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 September 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 November 1, 2004, the registrant had outstanding 66,053,858 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 September 30, 2004 and December 31, 2003		3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2004 and 2003		4
		Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2004 and 2003		5
		Consolidated Statements of Cash Flows for the Nine Months Ended September 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		13
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		29
	Item 4.	Controls and Procedures		30


Part II	Other Information
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
	Item 6.	Exhibits		30

Signatures				31

Index to Exhibits				32
Section 302 Certification of CEO
Section 302 Certification of CFO
Section 906 Certification of CEO
Section 906 Certification of CFO

PART I: FINANCIAL INFORMATION


Item 1.	FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


			September 30			December 31
			2004			2003


			(Unaudited)

			(In thousands)
ASSETS
Loans, net of unearned income			$	8,162,845		$	8,142,679
Allowance for loan losses				(133,363	)		(135,221	)

Net loans				8,029,482			8,007,458

Investment securities:
	Available for sale			4,775,883			4,956,668
	Trading			29,803			9,356
	Non-marketable			73,298			73,170

Total investment securities				4,878,984			5,039,194

Federal funds sold and securities purchased under agreements to resell				117,505			108,120
Cash and due from banks				533,856			567,123
Land, buildings and equipment, net				341,904			336,366
Goodwill				48,522			48,522
Other intangible assets, net				889			2,184
Other assets				195,016			178,197

Total assets			$	14,146,158		$	14,287,164

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
	Non-interest bearing demand		$	1,750,318		$	1,716,214
	Savings, interest checking and money market			6,110,594			6,080,543
	Time open and C.D.’s of less than $100,000			1,654,399			1,730,237
	Time open and C.D.’s of $100,000 and over			766,260			679,214

Total deposits				10,281,571			10,206,208

Federal funds purchased and securities sold under agreements to repurchase				1,863,059			2,106,044
Other borrowings				392,586			403,853
Other liabilities				149,278			120,105

Total liabilities				12,686,494			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			353,705			359,300
	Retained earnings			828,758			707,136
	Treasury stock of 2,463,690 shares in 2004 and 668,539 shares in 2003, at cost			(115,190	)		(29,573	)
	Other			(2,706	)		(1,963	)
	Accumulated other comprehensive income			51,914			72,871

Total stockholders’ equity				1,459,664			1,450,954

Total liabilities and stockholders’ equity			$	14,146,158		$	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 Nine Months
		Ended September 30					Ended September 30

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



		(Unaudited)
INTEREST INCOME
Interest and fees on loans		$	106,218		$	107,379	$	312,980	$	327,758
Interest on investment securities			44,945			40,940		138,885		135,438
Interest on federal funds sold and securities purchased under agreements to resell			429			210		954		565

Total interest income			151,592			148,529		452,819		463,761

INTEREST EXPENSE
Interest on deposits:
	Savings, interest checking and money market		7,130			6,292		19,622		22,479
	Time open and C.D.’s of less than $100,000		9,525			11,354		29,016		37,915
	Time open and C.D.’s of $100,000 and over		3,883			3,363		10,719		11,214
Interest on federal funds purchased and securities sold under agreements to repurchase			5,466			3,500		14,353		11,141
Interest on other borrowings			1,904			2,032		5,980		6,127

Total interest expense			27,908			26,541		79,690		88,876

Net interest income			123,684			121,988		373,129		374,885
Provision for loan losses			6,606			9,655		23,136		29,674

Net interest income after provision for loan losses			117,078			112,333		349,993		345,211

NON-INTEREST INCOME
Trust fees			16,047			15,446		48,339		45,044
Deposit account charges and other fees			27,072			26,205		79,524		69,821
Bank card transaction fees			19,676			16,771		56,624		49,674
Trading account profits and commissions			2,812			3,653		9,608		11,613
Consumer brokerage services			2,376			2,306		7,101		6,811
Mortgage banking revenue			545			907		1,307		3,558
Net gains (losses) on securities transactions			(148	)		896		11,636		5,337
Other			10,540			10,756		35,039		33,389

