COMMERCE BANCSHARES INC /MO/ - 10-Q 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, 2004 OR

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

For the Transition Period from to

Commission File No. 0-2989

COMMERCE BANCSHARES, INC.

_____________________________________________________

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

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

Yes X No

As of July 30, 2004, the registrant had outstanding 66,443,377 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, 2004 and December 31, 2003		3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003		4
		Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2004 and 2003		5
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003		6
		Notes to Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations		11
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		28
	Item 4.	Controls and Procedures		29


Part II	Other Information
	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		29
	Item 4.	Submission of Matters to a Vote of Security Holders		29
	Item 6.	Exhibits and Reports on Form 8-K		30

Signatures				31

Index to Exhibits				32
Amended and Restated Restricted Stock Plan
Certification of CEO
Certification of CFO
Certification of CEO
Certification of CFO

PART I: FINANCIAL INFORMATION


Item 1.	FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


			June 30			December 31
			2004			2003


			(Unaudited)

			(In thousands)
ASSETS
Loans, net of unearned income			$	8,107,924		$	8,142,679
Allowance for loan losses				(133,124	)		(135,221	)

Net loans				7,974,800			8,007,458

Investment securities:
	Available for sale			4,792,606			4,956,668
	Trading			17,673			9,356
	Non-marketable			72,141			73,170

Total investment securities				4,882,420			5,039,194

Federal funds sold and securities purchased under agreements to resell				134,805			108,120
Cash and due from banks				860,203			567,123
Land, buildings and equipment, net				339,269			336,366
Goodwill				48,522			48,522
Other intangible assets, net				1,321			2,184
Other assets				183,547			178,197

Total assets			$	14,424,887		$	14,287,164

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
	Non-interest bearing demand		$	1,723,109		$	1,716,214
	Savings, interest checking and money market			6,130,449			6,080,543
	Time open and C.D.’s of less than $100,000			1,669,858			1,730,237
	Time open and C.D.’s of $100,000 and over			847,332			679,214

Total deposits				10,370,748			10,206,208

Federal funds purchased and securities sold under agreements to repurchase				2,157,542			2,106,044
Other borrowings				393,625			403,853
Other liabilities				94,883			120,105

Total liabilities				13,016,798			12,836,210

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 68,636,548 shares		343,183			343,183
	Capital surplus			356,186			359,300
	Retained earnings			781,457			707,136
	Treasury stock of 1,918,228 shares in 2004 and 668,539 shares in 2003, at cost			(89,473	)		(29,573	)
	Other			(2,827	)		(1,963	)
	Accumulated other comprehensive income			19,563			72,871

Total stockholders’ equity				1,408,089			1,450,954

Total liabilities and stockholders’ equity			$	14,424,887		$	14,287,164

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME



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

(In thousands, except per share data)		2004		2003		2004		2003



		(Unaudited)
INTEREST INCOME
Interest and fees on loans		$	102,753	$	109,407	$	206,762	$	220,379
Interest on investment securities			49,348		50,034		93,940		94,498
Interest on federal funds sold and securities purchased under agreements to resell			339		207		525		355

Total interest income			152,440		159,648		301,227		315,232

INTEREST EXPENSE
Interest on deposits:
	Savings, interest checking and money market		6,320		8,106		12,492		16,187
	Time open and C.D.’s of less than $100,000		9,592		12,704		19,491		26,561
	Time open and C.D.’s of $100,000 and over		3,571		3,900		6,836		7,851
Interest on federal funds purchased and securities sold under agreements to repurchase			4,431		4,179		8,887		7,641
Interest on other borrowings			2,065		2,072		4,076		4,095

Total interest expense			25,979		30,961		51,782		62,335

Net interest income			126,461		128,687		249,445		252,897
Provision for loan losses			6,280		9,999		16,530		20,019

Net interest income after provision for loan losses			120,181		118,688		232,915		232,878

NON-INTEREST INCOME
Trust fees			16,128		15,074		32,292		29,598
Deposit account charges and other fees			28,394		23,420		55,208		45,996
Bank card transaction fees			17,884		16,057		34,192		30,523
Trading account profits and commissions			2,970		3,566		6,796		7,960
Consumer brokerage services			2,371		2,312		4,725		4,505
Mortgage banking revenue			274		1,620		762		2,651
Net gains on securities transactions			2,833		2,169		11,784		4,441
Other			13,435		9,483		24,499		22,633

Total non-interest income			84,289		73,701		170,258		148,307

NON-INTEREST EXPENSE
Salaries and employee benefits			65,696		66,006		133,712		134,599
Net occupancy			9,834		9,439		20,000		19,777
Equipment			5,678		6,209		11,536		12,087
Supplies and communication			8,342		8,402		16,286		16,940
Data processing and software			11,802		9,889		22,432		19,765
Marketing			4,424		3,957		8,128		7,063
Intangible assets amortization			433		449		869		899
Other			14,727		13,864		26,885		27,819

Total non-interest expense			120,936		118,215		239,848		238,949

Income before income taxes			83,534		74,174		163,325		142,236
Less income taxes			29,696		23,687		58,163		44,521

Net income		$	53,838	$	50,487	$	105,162	$	97,715

Net income per share – basic		$	.80	$	.73	$	1.56	$	1.40
Net income per share – diluted		$	.79	$	.72	$	1.54	$	1.38

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY




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




	(Unaudited)
Balance January 1, 2004		68,636,548	$	343,183	$	359,300		$	707,136		$	(29,573	)	$	(1,963	)	$	72,871		$	1,450,954

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

Total comprehensive income																					51,854

Purchase of treasury stock												(75,762	)								(75,762	)
Issuance of stock under purchase, option and benefit plans						(7,450	)					14,652									7,202
Net tax benefit related to stock option plans						747															747
Stock based compensation						3,525									410						3,935
Issuance of stock under restricted stock award plan						64						1,210			(1,274	)					—
Cash dividends paid ($.460 per share)									(30,841	)											(30,841	)

Balance June 30, 2004		68,636,548	$	343,183	$	356,186		$	781,457		$	(89,473	)	$	(2,827	)	$	19,563		$	1,408,089

Balance January 1, 2003		67,238,437	$	336,192	$	290,041		$	707,433		$	(5,507	)	$	(1,800	)	$	96,093		$	1,422,452

Net income									97,715												97,715
Change in unrealized gain (loss) on available for sale securities																		21,200			21,200

Total comprehensive income																					118,915

Shares issued in connection with the purchase of Vaughn Group, Inc.		149,477		748		5,252															6,000
Purchase of treasury stock												(58,037	)								(58,037	)
Issuance of stock under purchase, option and benefit plans						(3,675	)					6,187									2,512
Net tax benefit related to stock option plans						474															474
Stock based compensation						3,333									368						3,701
Issuance of stock under restricted stock award plan						(34	)					836			(802	)					—
Cash dividends paid ($.314 per share)									(21,865	)											(21,865	)

Balance June 30, 2003		67,387,914	$	336,940	$	295,391		$	783,283		$	(56,521	)	$	(2,234	)	$	117,293		$	1,474,152

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS





		For the Six Months Ended
		June 30

(In thousands)		2004			2003



		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	105,162		$	97,715
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		16,530			20,019
	Provision for depreciation and amortization		20,573			20,709
	Amortization of investment security premiums, net		14,014			13,900
	Net gains on securities transactions^(A)		(11,784	)		(4,441	)
	Net increase in trading securities		(4,013	)		(18,601	)
	Stock based compensation		3,935			3,701
	(Increase) decrease in interest receivable		4,865			(554	)
	Decrease in interest payable		(1,404	)		(7,027	)
	Increase (decrease) in income taxes payable		4,392			(4,048	)
	Other changes, net		(22,486	)		(9,600	)

