Commerce Bancshares (CBSH) 10-Q 2007 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

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, 2007 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 FileNo. 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 checkmark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Act. (Check one):

Large accelerated filer X      Accelerated filer         Non-accelerated filer    

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

Yes   No X 

As of August 1, 2007, the registrant had outstanding 68,654,787 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, 2007 (unaudited) and December 31, 2006		3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006 (unaudited)		4
		Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2007 and 2006 (unaudited)		5
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (unaudited)		6
		Notes to Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations		16
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		35
	Item 4.	Controls and Procedures		35
PART II	Other Information
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		36
	Item 4.	Submission of Matters to a Vote of Security Holders		36
	Item 6.	Exhibits		36
Signatures				37
Index to Exhibits				38
Certification of CEO
Certification of CFO
Section 1350 Certifications

2

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	June 30			December 31
	2007			2006
	(Unaudited)
	(In thousands)
ASSETS
Loans, net of unearned income	$	10,225,921		$	9,681,520
Allowance for loan losses		(132,960	)		(131,730	)
Net loans		10,092,961			9,549,790
Loans held for sale		258,563			278,598
Investment securities:
Available for sale ($526,509,000 pledged in 2007 and $526,430,000 pledged in 2006 to secure structured repurchase agreements)		3,129,310			3,415,440
Trading		19,600			6,676
Non-marketable		92,213			74,207
Total investment securities		3,241,123			3,496,323
Federal funds sold and securities purchased under agreements to resell		566,145			527,816
Cash and due from banks		497,909			626,500
Land, buildings and equipment, net		397,108			386,095
Goodwill		110,705			97,643
Other intangible assets, net		18,052			19,633
Other assets		336,805			247,951
Total assets	$	15,519,371		$	15,230,349
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand	$	1,271,730		$	1,312,400
Savings, interest checking and money market		6,910,086			6,879,047
Time open and C.D.’s of less than $100,000		2,363,580			2,302,567
Time open and C.D.’s of $100,000 and over		1,516,326			1,250,840
Total deposits		12,061,722			11,744,854
Federal funds purchased and securities sold under agreements to repurchase		1,494,604			1,771,282
Other borrowings		346,137			53,934
Other liabilities		159,221			218,165
Total liabilities		14,061,684			13,788,235
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 70,465,922 shares		352,330			352,330
Capital surplus		422,189			427,421
Retained earnings		756,014			683,176
Treasury stock of 1,367,512 shares in 2007 and 422,468 shares in 2006, at cost		(65,904	)		(20,613	)
Accumulated other comprehensive loss		(6,942	)		(200	)
Total stockholders’ equity		1,457,687			1,442,114
Total liabilities and stockholders’ equity	$	15,519,371		$	15,230,349

See accompanying notes to consolidated financial statements.

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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)	2007			2006		2007		2006
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	183,736		$	155,672	$	360,279	$	300,285
Interest and fees on loans held for sale		6,185			5,516		12,265		10,777
Interest on investment securities		36,370			36,261		74,789		73,391
Interest on federal funds sold and securities purchased under agreements to resell		6,517			1,801		13,742		3,424
Total interest income		232,808			199,250		461,075		387,877
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		29,812			23,002		57,449		42,609
Time open and C.D.’s of less than $100,000		27,671			19,448		54,236		36,179
Time open and C.D.’s of $100,000 and over		19,566			13,906		36,479		27,093
Interest on federal funds purchased and securities sold under agreements to repurchase		18,621			14,024		43,744		26,605
Interest on other borrowings		3,274			2,391		3,824		5,177
Total interest expense		98,944			72,771		195,732		137,663
Net interest income		133,864			126,479		265,343		250,214
Provision for loan losses		9,054			5,672		17,215		10,104
Net interest income after provision for loan losses		124,810			120,807		248,128		240,110
NON-INTEREST INCOME
Deposit account charges and other fees		30,081			28,910		56,592		56,407
Bank card transaction fees		25,855			23,558		48,938		45,266
Trust fees		19,972			17,992		38,625		35,811
Trading account profits and commissions		1,440			2,010		3,301		4,575
Consumer brokerage services		3,332			2,771		6,375		5,160
Loan fees and sales		2,712			2,745		3,997		6,488
Other		10,667			10,193		20,515		21,517
Total non-interest income		94,059			88,179		178,343		175,224
INVESTMENT SECURITIES GAINS (LOSSES), NET		(493	)		3,284		3,402		5,687
NON-INTEREST EXPENSE
Salaries and employee benefits		76,123			71,239		153,023		142,964
Net occupancy		10,843			10,230		22,633		21,207
Equipment		5,681			6,071		12,114		12,020
Supplies and communication		8,586			7,872		17,092		16,265
Data processing and software		12,149			12,631		23,380		25,024
Marketing		4,859			4,657		9,177		8,975
Other		18,108			16,850		35,349		33,056
Total non-interest expense		136,349			129,550		272,768		259,511
Income before income taxes		82,027			82,720		157,105		161,510
Less income taxes		26,453			27,387		50,035		53,233
NET INCOME	$	55,574		$	55,333	$	107,070	$	108,277
Net income per share – basic	$	.80		$	.79	$	1.54	$	1.54
Net income per share – diluted	$	.79		$	.78	$	1.52	$	1.52

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

												Accumulated
												Other
(In thousands,	Common		Capital			Retained			Treasury			Comprehensive
except per share data)	Stock		Surplus			Earnings			Stock			Income (Loss)			Total
	(Unaudited)
Balance January 1, 2007	$	352,330	$	427,421		$	683,176		$	(20,613	)	$	(200	)	$	1,442,114
Net income							107,070									107,070
Change in unrealized gain (loss) on available for sale securities, net of tax													(6,971	)		(6,971	)
Amortization of pension loss, net of tax													229			229
Total comprehensive income																100,328
Purchase of treasury stock										(91,584	)					(91,584	)
Issuance of stock under purchase and equity compensation plans				(7,197	)					16,005						8,808
Net tax benefit related to equity compensation plans				1,644												1,644
Stock based compensation				2,995												2,995
Issuance of nonvested stock awards				(2,371	)					2,371						—
Cash dividends paid ($.500 per share)							(34,678	)								(34,678	)
Issuance in South Tulsa Financial Corp. acquisition				(303	)					27,917						27,614
Adoption of FIN 48							446									446
Balance June 30, 2007	$	352,330	$	422,189		$	756,014		$	(65,904	)	$	(6,942	)	$	1,457,687
Balance January 1, 2006	$	347,049	$	388,552		$	693,021		$	(86,901	)	$	(3,883	)	$	1,337,838
Net income							108,277									108,277
Change in unrealized gain (loss) on available for sale securities, net of tax													(13,548	)		(13,548	)
Total comprehensive income																94,729
Purchase of treasury stock										(75,773	)					(75,773	)
Issuance of stock under purchase and equity compensation plans				(4,943	)					9,408						4,465
Net tax benefit related to equity compensation plans				747												747
Stock based compensation				2,079												2,079
Issuance of nonvested stock awards				(1,077	)					1,077						—
Cash dividends paid ($.467 per share)							(32,690	)								(32,690	)
Balance June 30, 2006	$	347,049	$	385,358		$	768,608		$	(152,189	)	$	(17,431	)	$	1,331,395

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months
	Ended June 30
(In thousands)	2007			2006
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	107,070		$	108,277
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		17,215			10,104
Provision for depreciation and amortization		25,849			23,219
Amortization of investment security premiums, net		3,911			6,209
Investment securities gains, net(A)		(3,402	)		(5,687	)
Net gains on sales of loans held for sale		(2,373	)		(4,889	)
Originations of loans held for sale		(184,214	)		(166,857	)
Proceeds from sales of loans held for sale		206,446			242,192
Net (increase) decrease in trading securities, including amounts in the course of settlement		(55,015	)		2,156
Stock based compensation		2,995			2,079
(Increase) decrease in interest receivable		1,465			(1,574	)
Increase in interest payable		3,730			9,897
Increase in income taxes payable		1,918			8,691
Net tax benefit related to equity compensation plans		(1,644	)		(747	)
Other changes, net		(11,262	)		6,213
Net cash provided by operating activities		112,689			239,283
INVESTING ACTIVITIES:
Net cash and cash equivalents received in acquisition		10,771			—
Proceeds from sales of investment securities(A)		5,541			17,528
Proceeds from maturities/pay downs of investment securities(A)		582,224			562,754
Purchases of investment securities(A)		(350,874	)		(277,268	)
Net increase in loans		(446,888	)		(561,317	)
Purchases of land, buildings and equipment		(29,170	)		(16,614	)
Sales of land, buildings and equipment		2,619			1,690
Net cash used in investing activities		(225,777	)		(273,227	)
FINANCING ACTIVITIES:
Net decrease in non-interest bearing demand, savings, interest checking and money market deposits		(157,462	)		(87,709	)
Net increase in time open and C.D.’s		291,226			314,937
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		(276,678	)		260,084
Additional long-term borrowings		300,000			—
Repayment of long-term borrowings		(18,450	)		(124,390	)
Purchases of treasury stock		(91,584	)		(75,773	)
Issuance of stock under stock purchase and equity compensation plans		8,808			4,465
Net tax benefit related to equity compensation plans		1,644			747
Cash dividends paid on common stock		(34,678	)		(32,690	)
Net cash provided by financing activities		22,826			259,671
Increase (decrease) in cash and cash equivalents		(90,262	)		225,727
Cash and cash equivalents at beginning of year		1,154,316			674,135
Cash and cash equivalents at June 30	$	1,064,054		$	899,862
(A) Available for sale and non-marketable securities
Income tax payments, net of refunds	$	46,942		$	44,460
Interest paid on deposits and borrowings	$	191,764		$	127,766

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007(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 financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2006 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, 2007 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 2006 Annual Report onForm 10-K.