Total non-interest income			78,920			76,940		249,178		225,247

NON-INTEREST EXPENSE
Salaries and employee benefits			65,549			65,036		199,261		199,635
Net occupancy			9,740			9,451		29,740		29,228
Equipment			5,634			5,849		17,170		17,936
Supplies and communication			9,153			8,539		25,439		25,479
Data processing and software			11,469			10,303		33,901		30,068
Marketing			4,552			3,936		12,680		10,999
Intangible assets amortization			431			453		1,300		1,352
Other			13,964			12,863		40,849		40,682

Total non-interest expense			120,492			116,430		360,340		355,379

Income before income taxes			75,506			72,843		238,831		215,079
Less income taxes			12,987			17,895		71,150		62,416

Net income		$	62,519		$	54,948	$	167,681	$	152,663

Net income per share – basic		$	.94		$	.79	$	2.50	$	2.19
Net income per share – diluted		$	.93		$	.79	$	2.47	$	2.17

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									167,681												167,681
Change in unrealized gain (loss) on available for sale securities																		(20,957	)		(20,957	)

Total comprehensive income																					146,724

Purchase of treasury stock												(111,095	)								(111,095	)
Issuance of stock under purchase, option and benefit plans						(11,934	)					24,155									12,221
Net tax benefit related to stock option plans						1,715															1,715
Stock based compensation						4,556									648						5,204
Issuance of stock under restricted stock award plan						68						1,323			(1,391	)					—
Cash dividends paid ($.690 per share)									(46,059	)											(46,059	)

Balance September 30, 2004		68,636,548	$	343,183	$	353,705		$	828,758		$	(115,190	)	$	(2,706	)	$	51,914		$	1,459,664

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

Net income									152,663												152,663
Change in unrealized gain (loss) on available for sale securities																		(25,329	)		(25,329	)

Total comprehensive income																					127,334

Shares issued in connection with the purchase of Vaughn Group, Inc.		149,477		748		5,252															6,000
Purchase of treasury stock												(89,326	)								(89,326	)
Issuance of stock under purchase, option and benefit plans						(5,422	)					11,050									5,628
Net tax benefit related to stock option plans						697															697
Stock based compensation						4,357									547						4,904
Issuance of stock under restricted stock award plan						(25	)					907			(882	)					—
Cash dividends paid ($.529 per share)									(36,653	)											(36,653	)

Balance September 30, 2003		67,387,914	$	336,940	$	294,900		$	823,443		$	(82,876	)	$	(2,135	)	$	70,764		$	1,441,036

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



		For the Nine Months Ended
		September 30

(In thousands)		2004			2003


		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	167,681		$	152,663
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		23,136			29,674
	Provision for depreciation and amortization		31,044			31,077
	Amortization of investment security premiums, net		20,131			24,976
	Net gains on securities transactions^(A)		(11,636	)		(5,337	)
	Net increase in trading securities		(10,709	)		(2,475	)
	Stock based compensation		5,204			4,904
	Net tax benefit related to stock option plans		1,715			697
	Decrease in interest receivable		8,631			8,609
	Decrease in interest payable		(1,145	)		(9,528	)
	Decrease in income taxes payable		(13,083	)		(5,575	)
	Other changes, net		(24,072	)		(44,835	)

Net cash provided by operating activities			196,897			184,850

INVESTING ACTIVITIES:
Net cash received in acquisition			—			5,199
Proceeds from sales of investment securities^(A)			192,755			243,329
Proceeds from maturities/pay downs of investment securities^(A)			1,147,168			1,264,004
Purchases of investment securities^(A)			(1,179,915	)		(1,933,674	)
Net increase in federal funds sold and securities purchased under agreements to resell			(9,385	)		(79,800	)
Net increase in loans			(57,957	)		(56,746	)
Purchases of land, buildings and equipment			(31,893	)		(24,527	)
Sales of land, buildings and equipment			1,150			3,020

Net cash provided by (used in) investing activities			61,923			(579,195	)

