Commerce Bancshares 10Q 2005 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

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Washington, D.C. 20549

FORM 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-2989

COMMERCE BANCSHARES, INC.

-------------------------------------------------

(Exact name of registrant as specified in its charter)


Missouri (State of Incorporation)		43-0889454 (IRS Employer Identification No.)

1000 Walnut, Kansas City, MO (Address of principal executive offices)		64106 (Zip Code)

(816) 234-2000 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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.

Yes X No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes X No

As of August 1, 2005, the registrant had outstanding 66,150,588 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q


INDEX
			Page

Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004		4
		Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2005 and 2004		5
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004		6
		Notes to Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations		12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		29
	Item 4.	Controls and Procedures		29


Part II	Other Information
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
	Item 4.	Submission of Matters to a Vote of Security Holders		30
	Item 6.	Exhibits		30
Signatures				31
Index to Exhibits				32
Notice of Grant of Stock Options and Option Agreement
Restricted Stock Award Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO & CFO Pursuant to Section 1350

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


			June 30			December 31
			2005			2004

			(Unaudited)
			(In thousands)
ASSETS
Loans, net of unearned income			$	8,499,301		$	8,305,359
Allowance for loan losses				(129,428	)		(132,394	)

Net loans				8,369,873			8,172,965

Investment securities:
	Available for sale			4,358,178			4,754,941
	Trading			12,359			9,403
	Non-marketable			73,674			73,024

Total investment securities				4,444,211			4,837,368

Federal funds sold and securities purchased under agreements to resell				128,204			68,905
Cash and due from banks				544,922			585,815
Land, buildings and equipment, net				372,291			336,446
Goodwill				48,522			48,522
Other intangible assets, net				54			499
Other assets				210,116			199,848

Total assets			$	14,118,193		$	14,250,368

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
	Non-interest bearing demand		$	1,351,186		$	1,943,771
	Savings, interest checking and money market			6,547,940			6,072,115
	Time open and C.D.’s of less than $100,000			1,744,629			1,656,002
	Time open and C.D.’s of $100,000 and over			1,022,361			762,421

Total deposits				10,666,116			10,434,309

Federal funds purchased and securities sold under agreements to repurchase				1,594,735			1,913,878
Other borrowings				371,781			389,542
Other liabilities				109,392			85,759

Total liabilities				12,742,024			12,823,488

Stockholders’ equity:
	Preferred stock, $1 par value
		Authorized and unissued 2,000,000 shares		—			—
	Common stock, $5 par value
		Authorized 100,000,000 shares; issued 69,409,882 shares		347,049			347,049
	Capital surplus			384,166			388,614
	Retained earnings			775,404			703,293
	Treasury stock of 3,225,214 shares in 2005 and 1,072,098 shares in 2004, at cost			(155,749	)		(51,646	)
	Accumulated other comprehensive income			25,299			39,570

Total stockholders’ equity				1,376,169			1,426,880

Total liabilities and stockholders’ equity			$	14,118,193		$	14,250,368

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME


		For the Three Months				For the Six Months
		Ended June 30				Ended June 30

(In thousands, except per share data)		2005		2004		2005		2004

		(Unaudited)
INTEREST INCOME
Interest and fees on loans		$	125,242	$	102,753	$	243,765	$	206,762
Interest on investment securities			46,394		49,348		88,140		93,940
Interest on federal funds sold and securities purchased under agreements to resell			1,164		339		1,748		525

Total interest income			172,800		152,440		333,653		301,227

INTEREST EXPENSE
Interest on deposits:
	Savings, interest checking and money market		12,192		6,320		22,649		12,492
	Time open and C.D.’s of less than $100,000		12,051		9,592		22,443		19,491
	Time open and C.D.’s of $100,000 and over		7,973		3,571		14,325		6,836
Interest on federal funds purchased and securities sold under agreements to repurchase			10,163		4,431		19,581		8,887
Interest on other borrowings			3,034		2,065		5,791		4,076

Total interest expense			45,413		25,979		84,789		51,782

Net interest income			127,387		126,461		248,864		249,445
Provision for loan losses			5,503		6,280		7,871		16,530

Net interest income after provision for loan losses			121,884		120,181		240,993		232,915

NON-INTEREST INCOME
Trust fees			17,040		16,128		33,434		32,292
Deposit account charges and other fees			27,476		26,930		51,777		52,452
Bank card transaction fees			21,295		19,348		40,802		36,948
Trading account profits and commissions			2,450		2,970		5,064		6,796
Consumer brokerage services			2,338		2,481		5,163		4,939
Loan fees and sales			4,805		5,254		8,245		8,907
Net gains on securities transactions			1,372		2,833		4,984		11,784
Other			8,204		8,345		16,202		16,140

Total non-interest income			84,980		84,289		165,671		170,258

NON-INTEREST EXPENSE
Salaries and employee benefits			67,585		65,696		137,765		133,712
Net occupancy			9,527		9,834		19,305		20,000
Equipment			5,701		5,678		11,392		11,536
Supplies and communication			8,257		8,342		16,470		16,286
Data processing and software			12,069		11,802		23,524		22,432
Marketing			4,687		4,424		8,549		8,128
Intangible assets amortization			67		433		448		869
Other			15,119		14,727		29,481		26,885

Total non-interest expense			123,012		120,936		246,934		239,848

Income before income taxes			83,852		83,534		159,730		163,325
Less income taxes			29,484		29,696		55,516		58,163

Net income		$	54,368	$	53,838	$	104,214	$	105,162

Net income per share — basic		$	.81	$	.77	$	1.55	$	1.49
Net income per share — diluted		$	.80	$	.76	$	1.53	$	1.47

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


														Accumulated
	Number of													Other
(Dollars in thousands,	Shares		Common		Capital			Retained			Treasury			Comprehensive
except per share data)	Issued		Stock		Surplus			Earnings			Stock			Income			Total

	(Unaudited)
Balance January 1, 2005		69,409,882	$	347,049	$	388,614		$	703,293		$	(51,646	)	$	39,570		$	1,426,880

Net income									104,214									104,214
Change in unrealized gain on available for sale securities															(14,271	)		(14,271	)

Total comprehensive income																		89,943

Purchase of treasury stock												(121,573	)					(121,573	)
Issuance of stock under purchase and option plans						(8,557	)					16,477						7,920
Net tax benefit related to stock option plans						1,024												1,024
Stock based compensation						4,078												4,078
Issuance of stock under restricted stock award plan						(993	)					993						—
Cash dividends paid ($.480 per share)									(32,103	)								(32,103	)

Balance June 30, 2005		69,409,882	$	347,049	$	384,166		$	775,404		$	(155,749	)	$	25,299		$	1,376,169

Balance January 1, 2004		68,636,548	$	343,183	$	357,337		$	707,136		$	(29,573	)	$	72,871		$	1,450,954

Net income									105,162									105,162
Change in unrealized gain on available for sale securities															(53,308	)		(53,308	)

Total comprehensive income																		51,854

Purchase of treasury stock												(75,762	)					(75,762	)
Issuance of stock under purchase and option plans						(7,450	)					14,652						7,202
Net tax benefit related to stock option plans						747												747
Stock based compensation						3,935												3,935
Issuance of stock under restricted stock award plan						(1,210	)					1,210						—
Cash dividends paid ($.438 per share)									(30,841	)								(30,841	)

Balance June 30, 2004		68,636,548	$	343,183	$	353,359		$	781,457		$	(89,473	)	$	19,563		$	1,408,089

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS


		For the Six Months
		Ended June 30

(In thousands)		2005			2004

		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	104,214		$	105,162
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		7,871			16,530
	Provision for depreciation and amortization		20,362			20,573
	Amortization of investment security premiums, net		8,941			14,014
	Net gains on securities transactions^(A)		(4,984	)		(11,784	)
	Net gains on sales of mortgage loans held for sale		(613	)		(681	)
	Originations of mortgage loans held for sale		(40,560	)		(50,170	)
	Proceeds from sales of mortgage loans held for sale		40,354			45,890
	Net (increase) decrease in trading securities		3,527			(4,013	)
	Stock based compensation		4,078			3,935
	Decrease in interest receivable		3,408			4,865
	Increase (decrease) in interest payable		5,404			(1,404	)
	Increase in income taxes payable		14,104			4,392
	Net tax benefit related to stock option plans		(1,024	)		(747	)
	Other changes, net		1,162			(22,284	)

Net cash provided by operating activities			166,244			124,278

INVESTING ACTIVITIES:
Proceeds from sales of investment securities^(A)			1,299,648			192,689
Proceeds from maturities/pay downs of investment securities^(A)			623,914			822,300
Purchases of investment securities^(A)			(1,554,499	)		(938,204	)
Net increase in federal funds sold and securities purchased under agreements to resell			(59,299	)		(26,685	)
Net (increase) decrease in loans			(203,793	)		8,090
Purchases of land, buildings and equipment			(44,463	)		(21,183	)
Sales of land, buildings and equipment			464			572

Net cash provided by investing activities			61,972			37,579

FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing demand, savings, interest checking and money market deposits			(136,125	)		74,710
Net increase in time open and C.D.’s			348,567			113,809
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase			(319,143	)		51,498
Additional borrowings			—			100,000
Repayment of borrowings			(17,676	)		(107,264	)
Net decrease in other short-term borrowings			—			(2,876	)
Purchases of treasury stock			(121,573	)		(75,762	)
Issuance of stock under option plans			7,920			7,202
Net tax benefit related to stock option plans			1,024			747
Cash dividends paid on common stock			(32,103	)		(30,841	)

Net cash provided by (used in) financing activities			(269,109	)		131,223

Increase (decrease) in cash and cash equivalents			(40,893	)		293,080
Cash and cash equivalents at beginning of year			585,815			567,123

Cash and cash equivalents at June 30		$	544,922		$	860,203

^(A)Available for sale and non-marketable securities

Income tax payments, net of refunds		$	41,564		$	56,099
Interest paid on deposits and borrowings		$	79,385		$	53,186

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2005 (Unaudited)


1.	Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). The consolidated statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2004 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2005 are not necessarily indicative of results to be attained for the full year or any other interim periods.

