because it depends on the levels of
share-based awards granted in the future. However, had the Company adopted
Statement 123(R) in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of pro
forma net income and earnings per share in Note E to the consolidated financial
statements.
 
  
  In March
2004, the FASB ratified the consensus reached by the Emerging Issues Task Force
in Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides guidance
for determining when an investment is considered impaired, whether that
impairment is other-than-temporary, and measurement of an impairment loss. An
investment is considered impaired if the fair value of the investment is less
than its cost. Generally, an impairment is considered other-than-temporary
unless: (a) the investor has the ability and intent to hold an investment for a
reasonable period of time sufficient for a forecasted recovery of fair value up
to (or beyond) the cost of the investment; and (b) evidence indicating that the
cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If impairment is determined to be
other-than-temporary, then an impairment loss is recognized equal to the
difference between the investment’s cost and its fair value. The guidance also
includes accounting considerations subsequent to recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments.
 
 With the
release of EITF 03-1-1 on September 30, 2004, the FASB staff delayed the
effective date of the other-than-temporary impairment evaluation guidance of
EITF 03-1 (which was initially to be applied prospectively to all current and
future investments in interim and annual reporting periods beginning after June
15, 2004). EITF 03-1-1 delays the effective date of the measurement and
recognition guidance until certain implementation issues are addressed and a
final FASB Staff Position providing implementation guidance is issued. The
disclosure requirements of the EITF 03-1 remain in effect. The amount of any
other-than-temporary impairment that may need to be recognized in the future
will be dependent on market conditions, the occurrence of certain events or
changes in circumstances relative to an investee, and the Company’s intent and
ability to hold the impaired investments at the time of the
valuation.
 
 **NOTE
C - EARNINGS PER SHARE**
 
 Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding during the period less unearned ESOP shares.
Diluted earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period less
unallocated ESOP shares plus the assumed conversion of all potentially dilutive
securities. The denominators for the earnings per share amounts are as
follows:
 
 **Three
      months ended****March
      31,**
      **2005**
    
    **March
      31,**
      **2004****Basic:**Weighted-average
      number of shares outstanding
    
    
    6,913,160
    
    
    7,027,777Less:
      weighted-average number of unearned ESOP shares
    
    
    (262,516
    )
    
    (294,475
    )Denominator
      for basic earnings per share
    
    
    6,650,644
    
    
    6,733,302**Fully
      diluted:**Denominator
      for basic earnings per share
    
    
    6,650,644
    
    
    6,733,302Add:
      assumed conversion of stock options using treasury stock
      method
    
    
    172,749
    
    
    199,995Denominator
      for fully diluted earnings per share
    
    
    6,823,393
    
    
    6,933,297
 
  
  **NOTE
D - COMPREHENSIVE INCOME**
 
 Comprehensive
income is the total of reported net income and all other revenues, expenses,
gains and losses that under GAAP are not included in reported net income but are
instead reflected directly in shareholders’ equity.
 
 **Three
      months ended****March
      31,**
      **2005**
    
    **March
      31,**
      **2004**Net
      income
    
    $3,684,137
    
    $3,241,754Other
      comprehensive income:Change
      in unrealized securities gains (losses), net of tax
    
    
    (2,818,544
    )
    
    824,817Fair
      market value adjustment on cash flow hedge, net of tax
    
    
    114,367
    
    
    -Reclassification
      adjustment for realized gains (losses) included in net income, net of
      tax
    
    
    (88,063
    )
    
    (133,361
    )Total
      comprehensive income
    
    $
    891,897
    
    $
    3,933,210
 
 **NOTE
E - STOCK-BASED COMPENSATION**
 
 The
Company follows APB Opinion No. 25 under which no compensation expense is
recorded when the exercise price of the Company’s employee stock options equals
the market price of the underlying stock on the date of grant. The Company’s pro
forma information regarding net income and net income per share has been
determined as if these options had been accounted for in accordance with the
fair value method of Statement 123.
 
 The
Black-Scholes option valuation model is commonly used in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Since the
Company’s employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimates, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
 In
determining compensation expense in accordance with Statement 123, the fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for the three months ended March 31, 2005 and March 31,
2004.
 