Net cash provided by operating activities			129,784			111,773

INVESTING ACTIVITIES:
Net cash received in acquisition			—			5,199
Proceeds from sales of investment securities^(A)			192,689			98,637
Proceeds from maturities/pay downs of investment securities^(A)			822,300			591,337
Purchases of investment securities^(A)			(938,204	)		(1,136,597	)
Net increase in federal funds sold and securities purchased under agreements to resell			(26,685	)		(8,715	)
Net (increase) decrease in loans			3,331			(218,348	)
Purchases of land, buildings and equipment			(21,183	)		(17,597	)
Sales of land, buildings and equipment			572			1,542

Net cash provided by (used in) investing activities			32,820			(684,542	)

FINANCING ACTIVITIES:
Net increase in non-interest bearing demand, savings, interest checking and money market deposits			74,710			345,207
Net increase in time open and C.D.’s			113,809			5,181
Net increase in federal funds purchased and securities sold under agreements to repurchase			51,498			228,895
Additional borrowings			100,000			307,794
Repayment of borrowings			(107,264	)		(260,272	)
Net decrease in other short-term borrowings			(2,876	)		(25,717	)
Purchases of treasury stock			(75,762	)		(58,037	)
Issuance of stock under purchase, option and benefit plans			7,202			2,512
Cash dividends paid on common stock			(30,841	)		(21,865	)

Net cash provided by financing activities			130,476			523,698

Increase (decrease) in cash and cash equivalents			293,080			(49,071	)
Cash and cash equivalents at beginning of year			567,123			710,406

Cash and cash equivalents at June 30		$	860,203		$	661,335

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

Net income tax payments		$	56,099		$	48,403
Interest paid on deposits and borrowings		$	53,186		$	69,529

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004 (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). All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2003 data to conform to current year presentation. Results of operations for the three and six month periods ended June 30, 2004 are not necessarily indicative of results to be attained for any other period.

The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2003 Annual Report on Form 10-K.


2.	Allowance for Loan Losses

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





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

(In thousands)		2004		2003		2004		2003


Balance, beginning of period		$	133,092	$	132,162	$	135,221	$	130,618

Additions:
	Allowance for loan losses of acquired company		—		—		—		500
	Provision for loan losses		6,280		9,999		16,530		20,019

Total additions			6,280		9,999		16,530		20,519

Deductions:
	Loan losses		10,042		13,065		26,518		26,356
	Less recoveries on loans		3,794		3,610		7,891		7,925

Net loan losses			6,248		9,455		18,627		18,431

Balance, June 30		$	133,124	$	132,706	$	133,124	$	132,706


3.	Investment Securities

Investment securities, at fair value, consist of the following at June 30, 2004 and December 31, 2003.




		June 30		December 31
(In thousands)		2004		2003


Available for sale
	U.S. government and federal agency obligations	$	1,653,147	$	1,834,726
	State and municipal obligations		70,406		74,593
	Mortgage-backed securities		1,298,776		1,449,231
	Other asset-backed securities		1,569,795		1,351,203
	Other debt securities		21,924		63,587
	Equity securities		178,558		183,328
Trading			17,673		9,356
Non-marketable			72,141		73,170

Total investment securities		$	4,882,420	$	5,039,194

Equity securities include short-term investments in money market mutual funds of $136,273,000 at June 30, 2004 and $142,659,000 at December 31, 2003.


4.	Intangible Assets

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





		June 30, 2004					December 31, 2003


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


Amortized intangible assets:
	Core deposit premium	$	47,930	$	(46,666	)	$	47,930	$	(45,812	)
	Mortgage servicing rights		548		(491	)		567		(501	)

Total		$	48,478	$	(47,157	)	$	48,497	$	(46,313	)

The Company does not have any intangible assets that are not currently being amortized. Aggregate amortization expense on intangible assets was $433,000 and $449,000, respectively, for the three month periods ended June 30, 2004 and 2003, and $869,000 and $899,000 for the six month periods ended June 30, 2004 and 2003. Estimated annual amortization expense for the years 2004 through 2008 is as follows.




(In thousands)


2004	$	1,685
2005		453
2006		10
2007		10
2008		10


5.	Guarantees

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

At June 30, 2004, a liability in the amount of $4,516,000, representing the carrying value of the guarantee obligations associated with the standby letters of credit mentioned above, was recorded in accordance with Financial Accounting Standards Board Interpretation 45. This amount will be amortized into income over the life of the commitment. The contract amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $342,877,000 at June 30, 2004.

The Company guarantees payments to holders of certain trust preferred securities issued by a wholly owned grantor trust. The securities are due in 2030 and may be redeemed beginning in 2010. The maximum potential future payments guaranteed by the Company, which includes future interest and principal payments through maturity, was approximately $15,171,000 at June 30, 2004. At June 30, 2004, the Company had a recorded liability of $4,145,000 in principal and accrued interest to date, representing amounts owed to the security holders.


6.	Pension

The amount of net pension cost is as follows:





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

(In thousands)	2004			2003			2004			2003


Service cost – benefits earned during the period	$	1,252		$	980		$	2,503		$	1,960
Interest cost on projected benefit obligation		1,135			1,207			2,270			2,414
Expected return on plan assets		(1,603	)		(1,299	)		(3,195	)		(2,598	)
Amortization of prior service cost		(25	)		(25	)		(50	)		(50	)
Amortization of unrecognized net loss		316			511			632			1,022

Net periodic pension cost	$	1,075		$	1,374		$	2,160		$	2,748

The Company made a discretionary cash contribution of $6,000,000 to the pension plan in March 2004. The Company does not expect to contribute more than an additional $2,000,000 prior to the plan’s September 30 valuation date.


7.	Common Stock

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

For the

Three Months

Six Months

Ended June 30

(In thousands)

2004

2003

2004

2003

Weighted average common shares outstanding

67,005

69,461

67,355

69,831

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

932

733

1,002

739

67,937

70,194

68,357

70,570


8.	Comprehensive Income (Loss)

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





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

(In thousands)	2004			2003			2004			2003


Unrealized holding gains (losses)	$	(131,914	)	$	46,126		$	(74,693	)	$	39,134
Reclassification adjustment for gains included in net income		(3,046	)		(2,669	)		(11,288	)		(4,941	)

Net unrealized gains (losses) on securities		(134,960	)		43,457			(85,981	)		34,193
Income tax expense (benefit)		(51,285	)		16,513			(32,673	)		12,993

Other comprehensive income (loss)	$	(83,675	)	$	26,944		$	(53,308	)	$	21,200


9.	Segments

The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The Consumer segment includes the retail branch network, consumer finance, 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.