2. Acquisitions

The Company completed its previously announced acquisition of South Tulsa Financial Corporation (South Tulsa) on April 1, 2007, and South Tulsa’s results of operations were included in the Company’s consolidated financial results beginning on that date. In this transaction, the Company acquired the outstanding stock of South Tulsa and issued 561,951 shares of Company stock valued at $27.6 million. The valuation of Company stock was based on the average closing price of Company stock during the measurement period of March 21 through March 27. The Company’s acquisition of South Tulsa added $114.7 million in loans, $103.9 million in deposits and two branch locations in Tulsa, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $11.4 million in goodwill and $2.7 million in core deposit premium.

On July 1, 2007, the Company completed its previously announced acquisition of Commerce Bank in Denver, Colorado. In this transaction, the Company acquired the outstanding stock of Commerce Bank for $29.5 million in cash. The acquisition added $74.5 million in loans, $72.2 million in deposits and the Company’s first location in Colorado. Intangible assets recognized as a result of the transaction consisted primarily of goodwill and core deposit premium of approximately $21.3 million.

3. Loans and Allowance for Loan Losses

Major classifications within the Company’s loan portfolio at June 30, 2007 and December 31, 2006 are as follows.

	June 30		December 31
(In thousands)	2007		2006
Business	$	3,080,804	$	2,860,692
Real estate – construction		712,206		658,148
Real estate – business		2,187,301		2,148,195
Real estate – personal		1,533,943		1,478,669
Consumer		1,567,897		1,435,038
Home equity		442,294		441,851
Credit card		675,953		648,326
Overdrafts		25,523		10,601
Total loans	$	10,225,921	$	9,681,520

Included in the table above are impaired loans amounting to $37,076,000 at June 30, 2007 and $18,236,000 at December 31, 2006. Impaired loans include loans on non-accrual status and other loans classified as substandard and more than 60 days past due. Loans acquired in the South Tulsa transaction

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with evidence of a deterioration in credit quality were not material to the consolidated financial statements of the Company. Accordingly, the provisions of AICPA Statement of Position03-3, which require special accounting for such loans, were not applied.

In addition to its basic portfolio, the Company originates other held for sale loans which it intends to sell in secondary markets. Loans held for sale amounted to $258,563,000 at June 30, 2007 compared to $278,598,000 at December 31, 2006. These loans consist mainly of student loans, amounting to $247,353,000 at June 30, 2007, in addition to $11,210,000 of certain fixed rate residential mortgage loans.

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

	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2007		2006		2007		2006
Balance, beginning of period	$	131,730	$	128,468	$	131,730	$	128,447
Additions:
Allowance for loan losses of acquired bank		1,228		—		1,228		—
Provision for loan losses		9,054		5,672		17,215		10,104
Total additions		10,282		5,672		18,443		10,104
Deductions:
Loan losses		13,888		9,223		26,281		18,569
Less recoveries on loans		4,836		3,529		9,068		8,464
Net loan losses		9,052		5,694		17,213		10,105
Balance, June 30	$	132,960	$	128,446	$	132,960	$	128,446

4. Investment Securities

Investment securities, at fair value, consist of the following at June 30, 2007 and December 31, 2006.

	June 30		December 31
(In thousands)	2007		2006
Available for sale:
U.S. government and federal agency obligations	$	9,754	$	9,651
Government-sponsored enterprise obligations		380,430		464,567
State and municipal obligations		592,541		594,824
Mortgage-backed securities		1,732,541		1,782,443
Other asset-backed securities		233,727		354,465
Other debt securities		23,379		36,009
Equity securities		156,938		173,481
Total available for sale		3,129,310		3,415,440
Trading		19,600		6,676
Non-marketable		92,213		74,207
Total investment securities	$	3,241,123	$	3,496,323

Available for sale equity securities included short-term investments in money market mutual funds of $40,660,000 at June 30, 2007 and $59,973,000 at December 31, 2006. Equity securities also included common and preferred stock held by the Parent with a fair value of $95,392,000 at June 30, 2007 and $107,840,000 at December 31, 2006.

Non-marketable securities included Federal Home Loan Bank stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $49,165,000 and $35,592,000 at June 30, 2007 and December 31, 2006, respectively. Also included were venture capital and private equity investments, which amounted to $42,968,000 and $38,548,000 at June 30, 2007 and December 31, 2006, respectively. During the first six months of 2007 and 2006, net gains of $3,328,000 and $5,003,000, respectively, were recognized on venture capital and private equity investments. The net gains consisted of both realized gains and losses and fair value adjustments.

8

At June 30, 2007, securities carried at $2.0 billion were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowing capacity at the Federal Reserve. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $526.5 million, while securities pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral approximated $1.5 billion at June 30, 2007.

5. Goodwill and Other Intangible Assets

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

	June 30, 2007							December 31, 2006
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
(In thousands)	Amount		Amortization			Amount		Amount		Amortization			Amount
Amortizable intangible assets:
Core deposit premium	$	20,162	$	(2,831	)	$	17,331	$	19,920	$	(1,093	)	$	18,827
Mortgage servicing rights		1,338		(617	)		721		1,338		(532	)		806
Total	$	21,500	$	(3,448	)	$	18,052	$	21,258	$	(1,625	)	$	19,633

Aggregate amortization expense on intangible assets was $887,000 and $3,000, respectively, for the three month periods ended June 30, 2007 and 2006, and $1,823,000 and $4,000 for the six month periods ended June 30, 2007 and 2006. The following table shows the estimated future amortization expense based on existing asset balances and the interest rate environment as of June 30, 2007. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the addition of new intangible assets, changes in mortgage interest rates, pre-payment rates and other market conditions.

(In thousands)
2007	$	3,611
2008		3,316
2009		2,896
2010		2,480
2011		2,067

Changes in the carrying amount of goodwill and net other intangible assets for the six month period ended June 30, 2007 are as follows. Additional intangible assets were acquired in the South Tulsa transaction, and adjustments were recorded to intangible assets acquired in prior years, mainly due to the finalization of core deposit premium valuation analyses.

						Mortgage
			Core Deposit			Servicing
(In thousands)	Goodwill		Premium			Rights
Balance at December 31, 2006	$	97,643	$	18,827		$	806
Current year acquisition		11,364		2,732			—
Adjustments to prior year acquisitions		1,698		(2,490	)		—
Amortization		—		(1,738	)		(85	)
Balance at June 30, 2007	$	110,705	$	17,331		$	721

6. 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

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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.

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees to be received from the customer over the life of the agreement. At June 30, 2007 that net liability was $5,522,000, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $466,297,000 at June 30, 2007.

The Company guarantees payments to holders of certain trust preferred securities issued by wholly owned grantor trusts. Preferred securities issued by Breckenridge Capital Trust I, amounting to $4,000,000, are due in 2030 and may be redeemed beginning in 2010. These securities have a 10.875% interest rate throughout their term. Securities issued by West Pointe Statutory Trust  I, amounting to $10,000,000, are due in 2034 and may be redeemed beginning in 2009. These securities have a variable interest rate based on LIBOR, which resets on a quarterly basis. The maximum potential future payments guaranteed by the Company, which includes future interest and principal payments through maturity, was estimated to be approximately $44,793,000 at June 30, 2007. At June 30, 2007, the Company had a recorded liability of $14,179,000 in principal and accrued interest to date, representing amounts owed to the security holders.

In 2007, the Company entered into a risk participation agreement (RPA) with another financial institution which mitigates that institution’s credit risk arising from an interest rate swap with a third party. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. The Company’s exposure is based on a notional amount of $9,934,000. At inception, the Company recorded a liability which represented the fair value of the RPA, which is being accreted to income over the seven year term of the RPA, given no adverse change in the third party’s creditworthiness. At June 30, 2007 the liability was $68,000. The maximum potential future payment guaranteed by the Company cannot be readily estimated, but is dependent upon the fair value of the interest rate swap at the time of default. If an event of default had occurred at June 30, 2007, the Company would not have been required to make a payment.

7. Pension

The amount of net pension cost (income) is as follows:

							For the Six
							Months Ended
	For the Three Months Ended June 30						June 30
(In thousands)	2007			2006			2007			2006
Service cost – benefits earned during the period	$	247		$	276		$	495		$	552
Interest cost on projected benefit obligation		1,146			1,191			2,291			2,382
Expected return on plan assets		(1,705	)		(1,800	)		(3,410	)		(3,600	)
Amortization of unrecognized net loss		185			257			370			515
Net periodic pension cost (income)	$	(127	)	$	(76	)	$	(254	)	$	(151	)

Substantially all benefits under the Company’s defined benefit pension plan were frozen effective January 1, 2005. During the first six months of 2007, the Company made no funding contributions to its defined benefit pension plan, and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2007. The higher income

10

recognized for the defined benefit pension plan in the three and six month periods ended June 30, 2007 compared to the same periods in 2006 was primarily due to the greater than expected return on plan assets for the year ended September 30, 2006 (the valuation date).

Recently issued accounting pronouncements required the Company to reflect the funded status of its defined benefit pension plan on its consolidated balance sheet at December 31, 2006. Accordingly, the Company recorded a pre-tax reduction in accumulated other comprehensive income of $17,532,000, consisting of accumulated net loss, on that date. During the first six months of 2007, $370,000 of accumulated net loss was recognized as a component of net periodic benefit cost, as shown above, and as an increase in other comprehensive income.

8. Common Stock

Presented below is a summary of the components used to calculate basic and diluted earnings per share.

	For the Three				For the Six
	Months Ended				Months Ended
	June 30				June 30
(In thousands, except per share data)	2007		2006		2007		2006
Basic earnings per share:
Net income available to common shareholders	$	55,574	$	55,333	$	107,070	$	108,277
Weighted average basic common shares outstanding		69,285		69,879		69,457		70,108
Basic earnings per share	$	.80	$	.79	$	1.54	$	1.54
Diluted earnings per share:
Net income available to common shareholders	$	55,574	$	55,333	$	107,070	$	108,277
Weighted average common shares outstanding		69,285		69,879		69,457		70,108
Net effect of nonvested stock and the assumed exercise of stock-based awards — based on the treasury stock method using the average market price for the respective periods		782		954		822		969
Weighted average diluted common shares outstanding		70,067		70,833		70,279		71,077
Diluted earnings per share	$	.79	$	.78	$	1.52	$	1.52

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9. Other Comprehensive Income (Loss)

The Company’s components of other comprehensive income (loss) consist of the unrealized holding gains and losses on available for sale investment securities and the amortization of accumulated pension loss which has been recognized in net periodic benefit cost.