 **Three
      months ended March 31,****2005**
    
    **2004**Expected
      life of options
    
    
    6.28
      years
    
    
    6.45
      yearsRisk-free
      interest rate
    
    
    3.65
    %
    
    3.51
    %Expected
      dividend yield
    
    
    2.14
    %
    
    2.21
    %Expected
      volatility factor
    
    
    20.80
    %
    
    21.74
    %
 
  
  For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options’ vesting period, which is generally three
years. The Company’s pro forma information (including stock based compensation
expense) is as follows:
 
 **Three
      months ended March 31,***(Thousands,
      except per share data)*
    
    **2005**
    
    **2004**Net
      income, as reported
    
    $
    3,684
    
    $
    3,242Compensation
      expense, net of taxes, as reported
    
    
    3,421
    
    
    2,963Pro
      forma compensation expense in accordance with Statement 123, net of
      tax
    
    
    (3,555
    )
    
    (3,026
    )Pro
      forma net income
    
    $
    3,550
    
    $
    3,179Net
      income per common share, as reported:Basic
    
    $
    0.55
    
    $
    0.48Diluted
    
    $
    0.54
    
    $
    0.47Pro
      forma net income per common share:Basic
    
    $
    0.53
    
    $
    0.47Diluted
    
    $
    0.52
    
    $
    0.46
 
 **NOTE
F - ACQUISITIONS**
 
 On March
21, 2005, the Company entered into a definitive agreement to be acquired by
Associated Banc-Corp (“Associated”), headquartered in Green Bay, Wisconsin. The
stock merger transaction is valued at $278 million based on the closing share
price of Associated’s common stock on March 18, 2005. According to the terms of
the agreement, the Corporation will merge into Associated, with the
Corporation’s shareholders exchanging each share of their State common stock for
1.20 shares of Associated common stock.
 
 The
acquisition is expected to close during the third or fourth quarter of 2005,
subject to approval by State’s shareholders, regulatory approvals, and various
other conditions to closing.
 
 On
January 13, 2005, the Company acquired an 80% interest in m2 Lease Funds, LLC
(“M2”) for $3.6 million in cash resulting in approximately $1.5 million in
goodwill. M2 is engaged in the business of leasing, primarily machinery and
equipment, to commercial and industrial businesses accounted for as direct
financing lease contracts. Accordingly, M2’s operating results are included in
the Company’s consolidated statement of income from January 13, 2005 through
March 31, 2005. M2’s financial condition is included in the Company’s
consolidated statement of financial condition as of March 31, 2005.
 
 **Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.**
 
 **Application
of Critical Accounting Policies**
 
 The
Company’s consolidated financial statements are prepared in accordance with
United States GAAP and follow general practices within the banking industry.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the consolidated
financial statements and accompanying notes. These estimates, assumptions, and
judgments are based on information available as of the date of the financial
statements. Future changes in information may affect these estimates,
assumptions, and judgments, which, in turn, may affect amounts reported in the
consolidated financial statements.
 
 All
significant accounting policies are presented in Note 1 to the consolidated
financial statements in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2004. These policies, along with the disclosures presented in
the other financial statement notes and in this discussion, provide information
on how significant assets and liabilities are valued in the consolidated
financial statements and how those values are determined.
  
  Management
has determined that its accounting policies with respect to the allowance for
loan and lease losses (“allowance”) is the accounting area requiring subjective
or complex judgments relating to the Company’s financial position and results of
operations, and therefore, is its most important critical accounting policy. The
allowance represents management’s estimate of probable credit losses inherent in
the loan and lease portfolio. Determining the amount of the allowance is
considered  a
critical accounting estimate because it requires significant judgment and the
use of estimates related to the amount and timing of expected future cash flows
on impaired loans and leases, estimated losses on pools of homogeneous loans
based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan and lease portfolio also represents the largest asset type on the
consolidated statement of condition. Note 1 to the consolidated financial
statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004 describes the methodology used to determine the allowance. In
addition, a discussion of the factors driving changes in the amount of the
allowance is included in the Provision for Loan Losses ad Risk Elements in the
Loan Portfolio sections of management’s discussion.
 