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


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

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

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

Three Months Ended June 30, 2003:
Net interest income after provision for loan losses	$	27,777	$	49,349		$	(1,974	)	$	75,152	$	43,536		$	118,688
Cost of funds allocation		28,952		(8,034	)		3,991			24,909		(24,909	)		—
Non-interest income		32,821		19,198			19,734			71,753		1,948			73,701

Total net revenue		89,550		60,513			21,751			171,814		20,575			192,389
Non-interest expense		66,368		31,834			16,248			114,450		3,765			118,215

Income before income taxes	$	23,182	$	28,679		$	5,503		$	57,364	$	16,810		$	74,174

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

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

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

Six Months Ended June 30, 2003:
Net interest income after provision for loan losses	$	55,039	$	98,294		$	(3,424	)	$	149,909	$	82,969		$	232,878
Cost of funds allocation		59,072		(15,877	)		7,336			50,531		(50,531	)		—
Non-interest income		67,512		34,395			39,663			141,570		6,737			148,307

Total net revenue		181,623		116,812			43,575			342,010		39,175			381,185
Non-interest expense		131,284		58,652			32,056			221,992		16,957			238,949

Income before income taxes	$	50,339	$	58,160		$	11,519		$	120,018	$	22,218		$	142,236

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. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided) by assets and liabilities based on their maturity, prepayment and/or repricing characteristics.

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


10.	Derivative Instruments

The Company uses derivative instruments, on a limited basis, primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. At June 30, 2004, the Company had interest rate swaps with a total notional amount of $25,942,000, of which two swaps with a notional amount of $12,911,000 were designated as fair value hedges of certain fixed rate loans. Through its International Department, the Company enters into foreign exchange contracts consisting mainly of contracts to purchase or deliver foreign currency transactions for customers at a specific future date. Also, mortgage loan commitments and forward sales contracts are derived from the Company’s mortgage banking operation in which fixed rate personal real estate loans are originated and sold to other institutions.

The Company’s usage of derivative instruments is detailed below.





		June 30, 2004							December 31, 2003


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


Interest rate swaps		$	25,942	$	215	$	(865	)	$	28,910	$	405	$	(1,487	)
Interest rate cap			—		—		—			4,319		—		—
Foreign exchange contracts:
	Forward contracts		16,189		121		(129	)		8,254		490		(551	)
	Options written/purchased		2,650		3		(3	)		2,500		38		(38	)
Mortgage loan commitments			11,831		19		(5	)		7,542		54		(1	)
Mortgage loan forward sale contracts			22,220		113		(44	)		7,298		8		(4	)

Total		$	78,832	$	471	$	(1,046	)	$	58,823	$	995	$	(2,081	)

In March 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (SAB 105). SAB 105 provides additional guidance in determining the fair market value of mortgage loan commitments. The new guidance prohibits the inclusion of the expected cash flows related to the associated servicing of the loan when determining the fair value of the loan commitment. This change in accounting tends to reduce the fair market value of the loan commitment and defers the income recognition resulting from the valuation of the commitment. SAB 105 was effective for loan commitments accounted for as derivatives and entered into on or after April 1, 2004, at which time the Company began excluding these expected cash flows in its determination of fair value. The effect of the change was a $227,000 reduction of pre-tax income, which was recorded in the second quarter of 2004.


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 2003 Annual Report on Form 10-K. Results of operations for the three and

six month periods ended June 30, 2004 are not necessarily indicative of results to be attained for any other period.

Forward-Looking Information

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

Critical Accounting Policies

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

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

The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company’s estimate of the losses inherent in the loan portfolio at any point in time. While these estimates are based on substantive methods for determining allowance requirements, nevertheless, actual outcomes may differ significantly from estimated results. 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 Small Business Investment subsidiaries, has numerous private equity and venture capital investments, which totaled $23.9 million at June 30, 2004. These private equity and venture capital securities are reported at estimated fair values in the absence of readily ascertainable fair values. 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.

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

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

Selected Financial Data





		Three Months						Six Months
		Ended June 30						Ended June 30

		2004			2003			2004			2003


Per Share Data
	Net income – basic	$	.80		$	.73		$	1.56		$	1.40
	Net income – diluted		.79			.72			1.54			1.38
	Cash dividends		.230			.157			.460			.314
	Book value								21.13			21.32
	Market price								45.95			37.07
Selected Ratios
(Based on average balance sheets)
	Loans to deposits		78.13	%		80.16	%		78.99	%		80.34	%
	Non-interest bearing deposits to total deposits		12.29			10.34			12.20			10.20
	Equity to loans		17.91			17.94			17.95			18.01
	Equity to deposits		13.99			14.38			14.18			14.47
	Equity to total assets		10.14			10.66			10.23			10.81
	Return on total assets		1.51			1.49			1.48			1.48
	Return on total stockholders’ equity		14.91			14.02			14.50			13.66
(Based on end-of-period data)
	Efficiency ratio*		57.96			58.82			58.58			60.00
	Tier I capital ratio								12.21			12.41
	Total capital ratio								13.56			13.79
	Leverage ratio								9.47			9.82


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

Results of Operations

Summary



	Three Months Ended June 30									Six Months Ended June 30

							%									%
(Dollars in thousands)	2004			2003			Change			2004			2003			Change


Net interest income	$	126,461		$	128,687			(1.7	)%	$	249,445		$	252,897			(1.4	)%
Provision for loan losses		(6,280	)		(9,999	)		(37.2	)		(16,530	)		(20,019	)		(17.4	)
Non-interest income		84,289			73,701			14.4			170,258			148,307			14.8
Non-interest expense		(120,936	)		(118,215	)		2.3			(239,848	)		(238,949	)		.4
Income taxes		(29,696	)		(23,687	)		25.4			(58,163	)		(44,521	)		30.6

Net income	$	53,838		$	50,487			6.6	%	$	105,162		$	97,715			7.6	%

For the quarter ended June 30, 2004, net income amounted to $53.8 million, an increase of $3.4 million, or 6.6%, over the second quarter of the previous year. Return on assets was 1.51% and the return on equity totaled 14.91%. For the quarter, the efficiency ratio amounted to 57.96%. The increase in net income over the second quarter of last year was the result of a 14.4% increase in non-interest income coupled with a decrease in provision for loan losses of 37.2%, and partly offset by a higher effective income tax rate. Non-interest expense grew less than 3% and net interest income was down approximately 2%. Diluted earnings per share was $.79, an increase of 9.7% over $.72 per share in the second quarter of 2003.

Net income for the first six months of 2004 was $105.2 million, a $7.4 million, or 7.6%, increase over the first six months of 2003. Diluted earnings per share increased 11.6% to $1.54, compared to $1.38 for the first six months of last year. The increase in net income was primarily due to a 14.8% rise in non-interest income and a 17.4% decline in the provision for loan losses, partly offset by a higher effective income tax rate. In addition, net interest income declined slightly and non-interest expense was stable.

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 June 30,									Six Months Ended
			2004 vs. 2003									June 30, 2004 vs. 2003


			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			$	1,775		$	(8,452	)	$	(6,677	)	$	5,544		$	(19,200	)	$	(13,656	)
Investment securities:
	U.S. government and federal agency securities			2,709			(3,710	)		(1,001	)		7,143			(7,058	)		85
	State and municipal obligations			(146	)		(34	)		(180	)		(305	)		(65	)		(370	)
	Mortgage and asset-backed securities			5,812			(4,879	)		933			12,008			(11,289	)		719
	Other securities			(271	)		(207	)		(478	)		(617	)		(440	)		(1,057	)

		Total interest on investment securities		8,104			(8,830	)		(726	)		18,229			(18,852	)		(623	)

Federal funds sold and securities purchased under agreements to resell				176			(44	)		132			239			(69	)		170

Total interest income				10,055			(17,326	)		(7,271	)		24,012			(38,121	)		(14,109	)

Interest expense:
Deposits:
	Savings			27			(94	)		(67	)		57			(179	)		(122	)
	Interest checking and money market			133			(1,852	)		(1,719	)		343			(3,916	)		(3,573	)
	Time open & C.D.’s of less than $100,000			(1,034	)		(2,078	)		(3,112	)		(2,198	)		(4,872	)		(7,070	)
	Time open & C.D.’s of $100,000 and over			426			(755	)		(329	)		592			(1,607	)		(1,015	)