FINANCING ACTIVITIES:
Net increase in non-interest bearing demand, savings, interest checking and money market deposits			89,688			221,769
Net increase (decrease) in time open and C.D.’s			17,278			(171,834	)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase			(242,985	)		273,515
Additional borrowings			100,000			225,090
Repayment of borrowings			(109,257	)		(278,488	)
Net increase (decrease) in other short-term borrowings			(1,878	)		77,143
Purchases of treasury stock			(111,095	)		(89,326	)
Issuance of stock under purchase, option and benefit plans			12,221			5,628
Cash dividends paid on common stock			(46,059	)		(36,653	)

Net cash provided by (used in) financing activities			(292,087	)		226,844

Decrease in cash and cash equivalents			(33,267	)		(167,501	)
Cash and cash equivalents at beginning of year			567,123			710,406

Cash and cash equivalents at September 30		$	533,856		$	542,905

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

Net income tax payments		$	82,517		$	66,971
Interest paid on deposits and borrowings		$	80,835		$	96,571

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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). 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 2003 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, except for the income tax expense adjustment discussed below in Note 11. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results of operations 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 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				For the
		Three Months Ended				Nine Months Ended
		September 30				September 30

(In thousands)		2004		2003		2004		2003


Balance, beginning of period		$	133,124	$	132,706	$	135,221	$	130,618

Additions:
	Allowance for loan losses of acquired company		—		—		—		500
	Provision for loan losses		6,606		9,655		23,136		29,674

Total additions			6,606		9,655		23,136		30,174

Deductions:
	Loan losses		10,174		13,094		36,692		39,450
	Less recoveries on loans		3,807		3,434		11,698		11,359

Net loan losses			6,367		9,660		24,994		28,091

Balance, September 30		$	133,363	$	132,701	$	133,363	$	132,701


3.	Investment Securities

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




		September 30		December 31
(In thousands)		2004		2003


Available for sale
	U.S. government and federal agency obligations	$	1,757,774	$	1,834,726
	State and municipal obligations		73,203		74,593
	Mortgage-backed securities		1,295,471		1,449,231
	Other asset-backed securities		1,434,195		1,351,203
	Other debt securities		23,022		63,587
	Equity securities		192,218		183,328
Trading			29,803		9,356
Non-marketable			73,298		73,170

Total investment securities		$	4,878,984	$	5,039,194

Equity securities in the available for sale portfolio include short-term investments in money market mutual funds of $148,588,000 at September 30, 2004 and $142,659,000 at December 31, 2003. Non-marketable securities primarily include securities held for debt and regulatory purposes, which amounted to $51,670,000 and $51,644,000 at September 30, 2004 and December 31, 2003, respectively, in addition to venture capital and private equity investments, which amounted to $21,569,000 and $21,507,000 at the respective dates.


4.	Intangible Assets

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





		September 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	$	(47,092	)	$	47,930	$	(45,812	)
	Mortgage servicing rights		537		(486	)		567		(501	)

Total		$	48,467	$	(47,578	)	$	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 $431,000 and $453,000, respectively, for the three month periods ended September 30, 2004 and 2003, and $1,300,000 and $1,352,000 for the nine month periods ended September 30, 2004 and 2003. Estimated annual amortization expense for the years 2004 through 2008 is as follows.




(In thousands)


2004	$	1,705
2005		463
2006		20
2007		20
2008		20


5.	Guarantees

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

At September 30, 2004, a liability in the amount of $4,803,000, 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 $331,993,000 at September 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 $15,062,000 at September 30, 2004. At September 30, 2004, the Company had a recorded liability of $4,036,000 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						Nine Months
	Ended						Ended
	September 30						September 30

(In thousands)	2004			2003			2004			2003


Service cost – benefits earned during the period	$	1,235		$	981		$	3,738		$	2,941
Interest cost on projected benefit obligation		1,075			1,208			3,345			3,622
Expected return on plan assets		(1,607	)		(1,301	)		(4,802	)		(3,899	)
Amortization of prior service cost		(26	)		(26	)		(76	)		(76	)
Amortization of unrecognized net loss		274			511			906			1,533

Net periodic pension cost	$	951		$	1,373		$	3,111		$	4,121

The Company made a discretionary cash contribution of $6,000,000 to the pension plan in March 2004. The Company does not expect to make any additional contributions during 2004.