 **Changes
in Financial Condition**
 
 At March
31, 2005 and December 31, 2004, the Company’s total assets were $1.5 billion.
During the first quarter of 2005, significant uses of funds by the Company
consisted of a $34.4 million increase in loans and leases receivable, a $3.4
million decrease in securities sold under agreement to repurchase, $3.1 million
in business acquisitions, and a $1.1 million payment for cash dividends.
Significant funding sources for the first quarter of 2005 came from a $19.2
million net decrease in investment securities, $6.6 million in cash from
operating activities, a $4.1 million net increase in notes payable, and a $3.1
million increase in deposits.
 
 **Asset
Quality**
 
 At March
31, 2005, the Company’s non-performing assets were $9.0 million, an increase of
$1.3 million from December 31, 2004 due to an increase of $0.8 million in
non-accrual loans and leases and a $0.5 million increase in other real estate
owned. Total non-performing assets as a percentage of total assets were 0.59% at
March 31, 2005 and 0.52% at December 31, 2004. As a percentage of total loans
and leases outstanding, the level of non-performing loans and leases was 0.76%
at March 31, 2005 compared to 0.72% at December 31, 2004. This percentage
increase was primarily due to the increase in non-performing loans and
leases.
 
 When, in
the opinion of management, serious doubt exists as to the collectibility of a
loan or lease, it is placed on non-accrual status. In all cases, however, when a
loan or lease reaches 90 days delinquent on the payment of principal or
interest, it is placed on non-accrual status. At the time a loan or lease is
classified as non-accrual, interest credited to income in the current year is
reversed and interest income accrued in the prior year is charged to the
allowance. The following table summarizes non-performing assets on the dates
indicated (dollars in thousands).
 
 **Mar.
      31**
      **2005**
    
    **Dec.
      31**
      **2004**
    
    **Sep.
      30**
      **2004**
    
    **Jun.
      30**
      **2004**
    
    **Mar.
      31**
      **2004**Non-accrual
      loans and leases
    
    $
    7,582
    
    $
    6,767
    
    $
    7,830
    
    $
    8,729
    
    $
    9,429Accruing
      loans and leases past due 90 days or more
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Restructured
      loans and leases
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      non-performing and restructured loans and leases
    
    
    7,582
    
    
    6,767
    
    
    7,830
    
    
    8,729
    
    
    9,429Other
      real estate owned
    
    
    1,377
    
    
    872
    
    
    852
    
    
    988
    
    
    5,742Total
      non-performing assets
    
    $
    8,959
    
    $
    7,639
    
    $
    8,682
    
    $
    9,717
    
    $
    15,171Ratios:Non-performing
      loans and leases to total loans and leases
    
    
    0.76
    %
    
    0.72
    %
    
    0.84
    %
    
    0.97
    %
    
    1.05
    %Allowance
      to total loans and leases
    
    
    1.33
    
    
    1.32
    
    
    1.32
    
    
    1.32
    
    
    1.24Allowance
      to non-performing loans and leases
    
    
    175.34
    
    
    182.46
    
    
    156.81
    
    
    135.22
    
    
    118.53Non-performing
      assets to total assets
    
    
    0.59
    
    
    0.52
    
    
    0.53
    
    
    0.61
    
    
    1.01
 
  
  **Allowance
for Loan and Lease Losses and Net Charge-offs**
 
 Management
maintains the allowance at a level considered adequate to provide for probable
loan and lease losses. The allowance is increased by provisions charged to
earnings and is reduced by charge-offs, net of recoveries. At March 31, 2005,
the allowance was $13.3 million, an increase of $0.9 million from December 31,
2004. The allowance was increased primarily due to the increased number of
commercial loans, which are generally higher risk, and the $0.4 million acquired
allowance of M2. As of March 31, 2005 and December 31, 2004, commercial and
commercial real estate loans made up 79% of the total loan and lease portfolio.
 
 As a
percentage of total loans and leases outstanding, the allowance was 1.33% at
March 31, 2005 compared to 1.32% at December 31, 2004. The determination of
allowance adequacy is based upon ongoing evaluations of the Company’s loan and
lease portfolio conducted by the Internal Loan Review function of its banking
subsidiary, State Financial Bank, N.A. (the “Bank”), and reviewed by the
Company’s management. These evaluations consider a variety of factors,
including, but not limited to, general economic conditions, loan and lease
portfolio size, type, and composition, previous loss experience, the borrowers’
financial condition, collateral adequacy, and the level of non-performing loans
and leases. Based upon its analyses, management considered the allowance
adequate to recognize the risk inherent in the loan and lease portfolio at March
31, 2005.
 