		Total interest on deposits		(448	)		(4,779	)		(5,227	)		(1,206	)		(10,574	)		(11,780	)

Federal funds purchased and securities sold under agreements to repurchase				1,090			(838	)		252			2,807			(1,561	)		1,246
Other borrowings				329			(319	)		10			727			(714	)		13

Total interest expense				971			(5,936	)		(4,965	)		2,328			(12,849	)		(10,521	)

Net interest income, fully taxable equivalent basis			$	9,084		$	(11,390	)	$	(2,306	)	$	21,684		$	(25,272	)	$	(3,588	)

Net interest income for the second quarter of 2004 totaled $126.5 million, a 1.7% decrease from the second quarter of 2003. The decline in net interest income was mainly the result of lower interest income earned on both loans and investment securities. The reduction in total interest income exceeded the decrease in total interest expense. As a result, the net interest rate margin was 3.85% for the second quarter of 2004, compared to 4.15% in the second quarter of 2003 and 3.78% in the first quarter of 2004. For the first six months of 2004, net interest income totaled $249.4 million, a decrease of $3.5 million, or 1.4%, compared with the first six months of the previous year. The net interest rate margin declined 35 basis points to 3.82% during the first six months of 2004.

Total interest income decreased $7.2 million, or 4.5%, from the second quarter of 2003. The decrease was the result of lower interest earned on loans and investment securities. Rates earned on loans declined 35 basis points and rates earned on investment securities declined 64 basis points. The decrease in loan interest income was mainly the result of lower rates earned on virtually all lending products, but was offset by volume growth in the consumer lending area. Business loan volumes continued to be lower than the previous year, and this also factored in the reduction of interest income. While interest income on invest-

ment securities declined by $686 thousand, most of this decline was due to substantially lower rates earned, but offset by higher volumes of U.S. government and agency, mortgage-backed, and asset-backed securities. Also, the Company’s inflation indexed treasury securities contributed $5.0 million in the second quarter of 2004, compared with $6.6 million in the same period last year and $261 thousand in the first quarter of 2004. The average tax equivalent yield on interest earning assets was 4.64% in the second quarter of 2004 compared to 5.14% in the second quarter of 2003.

Compared to the first six months of 2003, total interest income decreased $14.0 million. The decline reflects similar trends as noted in the quarterly comparison above, with lower average overall rates earned on interest earning assets, which occurred because of a declining rate environment in the last several years. The decline was partly offset by higher balances in investment securities and in consumer and real estate loans. Average tax equivalent yields on total interest earning assets for the six months were 4.60% in 2004 and 5.19% in 2003.

Total interest expense decreased $5.0 million, or 16.1%, compared to the second quarter of 2003. This decline was mainly the result of lower rates paid on all deposit products, but especially on money market and certificate of deposit balances. Rates on overnight borrowings also declined. Also, average retail certificate of deposit balances were lower, thus reducing interest expense, mainly due to the continued run-off of these balances. However, average balances of long-term jumbo certificates of deposit grew, as did short-term borrowings, and this liquidity was used to provide funding for the growth in the Company’s investment securities portfolio. Average rates paid on all interest bearing liabilities decreased from 1.14% in the second quarter of 2003 to .91% in the second quarter of 2004.

For the first six months of 2004, total interest expense decreased $10.6 million, or 16.9%, compared with the previous year. Most of the decline resulted from a 28 basis point reduction in average rates paid on deposit balances. Also contributing to the decline were lower rates paid on borrowings and lower average balances in retail certificates of deposit, partly offset by higher borrowings. Average balances of federal funds purchased and securities sold under agreements to repurchase increased by $515.3 million and were used mainly to fund investment securities purchases and loan growth. The overall average cost of total interest bearing liabilities was .91% for the first six months of 2004 compared to 1.17% for the same period in 2003.

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

Non-Interest Income





	Three Months Ended June 30									Six Months Ended June 30

(Dollars in thousands)	2004			2003			% Change			2004			2003			% Change


Trust fees	$	16,128		$	15,074			7.0	%	$	32,292		$	29,598			9.1	%
Deposit account charges and other fees		28,394			23,420			21.2			55,208			45,996			20.0
Bank card transaction fees		17,884			16,057			11.4			34,192			30,523			12.0
Trading account profits and commissions		2,970			3,566			(16.7	)		6,796			7,960			(14.6	)
Consumer brokerage services		2,371			2,312			2.6			4,725			4,505			4.9
Mortgage banking revenue		274			1,620			(83.1	)		762			2,651			(71.3	)
Net gains on securities transactions		2,833			2,169			30.6			11,784			4,441			165.3
Other		13,435			9,483			41.7			24,499			22,633			8.2

Total non-interest income	$	84,289		$	73,701			14.4	%	$	170,258		$	148,307			14.8	%

Non-interest income as a % of operating income*		40.0	%		36.4	%					40.6	%		37.0	%


*	Operating income is calculated as net interest income plus non-interest income.

For the second quarter of 2004, total non-interest income amounted to $84.3 million compared with $73.7 million in the same quarter last year, or an increase of 14.4%. This increase resulted from growth in deposit account, bank card and trust fee income, coupled with an increase in gains on sales of student loans. Deposit account fees in the second quarter of 2004 grew by 21.2% over the same quarter last year as a result of a 43.6% increase in overdraft fees (mainly due to pricing increases). Bank card fees for the quarter increased 11.4% over the same period last year, due mainly to higher fees earned on merchant and credit card transactions, both of which grew by more than 16%. Trust fees for the quarter were up 7.0% over the same period last year as the result of higher fees on personal and institutional trust accounts. Bond trading account and mortgage banking revenues declined from amounts recorded in the same period last year due to slowing business as interest rates have begun to rise. Compared with the same period last year, bond trading account revenues decreased $596 thousand due to lower demand by business and correspondent bank customers, while the decline in mortgage banking revenue of $1.3 million was due to lower personal mortgage loan originations. Other non-interest income in the second quarter of 2004 included a gain of $1.1 million on the sale of a bank branch. In addition, gains of $4.1 million on sales of $113.0 million of student loans were recorded in the second quarter of 2004, compared to gains of $101 thousand in the second quarter of 2003.

Non-interest income for the six months ended June 30, 2004 increased $22.0 million, or 14.8%, over the first six months of 2003. Deposit account fees rose $9.2 million, or 20.0%, due to growth of 41.5% in fee income on overdraft and return items. Compared to the previous year, bank card fee income rose $3.7 million, or 12.0%, mainly due to growth of $2.3 million in merchant fees and $1.8 million in cardholder fees. Trust fees increased $2.7 million, or 9.1%, over the same period last year as a result of growth in personal and institutional trust accounts, along with rising account valuations upon which fees are based. Other non-interest income increased $1.9 million in 2004 compared to the previous year, mainly due to higher levels of student loan sales and the bank branch sale mentioned above. These increases to non-interest income were partly offset by declines of $1.2 million in bond trading revenue and $1.9 million in mortgage banking revenue.

During the current quarter, net securities gains amounted to $2.8 million compared with net securities gains of $2.2 million in the same period last year. On a year to date basis, such gains amounted to $11.8 million and $4.4 million for 2004 and 2003, respectively. Most of the 2004 gain resulted from sales of $152.8 million in inflation-indexed treasury securities and $26.2 million in mortgage-backed securities.