On October 22, 2004, the Company’s Board of Directors approved a change to its employee benefits plans effective January 1, 2005. With this change, the benefits accrued under the Company’s defined benefit pension plan will be frozen and enhancements will be made to its employee 401k plan, thereby increasing contributions to this 401k plan. These changes are not expected to have a material effect on the Company’s financial statements.


7.	Common Stock

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

For the

Three Months

Nine Months

Ended

September 30

(In thousands)

2004

2003

2004

2003

Weighted average common shares outstanding

66,386

69,027

67,029

69,560

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

947

909

985

797

67,333

69,936

68,014

70,357


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						Nine Months
	Ended						Ended
	September 30						September 30

(In thousands)	2004			2003			2004			2003


Unrealized holding gains (losses)	$	52,331		$	(73,238	)	$	(22,362	)	$	(34,104	)
Reclassification adjustment for gains included in net income		(151	)		(1,808	)		(11,439	)		(6,749	)

Net unrealized gains (losses) on securities		52,180			(75,046	)		(33,801	)		(40,853	)
Income tax expense (benefit)		19,829			(28,517	)		(12,844	)		(15,524	)

Other comprehensive income (loss)	$	32,351		$	(46,529	)	$	(20,957	)	$	(25,329	)


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 September 30, 2004:
Net interest income after provision for loan losses	$	32,338	$	48,607		$	(1,846	)	$	79,099	$	37,979		$	117,078
Cost of funds allocation		32,094		(2,905	)		3,573			32,762		(32,762	)		—
Non-interest income		38,314		20,378			20,360			79,052		(132	)		78,920

Total net revenue		102,746		66,080			22,087			190,913		5,085			195,998
Non-interest expense		67,535		34,814			14,922			117,271		3,221			120,492

Income before income taxes	$	35,211	$	31,266		$	7,165		$	73,642	$	1,864		$	75,506

Three Months Ended September 30, 2003:
Net interest income after provision for loan losses	$	30,541	$	46,803		$	(1,180	)	$	76,164	$	36,169		$	112,333
Cost of funds allocation		26,206		(6,312	)		2,996			22,890		(22,890	)		—
Non-interest income		37,484		18,106			20,553			76,143		797			76,940

Total net revenue		94,231		58,597			22,369			175,197		14,076			189,273
Non-interest expense		65,868		29,896			14,177			109,941		6,489			116,430

Income before income taxes	$	28,363	$	28,701		$	8,192		$	65,256	$	7,587		$	72,843

Nine Months Ended September 30, 2004:
Net interest income after provision for loan losses	$	95,643	$	136,465		$	(5,417	)	$	226,691	$	123,302		$	349,993
Cost of funds allocation		87,790		(9,399	)		10,945			89,336		(89,336	)		—
Non-interest income		116,263		58,357			61,078			235,698		13,480			249,178

Total net revenue		299,696		185,423			66,606			551,725		47,446			599,171
Non-interest expense		200,991		101,472			44,922			347,385		12,955			360,340

Income before income taxes	$	98,705	$	83,951		$	21,684		$	204,340	$	34,491		$	238,831

Nine Months Ended September 30, 2003:
Net interest income after provision for loan losses	$	85,580	$	145,097		$	(4,604	)	$	226,073	$	119,138		$	345,211
Cost of funds allocation		85,278		(22,189	)		10,332			73,421		(73,421	)		—
Non-interest income		104,996		52,501			60,216			217,713		7,534			225,247

Total net revenue		275,854		175,409			65,944			517,207		53,251			570,458
Non-interest expense		197,152		88,548			46,233			331,933		23,446			355,379

Income before income taxes	$	78,702	$	86,861		$	19,711		$	185,274	$	29,805		$	215,079

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

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


10.	Derivative Instruments

The Company uses derivative instruments, on a limited basis, primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. At September 30, 2004, the Company had interest rate swaps with a total notional amount of $24,481,000, of which two swaps with a notional amount of $12,774,000 were designated as fair value hedges of certain fixed rate loans. The remaining swaps are matching stand alone instruments, whose fair values offset each other with no impact to income. 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.