 The
following table sets forth an analysis of the allowance for the periods
indicated (dollars in thousands):
 
 **Three
      months**
      **ended**
      **March
      31, 2005**
    
    **Year
      ended**
      **Dec.
      31, 2004****Balance
      at beginning of period**
    
    $
    12,347
    
    $
    10,706**Charge-offs:**Commercial
    
    
    5
    
    
    813Real
      estate mortgage
    
    
    24
    
    
    113Consumer
    
    
    23
    
    
    289Leases
    
    
    -
    
    
    -Other
    
    
    10
    
    
    18**Total
      charge-offs**
    
    
    62
    
    
    1,233**Recoveries:**Commercial
    
    
    54
    
    
    408Real
      estate mortgage
    
    
    10
    
    
    29Consumer
    
    
    2
    
    
    51Leases
    
    
    33
    
    
    -Other
    
    
    2
    
    
    5**Total
      recoveries**
    
    
    101
    
    
    493**Net
      charge-offs**
    
    
    (39
    )
    
    740Balance
      of acquired allowance at date of acquisition
    
    
    380
    
    
    -Additions
      charged to operations
    
    
    528
    
    
    2,381**Balance
      at end of period**
    
    $
    13,294
    
    $
    12,347**Ratios:**Net
      charge-offs (recoveries) to average loans and leases
      outstanding1
    
    
    (0.02
    )%
    
    0.08
    %Net
      charge-offs (recoveries) to total allowance1
    
    
    (1.17
    )
    
    5.99Allowance
      to period end loans and leases outstanding
    
    
    1.33
    
    
    1.32
 1.Annualized.
  
  **Results
of Operations-Comparison of the Three-Month Periods Ended March 31, 2005 and
March 31, 2004.**
 
 **General**
 
 For the
quarter ended March 31, 2005, the Company reported net income of $3.7 million
and net income per share on a fully diluted basis of $0.54, compared to net
income of $3.2 million and net income per share on a fully diluted basis of
$0.47 reported for the quarter ended March 31, 2004.
 
 **Net
Interest Income**
 
 The
following table sets forth average balances, related interest income and
expenses, and effective interest yields and rates for the three-month periods
ended March 31, 2005 and March 31, 2004 (dollars in thousands):
 
 **Three
      months ended**
      **March
      31, 2005**
    
    **Three
      months ended**
      **March
      31, 2004****Average
      Balance**
    
    **Interest**
    
    **Yield/**
      **Rate****4**
    
    **Average
      Balance**
    
    **Interest**
    
    **Yield/**
      **Rate****4****Assets**Interest-earning
      assets:Loans
      and leases123
    
    $
    987,853
    
    $
    15,712
    
    
    6.45
    %
    $
    885,740
    
    $
    12,873
    
    
    5.85
    %Taxable
      investment securities
    
    
    318,795
    
    
    3,516
    
    
    4.47
    %
    
    341,282
    
    
    3,432
    
    
    4.04
    %Tax-exempt
      investment securities3
    
    
    57,036
    
    
    852
    
    
    6.06
    %
    
    57,469
    
    
    837
    
    
    5.86
    %Interest-earnings
      deposits
    
    
    4,871
    
    
    28
    
    
    2.31
    %
    
    9,977
    
    
    29
    
    
    1.18
    %Federal
      funds sold
    
    
    4,438
    
    
    26
    
    
    2.34
    %
    
    19,554
    
    
    48
    
    
    0.99
    %Total
      interest-earning assets
    
    
    1,372,993
    
    
    20,134
    
    
    5.95
    %
    
    1,314,022
    
    
    17,219
    
    
    5.27
    %Non-interest-earnings
      assets:Cash
      and due from banks
    
    
    38,585
    
    
    
    
    
    
    
    
    49,299Premises
      and equipment, net
    
    
    32,952
    
    
    
    
    
    
    
    
    32,930Other
      assets
    
    
    77,783
    
    
    
    
    
    
    
    
    79,461Less:
      Allowance for loan and lease losses
    
    
    (13,074
    )
    
    
    
    
    
    
    
    (10,917
    )**Total**
    
    $
    1,509,239
    
    
    
    
    
    
    