Non-Interest Expense





	Three Months Ended June 30							Six Months Ended June 30

(Dollars in thousands)	2004		2003		% Change			2004		2003		% Change


Salaries and employee benefits	$	65,696	$	66,006		(.5	)%	$	133,712	$	134,599		(.7	)%
Net occupancy		9,834		9,439		4.2			20,000		19,777		1.1
Equipment		5,678		6,209		(8.6	)		11,536		12,087		(4.6	)
Supplies and communication		8,342		8,402		(.7	)		16,286		16,940		(3.9	)
Data processing and software		11,802		9,889		19.3			22,432		19,765		13.5
Marketing		4,424		3,957		11.8			8,128		7,063		15.1
Intangible assets amortization		433		449		(3.6	)		869		899		(3.3	)
Other		14,727		13,864		6.2			26,885		27,819		(3.4	)

Total non-interest expense	$	120,936	$	118,215		2.3	%	$	239,848	$	238,949		.4	%

Non-interest expense for the quarter amounted to $120.9 million, an increase of $2.7 million, or 2.3%, compared with $118.2 million recorded in the second quarter of last year. Compared to the second quarter of last year, data processing costs grew $1.9 million, or 19.3%, mainly as a result of higher software expense and bank card processing fees. Increased costs were also incurred for marketing and occupancy, which rose $467 thousand and $395 thousand, respectively. Occupancy expense increased mainly due to higher net rent expense, partly offset by lower building services expense. Other non-interest expense increased 6.2% over the same quarter last year, primarily due to higher loan collection expense and lower

capitalized loan costs, partly offset by decreases in professional fees and operating losses. Compared with the second quarter of last year, salaries and benefits expense decreased slightly as a result of lower incentive payments and a reduction in temporary and contract labor. Full-time equivalent employees totaled 4,822 and 5,010 at June 30, 2004 and 2003, respectively. Equipment expense decreased 8.6% during the quarter mainly due to lower depreciation on computer hardware and lower costs for maintenance contracts.

Non-interest expense rose $899 thousand, or .4%, over the first six months of 2003. Data processing costs increased $2.7 million, or 13.5%, due to higher software expense and bank card processing fees, while marketing expense increased $1.1 million, or 15.1%, mainly due to higher deposit promotional costs. Salaries and benefits decreased $887 thousand, or .7%, due to a decline in incentive payments and a reduction in pension plan expense. Equipment costs declined 4.6% due to reductions in depreciation, rental, and repair expense. Supplies and communication expense decreased 3.9% from the prior year mainly due to lower postage and courier expense and lower telephone and network expense. Other non-interest expense decreased 3.4% due to decreases in professional fees, operating losses and operating lease depreciation, partly offset by a decrease in capitalized loan costs.

Provision and Allowance for Loan Losses





		Three Months Ended									Six Months Ended
											June 30
		June 30			June 30			March 31
(Dollars in thousands)		2004			2003			2004			2004			2003


Provision for loan losses		$	6,280		$	9,999		$	10,250		$	16,530		$	20,019

Net loan charge-offs (recoveries):
	Business		(270	)		2,550			5,502			5,232			4,400
	Credit card		5,040			4,641			4,934			9,974			9,350
	Personal banking		1,260			1,549			1,972			3,232			3,940
	Real estate		73			161			102			175			(231	)
	Overdrafts		145			554			(131	)		14			972

Total net loan charge-offs		$	6,248		$	9,455		$	12,379		$	18,627		$	18,431

Annualized total net charge-offs as a percentage of average loans			.31	%		.47	%		.61	%		.46	%		.46	%

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 internal loan review team and outside regulators.

Net loan charge-offs for the second quarter of 2004 amounted to $6.2 million compared with $12.4 million in the first quarter of 2004 and $9.5 million in the second quarter of last year. The ratio of annualized net loan charge-offs to total average loans in the current quarter was .31% compared with .47% in the same quarter last year and .61% in the first quarter of this year. The decrease in net charge-offs in the current

second quarter compared with the first quarter of this year was mainly the result of a $6.0 million charge-down in the first quarter of a large commercial loan in which the borrower had filed for bankruptcy.

For the second quarter of 2004, annualized net charge-offs on average credit card loans increased slightly to 3.64%, compared with 3.59% in the second quarter of last year. Personal banking loan charge-offs decreased in the current quarter, with a charge-off ratio of .27% compared to .35% in the same quarterly period last year, as delinquencies remained at low levels.

Net charge-offs during the first six months of 2004 amounted to $18.6 million, compared to $18.4 million in the comparable prior period. Net charge-offs increased in the business, credit card, and real estate loan categories, with partly offsetting declines in personal banking and overdraft categories. The annualized net charge-off ratios were .46% in both the 2004 and 2003 six month periods.

The provision for loan losses for the current quarter totaled $6.3 million, and was down $4.0 million from the provision recorded in the first quarter of this year, and also down $3.7 million from the amount recorded in the second quarter of 2003. The provision was $16.5 million in the first six months of 2004 compared to $20.0 million in the same period in 2003. The allowance for loan losses at June 30, 2004 was $133.1 million, or 1.64% of total loans, and represented 481% of total non-performing loans. The Company considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at June 30, 2004.

Risk Elements of Loan Portfolio

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




	June 30			December 31
(Dollars in thousands)	2004			2003


Non-accrual loans	$	27,654		$	32,523
Foreclosed real estate		1,877			1,162

Total non-performing assets	$	29,531		$	33,685

Non-performing assets to total loans		.36	%		.41	%
Non-performing assets to total assets		.20	%		.24	%
Loans past due 90 days and still accruing interest	$	16,481		$	20,901

Non-accrual loans at June 30, 2004 totaled $27.7 million, a decrease of $4.9 million from amounts recorded at December 31, 2003. Most of the decrease occurred in lease-related non-accrual loans, which declined $4.2 million from year end. Lease-related loans comprised 30.1% of the June 30, 2004 non-accrual loan total, with the remainder primarily relating to business or business real estate loans. Total loans past due 90 days or more and still accruing interest amounted to $16.5 million as of June 30, 2004, and decreased $4.4 million since December 31, 2003. The decline in past due loans occurred mainly due to a decrease of $4.9 million in the personal real estate loan category, partly offset by an increase of $2.4 million in the business and business real estate loan categories.

Income Taxes

The effective tax rate for the Company was 35.5% for the second quarter of 2004, compared with an effective tax rate of 35.7% in the first quarter of 2004 and 31.9% in the second quarter of 2003. The effective tax rate was 35.6% for the first six months of 2004, compared to 31.3% for the comparable period in 2003. As reported in the Company’s previously filed Quarterly Report on Form 10-Q and Annual Report on Form 10-K, the lower effective tax rates in the prior year resulted from the recognition of tax benefits

recorded from various corporate reorganization initiatives. Additional tax benefits related to these initiatives will not be recognized in income until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the third quarter of 2004 which would allow approximately $18.9 million of the remaining benefits to be recognized into income in the third and fourth quarters of 2004.

Financial Condition

Balance Sheet

Total assets of the Company were $14.4 billion at June 30, 2004 compared to $14.3 billion at December 31, 2003. Earning assets at June 30, 2004 were $13.1 billion and consisted of 62% loans and 37% investment securities, compared to $13.3 billion at December 31, 2003.