		September 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		$	24,481	$	177	$	(967	)	$	28,910	$	405	$	(1,487	)
Interest rate cap			—		—		—			4,319		—		—
Foreign exchange contracts:
	Forward contracts		12,157		106		(103	)		8,254		490		(551	)
	Options written/purchased		2,650		—		—			2,500		38		(38	)
Mortgage loan commitments			11,413		14		(4	)		7,542		54		(1	)
Mortgage loan forward sale contracts			23,486		6		(125	)		7,298		8		(4	)

Total		$	74,187	$	303	$	(1,199	)	$	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.


11.	Income Taxes

During the third quarter of 2004, the Company recognized income tax benefits totaling $13,960,000 associated with certain corporate tax reorganization initiatives. The overall effective income tax rate for the third quarter of 2004 was 17.2% compared with 35.4% in the second quarter of 2004 and 24.6% in the third quarter of 2003. For the nine months ended September 30, 2004 and 2003, income tax expense amounted to $71,150,000 and $62,416,000 and represented effective income tax rates of 29.8% and 29.0%, respectively. The Company will recognize an additional $4,950,000 tax benefit related to these initiatives in the fourth quarter of 2004, resulting in an annual effective tax rate of approximately 29%. The Company has additional income tax benefits totaling approximately $13,705,000 associated with other corporate reorganization activities, which will not be recognized into income until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the third quarter of 2005.


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 nine month periods ended September 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 esti-

mated 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 $25.0 million at September 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						Nine Months
		Ended						Ended
		September 30						September 30

		2004			2003			2004			2003


Per Share Data
	Net income – basic	$	.94		$	.79		$	2.50		$	2.19
	Net income – diluted		.93			.79			2.47			2.17
	Cash dividends		.230			.214			.690			.529
	Book value								22.08			21.03
	Market price								48.09			41.67
Selected Ratios
(Based on average balance sheets)
	Loans to deposits		77.83	%		79.81	%		78.60	%		80.16	%
	Non-interest bearing deposits to total deposits		12.45			11.09			12.28			10.50
	Equity to loans		17.69			18.19			17.86			18.07
	Equity to deposits		13.77			14.52			14.04			14.49
	Equity to total assets		10.22			10.72			10.23			10.78
	Return on total assets		1.78			1.60			1.58			1.52
	Return on total stockholders’ equity		17.41			14.96			15.46			14.10
(Based on end-of-period data)
	Efficiency ratio*		59.22			58.56			58.79			59.52
	Tier I capital ratio								12.49			12.73
	Total capital ratio								13.86			14.12
	Leverage ratio								9.83			9.88


*	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 September 30									Nine Months Ended September 30

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


Net interest income	$	123,684		$	121,988			1.4	%	$	373,129		$	374,885			(.5	)%
Provision for loan losses		(6,606	)		(9,655	)		(31.6	)		(23,136	)		(29,674	)		(22.0	)
Non-interest income		78,920			76,940			2.6			249,178			225,247			10.6
Non-interest expense		(120,492	)		(116,430	)		3.5			(360,340	)		(355,379	)		1.4
Income taxes		(12,987	)		(17,895	)		(27.4	)		(71,150	)		(62,416	)		14.0

Net income	$	62,519		$	54,948			13.8	%	$	167,681		$	152,663			9.8	%

For the quarter ended September 30, 2004, net income amounted to $62.5 million, an increase of $7.6 million, or 13.8%, over the third quarter of the previous year. Return on assets was 1.78% and the return on equity totaled 17.41%. For the quarter, the efficiency ratio amounted to 59.22%. The increase in net income over the third quarter of last year was the result of a $4.9 million reduction in income tax expense coupled with growth in non-interest income of $2.0 million, and a $3.0 million reduction in the provision for loan losses. Compared to the third quarter of last year, non-interest expense increased 3.5%. Diluted earnings per share was $.93, an increase of 17.7% over $.79 per share in the third quarter of 2003.