The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2004 Annual Report on Form 10-K.


2.	Allowance for Loan Losses

The following is a summary of the allowance for loan losses.



		For the Three Months				For the Six Months
		Ended June 30				Ended June 30

(In thousands)		2005		2004		2005		2004

Balance, beginning of period		$	130,960	$	133,092	$	132,394	$	135,221

Additions:
	Provision for loan losses		5,503		6,280		7,871		16,530

Total additions			5,503		6,280		7,871		16,530

Deductions:
	Loan losses		9,754		10,042		19,254		26,518
	Less recoveries on loans		2,719		3,794		8,417		7,891

Net loan losses			7,035		6,248		10,837		18,627

Balance, June 30		$	129,428	$	133,124	$	129,428	$	133,124


3.	Investment Securities

Investment securities, at fair value, consist of the following at June 30, 2005 and December 31, 2004.



		June 30		December 31
(In thousands)		2005		2004

Available for sale:
	U.S. government and federal agency obligations	$	1,021,258	$	1,746,365
	State and municipal obligations		78,688		66,389
	Mortgage-backed securities		1,906,005		1,336,982
	Other asset-backed securities		1,077,751		1,323,999
	Other debt securities		47,938		50,240
	Equity securities		226,538		230,966
Trading			12,359		9,403
Non-marketable			73,674		73,024

Total investment securities		$	4,444,211	$	4,837,368

U.S. government and federal agency obligations included government-sponsored agencies of $869,132,000 at June 30, 2005 and $1,344,298,000 at December 31, 2004.

Equity securities included short-term investments in money market mutual funds of $151,926,000 at June 30, 2005 and $187,705,000 at December 31, 2004. Equity securities also included $27,285,000 in FNMA and SLMA preferred stock at June 30, 2005.

Non-marketable securities primarily included securities held for debt and regulatory purposes, which amounted to $49,971,000 and $50,703,000 at June 30, 2005 and December 31, 2004, respectively, in addition to venture capital and private equity investments, which amounted to $23,641,000 and $22,278,000 at the respective dates.


4.	Intangible Assets

The following table presents information about the Company’s intangible assets which have estimable useful lives.



		June 30, 2005					December 31, 2004

		Gross					Gross
		Carrying		Accumulated			Carrying		Accumulated
(In thousands)		Amount		Amortization			Amount		Amortization

Amortized intangible assets:
	Core deposit premium	$	47,930	$	(47,930	)	$	47,930	$	(47,487	)
	Mortgage servicing rights		535		(481	)		539		(483	)

Total		$	48,465	$	(48,411	)	$	48,469	$	(47,970	)

The Company does not have any intangible assets that are not currently being amortized. Aggregate amortization expense on intangible assets was $67,000 and $433,000, respectively, for the three month periods ended June 30, 2005 and 2004, and $448,000 and $869,000 for the six month periods ended June 30, 2005 and 2004. Estimated annual amortization expense for the years 2005 through 2009 is as follows.



(In thousands)

2005	$	463
2006		20
2007		20
2008		20
2009		20


5.	Guarantees

The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured and in the event of nonperformance by the customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.

At June 30, 2005, a liability in the amount of $4,501,000, representing the carrying value of the guarantee obligations associated with the standby letters of credit mentioned above, was recorded in accordance with Financial Accounting Standards Board Interpretation 45. This amount will be amortized into income over the life of the commitment. The contract amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $337,906,000 at June 30, 2005.

The Company guarantees payments to holders of certain trust preferred securities issued by a wholly-owned grantor trust. The securities are due in 2030 and may be redeemed beginning in 2010. The maximum potential future payments guaranteed by the Company, which includes future interest and principal payments through maturity, was approximately $14,736,000 at June 30, 2005. At June 30, 2005, the Company had a recorded liability of $4,145,000 in principal and accrued interest to date, representing amounts owed to the security holders.


6.	Pension

The amount of net pension cost is as follows:



	For the						For the
	Three Months						Six Months
	Ended June 30						Ended June 30

(In thousands)	2005			2004			2005			2004

Service cost – benefits earned during the period	$	365		$	1,252		$	730		$	2,503
Interest cost on projected benefit obligation		1,170			1,135			2,340			2,270
Expected return on plan assets		(1,705	)		(1,603	)		(3,410	)		(3,195	)
Amortization of prior service cost		—			(25	)		—			(50	)
Amortization of unrecognized net loss		280			316			560			632

Net periodic pension cost	$	110		$	1,075		$	220		$	2,160

As discussed in the Company’s 2004 Annual Report on Form 10-K, effective January 1, 2005, substantially all benefits accrued under the Company’s pension plans were frozen. During the first six months of 2005, the Company made no funding contributions to its defined benefit pension plan, and made minimal funding contributions to its supplemental executive retirement plan, which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the supplemental executive retirement plan, during the remainder of 2005.


7.	Common Stock

The shares used in the calculation of basic and diluted income per share are shown below.

For the

Three Months

Six Months

Ended June 30

(In thousands)

2005

2004

2005

2004

Weighted average common shares outstanding

66,734

70,355

67,185

70,722

Net effect of the assumed exercise of stock options — based on the treasury stock method using average market price for the respective periods

919

979

930

1,053

67,653

71,334

68,115

71,775


8.	Comprehensive Income (Loss)

The Company’s only component of other comprehensive income (loss) during the periods presented below was the unrealized holding gains and losses on available for sale securities.



	For the						For the
	Three Months						Six Months
	Ended June 30						Ended June 30

(In thousands)	2005			2004			2005			2004

Unrealized holding gains (losses)	$	33,110		$	(131,914	)	$	(19,145	)	$	(74,693	)
Reclassification adjustment for gains included in net income		(1,044	)		(3,046	)		(3,873	)		(11,288	)

Net unrealized gains (losses) on securities		32,066			(134,960	)		(23,018	)		(85,981	)
Income tax expense (benefit)		12,185			(51,285	)		(8,747	)		(32,673	)

Other comprehensive income (loss)	$	19,881		$	(83,675	)	$	(14,271	)	$	(53,308	)


9.	Segments

The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The Consumer segment includes the retail branch network, consumer finance, bank card, student loans, and discount brokerage services. The Commercial segment provides corporate lending, leasing, and international services, as well as business, government deposit, and cash management services. The Money Management segment provides traditional trust and estate tax planning services, in addition to advisory and discretionary investment management services.

The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues among the three segments.



						Money			Segment		Other/			Consolidated
(In thousands)	Consumer		Commercial			Management			Totals		Elimination			Totals

Three Months Ended June 30, 2005:
Net interest income after provision for loan losses	$	30,545	$	59,825		$	(5,818	)	$	84,552	$	37,332		$	121,884
Cost of funds allocation		44,276		(12,093	)		8,199			40,382		(40,382	)		—
Non-interest income		44,307		18,122			20,574			83,003		1,977			84,980

Total net revenue		119,128		65,854			22,955			207,937		(1,073	)		206,864
Non-interest expense		69,970		34,753			14,757			119,480		3,532			123,012

Income before income taxes	$	49,158	$	31,101		$	8,198		$	88,457	$	(4,605	)	$	83,852

Three Months Ended June 30, 2004:
Net interest income after provision for loan losses	$	31,280	$	46,823		$	(1,866	)	$	76,237	$	43,944		$	120,181
Cost of funds allocation		28,407		(3,020	)		3,862			29,249		(29,249	)		—
Non-interest income		41,908		19,498			19,948			81,354		2,935			84,289

Total net revenue		101,595		63,301			21,944			186,840		17,630			204,470
Non-interest expense		67,041		33,485			14,872			115,398		5,538			120,936

Income before income taxes	$	34,554	$	29,816		$	7,072		$	71,442	$	12,092		$	83,534