    $
    1,464,795**Liabilities
      And Stockholders’ Equity**Interest-bearing
      liabilities:Now
      accounts
    
    $
    117,433
    
    $
    89
    
    
    0.31
    %
    $
    120,192
    
    $
    78
    
    
    0.26
    %Money
      market accounts
    
    
    299,458
    
    
    1,080
    
    
    1.46
    %
    
    235,132
    
    
    602
    
    
    1.03
    %Savings
      deposits
    
    
    123,703
    
    
    121
    
    
    0.40
    %
    
    135,600
    
    
    134
    
    
    0.40
    %Time
      deposits
    
    
    374,310
    
    
    2,535
    
    
    2.75
    %
    
    366,473
    
    
    2,371
    
    
    2.60
    %Notes
      payable
    
    
    87,534
    
    
    1,061
    
    
    4.92
    %
    
    58,327
    
    
    530
    
    
    3.65
    %FHLB
      borrowings
    
    
    67,300
    
    
    730
    
    
    4.40
    %
    
    67,800
    
    
    789
    
    
    4.68
    %Federal
      funds purchased
    
    
    9,171
    
    
    68
    
    
    3.01
    %
    
    2,481
    
    
    12
    
    
    1.95
    %Securities
      sold under agreement to repurchase
    
    
    137,326
    
    
    845
    
    
    2.50
    %
    
    186,355
    
    
    773
    
    
    1.67
    %Total
      interest-bearing liabilities
    
    
    1,216,236
    
    
    6,529
    
    
    2.18
    %
    
    1,172,360
    
    
    5,289
    
    
    1.81
    %Non-interest-bearings
      liabilities:Demand
      deposits
    
    
    168,096
    
    
    
    
    
    
    
    
    168,469Other
    
    
    9,330
    
    
    
    
    
    
    
    
    10,157Total
      liabilities
    
    
    1,393,662
    
    
    
    
    
    
    
    
    1,350,986Minority
      interest in consolidated subsidiary
    
    
    539
    
    
    
    
    
    
    
    
    -Stockholders’
      equity
    
    
    115,038
    
    
    
    
    
    
    
    
    113,809**Total**
    
    $
    1,509,239
    
    
    
    
    
    
    
    $
    1,464,795Net
      interest earning and interest rate spread
    
    
    
    
    $
    13,605
    
    
    3.77
    %
    
    
    
    $
    11,930
    
    
    3.46
    %Net
      yield on interest-earning assets
    
    
    
    
    
    
    
    
    4.02
    %
    
    
    
    
    
    
    
    3.65
    %
 **Footnotes**
 1 . For the
purposes of these computations, non-accrual loans and leases are included in the
daily average loan and lease amounts outstanding.
 
 2 .
Interest earned on loans and leases includes loan and lease fees, which are not
material in amount.
 
 3 . In
accordance with the Sarbanes-Oxley Act of 2002 regarding the use of financial
measures and ratios not calculated in accordance with GAAP, a reconciliation
must be provided that shows these measures and ratios calculated according to
GAAP and a statement why management believes these measures and ratios provide a
more accurate view of performance.
  
  Certain
non-GAAP performance measures and ratios are used by management to evaluate and
measure the Company’s performance. These include taxable-equivalent net interest
income (including its individual components) and net interest margin (including
its individual components). Management believes that these measures and ratios
provide users of the Company’s financial information a more accurate view of the
performance of the interest-earning assets and interest-bearing liabilities for
comparative purposes. Other financial holding companies may define or calculate
these measures and ratios differently. See the table below for supplemental data
and the corresponding reconciliation to GAAP financial measures for the three
months ended March 31, 2005 and March 31, 2004.
 
 Management
reviews yields on certain asset categories and the net interest margin of the
Company, and its banking subsidiaries, on a fully taxable-equivalent basis
(“FTE”). In this non-GAAP presentation, net interest income is adjusted to
reflect tax-exempt interest income on an equivalent before-tax basis. This
measures comparability of net interest income arising from both taxable and
tax-exempt sources (dollars in thousands).
 