	For the Three						For the Six
	Months Ended						Months Ended
	June 30						June 30
(In thousands)	2007			2006			2007			2006
Available for sale investment securities:
Unrealized holding gains (losses)	$	(21,106	)	$	(5,109	)	$	(11,135	)	$	(21,851	)
Reclassification adjustment for gains included in net income		(77	)		—			(75	)		—
Net unrealized gains (losses) on securities		(21,183	)		(5,109	)		(11,210	)		(21,851	)
Income tax expense (benefit)		(8,050	)		(1,941	)		(4,239	)		(8,303	)
Holding gains (losses) on investment securities		(13,133	)		(3,168	)		(6,971	)		(13,548	)
Prepaid pension cost:
Amortization of accumulated pension loss		185			—			370			—
Income tax expense (benefit)		(71	)		—			(141	)		—
Accumulated pension loss		114			—			229			—
Other comprehensive income (loss)	$	(13,019	)	$	(3,168	)	$	(6,742	)	$	(13,548	)

10. 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, bankcard, 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, and 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. Management periodically makes changes to methods of assigning costs and income to its business

12

segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below.

						Money		Segment		Other/			Consolidated
(In thousands)	Consumer		Commercial			Management		Totals		Elimination			Totals
Three Months Ended June 30, 2007:
Net interest income	$	98,450	$	55,629		$	2,566	$	156,645	$	(22,781	)	$	133,864
Provision for loan losses		8,028		1,040			—		9,068		(14	)		9,054
Non-interest income		48,194		20,908			22,661		91,763		2,296			94,059
Investment securities losses, net		—		—			—		—		(493	)		(493	)
Non-interest expense		76,636		39,198			15,401		131,235		5,114			136,349
Income before income taxes	$	61,980	$	36,299		$	9,826	$	108,105	$	(26,078	)	$	82,027
Three Months Ended June 30, 2006:
Net interest income	$	93,255	$	51,662		$	2,410	$	147,327	$	(20,848	)	$	126,479
Provision for loan losses		5,320		393			—		5,713		(41	)		5,672
Non-interest income		45,738		19,444			21,169		86,351		1,828			88,179
Investment securities gains, net		—		—			—		—		3,284			3,284
Non-interest expense		71,934		36,397			14,938		123,269		6,281			129,550
Income before income taxes	$	61,739	$	34,316		$	8,641	$	104,696	$	(21,976	)	$	82,720
Six Months Ended June 30, 2007:
Net interest income	$	195,736	$	111,087		$	4,768	$	311,591	$	(46,248	)	$	265,343
Provision for loan losses		15,925		1,261			—		17,186		29			17,215
Non-interest income		88,744		40,976			44,566		174,286		4,057			178,343
Investment securities gains, net		—		—			—		—		3,402			3,402
Non-interest expense		151,135		78,448			31,557		261,140		11,628			272,768
Income before income taxes	$	117,420	$	72,354		$	17,777	$	207,551	$	(50,446	)	$	157,105
Six Months Ended June 30, 2006:
Net interest income	$	181,664	$	101,344		$	5,034	$	288,042	$	(37,828	)	$	250,214
Provision for loan losses		10,967		(854	)		—		10,113		(9	)		10,104
Non-interest income		89,219		38,613			42,855		170,687		4,537			175,224
Investment securities gains, net		—		—			—		—		5,687			5,687
Non-interest expense		143,064		71,881			30,650		245,595		13,916			259,511
Income before income taxes	$	116,852	$	68,930		$	17,239	$	203,021	$	(41,511	)	$	161,510

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, prepaymentand/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.

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11. Derivative Instruments

The Company’s interest rate risk management strategy includes the ability to modify the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Interest rate swaps are used on a limited basis as part of this strategy. At June 30, 2007, the Company had entered into two interest rate swaps with a notional amount of $13,832,000, which are designated as fair value hedges of certain fixed rate loans. The Company also sells swap contracts to customers who wish to modify their interest rate sensitivity. These swaps are offset by matching contracts purchased by the Company from other financial institutions. Because of the matching terms of the offsetting contracts, the effect of these transactions on net income is minimal. The notional amount of these types of swaps at June 30, 2007 was $275,511,000. These swaps are accounted for as free-standing derivatives and changes in their fair value were recorded in other non-interest income.

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 result 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, 2007							December 31, 2006
			Positive		Negative					Positive		Negative
	Notional		Fair		Fair			Notional		Fair		Fair
(In thousands)	Amount		Value		Value			Amount		Value		Value
Interest rate contracts:
Swap contracts	$	289,343	$	2,495	$	(3,260	)	$	181,464	$	1,185	$	(2,003	)
Option contracts		6,970		4		(4	)		6,970		10		(10	)
Credit-related contracts		9,934		—		(68	)		—		—		—
Foreign exchange contracts:
Forward contracts		8,862		273		(271	)		16,117		29		(20	)
Option contracts		2,820		4		(4	)		2,670		16		(16	)
Mortgage loan commitments		7,909		12		(25	)		11,529		—		(43	)
Mortgage loan forward sale contracts		20,018		205		(13	)		21,269		60		(14	)
Total	$	345,856	$	2,993	$	(3,645	)	$	240,019	$	1,300	$	(2,106	)

12. Income Taxes

For the second quarter of 2007, income tax expense amounted to $26,453,000 compared to $27,387,000 in the second quarter of 2006. The effective income tax rate for the Company was 32.2% in the current quarter compared to 33.1% in the same quarter last year. For the six months ended June 30, 2007 and 2006, income tax expense amounted to $50,035,000 and $53,233,000, resulting in effective income tax rates of 31.8% and 33.0%, respectively.

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). Upon adoption of FIN 48, the Company recognized a $446,000 decrease to the liability for unrecognized tax benefits which, as required, was accounted for as an increase to the January 1, 2007 balance of retained earnings. The resulting amount of unrecognized tax benefits at January 1, 2007 was $2,379,000, which included $444,000 of related accrued interest and penalties.

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The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense in the consolidated statements of income.

The Company’s federal income tax returns for 2003 through 2006 remain subject to examination by the Internal Revenue Service. Its state tax returns for 2002 through 2006 remain subject to examination by various state jurisdictions, based on individual state statutes of limitations.

13. Stock-Based Compensation

During the first six months of 2007, stock-based compensation was issued in the form of stock appreciation rights (SARs) and nonvested stock. The stock-based compensation expense that has been charged against income was $1,477,000 and $1,280,000 in the three months ended June 30, 2007 and 2006, respectively, and $2,995,000 and $2,079,000 in the six months ended June 30, 2007 and 2006, respectively.

The Company’s adoption of SFAS No. 123R, “Share-Based Payment” (the Statement), on January 1, 2006 resulted in a $543,000 reduction in stock-based compensation expense, which was recorded at the adoption date. This adjustment resulted from a change by the Company from its former policy of recognizing the effect of forfeitures only as they occurred to the Statement’s requirement to estimate the number of outstanding instruments for which the requisite service is not expected to be rendered.

In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs and options on date of grant. SARs and stock options are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and have10-year contractual terms. SARs, which were granted for the first time in 2006, vest on a graded basis over 4 years of continuous service. All SARs must be settled in stock under provisions of the plan. Stock options, which were granted in 2005 and previous years, vest on a graded basis over 3 years of continuous service. The table below shows the fair values of SARs granted during the first six months of 2007 and 2006, including the model assumptions for those grants.

	Six Months
	Ended June 30
	2007			2006
Weighted per share average fair value at grant date		$12.56			$13.41
Assumptions:
Dividend yield		1.9	%		1.7	%
Volatility		19.9	%		21.1	%
Risk-free interest rate		4.6	%		4.6	%
Expected term (in years)		7.4 years			7.4 years

A summary of option activity during the first six months of 2007 is presented below.

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
(Dollars in thousands, except per share data)	Shares			Price		Term		Value
Outstanding at January 1, 2007		3,225,100		$	33.14
Granted		—			—
Cancelled		(2,207	)		43.16
Exercised		(343,668	)		28.12
Outstanding at June 30, 2007		2,879,225		$	33.73		4.9 years	$	33,302

15

A summary of SAR activity during the first six months of 2007 is presented below.

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
(Dollars in thousands, except per share data)	Shares			Price		Term		Value
Outstanding at January 1, 2007		477,009		$	49.29
Granted		473,950			49.50
Cancelled		(14,822	)		49.13
Exercised		—			—
Outstanding at June 30, 2007		936,137		$	49.40		9.1 years	$	—

A summary of the status of the Company’s nonvested share awards, as of June 30, 2007, and changes during the six month period then ended is presented below.

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Nonvested at January 1, 2007		167,560		$	41.09
Granted		51,141			48.75
Vested		(17,694	)		33.38
Forfeited		(3,361	)		45.15
Nonvested at June 30, 2007		197,646		$	43.69

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 2006 Annual Report onForm 10-K. Results of operations for the three and six month periods ended June 30, 2007 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.

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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, subjectiveand/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, the valuation of certain non-marketable investments, 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 homogenous 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.

The Company, through its direct holdings and its Small Business Investment subsidiaries, has numerous private equity and venture capital investments, which totaled $43.0 million at June 30, 2007. These private equity and venture capital securities are reported at fair value. The values assigned to these securities where no market quotations exist are based upon available information and management’s judgment. Although management believes its estimates of fair value reasonably reflect the fair value of these securities, key assumptions regarding the projected financial performance of these companies, the evaluation of the investee company’s management team, and other economic and market factors may affect the amounts that will ultimately be realized from these investments.

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 is presented in the Income Taxes section of this discussion.