Six Months Ended June 30, 2005:
Net interest income after provision for loan losses	$	62,901	$	118,412		$	(10,039	)	$	171,274	$	69,719		$	240,993
Cost of funds allocation		82,193		(21,712	)		14,518			74,999		(74,999	)		—
Non-interest income		82,622		35,773			40,710			159,105		6,566			165,671

Total net revenue		227,716		132,473			45,189			405,378		1,286			406,664
Non-interest expense		139,290		69,306			29,611			238,207		8,727			246,934

Income before income taxes	$	88,426	$	63,167		$	15,578		$	167,171	$	(7,441	)	$	159,730

Six Months Ended June 30, 2004:
Net interest income after provision for loan losses	$	63,305	$	87,858		$	(3,571	)	$	147,592	$	85,323		$	232,915
Cost of funds allocation		55,696		(6,494	)		7,372			56,574		(56,574	)		—
Non-interest income		77,949		37,979			40,718			156,646		13,612			170,258

Total net revenue		196,950		119,343			44,519			360,812		42,361			403,173
Non-interest expense		133,456		66,658			30,000			230,114		9,734			239,848

Income before income taxes	$	63,494	$	52,685		$	14,519		$	130,698	$	32,627		$	163,325

The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies, which have been developed to reflect the underlying economics of the businesses. The policies address the methodologies applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided) by assets and liabilities based on their maturity, prepayment and/or repricing characteristics.

The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments’ financial condition and results of operations if they were independent entities.


10.	Derivative Instruments

The Company uses derivative instruments, on a limited basis, primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. At June 30, 2005, the Company had interest rate swaps with a total notional amount of $67,714,000, of which three swaps with a notional amount of $21,746,000 were designated as fair value hedges of certain fixed rate loans. The remaining swaps consist of matched pairs with offsetting pay/ receive terms. Through its International Department, the Company enters into foreign exchange contracts consisting mainly of contracts to purchase or deliver foreign currencies for customers at specific future dates. Also, mortgage loan commitments and forward sales contracts are derived from the Company’s mortgage banking operation, in which fixed rate personal real estate loans are originated and sold to other institutions.

The Company’s derivative instruments are listed below.



		June 30, 2005							December 31, 2004

				Positive		Negative					Positive		Negative
		Notional		Fair		Fair			Notional		Fair		Fair
(In thousands)		Amount		Value		Value			Amount		Value		Value

Interest rate swaps		$	67,714	$	819	$	(1,771	)	$	49,963	$	649	$	(1,273	)
Foreign exchange contracts:
	Forward contracts		19,178		326		(226	)		13,031		171		(173	)
	Options written/purchased		2,840		—		—			2,853		12		(12	)
Mortgage loan commitments			17,714		20		(7	)		8,319		1		(13	)
Mortgage loan forward sale contracts			25,098		9		(167	)		15,728		39		(4	)

Total		$	132,544	$	1,174	$	(2,171	)	$	89,894	$	872	$	(1,475	)


11.	Income Taxes

For the second quarter of 2005 income tax expense amounted to $29,484,000, compared to $29,696,000 in the second quarter of 2004. The effective income tax rate for the Company was 35.2% in the current quarter compared to 35.5% in the same quarter last year. For the six months ended June 30, 2005 and 2004, income tax expense amounted to $55,516,000 and $58,163,000 and represented effective income tax rates of 34.8% and 35.6%, respectively. The Company has income tax benefits totaling approximately $13,705,000 associated with corporate reorganization activities, which will not be recognized until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the third quarter of 2005, which would allow these benefits to be recognized into income in the third and fourth quarters of 2005. It is not expected that material tax benefits of this nature will continue beyond 2005.


Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company’s 2004 Annual Report on Form 10-K. Results of operations for the three and six month periods ended June 30, 2005 are not necessarily indicative of results to be attained for any other period.

Forward Looking Information

This report may contain “forward-looking statements” that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as “expects”, “anticipates”, “believes”, “estimates”, variations of such words and other similar expressions are

intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company’s market area, and competition with other entities that offer financial services.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared based on the application of certain accounting policies, some of which require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company’s reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments primarily by using internal cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company’s future financial condition and results of operations.

The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, pension accounting, and accounting for income taxes.

The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company’s estimate of the losses inherent in the loan portfolio at any point in time. While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, lease, construction and business real estate loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal loans, including personal mortgage, credit card and consumer loans, are individually smaller and perform in a more homogeneous manner, making loss estimates more predictable. Further discussion of the methodologies used in establishing the allowance is provided in the Provision and Allowance for Loan Losses section of this discussion.

Management is required to make various assumptions in valuing its pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate, and the rate of increase in future compensation levels. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations, and expert opinions in determining the various rates used to estimate pension expense. The Company considers the Moody’s AA corporate bond yields and other market interest rates in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences, including the effects of IRS examinations and examinations by other state agencies, could materially impact the Company’s financial position and its results of operations. Further discussion of income taxes, including estimates of future income tax expense, is presented in the Income Taxes section of this discussion.

Selected Financial Data



		Three Months						Six Months
		Ended June 30						Ended June 30

		2005			2004			2005			2004

Per Share Data
	Net income — basic	$	.81		$	.77		$	1.55		$	1.49
	Net income — diluted		.80			.76			1.53			1.47
	Cash dividends		.240			.219			.480			.438
	Book value								20.82			20.12
	Market price								50.41			43.76
Selected Ratios
(Based on average balance sheets)
	Loans to deposits		79.35	%		78.13	%		79.40	%		78.99	%
	Non-interest bearing deposits to total deposits		5.93			12.29			6.63			12.20
	Equity to loans		16.29			17.91			16.56			17.95
	Equity to deposits		12.92			13.99			13.15			14.18
	Equity to total assets		9.85			10.14			9.93			10.23
	Return on total assets		1.55			1.51			1.50			1.48
	Return on total stockholders’ equity		15.78			14.91			15.07			14.50
(Based on end-of-period data)
	Efficiency ratio*		58.27			57.96			60.18			58.58
	Tier I capital ratio								11.77			12.21
	Total capital ratio								13.12			13.56
	Leverage ratio								9.37			9.47


*	The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of net interest income and non-interest income (excluding gains/losses on securities transactions).

Results of Operations

Summary


	Three Months Ended									Six Months Ended
	June 30									June 30

(Dollars in thousands)	2005			2004			% Change			2005			2004			% Change

Net interest income	$	127,387		$	126,461			.7	%	$	248,864		$	249,445			(.2	)%
Provision for loan losses		(5,503	)		(6,280	)		(12.4	)		(7,871	)		(16,530	)		(52.4	)
Non-interest income		84,980			84,289			.8			165,671			170,258			(2.7	)
Non-interest expense		(123,012	)		(120,936	)		1.7			(246,934	)		(239,848	)		3.0
Income taxes		(29,484	)		(29,696	)		(.7	)		(55,516	)		(58,163	)		(4.6	)

Net income	$	54,368		$	53,838			1.0	%	$	104,214		$	105,162			(.9	)%

For the quarter ended June 30, 2005, net income amounted to $54.4 million, an increase of $530 thousand, or 1.0%, over the second quarter of the previous year. Return on assets was 1.55% and the return on equity totaled 15.78%. For the quarter, the efficiency ratio amounted to 58.27%. The increase in net income

over the second quarter of last year was the result of a decrease in the provision for loan losses of 12.4% and increases in non-interest income and net interest income. Non-interest expense grew less than 2%. Diluted earnings per share was $.80, an increase of 5.3% over $.76 per share in the second quarter of 2004.

Net income for the first six months of 2005 was $104.2 million, a $948 thousand, or .9%, decrease from the first six months of 2004. Diluted earnings per share increased 4.1% to $1.53, compared to $1.47 for the first six months of last year. The decrease in net income was primarily due to flat net interest income and higher non-interest expense. These were offset by a lower provision for loan losses and a lower effective income tax rate.