 Three
      months ended March 31,2005
    
    2004(A)
      Interest income (GAAP)
    
    $
    19,830
    
    $
    16,917Taxable
      equivalent adjustment-loans
    
    
    6
    
    
    9Taxable
      equivalent adjustment-Tax-exempt securities
    
    
    298
    
    
    293Interest
      income-FTE
    
    
    20,134
    
    
    17,219(B)
      Interest expense (GAAP)
    
    
    6,529
    
    
    5,289(C)
      Net interest income (GAAP) (A minus B)
    
    
    13,301
    
    
    11,628Net
      interest income-FTE
    
    
    13,605
    
    
    11,930(D)
      Net interest margin (GAAP)
    
    
    3.93
    %
    
    3.56
    %Net
      interest margin-FTE
    
    
    4.02
    %
    
    3.65
    %
 
 Taxable-equivalent
adjustments to interest income involve the conversion of tax-exempt sources of
interest income to the equivalent amounts of interest income that would be
necessary to derive the same net return if the investments had been subject to
income taxes. A 35% incremental income tax rate is used in the conversion of
tax-exempt interest income to a taxable-equivalent basis.
 
 4 .
Annualized.
 
 For the
quarter ended March 31, 2005, the Company reported taxable-equivalent net
interest income of $13.6 million, an increase of $1.7 million, or 14.0%, from
the $11.9 million reported for the quarter ended March 31, 2004. This increase
reflects the Company’s interest rate risk management policy, which is currently
positioned to benefit from rising interest rates. The taxable-equivalent yield
on interest-earning assets (net interest margin) increased to 4.02% in the first
quarter of 2005 from 3.65% in the first quarter of 2004.
 
 The
Company’s taxable-equivalent total interest income increased $2.9 million for
the quarter ended March 31, 2005 compared to the same period of 2004 due to the
increase in average loans and leases outstanding, enhanced by a higher interest
rate environment. Average loans and leases outstanding increased by $102.1
million, or 11.5%, in the first quarter of 2005 over the first quarter of 2004.
For the quarter ended March 31, 2005, the taxable-equivalent yield on
interest-earning assets was 5.95% compared to 5.27% for the quarter ended March
31, 2004. The first quarter 2005 loan and lease yield was 6.45% compared to
5.85% in the first quarter of 2004. The Company also experienced increases in
the yields earned on its investment securities as cash flows from maturities and
repayments were reinvested at higher interest rates. For the quarter ended March
31, 2005, the yield earned on taxable investment securities increased to 4.47%
from 4.04% for the quarter ended March 31, 2004. The taxable equivalent yields
earned on tax-exempt investment securities increased to 6.06% for the quarter
ended March 31, 2005 from 5.86% for the quarter ended March 31, 2004. The
increase in these yields for the first quarter of 2005 compared to the first
quarter of 2004 is the result of matured or repaid securities replaced by higher
yielding securities in an increasing interest rate environment.
  
  The
Company’s funding costs were also impacted by the higher interest rate
environment prevalent over the preceding twelve months. The cost of
interest-bearing liabilities increased to 2.18% for the first quarter of 2005
from 1.81% for the first quarter of 2004. The Company uses wholesale funding
sources, such as the Federal Home Loan Bank (“FHLB”), to balance the timing
differences between its various business funding sources and to support loan
origination. In the first quarter of 2005, notes payable, FHLB borrowings,
federal funds purchased, and securities sold under agreements to repurchase
comprised 24.8% of the Company’s interest-bearing liabilities compared to 26.9%
in the first quarter 2004 due to loan and lease growth exceeding deposit growth
in the period. Additionally, interest expense on other borrowings increased $0.6
million, or 108.9%, primarily due to the additional notes payable related to the
acquisition of M2.
 
 **Provision
for Loan and Lease Losses**
 
 The
provision for loan and lease losses was $0.5 million in the first quarter of
2005 and $0.6 million in the first quarter of 2004. The provision is adjusted to
reflect loan and lease growth and management’s assessment of asset quality and
risk inherent in the loan and lease portfolio. This growth has been primarily
concentrated in the commercial real estate loan category. These loans inherently
involve more risk than exists in the remaining loan and lease
portfolio.
 
 **Other
Income**
 
 Total
other income decreased $181,000, or 6.5%, in the first quarter of 2005 compared
to the first quarter of 2004. The decrease was primarily the result of decreases
in gains on sale of residential mortgage loans of $99,000, service charges on
deposits of $79,000, and investment securities gains of $73,000, offset by
increases in automated teller machine (“ATM”) and merchant service fees of
$46,000. Gains on sale of residential mortgage loans decreased due to a
reduction in mortgage origination volumes. Service charges on deposit accounts
decreased due to fewer fees on business accounts. ATM and merchant services
increased mainly due to increased transactional volumes.
 