Net income for the first nine months of 2004 was $167.7 million, a $15.0 million, or 9.8%, increase over the first nine months of 2003. Diluted earnings per share increased 13.8% to $2.47, compared to $2.17 for the first nine months of last year. The increase in net income was primarily due to a 10.6% rise in non-interest income and a 22.0% decline in the provision for loan losses, partly offset by growth in non-interest expense of 1.4% and a slight decline in net interest income. Income tax expense in 2004 increased

$8.7 million over 2003. The effective tax rate was 29.8% for the first nine months of 2004 and 29.0% for the same period in 2003.

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 September									Nine Months Ended
			30, 2004 vs. 2003									September 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			$	2,046		$	(3,212	)	$	(1,166	)	$	7,421		$	(22,243	)	$	(14,822	)
Investment securities:
	U.S. government and federal agency securities			733			1,154			1,887			7,358			(5,386	)		1,972
	State and municipal obligations			(109	)		(68	)		(177	)		(414	)		(133	)		(547	)
	Mortgage and asset-backed securities			2,693			764			3,457			14,284			(10,108	)		4,176
	Other securities			(552	)		(1,075	)		(1,627	)		(1,098	)		(1,586	)		(2,684	)

		Total interest on investment securities		2,765			775			3,540			20,130			(17,213	)		2,917

Federal funds sold and securities purchased under agreements to resell				109			110			219			342			47			389

Total interest income				4,920			(2,327	)		2,593			27,893			(39,409	)		(11,516	)

Interest expense:
Deposits:
	Savings			15			(1	)		14			71			(179	)		(108	)
	Interest checking and money market			103			721			824			437			(3,186	)		(2,749	)
	Time open & C.D.’s of less than $100,000			(792	)		(1,037	)		(1,829	)		(2,966	)		(5,933	)		(8,899	)
	Time open & C.D.’s of $100,000 and over			798			(278	)		520			1,423			(1,918	)		(495	)

		Total interest on deposits		124			(595	)		(471	)		(1,035	)		(11,216	)		(12,251	)

Federal funds purchased and securities sold under agreements to repurchase				347			1,619			1,966			3,101			111			3,212
Other borrowings				(89	)		(10	)		(99	)		602			(688	)		(86	)

Total interest expense				382			1,014			1,396			2,668			(11,793	)		(9,125	)

Net interest income, fully taxable equivalent basis			$	4,538		$	(3,341	)	$	1,197		$	25,225		$	(27,616	)	$	(2,391	)

Net interest income for the third quarter of 2004 totaled $123.7 million, a 1.4% increase over the third quarter of 2003. The increase in net interest income was mainly the result of higher interest income earned on investment securities, coupled with lower deposit interest expense. These effects were partly offset by higher short-term borrowing costs and lower interest on loans. As a result, the net interest rate margin was 3.82% for the third quarter of 2004, compared to 3.89% in the third quarter of 2003 and 3.85% in the second quarter of 2004. For the first nine months of 2004, net interest income totaled $373.1 million, a decrease of $1.8 million, or .5%, compared with the first nine months of the previous year. The net interest rate margin declined 25 basis points to 3.82% during the first nine months of 2004 compared to the prior year.