During the first six months of 2004, total period end loans decreased $34.8 million, or .4%, compared with balances at December 31, 2003. The decline was the result of decreases of $50.6 million in business real estate loans and $49.6 million in business loans, offset by increases of $27.3 million in construction loans and $2.5 million in personal real estate loans. Also, an increase of $20.3 million in personal banking loans was the result of growth in installment and home equity loans, partly offset by scheduled sales of student loans during the first six months of the year. While period end business loans declined from amounts recorded at December 31, 2003, average business loans grew $31.5 million in the second quarter of 2004 over the first quarter of 2004, reflecting higher line of credit usage and new lending relationships. Business real estate loans declined, on average, $30.3 million in the second quarter compared to the first quarter mainly due to scheduled payments on several large loans. While personal real estate loans grew slightly, new loan originations grew steadily since February due to continued low interest rates and seasonal increases. The increase in installment loans was mainly the result of increased lending initiatives in the areas of marine and recreational vehicles, and continued growth in home equity loans was reflective of the continued promotion of this product.

Available for sale investment securities, excluding fair value adjustments, decreased $78.1 million, or 1.6%, at June 30, 2004 compared to December 31, 2003. The decrease was due to principal paydowns of $408.5 million on mortgage-backed and asset-backed securities, maturities of $390.7 million and sales of $179.0 million, offset by purchases during the six months of 2004 of $933.0 million. The purchases of investment securities, which were funded mainly by increases in federal funds purchased, consisted primarily of asset-backed securities ($410.1 million) and U.S. government agency securities ($346.9 million).

Total deposits increased by $164.5 million, or 1.6%, at June 30, 2004 compared to December 31, 2003. The increase was due mainly to increases of $168.1 million in certificates of deposit of $100,000 and over, $32.9 million in money market accounts, and $28.8 million in savings accounts. This growth was offset by a decline of $60.4 million in certificates of deposit of less than $100,000.

Compared to 2003 year end balances, total borrowings at June 30, 2004 increased $41.3 million. This increase was due to increases in federal funds purchased of $247.5 million, offset by a decrease in repurchase agreements of $196.0 million. The increase in federal funds purchased provided liquidity for purchases of investment securities.

Liquidity and Capital Resources

Liquidity Management

The Company’s most liquid assets are comprised of investments in federal funds sold, securities purchased under agreements to resell (resale agreements), and available for sale marketable securities. Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The available for sale investment portfolio includes maturities of over $980 million which are scheduled 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, and borrowing capacity at the Federal Reserve. Total investment securities pledged for these purposes comprised approximately 50% of the total investment portfolio at June 30, 2004.




		June 30		March 31		December 31
(In thousands)		2004		2004		2003


Liquid assets:
	Federal funds sold	$	109,805	$	71,645	$	108,120
	Securities purchased under agreements to resell		25,000		—		—
	Available for sale investment securities		4,792,606		5,307,223		4,956,668

	Total	$	4,927,411	$	5,378,868	$	5,064,788

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, 2004, such deposits totaled $7.9 billion and represented nearly 76% 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 are normally considered more volatile and higher costing. These accounts totaled $847.3 million at June 30, 2004, comprising just 8.2% of total deposits.




		June 30		March 31		December 31
(In thousands)		2004		2004		2003


Core deposit base:
	Non-interest bearing demand	$	1,723,109	$	1,697,680	$	1,716,214
	Interest checking		669,617		614,175		681,405
	Savings and money market		5,460,832		5,424,887		5,399,138

	Total	$	7,853,558	$	7,736,742	$	7,796,757

Another important component of liquidity is 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 on an overnight basis. Federal funds purchased are obtained mainly from upstream correspondent banks with whom the Company maintains approved lines of credit, while securities sold under agreements to repurchase are comprised of non-insured customer funds secured by a portion of the Company’s investment portfolio. The Company’s long-term debt is relatively small compared to the Company’s overall liability position. It is comprised mainly of advances from the FHLB. The FHLB borrowings were a combination of fixed and floating rates with maturities of generally less than four years. Other outstanding long-term borrowings relate to the

Company’s leasing and venture capital operations. Period end borrowings of the Company are shown below.




		June 30		March 31		December 31
(In thousands)		2004		2004		2003


Borrowings:
	Federal funds purchased	$	1,431,700	$	1,268,170	$	1,184,189
	Securities sold under agreements to repurchase		725,842		799,995		921,855
	FHLB advances		367,004		467,042		367,079
	Subordinated debentures		4,000		4,000		4,000
	Other long-term debt		22,621		27,167		29,898
	Other short-term debt		—		1,256		2,876

	Total	$	2,551,167	$	2,567,630	$	2,509,897

In addition to those mentioned above, several other sources of liquidity are available. The Company believes that its sound debt ratings from Standard & Poor’s and Moody’s would enable its commercial paper to be readily marketable should the need arise. No commercial paper has been issued or outstanding during the past five years. In addition, the Company has temporary borrowing capacity at the Federal Reserve discount window, for which it has pledged $289.7 million in loans and $804.2 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 large, jumbo certificates of deposit. Future financing could also include the issuance of common or preferred stock.

The following discussion is based on cash flow amounts as shown in the accompanying consolidated statements of cash flows. The Company’s cash and cash equivalents (defined as “Cash and due from banks” on the accompanying balance sheets) were $860.2 million at June 30, 2004, an increase of $293.1 million compared to December 31, 2003. 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 $129.8 million during the first six months of 2004. Investing activities, consisting mainly of purchases and maturities of available for sale securities, changes in levels of overnight investments in federal funds sold and resale agreements, and changes in the level of the loan portfolio, provided total cash of $32.8 million. Most of the cash inflow was due to $1.0 billion in sales and maturities of investment securities, partly offset by purchases of $938.2 million. Financing activities provided cash of $130.5 million, resulting from a $188.5 million increase in deposits and $51.5 million in additional overnight borrowings. These cash inflows were partly offset by $75.8 million required by the Company’s treasury stock repurchase program and cash dividend payments of $30.8 million. Future short-term liquidity needs arising from daily operations are not expected to vary significantly, and the Company believes it will be able to meet these cash flow needs.

Capital Management

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




							Minimum Ratios
							for Well-
	June 30			December 31			Capitalized
(Dollars in thousands)	2004			2003			Banks


Risk-adjusted assets	$	11,001,047		$	10,813,111
Tier I capital		1,342,683			1,331,439
Total capital		1,491,530			1,481,600
Tier I capital ratio		12.21	%		12.31	%		6.00	%
Total capital ratio		13.56	%		13.70	%		10.00	%
Leverage ratio		9.47	%		9.71	%		5.00	%

The Company maintains a treasury stock buyback program; and in January 2004 was authorized by the Board of Directors to repurchase up to 3 million shares of its common stock. The Company has routinely used these shares to fund the Company’s annual 5% stock dividend and various employee benefit programs. During the current quarter, the Company purchased approximately 759 thousand shares of treasury stock at an average cost of $45.22 per share. At June 30, 2004, nearly 1.5 million shares were available for purchase by the Company under its current 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 by 7% in the first quarter of 2004 compared to the fourth quarter of 2003, and maintained the same dividend payout in the second quarter of 2004. The year 2004 represents the 36th 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, 2004 totaled $5.7 billion (including approximately $2.6 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts amounted to $342.9 million and $37.0 million, respectively, at June 30, 2004. Since many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the balance sheet, amounted to $4.5 million at June 30, 2004. 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.

In March 2004, the Company contributed $6.0 million to its pension plan. This contribution represented the latest discretionary contribution from the Company over the last several years in order to mitigate the effect of declining returns and valuation on the pension fund assets along with growing pension obligations. The contribution had no significant effect on the Company’s overall liquidity. The minimum required contribution for 2004 is expected to be zero. The Company does not expect to contribute more than an additional $2.0 million prior to the pension fund’s annual measurement date of September 30.