17

Selected Financial Data

	Three Months						Six Months
	Ended						Ended
	June 30						June 30
	2007			2006			2007			2006
Per Share Data
Net income – basic	$	.80		$	.79		$	1.54		$	1.54
Net income – diluted		.79			.78			1.52			1.52
Cash dividends		.250			.233			.500			.467
Book value								21.12			19.12
Market price								45.30			47.67
Selected Ratios
(Based on average balance sheets)
Loans to deposits*		87.73	%		84.27	%		87.75	%		83.80	%
Non-interest bearing deposits to total deposits		5.43			6.06			5.39			5.80
Equity to loans*		14.04			14.48			14.14			14.62
Equity to deposits		12.31			12.21			12.41			12.26
Equity to total assets		9.62			9.69			9.59			9.70
Return on total assets		1.46			1.61			1.42			1.59
Return on total stockholders’ equity		15.12			16.59			14.77			16.37
(Based on end-of-period data)
Non-interest income to revenue**		41.27			41.08			40.20			41.19
Efficiency ratio***		59.43			60.35			61.07			61.00
Tier I capital ratio								10.65			11.51
Total capital ratio								11.89			12.85
Leverage ratio								8.94			9.47

*	Includes loans held for sale.
**	Revenue includes net interest income and non-interest income.
***	The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

Results of Operations

Summary

	Three Months Ended June 30									Six Months Ended June 30
(Dollars in thousands)	2007			2006			% Change			2007			2006			% Change
Net interest income	$	133,864		$	126,479			5.8	%	$	265,343		$	250,214			6.0	%
Provision for loan losses		(9,054	)		(5,672	)		59.6			(17,215	)		(10,104	)		70.4
Non-interest income		94,059			88,179			6.7			178,343			175,224			1.8
Investment securities gains (losses), net		(493	)		3,284			(115.0	)		3,402			5,687			(40.2	)
Non-interest expense		(136,349	)		(129,550	)		5.2			(272,768	)		(259,511	)		5.1
Income taxes		(26,453	)		(27,387	)		(3.4	)		(50,035	)		(53,233	)		(6.0	)
Net income	$	55,574		$	55,333			.4	%	$	107,070		$	108,277			(1.1	)%

For the quarter ended June 30, 2007, net income amounted to $55.6 million, an increase of $241 thousand, or .4%, over the second quarter of the previous year. For the current quarter, the annualized return on average assets was 1.46%, the annualized return on average equity was 15.12%, and the efficiency ratio was 59.43%. Compared to the second quarter of last year, net interest income increased 5.8%, mainly due to

18

loan growth and higher yields. Non-interest income grew 6.7%, with increases in bank card, deposit account and trust fee income. Net gains reported on securities transactions and valuations declined $3.8 million. The provision for loan losses amounted to $9.1 million for the quarter, a $3.4 million increase over the second quarter of last year. Non-interest expense grew by 5.2%, with most of the increase related to salaries and employee benefits. Diluted earnings per share was $.79, an increase of 1.3% over $.78 per share in the second quarter of 2006.

Net income for the first six months of 2007 was $107.1 million, a $1.2 million, or 1.1%, decrease from the first six months of 2006. For the first six months of 2007, the annualized return on average assets was 1.42%, the annualized return on average equity was 14.77%, and the efficiency ratio was 61.07%. The decrease in net income was primarily due to a 5.1% increase in non-interest expense and a $7.1 million increase in the provision for loan losses. These effects were partly offset by a 6.0% increase in net interest income and a 1.8% increase in non-interest income. Diluted earnings per share of $1.52 for the first six months of 2007 was unchanged from the same period in the prior year.

Effective April 1, 2007, the Company completed the acquisition of South Tulsa Financial Corporation (South Tulsa). In this transaction, the Company acquired the outstanding stock of South Tulsa and issued 561,951 shares of Company stock valued at $27.6 million. The Company’s acquisition of South Tulsa added $114.7 million in loans, $103.9 million in deposits and two branch locations in Tulsa, Oklahoma. Goodwill of $11.4 million and core deposit premium of $2.7 million were recorded in this transaction.

In the third quarter of 2006, the Company acquired certain assets and assumed certain liabilities of Boone National Savings and Loan Association in central Missouri through a purchase and assumption agreement. Loans and deposits of $126.4 million and $100.9 million, respectively, were acquired, and goodwill and core deposit premium of $15.6 million and $2.6 million, respectively, were recorded as a result of this transaction. During the same quarter, the Company acquired the outstanding stock of West Pointe Bancorp, Inc. in Belleville, Illinois, which added $508.8 million in assets (including $255.0 million in loans) and $381.8 million in deposits. Goodwill of $38.7 million and core deposit premium of $14.9 million were recorded in this transaction.

On July 1, 2007, the Company completed the acquisition of Commerce Bank in Denver, Colorado. In this transaction, the Company acquired the outstanding stock of Commerce Bank for $29.5 million in cash. The acquisition added $74.5 million in loans, $72.2 million in deposits and the Company’s first location in Colorado.

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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, 2007 vs. 2006									June 30, 2007 vs. 2006
	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	$	20,795		$	7,489		$	28,284		$	40,387		$	19,963		$	60,350
Loans held for sale		1,148			(479	)		669			773			715			1,488
Investment securities:
U.S. government and federal agency securities		(2,476	)		522			(1,954	)		(5,323	)		993			(4,330	)
State and municipal obligations		2,764			287			3,051			6,494			688			7,182
Mortgage and asset-backed securities		(1,631	)		2,051			420			(3,475	)		4,717			1,242
Other securities		(756	)		(130	)		(886	)		(1,550	)		102			(1,448	)
Total interest on investment securities		(2,099	)		2,730			631			(3,854	)		6,500			2,646
Federal funds sold and securities purchased under agreements to resell		4,367			349			4,716			9,049			1,269			10,318
Total interest income		24,211			10,089			34,300			46,355			28,447			74,802
Interest expense:
Deposits:
Savings		13			(14	)		(1	)		31			(9	)		22
Interest checking and money market		2,294			4,517			6,811			3,305			11,513			14,818
Time open & C.D.’s of less than $100,000		3,685			4,538			8,223			7,478			10,579			18,057
Time open & C.D.’s of $100,000 and over		3,446			2,214			5,660			4,176			5,210			9,386
Total interest on deposits		9,438			11,255			20,693			14,990			27,293			42,283
Federal funds purchased and securities sold under agreements to repurchase		2,126			2,471			4,597			9,645			7,494			17,139
Other borrowings		959			(79	)		880			(1,163	)		(193	)		(1,356	)
Total interest expense		12,523			13,647			26,170			23,472			34,594			58,066
Net interest income, fully taxable equivalent basis	$	11,688		$	(3,558	)	$	8,130		$	22,883		$	(6,147	)	$	16,736

Net interest income in the second quarter of 2007 amounted to $133.9 million, which increased $7.4 million, or 5.8%, compared to the second quarter of last year. The growth in net interest income was the result of loan growth, coupled with higher average rates earned on loans. These increases were partially offset by an increase in average rates paid on interest bearing deposits and higher levels of deposits and

20

borrowings. During the second quarter of 2007, the net yield on earning assets (tax equivalent) was 3.82%, compared with 3.98% in the same quarter last year. For the first six months of 2007, net interest income totaled $265.3 million, a $15.1 million increase over net interest income of $250.2 million in the first six months of 2006. The net yield on earning assets declined by 15 basis points during the first six months of 2007 to 3.83%, compared with 3.98% in the same period last year.

Total interest income increased $33.6 million, or 16.8%, over the second quarter of 2006. The increase was the result of higher loan interest income, which grew $28.3 million on a tax equivalent basis (excluding loans held for sale), or 18.1%. The growth in loan interest income was mainly due to an increase of $1.2 billion in average loan balances outstanding, which included increases of $440.4 million in business loans, $227.4 million in business real estate loans, $148.8 million in personal real estate loans, and $185.8 million in consumer loans. Also, overall average rates earned on the loan portfolio increased 29 basis points and contributed $7.5 million in tax equivalent interest income. The second quarter of 2007 included the effects of bank acquisitions during the third quarter of 2006 and the second quarter of 2007, which contributed average loan growth of $454.3 million and related loan income of $8.6 million in the second quarter of 2007. The second quarter of 2006 included a $1.3 million increase to loan income, resulting from the Company’s decision at that time to classify its student loan portfolio as held for sale and to cease amortization of deferred costs related to those loans. Total interest income was also slightly impacted by the level and yields of the investment securities portfolio. Average yields rose 40 basis points during the second quarter of 2007 compared to the second quarter of 2006, which contributed $2.7 million in tax equivalent income. This increase was partly offset by lower average balances in the securities portfolio. While the total portfolio declined $242.2 million on average compared to the second quarter of 2006, investments in state and municipal securities rose from 9.9% of the portfolio in the second quarter of 2006 to 18.3% in the second quarter of 2007 and contributed $3.1 million on a tax equivalent basis. The average tax equivalent yield on interest earning assets was 6.60% in the second quarter of 2007 compared to 6.25% in the second quarter of 2006.

Compared to the first six months of 2006, total interest income increased $73.2 million, or 18.9%. The increase reflects similar trends as noted in the quarterly comparison above, with higher average rates earned on higher loan balances, contributing an increase of $60.4 million in tax equivalent interest income. The rate increase was the result of increases in the federal funds rate ordered earlier in 2006 by the Federal Reserve. Securities interest income in the first six months of 2007 compared to the prior period rose $2.6 million on a tax equivalent basis, due mainly to higher yields. Average yields on securities rose 45 basis points over the prior period, partly offset by a $225.9 million decline in average balances, as proceeds from maturities and pay downs were shifted to fund loan growth. Interest earned on overnight investments in federal funds sold and resale agreements rose $10.3 million over the prior period, primarily due to a $387.6 million increase in average balances. The average tax equivalent yield on total interest earning assets for the six months was 6.61% in 2007 and 6.14% in 2006.