Total interest income increased $3.1 million, or 2.1%, over the third quarter of 2003. The increase was the result of higher average balances of investment securities and loans, but partly offset by lower loan yields. Rates earned on loans declined 9 basis points and rates earned on investment securities increased

8 basis points. The decrease in loan interest income was mainly the result of lower rates earned on virtually all lending products compared to the third quarter of last year. Offsetting the effect of lower loan rates on interest income was growth in the average balances of construction, personal real estate, home equity, consumer and credit card loans. Business and business real estate loan volumes continued to be lower than the previous year, and this also factored in the reduction of interest income. Interest income on investment securities increased by $4.0 million, due to higher average balances of U.S. government and agency, mortgage-backed, and asset-backed securities, coupled with higher rates earned. Also, the Company’s inflation indexed treasury securities contributed $4.9 million in interest income in the third quarter of 2004, compared with $3.5 million in the same period last year and $7.5 million in the second quarter of 2004. The average tax equivalent yield on interest earning assets was 4.67% in the third quarter of 2004 compared to 4.72% in the third quarter of 2003.

Compared to the first nine months of 2003, total interest income decreased $10.9 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 the declining interest 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 nine months were 4.63% in 2004 and 5.03% in 2003.

Total interest expense increased $1.4 million, or 5.2%, compared to the third quarter of 2003. This increase was mainly the result of an increase in average borrowings of $85.5 million and an increase in average rates, especially on federal funds purchased, which increased 50 basis points over the same quarter last year. In addition, average rates paid were lower on most certificate of deposit balances, while rates paid on non-maturity deposits were only modestly higher. Average rates paid on interest bearing liabilities increased from .97% in the third quarter of 2003 to 1.00% in the third quarter of 2004.

For the first nine months of 2004, total interest expense decreased $9.2 million, or 10.3%, compared with the previous year. Most of the decline resulted from a 19 basis point reduction in average rates paid on deposit balances. Also contributing to the decline were lower average balances in retail certificates of deposit. These decreases were partly offset by higher borrowings. Average balances of federal funds purchased and securities sold under agreements to repurchase increased by $377.8 million and were used mainly to fund investment securities purchases primarily at the beginning of 2004 and loan growth. The overall average cost of total interest bearing liabilities was .94% for the first nine months of 2004 compared to 1.10% 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									Nine Months Ended
	September 30									September 30

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


Trust fees	$	16,047		$	15,446			3.9	%	$	48,339		$	45,044			7.3	%
Deposit account charges and other fees		27,072			26,205			3.3			79,524			69,821			13.9
Bank card transaction fees		19,676			16,771			17.3			56,624			49,674			14.0
Trading account profits and commissions		2,812			3,653			(23.0	)		9,608			11,613			(17.3	)
Consumer brokerage services		2,376			2,306			3.0			7,101			6,811			4.3
Mortgage banking revenue		545			907			(39.9	)		1,307			3,558			(63.3	)
Net gains (losses) on securities transactions		(148	)		896			N.M.			11,636			5,337			118.0
Other		10,540			10,756			(2.0	)		35,039			33,389			4.9

Total non-interest income	$	78,920		$	76,940			2.6	%	$	249,178		$	225,247			10.6	%

Non-interest income as a % of total revenue*		39.0	%		38.7	%					40.0	%		37.5	%


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

For the third quarter of 2004, total non-interest income amounted to $78.9 million compared with $76.9 million in the same quarter last year, or an increase of 2.6%. This increase resulted from growth in deposit account, bank card and trust fee income. Deposit account fees grew by 3.3% in the current quarter compared to the same quarter last year as a result of a 10.7% increase in overdraft fees (mainly due to pricing increases). Bank card fees rose 17.3% over the same period last year, due mainly to higher fees earned on merchant, debit card and credit card transactions, all of which grew by more than 10%. Trust fees for the quarter were up 3.9% over the same period last year as the result of higher fees on institutional trust accounts. Mortgage banking fee income declined $362 thousand from amounts recorded in the same period last year due to lower customer demand, and bond trading account revenues decreased $841 thousand due to lower demand by business and correspondent bank customers. Other non-interest income in the third quarter of 2004 included gains of $1.6 million on sales of student loans, compared to gains of $1.9 million in the third quarter of 2003. In addition, farm management fees declined $757 thousand due to the sale of the farm management business in the third quarter of 2003.