The Company has additional funding commitments arising from investments in several private equity concerns, classified as non-marketable investment securities, and low-income housing partnerships. These unfunded commitments are not significant to the Company’s liquidity position.

Segment Results

The table below is a summary of segment results for the first six months of 2004 and 2003. Please refer to Note 9 in the notes to the consolidated financial statements for additional information about the Company’s operating segments.





		Six Months Ended				Increase
		June 30				(decrease)

(Dollars in thousands)		2004		2003		Amount			Percent


Consumer		$	63,494	$	50,339	$	13,155			26.1	%
Commercial			52,685		58,160		(5,475	)		(9.4	)
Money management			14,519		11,519		3,000			26.0

	Total segments		130,698		120,018		10,680			8.9
Other/ elimination			32,627		22,218		10,409			46.8

Income before income taxes		$	163,325	$	142,236	$	21,089			14.8	%

For the six months ended June 30, 2004, income before income taxes for the Consumer segment increased $13.2 million, or 26.1%, mainly due to higher net interest income (including allocated credit for funds provided) and lower assigned loan loss costs, coupled with a 15.5% increase in non-interest income. The increase in non-interest income resulted mainly from higher overdraft fees. Also, non-interest expense grew only 1.7% over the previous year mainly due to lower corporate overhead allocations. For the six months ended June 30, 2004, income before income taxes for the Commercial segment was lower by 9.4%, mainly as a result of higher assigned loan loss costs and higher non-interest expense. A large commercial loan charge-off of $6.0 million in the first quarter of 2004 contributed to the higher loan loss costs. Non-interest income increased by 10.4% over the previous year mainly as a result of higher cash management fees coupled with an increase in corporate bank card transaction fee income. The increase in non-interest expense resulted from higher assigned costs for check processing and other internally allocated overhead costs. Money Management segment pre-tax profitability for the first six months of 2004 was up 26.0% over the previous year mainly due to higher overall revenues coupled with lower non-interest expense, which was down 6.4%. The reduction in expense was mainly due to lower salaries costs, which resulted mainly from a staffing reduction in the trust administration area as part of a department restructuring. Higher trust fees resulted in the higher overall trust revenue totals.

Impact of Recently Issued Accounting Standards

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

As mentioned in the 2003 Annual Report on Form 10-K, the Company has several Small Business Investment Company (SBIC) related private equity investments and other investments in low-income housing partnerships which are being evaluated under several provisions of FIN 46R. In addition to the above, the FASB has elected to reconsider provisions of FIN 46R concerning SBIC related private equity investments and does not currently require these types of investments to be consolidated. If consolidation is ultimately required for any of these investments, the Company’s assets, liabilities, revenues and expenses would be adjusted to reflect the consolidation of these investments; however, it is not expected that net income would be significantly affected. The Company does not have any other significant investments in unconsolidated entities meeting the requirements of FIN 46R.

In March 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (SAB 105). SAB 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments, as is discussed further in Note 10 to the consolidated financial statements. The Company’s adoption of SAB 105 effective April 1, 2004 resulted in the recognition of a pre-tax loss of $227 thousand.

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Three Months Ended June 30, 2004 and 2003



		Second Quarter 2004								Second Quarter 2003

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


ASSETS:
Loans:
	Business^(A)	$	2,076,813		$	20,929		4.05	%	$	2,234,452		$	23,584		4.23	%
	Real estate – construction		439,082			4,317		3.95			403,705			4,386		4.36
	Real estate – business		1,850,935			22,075		4.80			1,831,897			23,633		5.17
	Real estate – personal		1,329,562			17,175		5.20			1,294,147			18,552		5.75
	Personal banking		1,844,001			24,595		5.36			1,758,271			25,907		5.91
	Credit card		557,029			13,850		10.00			518,356			13,556		10.49
	Overdrafts		10,779			—		—			10,793			—		—

Total loans			8,108,201			102,941		5.11			8,051,621			109,618		5.46

Investment securities:
	U.S. government & federal agency		1,756,428			20,000		4.58			1,555,367			21,001		5.42
	State & municipal obligations^(A)		70,473			871		4.97			81,880			1,051		5.15
	Mortgage and asset-backed securities		2,985,830			27,123		3.65			2,442,177			26,190		4.30
	Trading securities		25,151			229		3.67			19,648			205		4.18
	Other marketable securities^(A)		137,523			710		2.08			225,774			1,041		1.85
	Non-marketable securities		77,663			808		4.18			71,953			979		5.46

Total investment securities			5,053,068			49,741		3.96			4,396,799			50,467		4.60

Federal funds sold and securities purchased under agreements to resell			111,170			339		1.23			59,687			207		1.39

Total interest earning assets			13,272,439			153,021		4.64			12,508,107			160,292		5.14

Less allowance for loan losses			(132,767	)							(132,227	)
Unrealized gain on investment securities			96,764								156,478
Cash and due from banks			549,708								503,066
Land, buildings and equipment, net			338,103								336,950
Other assets			199,583								177,848

Total assets		$	14,323,830							$	13,550,222

LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	411,260			318		.31		$	384,002			385		.40
	Interest checking and money market		6,164,127			6,002		.39			5,970,037			7,721		.52
	Time open & C.D.’s of less than $100,000		1,685,584			9,592		2.29			1,872,368			12,704		2.72
	Time open & C.D.’s of $100,000 and over		841,283			3,571		1.71			778,928			3,900		2.01

Total interest bearing deposits			9,102,254			19,483		.86			9,005,335			24,710		1.10

Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,911,587			4,431		.93			1,525,278			4,179		1.10
	Other borrowings^(B)		453,931			2,082		1.84			389,413			2,072		2.13

Total borrowings			2,365,518			6,513		1.11			1,914,691			6,251		1.31

Total interest bearing liabilities			11,467,772			25,996		.91	%		10,920,026			30,961		1.14	%

Non-interest bearing demand deposits			1,275,569								1,038,701
Other liabilities			128,470								146,760
Stockholders’ equity			1,452,019								1,444,735

Total liabilities and equity		$	14,323,830							$	13,550,222

Net interest margin (T/E)					$	127,025							$	129,331

Net yield on interest earning assets								3.85	%							4.15	%


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

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Six Months Ended June 30, 2004 and 2003



		Six Months 2004								Six Months 2003

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


ASSETS:
Loans:
	Business^(A)	$	2,061,050		$	41,249		4.02	%	$	2,247,699		$	47,511		4.26	%
	Real estate – construction		432,632			8,553		3.98			403,399			8,870		4.43
	Real estate – business		1,866,072			44,825		4.83			1,801,634			47,196		5.28
	Real estate – personal		1,330,288			34,543		5.22			1,284,669			37,831		5.94
	Personal banking		1,867,536			49,709		5.35			1,740,314			51,849		6.01
	Credit card		554,493			28,272		10.25			518,192			27,550		10.72
	Overdrafts		14,128			—		—			11,749			—		—

Total loans			8,126,199			207,151		5.13			8,007,656			220,807		5.56

Investment securities:
	U.S. government & federal agency		1,766,049			35,585		4.05			1,471,099			35,500		4.87
	State & municipal obligations^(A)		71,153			1,755		4.96			82,974			2,125		5.16
	Mortgage and asset-backed securities		2,915,511			53,933		3.72			2,380,078			53,214		4.51
	Trading securities		16,792			306		3.67			24,156			460		3.84
	Other marketable securities^(A)		150,977			1,496		1.99			212,887			2,111		2.00
	Non-marketable securities		76,157			1,660		4.38			71,082			1,948		5.53