Total interest expense increased $26.2 million, or 36.0%, compared to the second quarter of 2006. This increase was mainly the result of growth in deposit interest expense of $20.7 million, due to a 53 basis point increase in average rates paid, in addition to a $1.0 billion increase in average interest bearing deposit balances. Average rates paid on overnight borrowings increased 44 basis points, along with a $257.9 million increase in average borrowings, causing interest expense on federal funds purchased and securities sold under agreements to repurchase to increase $4.6 million. The average rate paid on all interest bearing liabilities increased to 3.04% in the second quarter of 2007 compared to 2.49% in the second quarter of 2006.

For the first six months of 2007, total interest expense increased $58.1 million, or 42.2%, compared with the previous year. Most of the growth was due to higher deposit interest expense of $42.3 million. Both higher interest bearing deposit balances, which rose $889.7 million, and higher rates paid, which rose 60 basis points, contributed to the increase. Interest expense on overnight borrowings grew $17.1 million, which was due to both higher balances and higher rates paid. The overall average cost of total interest bearing liabilities was 3.03% for the first six months of 2007 compared to 2.37% for the same period in 2006.

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

21

Non-Interest Income

	Three Months Ended June 30									Six Months Ended June 30
(Dollars in thousands)	2007			2006			% Change			2007			2006			% Change
Deposit account charges and other fees	$	30,081		$	28,910			4.1	%	$	56,592		$	56,407			.3	%
Bank card transaction fees		25,855			23,558			9.8			48,938			45,266			8.1
Trust fees		19,972			17,992			11.0			38,625			35,811			7.9
Trading account profits and commissions		1,440			2,010			(28.4	)		3,301			4,575			(27.8	)
Consumer brokerage services		3,332			2,771			20.2			6,375			5,160			23.5
Loan fees and sales		2,712			2,745			(1.2	)		3,997			6,488			(38.4	)
Other		10,667			10,193			4.7			20,515			21,517			(4.7	)
Total non-interest income	$	94,059		$	88,179			6.7	%	$	178,343		$	175,224			1.8	%
Non-interest income as a % of total revenue*		41.3	%		41.1	%					40.2	%		41.2	%

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

For the second quarter of 2007, total non-interest income was $94.1 million, an increase of $5.9 million, or 6.7%, compared with $88.2 million in the same quarter last year. The increase in non-interest income over the second quarter of last year resulted mainly from growth in bank card revenues, trust fee income and corporate cash management fee income. Deposit account fees increased $1.2 million, or 4.1%, compared with the second quarter of 2006, mainly due to an increase in corporate cash management fees, which grew $1.1 million, or 19.3%, while overdraft fees remained relatively flat. Bank card fees for the quarter increased $2.3 million, or 9.8%, over the same period last year, due mainly to higher fees earned on debit and corporate card transactions, which grew by 14.8% and 30.7%, respectively. Merchant fees, included in bank card revenues, decreased 8.9%, and continued to reflect slightly lower pricing margins and the loss of a large merchant customer last year. Credit card fees were up slightly. Trust fees for the quarter increased $2.0 million, or 11.0%, mainly as a result of growth in personal and corporate trust fees. Bond trading income declined $570 thousand from amounts recorded in the same period last year, while consumer brokerage services revenue continued to grow this quarter and was up 20.2% over last year. Loan fees and sales decreased by $33 thousand, as gains on student loan sales declined from $1.8 million in the second quarter of 2006 to $1.6 million in 2007. Other non-interest income for the quarter increased $474 thousand, or 4.7%. This increase resulted from smaller increases in international fees, cash sweep commissions and a gain on the sale of adrive-up facility, partly offset by a gain on the sale of a parking garage in the second quarter of 2006, which did not re-occur in the current quarter.

Non-interest income for the six months ended June 30, 2007 was $178.3 million compared to $175.2 million in the first six months of 2006, resulting in a $3.1 million, or 1.8%, increase. Deposit account fees rose slightly as a result of higher cash management revenue, which grew $1.3 million, or 11.7%. This growth was mostly offset by lower deposit account overdraft fees, which declined $987 thousand, or 2.5%. Bank card fees rose $3.7 million, or 8.1% overall, due to increases of 12.6% and 24.4%, respectively, in debit and corporate card transaction fees. Trust fees rose $2.8 million, or 7.9%, mainly due to a 6.7% increase in personal trust account fees. Bond trading income fell $1.3 million due to lower sales activity, while consumer brokerage income grew $1.2 million, or 23.5%, as a result of higher mutual fund fees. Loan fees and sales decreased by $2.5 million, as gains on student loan sales declined from $4.5 million in the first six months of 2006 to $1.8 million in 2007. Other non-interest income declined $1.0 million compared to the prior year, mainly due to the receipt in the first quarter of 2006 of $1.2 million in non-recurring income from a Parent company equity investment and the $1.3 million gain on the sale of a parking garage recorded in the second quarter of 2006, as mentioned above. Partly offsetting these effects was an increase in cash sweep commissions.

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Investment Securities Gains and Losses, Net

Net securities losses of $493 thousand were recorded in the second quarter of 2007, which resulted from losses of $742 thousand on sales of asset-backed home equity securities and agency preferred securities, in addition to fair value declines of $620 thousand on venture capital and private equity investments. The losses were partly offset by an $821 thousand gain on the sale of an equity investment owned by the Parent company. Net securities gains of $3.3 million were recorded in the second quarter of 2006, which included $2.6 million in realized gains and fair value adjustments on private equity investments. During the same quarter, a $683 thousand gain was recorded in conjunction with the conversion of MasterCard Inc. to a public company. The venture capital and private equity investments were held by the Company’s majority-owned venture capital subsidiaries. Minority interest pertaining to these gains and losses was $79 thousand in income and $748 thousand in expense for the second quarter of 2007 and 2006, respectively, and was reported in other non-interest expense.

On a year-to-date basis, net securities gains of $3.4 million were recorded in the six months ended June 30, 2007 compared to $5.7 million recorded in the same period in 2006.

Non-Interest Expense

	Three Months Ended June 30							Six Months Ended June 30
(Dollars in thousands)	2007		2006		% Change			2007		2006		% Change
Salaries and employee benefits	$	76,123	$	71,239		6.9	%	$	153,023	$	142,964		7.0	%
Net occupancy		10,843		10,230		6.0			22,633		21,207		6.7
Equipment		5,681		6,071		(6.4	)		12,114		12,020		.8
Supplies and communication		8,586		7,872		9.1			17,092		16,265		5.1
Data processing and software		12,149		12,631		(3.8	)		23,380		25,024		(6.6	)
Marketing		4,859		4,657		4.3			9,177		8,975		2.3
Other		18,108		16,850		7.5			35,349		33,056		6.9
Total non-interest expense	$	136,349	$	129,550		5.2	%	$	272,768	$	259,511		5.1	%

Non-interest expense for the quarter amounted to $136.3 million, which represented an increase of $6.8 million, or 5.2%, over the expense recorded in the second quarter of last year. Excluding the effects of recent bank acquisitions, non-interest expense in the current quarter grew 2.2% over the same period last year. Compared with the second quarter of last year, salaries and benefits expense increased $4.9 million, or 6.9%, mainly as a result of normal merit increases, severance expense, and the effects of the bank acquisitions, which increased salaries and benefits by approximately $2.0 million. Occupancy costs grew $613 thousand, or 6.0%, over the same quarter last year, mainly as a result of higher depreciation and building services expense. Supplies and communication expense increased $714 thousand, or 9.1%, mainly due to higher supplies, postage and data network expense, and was impacted by the effects of the acquisitions. Equipment and data processing expenses declined 6.4% and 3.8%, respectively, due to lower depreciation, maintenance and software costs. The increase in other expense of $1.3 million compared to the same quarter last year included increases in intangible assets amortization resulting from the bank acquisitions, operating losses, and travel and entertainment expense, partly offset by a decline in minority interest expense.

Non-interest expense increased $13.3 million, or 5.1%, over the first six months of 2006. Excluding the effects of the bank acquisitions, non-interest expense increased 2.4% over the prior year. Salaries and benefits expense grew $10.1 million, or 7.0%, due to merit increases, incentive compensation, payroll taxes and the effects of the bank acquisitions, which contributed $3.3 million during the current year. Partly offsetting these increases was a decline in employee group medical plan expense. Full-time equivalent employees totaled 5,051 and 4,868 at June 30, 2007 and 2006, respectively. Occupancy costs grew by $1.4 million, or 6.7%, over the same period last year, mainly as a result of seasonal maintenance costs, higher building depreciation expense and the effects of bank acquisitions. Supplies and communication expense increased $827 thousand, or 5.1%, over the prior year, mainly due to higher supplies and postage

23

expense, partly offset by lower data network expense. Data processing and software expense decreased $1.6 million, or 6.6%, due to lower bank card processing fees and online banking fees. Smaller variances occurred in equipment and marketing, which increased $94 thousand and $202 thousand, respectively. Other non-interest expense increased $2.3 million mainly due to increases in operating losses and intangible assets amortization. Partly offsetting these increases were declines in minority interest expense and professional fees.

Provision and Allowance for Loan Losses

										Six Months Ended
	Three Months Ended									June 30
(Dollars in thousands)	June 30, 2007			June 30, 2006			March 31, 2007			2007			2006
Provision for loan losses	$	9,054		$	5,672		$	8,161		$	17,215		$	10,104
Net loan charge-offs (recoveries):
Business		(11	)		259			704			693			(822	)
Credit card		5,948			4,387			5,813			11,761			8,135
Personal banking*		1,823			446			1,965			3,788			2,095
Real estate		988			80			(501	)		487			(175	)
Overdrafts		304			522			180			484			872
Total net loan charge-offs	$	9,052		$	5,694		$	8,161		$	17,213		$	10,105
Annualized total net charge-offs as a percentage of average loans (excluding held for sale)		.36	%		.26	%		.34	%		.35	%		.23	%

* Includes consumer 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 for the second quarter of 2007 amounted to $9.1 million, compared with $8.2 million in the prior quarter and $5.7 million in the second quarter of last year. The increase in net charge-offs in the second quarter of 2007 compared to the same quarter of last year was the result of higher credit card and personal banking loan charge-offs, coupled with charge-offs of several real estate construction-related loans this quarter. The lower levels of personal banking and credit card net loan charge-offs in the second quarter of 2006 were related to the changes to bankruptcy laws occurring late in 2005, resulting in lower loan charge-offs in the first half of 2006.