Net Interest Income

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income



			Three Months Ended									Six Months Ended
			June 30, 2005 vs. 2004									June 30, 2005 vs. 2004

			Change due to									Change due to

			Average			Average						Average			Average
(In thousands)			Volume			Rate			Total			Volume			Rate			Total

Interest income, fully taxable equivalent basis:
Loans			$	4,381		$	18,163		$	22,544		$	7,205		$	29,899		$	37,104
Investment securities:
	U.S. government and federal agency securities			(7,152	)		67			(7,085	)		(10,333	)		(994	)		(11,327	)
	State and municipal obligations			3			(91	)		(88	)		(86	)		(181	)		(267	)
	Mortgage and asset-backed securities			(551	)		3,377			2,826			(531	)		3,743			3,212
	Other securities			248			1,206			1,454			540			2,055			2,595

		Total interest on investment securities		(7,452	)		4,559			(2,893	)		(10,410	)		4,623			(5,787	)

Federal funds sold and securities purchased under agreements to resell				116			709			825			192			1,031			1,223

Total interest income				(2,955	)		23,431			20,476			(3,013	)		35,553			32,540

Interest expense:
Deposits:
	Savings			4			3			7			13			—			13
	Interest checking and money market			153			5,712			5,865			376			9,768			10,144
	Time open & C.D.’s of less than $100,000			(90	)		2,549			2,459			(586	)		3,538			2,952
	Time open & C.D.’s of $100,000 and over			820			3,582			4,402			1,720			5,769			7,489

		Total interest on deposits		887			11,846			12,733			1,523			19,075			20,598

Federal funds purchased and securities sold under agreements to repurchase				(920	)		6,652			5,732			(1,465	)		12,159			10,694
Other borrowings				(321	)		1,313			992			(541	)		2,348			1,807

Total interest expense				(354	)		19,811			19,457			(483	)		33,582			33,099

Net interest income, fully taxable equivalent basis			$	(2,601	)	$	3,620		$	1,019		$	(2,530	)	$	1,971		$	(559	)

Net interest income for the second quarter of 2005 totaled $127.4 million, a .7% increase over the second quarter of 2004. The increase in net interest income was mainly the result of higher interest income earned on loans. As a result, the net interest rate margin was 3.93% for the second quarter of 2005, compared to 3.85% in the second quarter of 2004 and 3.79% in the first quarter of 2005. The increase in the net interest rate margin in the second quarter of 2005 over the first quarter was mainly due to a $3.0 million increase in inflation related earnings on inflation-indexed treasury securities held by the Company, in addition to higher rates earned on the loan portfolio. For the first six months of 2005, net interest income totaled $248.9 million, a decrease of $581 thousand, or ..2%, compared with the first six

months of the previous year. The net interest rate margin was 3.86% in the first six months of 2005, an increase of 4 basis points over the same period in the previous year.

Total interest income increased $20.4 million, or 13.4%, over the second quarter of 2004. The increase was the result of higher loan interest income, which was mainly due to higher rates earned on virtually all lending products. Average rates earned on loans increased 82 basis points over the second quarter of 2004. In addition, average rates earned on investment securities increased 28 basis points. Increases in loan volume, especially consumer and business, also increased interest income While interest income on investment securities declined $3.0 million, most of this decline was due to substantially lower average balances of the Company’s inflation-indexed treasury securities. Because of this, overall income on these securities was lower and inflation related earnings decreased by $2.1 million from the second quarter of 2004. These declines were offset by higher yields earned on mortgage and asset-backed securities. The average tax equivalent yield on interest earning assets was 5.33% in the second quarter of 2005 compared to 4.64% in the second quarter of 2004.

Compared to the first six months of 2004, total interest income increased $32.4 million. The increase reflects similar trends as noted in the quarterly comparison above, with higher average overall rates earned on interest earning assets, which occurred because of a rising rate environment in the last several months. In addition, increases in loan balances increased interest income. These increases were offset by lower interest income on investment securities due to lower average balances. Average tax equivalent yields on total interest earning assets for the six months were 5.18% in 2005 and 4.60% in 2004.

Total interest expense increased $19.4 million, or 74.8%, compared to the second quarter of 2004. This increase was mainly the result of higher rates paid on all deposit products, especially on money market accounts and short-term certificates of deposit. Rates on overnight borrowings also increased, causing interest expense on federal funds purchased and securities sold under agreements to repurchase to increase $5.7 million. Average rates paid on all interest bearing liabilities increased to 1.53% in the second quarter of 2005 compared to .91% in the second quarter of 2004.

For the first six months of 2005, total interest expense increased $33.0 million, or 63.7%, compared with the previous year. Most of the increase resulted from a 35 basis point increase in average rates paid on deposit balances. Also contributing to the increase were higher rates paid on borrowings and higher average balances in short-term jumbo certificates of deposit, partly offset by lower average borrowings. Average balances of federal funds purchased and securities sold under agreements to repurchase decreased by $361.8 million. The overall average cost of total interest bearing liabilities was 1.44% for the first six months of 2005 compared to .91% for the same period in 2004.

Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.

Non-Interest Income



	Three Months									Six Months
	Ended June 30									Ended June 30

(Dollars in thousands)	2005			2004			% Change			2005			2004			% Change

Trust fees	$	17,040		$	16,128			5.7	%	$	33,434		$	32,292			3.5	%
Deposit account charges and other fees		27,476			26,930			2.0			51,777			52,452			(1.3	)
Bank card transaction fees		21,295			19,348			10.1			40,802			36,948			10.4
Trading account profits and commissions		2,450			2,970			(17.5	)		5,064			6,796			(25.5	)
Consumer brokerage services		2,338			2,481			(5.8	)		5,163			4,939			4.5
Loan fees and sales		4,805			5,254			(8.5	)		8,245			8,907			(7.4	)
Net gains on securities transactions		1,372			2,833			(51.6	)		4,984			11,784			(57.7	)
Other		8,204			8,345			(1.7	)		16,202			16,140			.4

Total non-interest income	$	84,980		$	84,289			.8	%	$	165,671		$	170,258			(2.7	)%

Non-interest income as a % of total revenue*		40.0	%		40.0	%					40.0	%		40.6	%


*	Total revenue is calculated as net interest income plus non-interest income.

For the second quarter of 2005, total non-interest income amounted to $85.0 million compared with $84.3 million in the same quarter last year. Excluding investment securities gains, non-interest income grew 2.6% over the same period last year. This growth was mainly the result of higher deposit, bank card and trust fee income. Bond trading income declined from amounts recorded in the same period last year due to lower sales activity. Bank card fees for the quarter increased 10.1% over the same period last year, as higher transaction volume increased debit and credit card fee income by 15.4% and 12.1%, respectively. Deposit account fees increased 2.0% over the same period last year as a result of a 15.8% increase in overdraft fees, but were partially offset by lower corporate cash management fee income, which declined 18.5%. The increase in overdraft fees was the result of higher transaction volumes, while the current higher interest rate environment had the effect of lowering corporate cash management fee income. Trust fees for the quarter increased 5.7% mainly as a result of higher fees on personal trust accounts. Other income in the second quarter of 2004 included a $1.1 million gain on a branch sale that did not reoccur in 2005. Additionally, gains on student loan sales were $3.6 million in the second quarter 2005 compared to gains of $4.1 million in the same period last year.

Non-interest income for the six months ended June 30, 2005 was $165.7 million compared to $170.3 million in the first six months of 2004, resulting in a 2.7% decrease. Excluding investment securities gains, however, non-interest income grew 1.4% over the same period last year. Trust fees rose $1.1 million, or 3.5%, due to a 2.6% increase in personal account fees. Bank card fees rose $3.9 million, or 10.4% overall, due to increases of 16.5% and 12.8%, respectively, in debit and credit card transaction fees. Bond trading income fell $1.7 million due to the lower sales activity noted previously. Deposit account fees declined $675 thousand as a result of lower cash management revenues and lower non-personal service charges, partly offset by higher overdraft fees. Loan fees and sales decreased by $662 thousand as gains on student loan sales declined from $6.4 million in the first six months of 2004 to $5.9 million in 2005. Other non-interest income included an increase in check float income, offset by lower operating lease revenues and the non-recurrence of the 2004 branch sale mentioned above.

During the current quarter, net securities gains amounted to $1.4 million compared with $2.8 million in the same period last year. On a year to date basis, such gains amounted to $5.0 million and $11.8 million for 2005 and 2004, respectively. During the first six months of 2005, the Company undertook initiatives to review and re-position its investment securities portfolio to address such things as concentration, duration and interest rate risk. Consequently, during the first six months of 2005, the company sold available for sale securities totaling $1.3 billion. These sales were comprised mainly of $436.9 million in

U.S. government agency securities, $502.4 million in asset-backed securities, and $226.6 million in inflation-indexed treasury securities. Also as a result of the repositioning, the Company purchased $1.5 billion of available for sale securities during the six month period. The purchases were comprised mainly of $897.4 million in mortgage-backed securities and $488.1 million in other asset-backed securities.

Non-Interest Expense



	Three Months							Six Months
	Ended June 30							Ended June 30

(Dollars in thousands)	2005		2004		% Change			2005		2004		% Change

Salaries and employee benefits	$	67,585	$	65,696		2.9	%	$	137,765	$	133,712		3.0	%
Net occupancy		9,527		9,834		(3.1	)		19,305		20,000		(3.5	)
Equipment		5,701		5,678		.4			11,392		11,536		(1.2	)
Supplies and communication		8,257		8,342		(1.0	)		16,470		16,286		1.1
Data processing and software		12,069		11,802		2.3			23,524		22,432		4.9
Marketing		4,687		4,424		5.9			8,549		8,128		5.2
Intangible assets amortization		67		433		(84.5	)		448		869		(48.4	)
Other		15,119		14,727		2.7			29,481		26,885		9.7

Total non-interest expense	$	123,012	$	120,936		1.7	%	$	246,934	$	239,848		3.0	%

Non-interest expense for the quarter amounted to $123.0 million, which represented an increase of $2.1 million, or 1.7%, over the expense recorded in the second quarter of last year. Compared with the second quarter of last year, salaries and benefits expense increased $1.9 million, or 2.9%, mainly as a result of normal merit increases. Costs for supplies and communication, occupancy, loan collection, and professional fees all declined from amounts recorded in the second quarter of last year. Data processing costs grew $267 thousand, or 2.3%, mainly as a result of higher bank card processing fees, which were related to higher bank card revenues noted above. Increased costs were also incurred for marketing, which rose 5.9%.