Total investment securities			4,996,639			94,735		3.81			4,242,276			95,358		4.53

Federal funds sold and securities purchased under agreements to resell			85,784			525		1.23			50,999			355		1.40

Total interest earning assets			13,208,622			302,411		4.60			12,300,931			316,520		5.19

Less allowance for loan losses			(132,936	)							(131,892	)
Unrealized gain on investment securities			113,775								160,845
Cash and due from banks			539,615								504,311
Land, buildings and equipment, net			337,492								337,728
Other assets			192,147								172,154

Total assets		$	14,258,715							$	13,344,077

LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	401,975			622		.31		$	373,069			744		.40
	Interest checking and money market		6,137,346			11,870		.39			5,924,582			15,443		.53
	Time open & C.D.’s of less than $100,000		1,700,311			19,491		2.31			1,896,487			26,561		2.82
	Time open & C.D.’s of $100,000 and over		793,192			6,836		1.73			756,567			7,851		2.09

Total interest bearing deposits			9,032,824			38,819		.86			8,950,705			50,599		1.14

Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,929,397			8,887		.93			1,414,124			7,641		1.09
	Other borrowings^(B)		447,475			4,108		1.85			377,432			4,095		2.19

Total borrowings			2,376,872			12,995		1.10			1,791,556			11,736		1.32

Total interest bearing liabilities			11,409,696			51,814		.91	%		10,742,261			62,335		1.17	%

Non-interest bearing demand deposits			1,254,744								1,016,884
Other liabilities			135,808								142,682
Stockholders’ equity			1,458,467								1,442,250

Total liabilities and equity		$	14,258,715							$	13,344,077

Net interest margin (T/ E)					$	250,597							$	254,185

Net yield on interest earning assets								3.82	%							4.17	%


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


Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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





	June 30, 2004						March 31, 2004						December 31, 2003

	$ 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	$	(9.3	)		(1.94	)%	$	(9.6	)		(1.96	)%	$	(6.9	)		(1.40	)%
100 basis points rising		(5.1	)		(1.06	)		(3.3	)		(.67	)		(2.0	)		(.40	)
100 basis points falling		2.7			.57			(.6	)		(.13	)		(1.9	)		(.38	)

The table shown above reflects somewhat greater exposure of the Company’s net interest income to rising rates during the first six months of 2004. As currently projected, a 200 basis point rising rate scenario would cause net interest income to decline $9.3 million or 1.94%, which is comparable to the amount reported at March 31, 2004. Under a scenario whereby rates increase 100 basis points, it is projected that net interest income would decline by $5.1 million, or 1.06%, compared with a decline of $3.3 million in the previous quarter’s projection. Under current projections, the Company’s exposure to declining rates was further reduced during the quarter such that a 100 basis point decline in rates would cause net interest income to increase by $2.7 million.

During the quarter, average loans declined $36.0 million from the previous quarter mainly as a result of the sales of $113.0 million in student loans, most of which occurred early in the quarter. Growth in business loans was offset by a decline in business real estate lending, but installment and home equity loans grew by a combined $47 million. The Company’s average investment securities portfolio increased by $112.9 million during the second quarter 2004 due mainly to asset-backed securities purchases occurring early in the quarter. However, the Company then began limiting the purchases of new securities, allowing normal maturities and pay-downs to reduce the overall portfolio. At June 30, 2004, total period end investment securities were $4.9 billion, a decline of $530.5 million from the balance at March 31, 2004. During the second quarter of 2004, average deposits increased by $180.5 million as a result of growth in both non-interest bearing deposits and other interest bearing non-maturity deposits. The result of lower investment securities balances towards the end of the quarter, coupled with higher average deposits and limited loan growth, allowed the Company’s short-term borrowings to decrease in the latter half of the second quarter. This decrease is expected to extend into the third quarter as well. Also, in June, the Federal Reserve raised its target federal funds rate by 25 basis points, beginning what most economists believe is the start of a rising rate environment, which could continue in the next few quarters.

As a result of these changes during the quarter, the Company made certain adjustments to its net interest income simulation models. Under the rising rate interest scenarios described above, projections of increases in rates on non-maturity deposits, coupled with the Company’s fixed rate investment portfolio, tend to offset the positive effects of the anticipated rate re-pricing of the loan portfolio. Also, lower levels of investment securities and lower short-term debt tends to reduce net interest income in the near term. A change in the mix of the balance sheet, in which maturities and re-payments of investment securities are reinvested into lending products, could however, improve the overall mix of earning assets and improve net interest income.

The Company performs monthly simulations modeling interest rate risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations included in the Company’s 2003 Annual Report on Form 10-K.


Item 4.	CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2004. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were not any significant changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION


Item 2.	CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

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




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


April 1 – 30, 2004		278,776	$	44.74		278,776		1,936,006
May 1 – 31, 2004		480,000	$	45.51		480,000		1,456,006
June 1 – 30, 2004		570	$	45.73		570		1,455,436

Total		759,346	$	45.22		759,346		1,455,436

On January 30, 2004, the Company announced that its Board of Directors had approved the additional purchase of up to 1,825,129 shares of Company common stock. This, coupled with the shares available under the prior authorization, provided the Company with authority to purchase 3,000,000 shares.


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

The annual meeting of shareholders of the Company was held on April 21, 2004. The following proposals were submitted by the Board of Directors to a vote of security holders:

(1) Election of four directors to the 2007 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		40,504,295		12,593,199
Benjamin F. Rassieur, III		41,318,388		11,779,106
Andrew C. Taylor		38,793,868		14,303,626
Robert H. West		41,328,385		11,769,109

Other directors whose term of office as director continued after the meeting were: Giorgio Balzer, John R. Capps, W. Thomas Grant II, James B. Hebenstreit, David W. Kemper, Jonathan M. Kemper, Terry O. Meek, L.W. Stolzer, and Mary Ann Van Lokeren.

(2) Approval of the amendment of the Company’s Restricted Stock Plan to increase the number of shares available for issuance under the Restricted Stock Plan by 250,000 shares and to permit

the deductibility of the payments pursuant to Section 162(m) of the Internal Revenue Code. The proposal received the following votes:




Votes For		Votes Against		Votes Abstain		Broker Non-votes


	39,483,047		3,186,985		351,867		10,075,595

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




Votes For		Votes Against		Votes Abstain


	43,760,802		9,095,435		241,257


Item 6.	EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

See Index to Exhibits

(b) Reports on Form 8-K:

On April 13, 2004, the Registrant furnished its announcement of first quarter earnings for 2004 under item 12 of Form 8-K. On May 25, 2004, the Registrant reported, under items 7 and 11 of Form 8-K, a blackout period for the Commerce Bancshares, Inc. Participating Investment Plan in conjunction with a change in the plan’s recordkeeper.

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 4, 2004

By /s/ JEFFERY D. ABERDEEN

Jeffery D. Aberdeen

Controller

(Chief Accounting Officer)

Date: August 4, 2004

INDEX TO EXHIBITS

10.1 – Amended and Restated Commerce Bancshares, Inc. Restricted Stock Plan

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

32.1 – Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 – Certification of 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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	(1)	Election of four directors to the 2007 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:


	(2)	Approval of the amendment of the Company’s Restricted Stock Plan to increase the number of shares available for issuance under the Restricted Stock Plan by 250,000 shares and to permit


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