 **Other
Expenses**
 
 Other
expenses increased $726,000, or 8.0%, in the first quarter of 2005 over the
first quarter of 2004. The increase was primarily due to increases in salaries
and employee benefits of $802,000 and legal and professional fees of $96,000,
offset by decreases in advertising of $85,000 and delivery and postage of
$56,000. Salaries and employee benefits increased due to higher salaries
resulting from annual merit increases, additional salaries from the acquisition
of M2, higher employee insurance costs and higher performance incentive
accruals. Legal and professional expense increased due to acquisition-related
expenditures and higher audit expenses. Advertising expenses decreased due to a
change in the long-term advertising strategy relating to the pending acquisition
by Associated. Delivery and postage decreased due to timing of the related
expenditures.
 
 **Income
Taxes**
 
 The
Company’s consolidated income tax rate varies from statutory rates principally
due to nondeductible goodwill, tax-exempt interest income on investment
securities, loans, and nondeductible merger related expenses. The effective tax
rate for the three months ended March 31, 2005 was 33.8% compared to 32.1% for
the three months ended March 31, 2004. Provisions for income tax were $1.9
million for the first quarter of 2005 compared to $1.5 million for the first
quarter of 2004.
 
 **Liquidity**
 
 The
primary functions of asset/liability management are to assure adequate liquidity
and to maintain an appropriate balance between interest-earning assets and
interest-bearing liabilities. Liquidity management involves the ability to meet
the cash flow requirements of depositors and borrowers. Liquid assets (including
cash deposits with banks, short-term investments, interest-earning deposits, and
federal funds sold) are maintained primarily to meet customers’ current needs.
The Company had liquid assets of $46.0 million and $55.0 million at March 31,
2005 and December 31, 2004, respectively.
 
  
  **Capital
Resources**
 
 There are
certain regulatory requirements that affect the Company’s level of capital. The
following table sets forth these requirements and the Company's capital levels
and ratios at March 31, 2005 (dollars in thousands):
 
 **Actual**
    
    **Regulatory**
      **Minimum**
      **Requirement**
    
    **Regulatory**
      **Well-capitalized**
      **Requirement****Amount**
    
    **Percent**
    
    **Amount**
    
    **Percent**
    
    **Amount**
    
    **Percent**Tier
      1 leverage
    
    $
    105,462
    
    
    7.2
    %
    $
    58,708
    
    
    4.0
    %
    $
    73,385
    
    
    5.0
    %Tier
      1 risk-based capital
    
    $
    105,462
    
    
    9.0
    %
    $
    46,785
    
    
    4.0
    %
    $
    70,177
    
    
    6.0
    %Risk-based
      capital
    
    $
    132,756
    
    
    11.4
    %
    $
    93,569
    
    
    8.0
    %
    $
    116,962
    
    
    10.0
    %
 
 The
Company is pursuing a policy of continued asset growth, which requires the
maintenance of appropriate ratios of capital to assets. The existing capital
levels allow for additional asset growth without further capital infusion. It is
the Company’s plan to maintain its capital position at or in excess of the
“well-capitalized” definition. The Company seeks to obtain additional capital
growth through earnings retention and a consistent dividend policy.
 
 **Derivative
Financial Instruments and Hedging Activities**
 
 Interest
rate risk, the exposure of the Company’s net interest income and net fair value
of its assets and liabilities, to adverse movements in interest rates, is a
significant market risk exposure that can have a material effect on the
Company’s financial position, results of operations and cash flows. The Company
has policies to ensure that neither earnings nor fair value at risk exceed
established guidelines and assesses these risks by continually identifying and
monitoring changes in interest rates that may adversely impact expected future
earnings and fair values.
 
 The
Company has designed strategies to confine these risks within the established
limits and identify appropriate risk/reward trade-offs in the financial
structure of its balance sheet. These strategies include the use of interest
rate swap agreements to manage fluctuations in cash flows or fair values
resulting from interest rate risk.
 