For the second quarter of 2007, annualized net charge-offs on average credit card loans were 3.69%, compared with 3.72% in the previous quarter and 3.01% in the same period last year. Additionally, personal banking loan net charge-offs for the quarter amounted to .37% of average personal loans, compared to .42% in the previous quarter and .10% in the same period last year. The provision for loan losses for the quarter totaled $9.1 million, and was $893 thousand higher than the previous quarter and $3.4 million higher than

24

the second quarter of 2006. The amount of the provision to expense in each quarter was determined by management’s review and analysis of the adequacy of the allowance for loan losses, involving all the activities and factors described above regarding that process.

Net charge-offs during the first six months of 2007 amounted to $17.2 million, compared to $10.1 million in the comparable prior period. The increase occurred because of higher credit card, business, and personal banking loan charge-offs in 2007. The annualized net charge-off ratios were .35% in the first six months of 2007 and .23% in the same period in 2006. The provision for loan losses was $17.2 million in the first six months of 2007 compared to $10.1 million in the same period in 2006.

The allowance for loan losses at June 30, 2007 was $133.0 million, or 1.30% of loans, compared to $131.7 million, or 1.36%, at December 31, 2006 and $128.4 million, or 1.41%, at June 30, 2006. The increase in the allowance at June 30, 2007 compared to the prior periods resulted from loan loss reserves related to banks acquired in the third quarter of 2006 and second quarter of 2007. The decrease in the allowance for loan losses as a percentage of loans resulted from growth in loans outstanding. The Company considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at June 30, 2007.

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 principaland/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)	2007			2006
Non-accrual loans	$	33,159		$	16,708
Foreclosed real estate		1,084			1,515
Total non-performing assets	$	34,243		$	18,223
Non-performing assets to total loans		.33	%		.19	%
Non-performing assets to total assets		.22	%		.12	%
Loans past due 90 days and still accruing interest	$	21,087		$	20,376

Non-accrual loans, which are also considered impaired, totaled $33.2 million at June 30, 2007, and increased $16.5 million over amounts recorded at December 31, 2006. The increase was mainly the result of placing one residential construction loan of $13.2 million on non-accrual status. The loan is secured by both undeveloped land and residential lots in the St. Louis metropolitan area, and management believes the collateral values are adequate to support the Company’s carrying value. There were also additional increases in non-accrual loans of $2.9 million in construction loans and $800 thousand in business loans. At June 30, 2007 non-accrual loans were comprised mainly of construction loans (48.8%), business real estate loans (28.6%) and business loans (19.9%).

Total loans past due 90 days or more and still accruing interest amounted to $21.1 million as of June 30, 2007, and increased $711 thousand over December 31, 2006. This growth included increases in business, personal real estate, consumer, and home equity loan delinquencies of $1.5 million, $640 thousand, $492 thousand and $364 thousand, respectively, offset by declines in credit card and business real estate loan delinquencies of $1.7 million and $832 thousand, respectively.

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

25

primarily classified as substandard under the Company’s internal rating system. 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 $47.5 million at June 30, 2007 compared with $71.5 million at March 31, 2007 and $41.9 million at December 31, 2006. The decline in the June 30, 2007 balance from the previous quarter occurred because several large loans, placed in this category because of deteriorating credit grade, were either repaid or placed on non-accrual status.

Income Taxes

Income tax expense was $26.5 million in the second quarter of 2007, compared to $23.6 million in the first quarter of 2007 and $27.4 million in the second quarter of 2006. The effective income tax rate on income from operations was 32.2% in the second quarter of 2007, compared with 31.4% in the first quarter of 2007 and 33.1% in the second quarter of 2006. Income tax expense was $50.0 million in the first six months of 2007 compared to $53.2 million in the previous year, resulting in effective income tax rates of 31.8% and 33.0%, respectively.

Effective tax rates were lower in 2007 compared to 2006 because of earnings on higher average balances in tax exempt state and municipal investment securities, coupled with higher levels of income from the Company’s real estate investment trust subsidiaries, which are not taxable in some states.

Financial Condition

Balance Sheet

Total assets of the Company were $15.5 billion at June 30, 2007 compared to $15.2 billion at December 31, 2006. Earning assets at June 30, 2007 were $14.3 billion and consisted of 73% loans and 23% investment securities, compared to $14.0 billion at December 31, 2006.

During the first six months of 2007, total period end loans, including held for sale, increased $524.4 million, or 5.3%, compared with balances at December 31, 2006. The increase was the result of growth of $220.1 million in business loans, $132.9 million in consumer loans, $55.3 million in personal real estate loans, $54.1 million in construction loans, and other smaller increases, offset by a decrease of $16.4 million in student loans. Growth in business loans reflected new business, especially in regional markets, and increased borrowings by existing customers. Consumer loan growth reflected increased demand for marine and recreational vehicle loans. Student loans declined mainly due to planned sales from the portfolio of $114.0 million in the second quarter of 2007.

On an average basis, loans increased $1.2 billion during the first six months of 2007 compared to the same period in 2006, or an increase of 13.3%. Loan growth occurred in nearly all loan categories, with increases of $443.0 million in business loans, $201.9 million in business real estate loans, $177.2 million in construction loans, $180.4 million in consumer loans, and $142.5 million in personal real estate loans. The overall increase in average loans included $406.2 million attributable to bank acquisitions during the third quarter of 2006 and the second quarter of 2007.

Available for sale investment securities, excluding fair value adjustments, decreased $274.9 million, or 8.1%, at June 30, 2007 compared to December 31, 2006 as the Company continued to reduce its investment securities portfolio, mainly through normal maturities paydowns, and some securities sales. Since December 31, 2006, maturities and principal paydowns of securities totaled $580.8 million. Sales during the six month period consisted mainly of $22.6 million in asset-backed home equity securities which, although rated AAA, were secured by sub-prime loans. These sales eliminated the Company’s exposure to sub-prime loans in the investment securities portfolio. During the same period, purchases of securities totaled $307.1 million, consisting of mortgage-backed securities ($161.1 million), federal agency securities ($101.7 million), other asset-backed securities ($24.0 million), and municipal obligations ($20.3 million).

On an average basis, available for sale investment securities, excluding fair value adjustments, declined $225.8 million, or 6.5%, during the first six months of 2007 compared to the same period in 2006. Federal

26

agency securities declined $251.2 million and other asset-backed securities declined $329.9 million, while municipal obligations and mortgage-backed securities increased $299.0 million and $167.0 million, respectively.

Total deposits increased by $316.9 million, or 2.7%, at June 30, 2007 compared to December 31, 2006. The increase in deposits over year end 2006 balances was due to increases of $265.5 million in jumbo certificates of deposit, $222.7 million in premium money market accounts, and $61.0 million in retail certificates of deposit. This growth was partly offset by declines of $132.8 million in money market accounts and $68.3 million in interest checking accounts.

On an average basis, total deposits increased $893.9 million, or 8.2%, during the first six months of 2007 compared to the same period in 2006, mainly due to increases of $400.1 million in retail certificates of deposit, $197.3 million in jumbo certificates of deposit, and $219.9 million in premium money market accounts. The overall increase in average deposits included $475.4 million attributable to the acquisitions mentioned above.

Compared to 2006 year end balances, total short-term borrowings at June 30, 2007 decreased $276.7 million, mainly due to lower overnight borrowings of federal funds at June 30. On an average basis, short-term borrowings were higher by $498.7 million during the first six months of 2007 compared to the same period in 2006, resulting from higher levels of repurchase agreements. Other longer-term borrowings increased $292.2 million over 2006 year end balances due to new advances from the Federal Home Loan Bank of Des Moines (FHLB) during the second quarter of 2007.

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 $566.1 million at June 30, 2007. 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 $3.1 billion at June 30, 2007, and included an unrealized net gain of $6.0 million. The portfolio includes maturities of approximately $576 million over the next 12 months, which offer substantial resources to meet either 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. At June 30, 2007, total investment securities pledged for these purposes comprised 62% of the total investment portfolio, leaving $1.2 billion of unpledged securities.

	June 30		March 31		December 31
(In thousands)	2007		2007		2006
Liquid assets:
Federal funds sold	$	80,694	$	12,734	$	28,794
Securities purchased under agreements to resell		485,451		454,076		499,022
Available for sale investment securities		3,129,310		3,243,687		3,415,440
Total	$	3,695,455	$	3,710,497	$	3,943,256

27

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, 2007, such deposits totaled $8.2 billion and represented 67.8% 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 $1.5 billion at June 30, 2007. These accounts are normally considered more volatile and higher costing, and comprised 12.6% of total deposits at June 30, 2007.

	June 30		March 31		December 31
(In thousands)	2007		2007		2006
Core deposit base:
Non-interest bearing demand	$	1,271,730	$	1,354,160	$	1,312,400
Interest checking		474,470		455,502		542,797
Savings and money market		6,435,616		6,348,895		6,336,250
Total	$	8,181,816	$	8,158,557	$	8,191,447

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 $1.5 billion at June 30, 2007. Federal funds purchased are obtained mainly from upstream correspondent banks with whom the Company maintains approved lines of credit. Securities sold under agreements to repurchase are secured by a portion of the Company’s investment portfolio and are comprised of both non-insured customer funds, totaling $582.5 million at June 30, 2007, and structured repurchase agreements of $500.0 million purchased in the third quarter of 2006 from an upstream financial institution. The Company’s long-term debt is relatively small compared to its overall liability position. It is comprised mainly of advances from the FHLB, which totaled $320.6 million at June 30, 2007. Most of the balance is comprised of $300.0 million in new advances during the second quarter of 2007, which mature in 2010. These advances have fixed interest rates. However, $200.0 million are subject to conversion to floating rates by the FHLB at specific dates prior to their maturity. In addition, the Company has $14.3 million in outstanding subordinated debentures issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts. Other outstanding long-term borrowings relate mainly to the Company’s leasing and venture capital operations.