Non-interest expense increased $7.1 million, or 3.0%, over the first six months of 2004. Salaries and benefits expense grew $4.1 million, or 3.0%, due to merit increases. Full-time equivalent employees totaled 4,826 and 4,822 at June 30, 2005 and 2004, respectively. Data processing and software expense increased $1.1 million, or 4.9%, due to higher bank card processing fees, which were partly offset by lower software amortization expense. Smaller variances occurred in supplies and communication and marketing, which increased $184 thousand and $421 thousand, respectively, and occupancy and equipment, which declined $695 thousand and $144 thousand, respectively. Other non-interest expense increased $2.6 million due to higher operating losses, proprietary mutual funds expense subsidies, lower capitalized loan costs, and higher minority interest expense relating to investment gains recorded by venture capital affiliates. A reduction in loan collection expense partly offset these increases.

Provision and Allowance for Loan Losses



		Three Months Ended									Six Months Ended
											June 30
		June 30			June 30			March 31
(Dollars in thousands)		2005			2004			2005			2005			2004

Provision for loan losses		$	5,503		$	6,280		$	2,368		$	7,871		$	16,530

Net loan charge-offs (recoveries):
	Business		(48	)		(223	)		(2,771	)		(2,819	)		5,337
	Credit card		5,430			4,993			4,597			10,027			9,869
	Personal banking*		1,474			1,260			1,948			3,422			3,232
	Real estate		(19	)		73			(56	)		(75	)		175
	Overdrafts		198			145			84			282			14

Total net loan charge-offs		$	7,035		$	6,248		$	3,802		$	10,837		$	18,627

Annualized total net charge-offs as a percentage of average loans			.33	%		.31	%		.18	%		.26	%		.46	%


*	Includes consumer, student and home equity loans

The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. The Company combines estimates of the reserves needed for loans evaluated on an individual basis for impairment with estimates of the reserves needed for pools of loans with similar risk characteristics. This process to determine reserves uses such tools as the Company’s “watch loan list” and actual loss experience to identify both individual loans and pools of loans and the amount of reserves that are needed. Additionally, management determines the amount of reserves necessary to offset credit risk issues associated with loan concentrations, economic uncertainties, industry concerns, adverse market changes in estimated or appraised collateral values, and other subjective factors.

In using this process and the information available, management must consider various assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these subjective factors, actual outcomes of inherent losses can differ from original estimates. The process of determining adequate levels of the allowance for loan losses is subject to regular review by the Company’s Credit Administration personnel and outside regulators.

Net loan charge-offs in the second quarter of 2005 amounted to $7.0 million, compared with $3.8 million in the first quarter of 2005 and $6.2 million in the second quarter of last year. The ratio of annualized net loan charge-offs to total average loans in the current quarter was .33%, compared with ..31% in the same quarter last year and .18% in the first quarter of this year. The increase in net charge-offs this quarter compared to the first quarter of this year was mainly the result of net recoveries received in the first quarter from previously charged off commercial and lease loans.

For the second quarter of 2005, annualized net charge-offs on average credit card loans decreased slightly to 3.93%, compared with 3.94% in the second quarter of last year. Personal banking loan charge-offs increased in the current quarter, with a charge-off ratio of .29% compared to .27% in the same quarterly period last year, as delinquencies remained at low levels.

Net charge-offs during the first six months of 2005 amounted to $10.8 million, compared to $18.6 million in the comparable prior period. Net charge-offs decreased primarily in the business loan category, as in the previous year a $6.0 million charge-down was recorded on a large commercial loan in which the borrower had filed for bankruptcy. The annualized net charge-off ratios were .26% in the first six months of 2005 and .46% in the same period in 2004.

The provision for loan losses for the current quarter totaled $5.5 million, which was up $3.1 million over the provision recorded in the first quarter of this year and down $777 thousand from the amount recorded in the second quarter of 2004. The provision was $7.9 million in the first six months of 2005 compared to $16.5 million in the same period in 2004. The allowance for loan losses at June 30, 2005 was

$129.4 million, or 1.52% of total loans, and represented 806% of total non-performing loans. The Company considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at June 30, 2005.

Risk Elements of Loan Portfolio

The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as non-accrual.



	June 30			December 31
(Dollars in thousands)	2005			2004

Non-accrual loans	$	16,060		$	17,618
Foreclosed real estate		542			1,157

Total non-performing assets	$	16,602		$	18,775

Non-performing assets to total loans		.20	%		.23	%
Non-performing assets to total assets		.12	%		.13	%

Loans past due 90 days and still accruing interest	$	15,070		$	13,067

Non-accrual loans, which are also considered impaired, totaled $16.1 million at June 30, 2005, and decreased $1.6 million from amounts recorded at December 31, 2004. This decline occurred in lease-related loans, partly due to the sale of a $2.1 million loan in the first quarter of 2005. Lease-related loans comprised 22.6% of the June 30, 2005 non-accrual loan total, with the remainder primarily relating to business or business real estate loans.

Total loans past due 90 days or more and still accruing interest amounted to $15.1 million as of June 30, 2005, and increased $2.0 million since December 31, 2004. The increase in past due loans occurred mainly due to a $2.9 million rise in business and business real estate delinquencies, partly offset by decreases in personal real estate and credit card delinquencies.

In addition to the non-accrual loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are primarily classified as substandard for regulatory purposes. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $81.2 million at June 30, 2005 compared with $63.9 million at December 31, 2004. The higher balance at June 30 was primarily due to the downgrading of a single $21.7 million commercial loan in the second quarter of 2005.

Income Taxes

Income tax expense was $29.5 million in the second quarter of 2005 compared to $29.7 million in the second quarter of 2004, resulting in effective tax rates on income from operations of 35.2% and 35.5%, respectively. Income tax expense was $55.5 million in the first six months of 2005 compared to $58.2 million in the first six months of 2004, with effective tax rates of 34.8% and 35.6%, respectively.

As reported in its previously filed 10-Q and 2004 Annual Report on Form 10-K, the Company has tax benefits related to corporate reorganization initiatives which will not be recognized into income until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the third quarter of 2005, which would allow the remaining benefits of approximately $13.7 million to be recognized into income in the third and fourth quarters of 2005. It is not expected that material tax benefits of this nature will continue beyond 2005.

Financial Condition

Balance Sheet

Total assets of the Company were $14.1 billion at June 30, 2005 compared to $14.3 billion at December 31, 2004. Earning assets at June 30, 2005 were $13.1 billion and consisted of 65% loans and 34% investment securities, compared to $13.2 billion at December 31, 2004.

During the first six months of 2005, total period end loans increased $193.9 million, or 2.3%, compared with balances at December 31, 2004. The growth was the result of increases of $85.0 million in construction loans, $58.2 million in consumer loans, $64.2 million in business loans, $22.2 million in personal real estate loans, and $14.9 million in business real estate loans, offset by decreases of $13.1 million in overdrafts and $57.0 million in student loans. The increase in consumer loans was the result of continued growth in marine and recreational vehicle lending.

Available for sale investment securities, excluding fair value adjustments, decreased $373.7 million, or 8.0%, at June 30, 2005 compared to December 31, 2004 as the Company continued to modify its investment securities portfolio to address such things as concentration, duration and interest rate risk. Accordingly, since December 31, 2004, sales, maturities and principal paydowns of securities totaled $1.9 billion. During the same period, purchases of securities totaled $1.5 billion and primarily consisted of mortgage-backed ($897.4 million) and asset-backed ($488.1 million) securities.

Total deposits increased by $231.8 million, or 2.2%, at June 30, 2005 compared to December 31, 2004. At the beginning of 2005, the Company re-characterized certain additional demand and interest checking accounts as money market accounts, in accordance with Federal Reserve rules. As a result, an additional $530 million of demand deposits and $344 million of interest checking accounts were reclassified as money market accounts during the first quarter of 2005. Exclusive of these and other ongoing reclassifications permissible under Federal Reserve rules, the increase in deposits over year end balances was due mainly to increases of $259.9 million in jumbo certificates of deposit, $88.6 million in retail certificates of deposit, $22.2 million in interest checking accounts and $19.3 million in savings accounts. This growth was partly offset by declines of $124.0 million in money market accounts and $32.4 million in personal demand accounts.