 The
Company designated the current interest rate swaps outstanding as fair value and
cash flow hedges that qualify for “short-cut” treatment.  Accordingly,
the Company does not anticipate ineffectiveness arising from differences between
the fair value of the hedged item and the fair value of the swap.
 
 The
following table summarizes the Company’s fair value and cash flow hedges at
March 31, 2005 (dollars in thousands):
 
 **Hedged
      Item**
    
    **Hedging
      Instrument**
    
    **Notional
      Amount**
    
    **Fair
      Value**
    
    **Remaining
      Term (Years)**Fixed
      Rate Loan
    
    
    Receive
      Variable Swap
    
    $
    3,780
    
    $
    77
    
    
    7.75Variable
      Rate Borrowing
    
    
    Pay
      Fixed Swap
    
    $
    15,000
    
    $
    191
    
    
    4.00
 
 **Item
3. Quantitative and Qualitative Disclosures About Market
Risk.**
 
 Refer to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2004
for a complete discussion of the Company’s market risk. There have been no
material changes to the market risk information included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2004.
 
  
  **Item
4. Controls and Procedures.**
 
 **Disclosure
Controls and Procedures**
 
 The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this report. Based
on such evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company’s
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
 
 **Internal
Controls Over Financial Reporting**
 
 There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
 
 **Forward
Looking Statements**
 
 Certain
matters discussed in this Report are “forward-looking statements” that are
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can be identified as such because the statements generally will
include words such as “believes,” “anticipates,” “expects,” or words of similar
meaning. Similarly, statements that describe future plans, objectives, outlooks,
targets or goals are also forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated as of the date of
this Report. Factors that could cause such a variance include, but are not
limited to, changes in interest rates, unanticipated issues negatively impacting
the ability of State and Associated to complete the proposed merger in a timely
manner, local market competition, customer loan and deposit preferences,
governmental regulations, and other general economic conditions. Shareholders,
potential investors, and other readers are urged to consider these factors in
evaluating the forward-looking statements and cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements
included in this Report are only made as of the date of this Report, and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
 
 Assumptions
regarding interest rate sensitivity of some deposits also require significant
judgment based on historical patterns relative to the industry and the Company’s
own experience. Actual sensitivity may vary from the assumptions made, and have
an impact on the Company’s net interest margin.
 
  
  **Part
II.**  **Other
Information**
 
 **Item
1. Legal Proceedings.**
 
 From time
to time, the Company and the Bank, are party to legal proceedings arising out of
their general lending activities and other operations. Currently there are no
material proceedings.
 
 **Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds**
 
 None.
 
 **Item
3. Default Upon Senior Securities.**
 
 None.
 
 **Item
4. Submission of Matters to Vote of Security Holders.**
 
 None
 
 **Item
5. Other Information.**
 
 None.
 
 **Item
6. Exhibits**
 
 RIDER
 
 31.1
    Certification
      by the Chief Executive Officer pursuant toRule
      13a-14(a) or 15d-14(a) under the Securities Exchange Act of
      1934.
 
 31.2
    Certification
      by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
      under the Securities Exchange Act of 1934.
 
 32.1
    Certification
      Statement of the Chief Executive Officer and Chief Financial Officer
      pursuant to 18 U.S.C. Section 1350.
 
 
  
  **SIGNATURES**
 
 
 Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 
 STATE
FINANCIAL SERVICES CORPORATION
 (Registrant)
 
 
 Date: May 10, 2005  By /s/
Michael J. Falbo
 Michael
J. Falbo
 Chairman
and Chief Executive Officer
 
 
 
 Date: May 10 ,
2005  By /s/
Daniel L. Westrope
 Daniel L.
Westrope
 Executive
Vice President, Chief Financial Officer,
 Treasurer,
and Corporate Secretary
  
  **STATE
FINANCIAL SERVICES CORPORATION**
 EXHIBIT
INDEX TO FORM 10-Q
 For The
Quarter Ended March 31, 2005
 
 
 Exhibit
Number
 
 RIDER
 
 31.1
    
    Certification
      by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
      under the Securities Exchange Act of 1934.
 
 31.2
    
    Certification
      by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
      under the Securities Exchange Act of 1934.
 
 32.1
    Certification
      Statement of the Chief Executive Officer and Chief Financial Officer
      pursuant to 18 U.S.C. Section 1350.