	June 30		March 31		December 31
(In thousands)	2007		2007		2006
Borrowings:
Federal funds purchased	$	412,132	$	608,122	$	715,475
Securities sold under agreements to repurchase		1,082,472		1,025,762		1,055,807
FHLB advances		320,601		13,625		28,215
Subordinated debentures		14,310		14,310		14,310
Other long-term debt		11,226		11,300		11,409
Total	$	1,840,741	$	1,673,119	$	1,825,216

In addition to those mentioned above, several other sources of liquidity are available. The Company believes that its sound short-term commercial paper ratings ofA-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 $275.3 million in loans and $321.0 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.

28

Cash and cash equivalents (defined as “Cash and due from banks” and “Federal funds sold and securities purchased under agreements to resell” as segregated in the accompanying balance sheets) was $1.1 billion at June 30, 2007 compared to $1.2 billion at December 31, 2006. The $90.3 million decrease 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, 2007. 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 $112.7 million during the first six months of 2007. Investing activities, consisting mainly of purchases, sales and maturities of available for sale securities and changes in the level of the loan portfolio, used total cash of $225.8 million. Most of the cash outflow was due to $446.9 million in loan growth and $350.9 million of investment securities purchases, partly offset by $587.8 million in sales, maturities and paydowns of investment securities. Financing activities provided cash of $22.8 million, resulting from $300.0 million in new long-term borrowings and a $133.8 million increase in deposits. Partly offsetting these cash inflows was a reduction of $276.7 million in overnight borrowings. In addition, cash of $91.6 million was required by the Company’s treasury stock repurchase program. 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 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
	June 30			December 31			Well-Capitalized
(Dollars in thousands)	2007			2006			Banks
Risk-adjusted assets	$	12,718,434		$	11,959,757
Tier I capital		1,354,296			1,345,378
Total capital		1,512,614			1,502,386
Tier I capital ratio		10.65	%		11.25	%		6.00	%
Total capital ratio		11.89	%		12.56	%		10.00	%
Leverage ratio		8.94	%		9.05	%		5.00	%

The Company maintains a treasury stock buyback program, and in February 2007 was authorized by the Board of Directors to repurchase up to 4,000,000 shares of its common stock. The Company has routinely used these shares to fund its annual 5% stock dividend and various stock compensation programs. During the current quarter, the Company purchased 932,134 shares of treasury stock at an average cost of $47.48 per share. At June 30, 2007, 2,345,285 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 alternative investment options. The Company increased its per share cash dividend to $.250 in the first quarter of 2007, an increase of 7.3% compared to the fourth quarter of 2006, and maintained the same dividend payout in the second quarter of 2007. The year 2007 represents the 39th 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, 2007 totaled $7.7 billion (including approximately $3.8 billion in unused approved credit card lines of credit). In addition, the Company enters into standby and commercial letters of credit with its business customers. These contracts amounted to $466.3 million and $28.6 million, respectively, at June 30, 2007.

29

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 $5.5 million at June 30, 2007. 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 various state tax credits arising from third-party property redevelopment. Most of the tax credits are resold to third parties, although some are retained for use by the Company. During the first six months of 2007, purchases and sales of tax credits amounted to $11.8 million and $12.4 million, respectively, and at June 30, 2007, outstanding purchase commitments totaled $89.9 million. The Company has additional funding commitments arising from several investments in private equity concerns, classified as non-marketable investment securities in the accompanying consolidated balance sheets. These funding commitments amounted to $2.4 million at June 30, 2007. The Company also has unfunded commitments relating to its investments in low-income housing partnerships, which amounted to $2.0 million at June 30, 2007.

Segment Results

The table below is a summary of segment pre-tax income results for the first six months of 2007 and 2006. Please refer to Note 10 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)	2007			2006			Amount			Percent
Consumer	$	117,420		$	116,852		$	568			.5	%
Commercial		72,354			68,930			3,424			5.0
Money management		17,777			17,239			538			3.1
Total segments		207,551			203,021			4,530			2.2
Other/elimination		(50,446	)		(41,511	)		(8,935	)		N.M.
Income before income taxes	$	157,105		$	161,510		$	(4,405	)		(2.7	)%

For the six months ended June 30, 2007, income before income taxes for the Consumer segment increased $568 thousand, or .5%, compared to the same period in the prior year. The relatively flat growth was mainly due to an increase of $14.1 million in net interest income, partly offset by an increase of $8.1 million in non-interest expense and slightly lower non-interest income. The increase in net interest income resulted mainly from a $30.4 million increase in net allocated funding credits assigned to the Consumer segment’s deposit and loan portfolios, in addition to a $21.8 million increase in loan interest income, which more than offset growth of $38.0 million in deposit interest expense. The slight decrease in non-interest income resulted mainly from lower deposit account fees (mainly overdraft return item charges) and gains on student loan sales, partly offset by increases in bank card fee income (primarily debit card) and consumer brokerage service fees (mainly mutual fund fees). Non-interest expense increased $8.1 million, or 5.6%, over the previous year mainly due to higher salaries expense, operating losses, corporate management fees and assigned processing costs. Net loan charge-offs increased $5.0 million in the Consumer segment, mainly relating to bank card, marine and recreational vehicle loans.

For the six months ended June 30, 2007, income before income taxes for the Commercial segment increased $3.4 million, or 5.0%, compared to the same period in the previous year. Most of the increase was due to a $9.7 million, or 9.6%, increase in net interest income and a $2.4 million increase in non-interest income. Included in net interest income was a $39.5 million increase in loan interest income, which was partly offset by higher assigned net funding costs of $26.3 million and higher deposit interest expense of $3.4 million. Non-interest income increased by 6.1% over the previous year mainly as a result of higher commercial cash management fees, overdraft fees, bank card fees (mainly corporate card) and cash sweep

30

commissions, partly offset by lower gains on terminations and sales of equipment leases. The $6.6 million, or 9.1%, increase in non-interest expense included increases in salaries expense, deposit account processing costs and corporate management fees. Net loan charge-offs were $1.3 million in the first six months of 2007 compared to net recoveries of $854 thousand in the first six months of 2006.

Money Management segment pre-tax profitability for the first six months of 2007 was up $538 thousand, or 3.1%, over the previous year. The growth was mainly due to higher non-interest income, which increased $1.7 million, or 4.0%, primarily in personal trust fees, partly offset by lower bond trading income. Net interest income declined $266 thousand, or 5.3%, from the prior year. Higher net funding charges assigned to the segment’s short-term investments and borrowings and higher interest expense on deposits and borrowings were partly offset by growth in interest income on short-term investments. The increase in non-interest expense of $907 thousand was mainly due to higher salaries expense, assigned processing costs and corporate management fees.

As shown in the table above, the pre-tax profitability in the Other/elimination category decreased $8.9 million in the first six months of 2007 compared to the same period in 2006. This decrease was mainly the result of higher cost of fund charges assigned to this category related to investment securities.

Impact of Recently Issued Accounting Standards

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140”. The Statement permits fair value remeasurement for certain hybrid financial instruments containing embedded derivatives, and clarifies the derivative accounting requirements for interest and principal-only strip securities and interests in securitized financial assets. It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and eliminates a previous prohibition on qualifying special-purpose entities from holding certain derivative financial instruments. For calendar year companies, the Statement was effective for all financial instruments acquired or issued after January 1, 2007. The Company’s holdings of instruments that are subject to the provisions of this Statement are not material, and, accordingly, its adoption of the Statement did not affect its consolidated financial statements.

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140”. The Statement specifies under what situations servicing assets and servicing liabilities must be recognized. It requires these assets and liabilities to be initially measured at fair value and specifies acceptable measurement methods subsequent to their recognition. Separate presentation in the financial statements and additional disclosures are also required. For calendar year companies, the Statement was effective beginning January 1, 2007. The Company’s adoption of the Statement did not result in the recognition of any additional servicing assets or liabilities, or a change in its measurement methods.

In June 2006, the FASB issued Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”, which prescribes the recognition threshold and measurement attribute necessary for recognition in the financial statements of a tax position taken, or expected to be taken, in a tax return. Under FIN 48, an income tax position will be recognized if it is more likely than not that it will be sustained upon IRS examination, based upon its technical merits. Once that status is met, the amount recorded will be the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. It also provides guidance on derecognition, classification, interest and penalties, interim period accounting, disclosure, and transition requirements. As a result of the Company’s adoption of FIN 48, additional income tax benefits of $446 thousand were recognized as of January 1, 2007 as an increase to equity.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It does not require any new fair value measurements. For calendar year companies who do not adopt early, the

31

Statement is effective beginning January 1, 2008. The Company does not expect that its adoption of the Statement in 2008 will have a material effect on its consolidated financial statements.

The FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, in September 2006. The Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. It also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position. For calendar year companies with publicly traded stock, the funded status was required to be initially recognized at December 31, 2006, while the measurement requirement is effective in 2008. The Company’s initial recognition at December 31, 2006 of the funded status of its defined benefit pension plan reduced its prepaid pension asset by $17.5 million, reduced deferred tax liabilities by $6.6 million, and reduced the equity component of accumulated other comprehensive income by $10.9 million.

In September 2006, the Emerging Issues Task Force Issue06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”, was ratified. This EITF Issue addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying this Issue must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. For calendar year companies, the Issue is effective beginning January 1, 2008. The Company does not expect the adoption of the Issue to have a material effect on the Company’s consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. For calendar year companies who do not adopt early, the Statement is effective beginning January 1, 2008. The Company does not expect that its adoption of the Statement in 2008 will have a material effect on its consolidated financial statements.