Compared to 2004 year end balances, total short-term borrowings at June 30, 2005 decreased $319.1 million. This decline was due to a decrease in federal funds purchased of $372.7 million, offset by an increase in repurchase agreements of $53.6 million. The decrease in federal funds purchased was accomplished with liquidity resulting from sales of investment securities.

Liquidity and Capital Resources

Liquidity Management

The Company’s most liquid assets are comprised of available for sale marketable investment securities, federal funds sold, and securities purchased under agreements to resell (resale agreements). Federal funds sold and resale agreements totaled $128.2 million at June 30, 2005. These investments normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available for sale investment portfolio was $4.4 billion at June 30, 2005, and included an unrealized gain of $40.8 million. The portfolio includes maturities of approximately $768 million which come due during the next 12 months, and offer substantial resources to meet new loan demand or reductions in the Company’s deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowing capacity at the

Federal Reserve. Investment securities pledged for these purposes comprised approximately 44% of the total investment portfolio at June 30, 2005, leaving $2.5 billion of unpledged securities.



		June 30		March 31		December 31
(In thousands)		2005		2005		2004

Liquid assets:
	Federal funds sold	$	128,204	$	179,107	$	68,905
	Securities purchased under agreements to resell		—		—		—
	Available for sale investment securities		4,358,178		4,442,210		4,754,941

	Total	$	4,486,382	$	4,621,317	$	4,823,846

Liquidity is also available from the Company’s large base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At June 30, 2005, such deposits totaled $7.9 billion and represented 74% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships. Time open and certificates of deposit of $100,000 and over totaled $1.0 billion at June 30, 2005. These accounts are normally considered more volatile and higher costing, but comprised just 9.6% of total deposits at June 30, 2005.



		June 30		March 31		December 31
(In thousands)		2005		2005		2004

Core deposit base:
	Non-interest bearing demand	$	1,351,186	$	1,347,994	$	1,943,771
	Interest checking		470,083		438,419		820,027
	Savings and money market		6,077,857		6,113,750		5,252,088

	Total	$	7,899,126	$	7,900,163	$	8,015,886

Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, and longer-term debt. Federal funds purchased and securities sold under agreements to repurchase are generally borrowed overnight, and amounted to $1.6 billion at June 30, 2005. Federal funds purchased are obtained mainly from upstream correspondent banks with whom the Company maintains approved lines of credit, while securities sold under agreements to repurchase are comprised of non-insured customer funds secured by a portion of the Company’s investment portfolio. The Company’s long-term debt is relatively small compared to the Company’s overall liability position. It is comprised mainly of advances from the Federal Home Loan Bank (FHLB), which totaled $351.9 million at June 30, 2005. These borrowings were a combination of fixed and floating rates, most of which mature in less than two years. Other outstanding long-term borrowings relate to the Company’s leasing and venture capital operations.



		June 30		March 31		December 31
(In thousands)		2005		2005		2004

Borrowings:
	Federal funds purchased	$	1,184,920	$	1,225,070	$	1,557,635
	Securities sold under agreements to repurchase		409,815		341,844		356,243
	FHLB advances		351,859		366,886		366,926
	Subordinated debentures		4,000		4,000		4,000
	Other long-term debt		15,922		17,442		18,616

	Total	$	1,966,516	$	1,955,242	$	2,303,420

In addition to those mentioned above, several other sources of liquidity are available. The Company believes that its sound debt ratings of A-1 from Standard & Poor’s and Prime-1 from Moody’s would ensure

the ready marketability of its commercial paper, should the need arise. No commercial paper has been issued or outstanding during the past ten years. In addition, the Company has temporary borrowing capacity at the Federal Reserve discount window, for which it has pledged $299.0 million in loans and $383.6 million in investment securities. Also, because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed debt offerings. Future financing could also include the issuance of common or preferred stock.

Cash and cash equivalents (defined as “Cash and due from banks” on the accompanying balance sheets) was $544.9 million at June 30, 2005 compared to $585.8 million at December 31, 2004. The $40.9 million decline resulted from changes in the various cash flows produced by the operating, investing and financing activities of the Company, as shown in the accompanying statement of cash flows for June 30, 2005. The cash flow provided by operating activities is considered a very stable source of funds and consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $166.2 million during the first six months of 2005. Investing activities, consisting mainly of purchases and maturities of available for sale securities, changes in levels of overnight investments in federal funds sold and resale agreements, and changes in the level of the loan portfolio, provided total cash of $62.0 million. Most of the cash inflow was due to $1.9 billion in sales and maturities of investment securities, partly offset by purchases of $1.6 billion. Financing activities used cash of $269.1 million, resulting from a $319.1 million decrease in overnight borrowings. Also, $121.6 million was required by the Company’s treasury stock repurchase program, and cash dividend payments were $32.1 million. These cash outflows were partly offset by an increase of $212.4 million in deposits. Future short-term liquidity needs arising from daily operations are not expected to vary significantly, and the Company believes it will be able to meet these cash flow needs.

Capital Management

The Company maintains strong regulatory capital ratios, including those of its principal banking subsidiaries, which exceed the well-capitalized guidelines under federal banking regulations. Information about the Company’s risk-based capital is shown below.



							Minimum Ratios
							for Well-
	June 30			December 31			Capitalized
(Dollars in thousands)	2005			2004			Banks

Risk-adjusted assets	$	11,096,042		$	10,993,542
Tier I capital		1,306,259			1,342,275
Total capital		1,455,302			1,492,009
Tier I capital ratio		11.77	%		12.21	%		6.00	%
Total capital ratio		13.12	%		13.57	%		10.00	%
Leverage ratio		9.37	%		9.60	%		5.00	%

The Company maintains a treasury stock buyback program, and, in October 2004, was authorized by the Board of Directors to repurchase up to 5,000,000 shares of its common stock. The Company has routinely used these shares to fund its annual 5% stock dividend and various employee benefit programs. During the current quarter, the Company purchased 1,251,614 shares of treasury stock at an average cost of $48.53 per share. At June 30, 2005, 1,215,168 shares remained available for purchase under the current Board authorization.

The Company’s common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital levels, and its usage of alternative investment options. The Company increased its cash dividend by 10% in the first quarter of 2005 compared to the fourth quarter of 2004, and maintained the same dividend payout in the second quarter of 2005. The year 2005 represents the 37th consecutive year of per share dividend increases.

Commitments and Off-Balance Sheet Arrangements

Various commitments and contingent liabilities arise in the normal course of business which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at June 30, 2005 totaled $6.6 billion (including approximately $3.2 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts amounted to $337.9 million and $21.2 million, respectively, at June 30, 2005. Since many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the balance sheet, amounted to $4.5 million at June 30, 2005. Management does not anticipate any material losses arising from commitments and contingent liabilities and believes there are no material commitments to extend credit that represent risks of an unusual nature.

The Company periodically purchases state historic rehabilitation tax credits, most of which are resold to third parties. During the year 2004, the tax credits purchased and sold amounted to $31.7 million and $32.2 million, respectively. During the first six months of 2005, the tax credits purchased and sold amounted to $45.1 million and $44.7 million, respectively. At June 30, 2005, the Company had outstanding purchase commitments totaling $51.3 million. Also, the Company has additional funding commitments arising from investments in several private equity concerns, classified as non-marketable investment securities, and low-income housing partnerships. These unfunded commitments amounted to $5.7 million at June 30, 2005.

Segment Results

The table below is a summary of segment pre-tax income results for the first six months of 2005 and 2004. Please refer to Note 9 in the notes to the consolidated financial statements for additional information about the Company’s operating segments.



		Six Months Ended
		June 30					Increase (decrease)

(Dollars in thousands)		2005			2004		Amount			Percent

Consumer		$	88,426		$	63,494	$	24,932			39.3	%
Commercial			63,167			52,685		10,482			19.9
Money management			15,578			14,519		1,059			7.3

	Total segments		167,171			130,698		36,473			27.9
Other/elimination			(7,441	)		32,627		(40,068	)		(122.8	)

Income before income taxes		$	159,730		$	163,325	$	(3,595	)		(2.2	)%

For the six months ended June 30, 2005, income before income taxes for the Consumer segment increased $24.9 million, or 39.3%, compared to the same period in the prior year. The increase was mainly due to higher allocated funding credits of $26.5 million, coupled with a 6.0% increase in non-interest income. Partly offsetting these increases was a 4.4% increase in non-interest expense. The increase in allocated funding credits resulted from the higher interest rate environment which assigns a greater value, and thus income, to customer deposits in this segment. The increase in non-interest income resulted mainly from higher overdraft fees and bank card transaction fees. Non-interest expense increased over the previous year mainly due to higher salaries expense, operating losses, bank card processing expense, loan servicing costs, assigned overhead costs, and expense related to brokerage and insurance activities. These increases were partly offset by declines in data processing and bank card servicing expense.