32

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Three Months Ended June 30, 2007 and 2006

	Second Quarter 2007								Second Quarter 2006
				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)	$	3,134,650		$	53,314		6.82	%	$	2,694,246		$	43,529		6.48	%
Real estate – construction		657,956			11,997		7.31			508,127			9,331		7.37
Real estate – business		2,224,877			39,180		7.06			1,997,502			33,844		6.80
Real estate – personal		1,514,445			22,553		5.97			1,365,652			19,174		5.63
Consumer		1,518,855			27,813		7.34			1,333,105			22,935		6.90
Home equity		438,471			8,485		7.76			446,094			8,381		7.54
Credit card		646,699			20,982		13.01			584,508			18,846		12.93
Overdrafts		11,311			—		—			11,836			—		—
Total loans		10,147,264			184,324		7.29			8,941,070			156,040		7.00
Loans held for sale		354,878			6,185		6.99			293,332			5,516		7.54
Investment securities:
U.S. government and federal agency		410,560			4,076		3.98			696,820			6,030		3.47
State and municipal obligations(A)		600,219			6,871		4.59			348,289			3,820		4.40
Mortgage and asset-backed securities		2,013,847			23,631		4.71			2,165,999			23,211		4.30
Trading securities		24,430			290		4.76			21,144			229		4.34
Other marketable securities(A)		132,082			1,863		5.66			194,419			2,649		5.47
Non-marketable securities		90,018			1,326		5.91			86,658			1,487		6.88
Total investment securities		3,271,156			38,057		4.67			3,513,329			37,426		4.27
Federal funds sold and securities purchased under agreements to resell		503,526			6,517		5.19			142,651			1,801		5.06
Total interest earning assets		14,276,824			235,083		6.60			12,890,382			200,783		6.25
Less allowance for loan losses		(132,229	)							(128,063	)
Unrealized gain (loss) on investment securities		23,666								(21,378	)
Cash and due from banks		451,489								470,660
Land, buildings and equipment, net		396,458								367,190
Other assets		299,776								221,522
Total assets	$	15,315,984							$	13,800,313
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	406,313			555		.55		$	396,959			556		.56
Interest checking and money market		7,006,109			29,257		1.67			6,666,190			22,446		1.35
Time open and C.D.’s of less than $100,000		2,347,311			27,671		4.73			1,973,722			19,448		3.95
Time open and C.D.’s of $100,000 and over		1,561,463			19,566		5.03			1,257,161			13,906		4.44
Total interest bearing deposits		11,321,196			77,049		2.73			10,294,032			56,356		2.20
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase		1,471,784			18,621		5.07			1,213,925			14,024		4.63
Other borrowings(B)		275,618			3,274		4.76			205,472			2,394		4.67
Total borrowings		1,747,402			21,895		5.03			1,419,397			16,418		4.64
Total interest bearing liabilities		13,068,598			98,944		3.04	%		11,713,429			72,774		2.49	%
Non-interest bearing demand deposits		650,119								663,820
Other liabilities		123,268								85,641
Stockholders’ equity		1,473,999								1,337,423
Total liabilities and equity	$	15,315,984							$	13,800,313
Net interest margin (T/E)				$	136,139							$	128,009
Net yield on interest earning assets							3.82	%							3.98	%

(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.

33

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Six Months Ended June 30, 2007 and 2006

	Six Months 2007								Six Months 2006
				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)	$	3,061,808		$	103,894		6.84	%	$	2,618,783		$	82,614		6.36	%
Real estate – construction		652,208			24,162		7.47			474,992			16,955		7.20
Real estate – business		2,186,317			76,435		7.05			1,984,422			65,461		6.65
Real estate – personal		1,501,747			44,431		5.97			1,359,199			37,720		5.60
Consumer		1,491,272			54,028		7.31			1,310,865			44,480		6.84
Home equity		436,890			16,843		7.77			446,638			16,347		7.38
Credit card		639,860			41,556		13.10			581,042			37,422		12.99
Overdrafts		11,803			—		—			15,952			—		—
Total loans		9,981,905			361,349		7.30			8,791,893			300,999		6.90
Loans held for sale		352,937			12,265		7.01			329,332			10,777		6.60
Investment securities:
U.S. government and federal agency		436,444			8,624		3.98			740,544			12,954		3.53
State and municipal obligations(A)		603,441			13,801		4.61			304,469			6,619		4.38
Mortgage and asset-backed securities		2,066,104			48,747		4.76			2,229,066			47,505		4.30
Trading securities		21,509			500		4.69			20,084			423		4.25
Other marketable securities(A)		136,468			3,965		5.86			194,136			5,145		5.34
Non-marketable securities		83,800			2,572		6.19			85,340			2,917		6.89
Total investment securities		3,347,766			78,209		4.71			3,573,639			75,563		4.26
Federal funds sold and securities purchased under agreements to resell		529,802			13,742		5.23			142,203			3,424		4.86
Total interest earning assets		14,212,410			465,565		6.61			12,837,067			390,763		6.14
Less allowance for loan losses		(131,780	)							(128,247	)
Unrealized gain (loss) on investment securities		21,512								(15,096	)
Cash and due from banks		456,062								475,607
Land, buildings and equipment, net		393,505								369,352
Other assets		293,592								214,860
Total assets	$	15,245,301							$	13,753,543
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	401,884			1,087		.55		$	390,450			1,065		.55
Interest checking and money market		6,944,210			56,362		1.64			6,663,358			41,544		1.26
Time open and C.D.’s of less than $100,000		2,327,855			54,236		4.70			1,927,755			36,179		3.78
Time open and C.D.’s of $100,000 and over		1,468,871			36,479		5.01			1,271,576			27,093		4.30
Total interest bearing deposits		11,142,820			148,164		2.68			10,253,139			105,881		2.08
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase		1,719,039			43,744		5.13			1,220,338			26,605		4.40
Other borrowings(B)		163,647			3,824		4.71			232,874			5,180		4.49
Total borrowings		1,882,686			47,568		5.10			1,453,212			31,785		4.41
Total interest bearing liabilities		13,025,506			195,732		3.03	%		11,706,351			137,666		2.37	%
Non-interest bearing demand deposits		635,072								630,839
Other liabilities		122,883								82,455
Stockholders’ equity		1,461,840								1,333,898
Total liabilities and equity	$	15,245,301							$	13,753,543
Net interest margin (T/E)				$	269,833							$	253,097
Net yield on interest earning assets							3.83	%							3.98	%

(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.

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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 Company performs monthly simulations which model interest rate movements and 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 2006 Annual Report onForm 10-K.

The table below shows the effect that gradual risingand/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, 2007						March 31, 2007						December 31, 2006
	$ 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	$	(2.6	)		(.47	)%	$	(5.4	)		(1.01	)%	$	(4.3	)		(.80	)%
100 basis points rising		(.4	)		(.08	)		(3.2	)		(.60	)		(.9	)		(.17	)
100 basis points falling		(1.2	)		(.21	)		(.2	)		(.03	)		(.6	)		(.10	)
200 basis points falling		(2.7	)		(.49	)		(.6	)		(.10	)		(.7	)		(.13	)

The table reflects a decline in the exposure of the Company’s net interest income to rising rates during the second quarter of 2007. As of June 30, 2007, under a 200 basis point rising rate scenario, net interest income is expected to decrease by $2.6 million, compared with a decline of $5.4 million at March 31, 2007 and a decline of $4.3 million at December 31, 2006. Under a 100 basis point increase, as of June 30, 2007 net interest income is expected to decline $400 thousand, compared with declines of $3.2 million at March 31, 2007 and $900 thousand at December 31, 2006. The Company’s exposure to falling rates during the current quarter increased over the prior quarter, as under a 100 basis point falling rate scenario net interest income would decrease by $1.2 million compared with a $200 thousand decline in the previous quarter, while under a 200 basis point decrease, net interest income would decline by $2.7 million compared with $600 thousand in the prior quarter.

The Company’s reduced exposure to rising interest rates during the current quarter was largely the result of lower balances of investment securities and resale agreements, offset by the addition of commercial and consumer loans which in part have fixed rates. Also, while the simulation model does utilize a twelve month gradual rate scenario, certain non-maturity deposits are assumed to re-price faster since they currently are at comparatively low levels, and this effect increases the rising rate exposure somewhat. The same factors which reduce interest rate risk in a rising rate environment also increase risk in a falling rate environment, leaving the Company subject to lower levels of net interest income. The risk to falling rates has increased during the current quarter as a result of a decline in federal funds purchased, partly offset by growth in other borrowings, which have fixed rates. The Company continues to believe that its overall interest rate management has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimized impacts to interest rate risk.

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 ActRules 13a-15(e) and15d-15(e)) as of June 30, 2007. 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.

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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
	Number		Average		Shares Purchased		Maximum Number that
	of Shares		Price Paid		as part of Publicly		May Yet Be Purchased
Period	Purchased		per Share		Announced Program		Under the Program
April 1 – 30, 2007		417,566	$	47.67		417,566		2,859,853
May 1 – 31, 2007		332,466	$	47.81		332,466		2,527,387
June 1 – 30, 2007		182,102	$	46.43		182,102		2,345,285
Total		932,134	$	47.48		932,134		2,345,285

In February 2007, the Board of Directors approved the purchase of up to 4,000,000 shares of the Company’s common stock. At June 30, 2007, 2,345,285 shares remain available to be purchased under the current authorization.

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

The annual meeting of shareholders of the Company was held on April 18, 2007. The following proposals were submitted by the Board of Directors to a vote of security holders:

(1) Election of four directors to the 2010 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
Thomas A. McDonnell		46,870,966		15,324,998
Benjamin F. Rassieur III		61,952,851		243,112
Andrew C. Taylor		61,967,324		228,639
Robert H. West		61,766,885		429,078

Other directors whose term of office as director continued after the meeting were: John R. Capps, W. Thomas Grant II, James B. Hebenstreit, David W. Kemper, Jonathan M. Kemper, Seth M. Leadbeater, Terry O. Meek, and Kimberly G. Walker.

(2) 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
60,978,482		1,071,190		146,292

Item 6.  EXHIBITS

See Index to Exhibits

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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 7, 2007

By  /s/  Jeffery D. Aberdeen

Jeffery D. Aberdeen

Controller

(Chief Accounting Officer)

Date: August 7, 2007

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INDEX TO EXHIBITS

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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