For the six months ended June 30, 2005, income before income taxes for the Commercial segment increased $10.5 million, or 19.9%, compared to the same period in the prior year. This resulted mainly from higher loan recoveries (used in assigning credit costs to the segment) and higher net interest income. Included in net interest income were higher allocated funding credits, which increased for the same reasons as mentioned in the Consumer segment above. Also, while interest on loans grew by $23.5 million, this growth was offset by higher assigned funding costs. Net loan recoveries were $2.9 million in the first six months of 2005, compared to net charge-offs of $5.4 million in the first six months of 2004. Non-interest

income decreased by 5.8% from the previous year mainly as a result of lower commercial cash management fees and lease-related income, partly offset by higher commercial bank card transaction fee income. The 4.0% increase in non-interest expense included increases in assigned deposit processing costs, loan servicing charges, bank card servicing charges, overhead cost allocations, and provision for off-balance sheet credit exposures. These increases were partly offset by higher deferred loan origination costs.

Money Management segment pre-tax profitability for the first six months of 2005 was up 7.3% over the previous year mainly due to higher net interest income, coupled with lower non-interest expense. Net interest income increased 17.8% over the prior year mainly due to higher assigned credit for funds resulting from rising interest rates as described above. The reduction in non-interest expense was mainly due to lower incentive compensation costs and trust processing costs, partly offset by higher proprietary mutual funds expense subsidies. Non-interest income decreased slightly from the prior period mainly due to lower bond trading income, partly offset by higher trust fee revenue.

As shown in the table above, the pre-tax profitability in the Other/elimination category decreased $40.1 million in the first six months of 2005 compared to the same period in 2004. This decrease was mainly the result of higher cost of fund charges assigned to this category, coupled with lower net gains on securities transactions.

Impact of Recently Issued Accounting Standards

The Financial Accounting Standards Board (FASB) issued Interpretation No. 46R (FIN 46R), “Consolidation of Variable Interest Entities”, in December 2003. FIN 46R clarified the requirements that investments in variable interest entities (VIE) be consolidated by the entity that has a variable interest that will absorb a majority of the VIE’s expected losses if they occur, receive a majority of the VIE’s expected returns, or both. Public companies were required to apply the unmodified provisions of the Interpretation to “special-purpose entities” by the end of the first reporting period ending after December 15, 2003. Public companies, other than small business issuers, were required to apply the revised Interpretation by the end of the first reporting period beginning after December 15, 2003 to all entities that were not special-purpose entities.

As mentioned in the 2004 Annual Report on Form 10-K, the Company has several Small Business Investment Company (SBIC) related private equity investments and other investments in low-income housing partnerships which would receive consolidated treatment under provisions of FIN 46R. The FASB, however, has elected to reconsider provisions of FIN 46R concerning SBIC related private equity investments. The FASB does not currently require these types of investments to be consolidated and has not resolved the accounting treatment for the investments. If consolidation is ultimately required for any of these investments, the Company’s assets, liabilities, revenues and expenses would be adjusted to reflect the consolidation of these investments; however, it is not expected that net income would be significantly affected. The Company does not have any other significant investments in unconsolidated entities meeting the requirements of FIN 46R.

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-03, “Accounting for Certain Loans and Debt Securities Acquired in a Transfer”. SOP 03-03 addresses the accounting for acquired loans that show evidence of having deteriorated in terms of credit quality since their origination (i.e. impaired loans). SOP 03-03 requires acquired loans to be recorded at their fair value, defined as the present value of future cash flows. SOP 03-03 prohibits the carryover of an allowance for loan loss on certain acquired loans, as credit losses are considered in the future cash flows assessment. SOP 03-03 is effective for loans that are acquired in fiscal years beginning after December 15, 2004. The Company has evaluated the applicability of this SOP for all prospective loans and currently does not expect this Statement to have a material effect on its consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment”. The revision requires entities to recognize the cost in their statements of income of employee services received in exchange for awards of equity instruments, based on the grant date fair

value of those awards. The Statement requires several accounting changes in the areas of award modifications and forfeitures. It contains additional guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. For calendar year companies, the Statement is effective January 1, 2006. The Company implemented provisions of the original Statement 123 beginning in 2003 and has recorded the cost of such awards in its statements of income. The Company does not expect that adoption of the revised Statement will have a material effect on its consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections”. The Statement changes the requirements for the accounting for and reporting of a change in accounting principle. Instead of including the cumulative effect of the change in net income, a change in accounting principle must be applied retrospectively to prior periods’ financial statements. In addition, the Statement gives specific guidance when it is impracticable to determine the effects of the change in accounting principle. The Statement carries forward previously issued guidance on reporting changes in accounting estimate (which shall be accounted for in the period of change and future periods, if affected) and errors in previously issued financial statements (which shall be reported as a prior period adjustment by restating the prior period financial statements). For calendar year companies, the Statement is effective for accounting changes and corrections of errors made after January 1, 2006. The Company does not expect that adoption of the Statement will have a material effect on its consolidated financial statements.

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Three Months Ended June 30, 2005 and 2004


		Second Quarter 2005								Second Quarter 2004

					Interest		Avg. Rates						Interest		Avg. Rates
		Average			Income/		Earned/			Average			Income/		Earned/
(Dollars in thousands)		Balance			Expense		Paid			Balance			Expense		Paid

ASSETS:
Loans:
	Business(A)	$	2,305,000		$	29,449		5.12	%	$	2,124,532		$	21,154		4.00	%
	Real estate — construction		478,675			6,776		5.68			439,082			4,317		3.95
	Real estate — business		1,765,896			25,259		5.74			1,850,935			22,075		4.80
	Real estate — personal		1,344,203			17,704		5.28			1,329,562			17,175		5.20
	Consumer		1,225,386			19,494		6.38			1,184,229			18,706		6.35
	Home equity		422,637			6,211		5.89			371,135			4,034		4.37
	Student		374,176			4,262		4.57			288,637			1,855		2.58
	Credit card		553,965			16,330		11.82			509,310			13,625		10.76
	Overdrafts		11,651			—		—			10,779			—		—

Total loans			8,481,589			125,485		5.93			8,108,201			102,941		5.11

Investment securities:
	U.S. government & federal agency		1,130,042			12,915		4.58			1,756,428			20,000		4.58
	State & municipal obligations(A)		70,746			783		4.44			70,473			871		4.97
	Mortgage and asset-backed securities		2,925,252			29,949		4.11			2,985,830			27,123		3.65
	Trading securities		7,864			78		3.98			25,151			229		3.67
	Other marketable securities(A)		219,289			2,091		3.82			137,523			710		2.08
	Non-marketable securities		75,968			1,032		5.45			77,663			808		4.18

Total investment securities			4,429,161			46,848		4.24			5,053,068			49,741		3.96

Federal funds sold and securities purchased under agreements to resell			145,135			1,164		3.22			111,170			339		1.23

Total interest earning assets			13,055,885			173,497		5.33			13,272,439			153,021		4.64

Less allowance for loan losses			(129,995	)							(132,767	)
Unrealized gain on investment securities			26,119								96,764
Cash and due from banks			502,834								549,708
Land, buildings and equipment, net			370,587								338,103
Other assets			198,816								199,583

Total assets		$	14,024,246							$	14,323,830


LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	417,059			325		.31		$	411,260			318		.31
	Interest checking and money market		6,820,516			11,867		.70			6,164,127			6,002		.39
	Time open & C.D.’s of less than $100,000		1,732,288			12,051		2.79			1,685,584			9,592		2.29
	Time open & C.D.’s of $100,000 and over		1,085,769			7,973		2.95			841,283			3,571		1.71

Total interest bearing deposits			10,055,632			32,216		1.29			9,102,254			19,483		.86

Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,481,135			10,163		2.75			1,911,587			4,431		.93
	Other borrowings(B)		380,043			3,074		3.24			453,931			2,082		1.84

Total borrowings			1,861,178			13,237		2.85			2,365,518			6,513		1.11

Total interest bearing liabilities			11,916,810			45,453		1.53	%		11,467,772			25,996		.91	%

Non-interest bearing demand deposits			633,473								1,275,569
Other liabilities			92,403								128,470
Stockholders’ equity			1,381,560								1,452,019

Total liabilities and equity		$	14,024,246							$	14,323,830

Net interest margin (T/ E)					$	128,044							$	127,025

Net yield on interest earning assets								3.93	%							3.85	%


(A)	Stated on a tax equivalent basis using a federal income tax rate of 35%.
(B)	Interest expense capitalized on construction projects is not deducted from the interest expense shown above.

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Six Months Ended June 30, 2005 and 2004


		Six Months 2005								Six Months 2004

					Interest		Avg. Rates						Interest		Avg. Rates
		Average			Income/		Earned/			Average			Income/		Earned/
(Dollars in thousands)		Balance			Expense		Paid			Balance			Expense		Paid

ASSETS:
Loans:
	Business(A)	$	2,275,806		$	56,902		5.04	%	$	2,105,495		$	41,687		3.98	%
	Real estate — construction		460,673			12,440		5.45			432,632			8,553		3.98
	Real estate — business		1,762,040			49,342		5.65			1,866,072			44,825		4.83
	Real estate — personal		1,339,639			35,151		5.29			1,330,288			34,543		5.22
	Consumer		1,209,314			38,050		6.34			1,168,070			37,457		6.45
	Home equity		417,525			11,771		5.69			364,119			7,920		4.37
	Student		391,999			8,617		4.43			335,347			4,332		2.60
	Credit card		550,475			31,982		11.72			510,048			27,834		10.97
	Overdrafts		13,961			—		—			14,128			—		—

Total loans			8,421,432			244,255		5.85			8,126,199			207,151		5.13

Investment securities:
	U.S. government & federal agency		1,251,566			24,258		3.91			1,766,049			35,585		4.05
	State & municipal obligations(A)		67,643			1,488		4.44			71,153			1,755		4.96
	Mortgage and asset-backed securities		2,886,712			57,145		3.99			2,915,511			53,933		3.72
	Trading securities		9,607			180		3.77			16,792			306		3.67
	Other marketable securities(A)		218,463			3,771		3.48			150,977			1,496		1.99
	Non-marketable securities		76,408			2,106		5.56			76,157			1,660		4.38

Total investment securities			4,510,399			88,948		3.98			4,996,639			94,735		3.81

Federal funds sold and securities purchased under agreements to resell			115,227			1,748		3.06			85,784			525		1.23

Total interest earning assets			13,047,058			334,951		5.18			13,208,622			302,411		4.60

Less allowance for loan losses			(130,928	)							(132,936	)
Unrealized gain on investment securities			36,982								113,775
Cash and due from banks			531,431								539,615
Land, buildings and equipment, net			362,206								337,492
Other assets			200,439								192,147

Total assets		$	14,047,188							$	14,258,715


LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	410,488			635		.31		$	401,975			622		.31
	Interest checking and money market		6,761,696			22,014		.66			6,137,346			11,870		.39
	Time open & C.D.’s of less than $100,000		1,698,742			22,443		2.66			1,700,311			19,491		2.31
	Time open & C.D.’s of $100,000 and over		1,032,685			14,325		2.80			793,192			6,836		1.73

Total interest bearing deposits			9,903,611			59,417		1.21			9,032,824			38,819		.86

Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,567,611			19,581		2.52			1,929,397			8,887		.93
	Other borrowings(B)		384,383			5,915		3.10			447,475			4,108		1.85

Total borrowings			1,951,994			25,496		2.63			2,376,872			12,995		1.10

Total interest bearing liabilities			11,855,605			84,913		1.44	%		11,409,696			51,814		.91	%

Non-interest bearing demand deposits			702,786								1,254,744
Other liabilities			93,884								135,808
Stockholders’ equity			1,394,913								1,458,467

Total liabilities and equity		$	14,047,188							$	14,258,715

Net interest margin (T/ E)					$	250,038							$	250,597

Net yield on interest earning assets								3.86	%							3.82	%


(A)	Stated on a tax equivalent basis using a federal income tax rate of 35%.
(B)	Interest expense capitalized on construction projects is not deducted from the interest expense shown above.


Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest sensitivity to movement in interest rates. The table below shows the effect that gradual rising and/or falling interest rates over a twelve month period would have on the Company’s net interest income, given a static balance sheet.



	June 30, 2005						March 31, 2005						December 31, 2004

	$ Change in			% Change in			$ Change in			% Change in			$ Change in			% Change in
	Net Interest			Net Interest			Net Interest			Net Interest			Net Interest			Net Interest
(Dollars in millions)	Income			Income			Income			Income			Income			Income

200 basis points rising	$	(8.8	)		(1.76	)%	$	(8.4	)		(1.69	)%	$	(8.7	)		(1.78	)%
100 basis points rising		(3.9	)		(.77	)		(3.8	)		(.77	)		(4.3	)		(.88	)
100 basis points falling		.4			.10			1.4			.30			2.6			.53

As shown in the table above, the Company’s exposure to interest rate changes varied slightly at the end of the second quarter of 2005 compared to previous quarters. As of June 30, 2005, under a 200 basis point rising rate scenario, net interest income is expected to decrease by $8.8 million compared with a decline of $8.4 million at March 31, 2005 and a decline of $8.7 million at December 31, 2004. Under a 100 basis point increase, as of June 30, 2005, net interest income is expected to decline by $3.9 million compared with declines of $3.8 million at March 31, 2005 and $4.3 million at December 31, 2004. The Company’s exposure to declining rates at June 30, 2005 increased somewhat, as under a 100 basis point falling rate scenario net interest income would increase by $400 thousand, a reduction of $1.0 million from estimated amounts at March 31, 2005.

During the second quarter of 2005 the Federal Reserve continued its economic strategy, raising its target federal funds rate by 25 basis points at its May meeting. As happened in the previous quarter, many of the Company’s variable rate loans re-priced at higher rates. This resulted in a 17 basis point increase in average rates earned on the Company’s loan portfolio in the second quarter of 2005. Additionally, average loans grew by $121.0 million over the previous quarter, providing greater interest income, and funded primarily from deposit growth coupled with a decrease in investment securities. The decrease in investment securities was mainly the result of continued efforts to re-position the Company’s investment portfolio, as described on page 17. During the quarter, average deposits increased by $166.3 million. The growth occurred mainly in certificates of deposit, personal demand, and interest checking accounts (excluding the reclassifications discussed on page 21). As a consequence of this deposit growth, average borrowings, primarily federal funds purchased, declined by $182.6 million.

As noted above, the Company’s overall risk to rising rates increased only slightly this quarter. This was due to a combination of factors, including an increase in fixed rate consumer loans, a reduction in variable rate student loans, and a decline in certain inflation-indexed treasury securities.

The Company performs monthly simulations which model interest rate risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations included in the Company’s 2004 Annual Report on Form 10-K.


Item 4.	CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2005. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were not any significant changes in the Company’s internal control over

financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION


Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information about the Company’s purchases of its $5 par value common stock, its only class of stock registered pursuant to Section 12 of the Exchange Act.



	Total				Total Number of		Maximum Number
	Number		Average		Shares Purchased		that May Yet Be
	of Shares		Price Paid		as part of Publicly		Purchased Under the
Period	Purchased		per Share		Announced Program		Program

April 1 – 30, 2005		375,428	$	47.28		375,428		2,091,354
May 1 – 31, 2005		357,587	$	48.99		357,587		1,733,767
June 1 – 30, 2005		518,599	$	49.12		518,599		1,215,168

Total		1,251,614	$	48.53		1,251,614		1,215,168

On October 22, 2004, the Company announced that its Board of Directors had approved the additional purchase of up to 4,296,580 shares of Company common stock. This, coupled with the shares available under the prior authorization, provided the Company with authority to purchase up to 5,000,000 shares.


Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of shareholders of the Company was held on April 20, 2005. The following proposals were submitted by the Board of Directors to a vote of security holders:

(1) Election of four directors to the 2008 Class for a term of three years. Proxies for the meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, and there was no solicitation in opposition to management’s nominees, as listed in the proxy statement. The four nominees for the four directorships received the following votes:



Name of Director	Votes For		Votes Withheld

John R. Capps		54,756,357		2,458,779
W. Thomas Grant, II		56,575,254		639,882
James B. Hebenstreit		56,659,344		555,792
David W. Kemper		56,516,302		698,834

Other directors whose term of office as director continued after the meeting were: Giorgio Balzer, Jonathan M. Kemper, Thomas A. McDonnell, Terry O. Meek, Benjamin F. Rassieur, III, Andrew C. Taylor, Mary Ann Van Lokeren, and Robert H. West.

(2) Adoption of the 2005 Equity Incentive Plan. The proposal received the following votes:



Votes For	Votes Against		Votes Abstain		Broker Non-votes

41,097,897		6,182,394		477,324		9,457,521

(3) Ratification of the selection of KPMG LLP as the Company’s independent public accountant. The proposal received the following votes:



Votes For	Votes Against		Votes Abstain

56,322,964		678,084		214,088


Item 6.	EXHIBITS

See Index to Exhibits

SIGNATURES

Pursuant to the requirements 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.


	Commerce Bancshares, Inc.


	By	/s/J. Daniel Stinnett


	J. Daniel Stinnett
	Vice President & Secretary

Date: August 5, 2005


	By	/s/Jeffery D. Aberdeen


	Jeffery D. Aberdeen
	Controller
	(Chief Accounting Officer)

Date: August 5, 2005

INDEX TO EXHIBITS

10.1 – Commerce Bancshares, Inc. 2005 Equity Incentive Plan incorporated herein by reference to Appendix A of the Company’s Proxy Statement dated March 11, 2005

10.2 – Commerce Bancshares, Inc. Notice of Grant of Stock Options and Option Agreement

10.3 – Commerce Bancshares, Inc. Restricted Stock Award Agreement

31.1 – Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 – Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 – Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Commerce Bancshares (CBSH) 10-Q2005 Q2 Quarterly report

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