Non-interest income for the nine months ended September 30, 2004 increased $23.9 million, or 10.6%, over the first nine months of 2003. Deposit account fees rose $9.7 million, or 13.9%, due to growth of 29.0% in fee income on overdraft and return items. Compared to the previous year, bank card fee income rose $7.0 million, or 14.0%, with merchant fees and cardholder fees each growing $2.8 million, and debit card fees growing $809 thousand. Trust fees increased $3.3 million, or 7.3%, 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 $1.7 million in 2004 compared to the previous year, mainly due to higher levels of student loan sales during 2004 and a bank branch sale in the second quarter of 2004, partly offset by lower farm management fees mentioned above. These increases to non-interest income were partly offset by declines of $2.0 million in bond trading revenue and $2.3 million in mortgage banking revenue.

During the current quarter, net securities losses amounted to $148 thousand compared with net securities gains of $896 thousand in the same period last year. The net securities losses in the third quarter of 2004 included an impairment of $300 thousand recognized on a private equity investment held by a venture capital subsidiary, which was partly offset by gains on sales from the banks’ available for sale portfolio. On a year-to-date basis, securities transactions resulted in net gains of $11.6 million and $5.3 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							Nine Months Ended
	September 30							September 30

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


Salaries and employee benefits	$	65,549	$	65,036		.8	%	$	199,261	$	199,635		(.2	)%
Net occupancy		9,740		9,451		3.1			29,740		29,228		1.8
Equipment		5,634		5,849		(3.7	)		17,170		17,936		(4.3	)
Supplies and communication		9,153		8,539		7.2			25,439		25,479		(.2	)
Data processing and software		11,469		10,303		11.3			33,901		30,068		12.7
Marketing		4,552		3,936		15.7			12,680		10,999		15.3
Intangible assets amortization		431		453		(4.9	)		1,300		1,352		(3.8	)
Other		13,964		12,863		8.6			40,849		40,682		.4

Total non-interest expense	$	120,492	$	116,430		3.5	%	$	360,340	$	355,379		1.4	%

Non-interest expense for the quarter amounted to $120.5 million, an increase of $4.1 million, or 3.5%, compared with $116.4 million recorded in the third quarter of last year. Compared to the third quarter of last year, salaries and benefits expense increased slightly as a result of higher salaries and health care expense, partly offset by lower pension and incentive payments. Full-time equivalent employees totaled 4,821 and 4,986 at September 30, 2004 and 2003, respectively. Increased costs were also incurred for occupancy, supplies and communication and marketing which rose $289 thousand, $614 thousand and $616 thousand, respectively, over amounts recorded in the third quarter of last year. Data processing costs grew $1.2 million, or 11.3%, mainly as a result of higher software expense and bank card processing fees. Other non-interest expense increased 8.6% over the same quarter last year, primarily due to higher operating losses, professional fees and lower capitalized loan costs. Equipment expense decreased 3.7% during the quarter mainly due to lower depreciation on computer hardware and lower costs for maintenance contracts.

Non-interest expense increased $5.0 million, or 1.4%, over the first nine months of 2003. Data processing costs increased $3.8 million, or 12.7%, due to higher software expense and bank card processing fees, while marketing expense increased $1.7 million, or 15.3%, mainly due to higher deposit promotional costs. Occupancy expense increased mainly due to the sale of a bank facility earlier in the year, which resulted in lower outside tenant rent income and higher rent expense as the banking operations were moved to other leased facilities. Salaries and benefits decreased $374 thousand, or .2%, due to a decline in incentive payments, lower costs for temporary and contract labor, and lower pension plan expense. These decreases were partly offset by higher staff salaries and health care expense. Equipment costs declined 4.3% due to reductions in depreciation and maintenance expense. Other non-interest expense was held to a slight increase of .4% over the prior period due to lower capitalized loan costs and higher operating losses and loan collection expense. These increases were partly offset by lower professional fees and operating lease depreciation.

Provision and Allowance for Loan Losses





		Three Months Ended									Nine Months Ended
											September 30
		Sept. 30			Sept. 30			June 30
(Dollars in thousands)		2004			2003			2004			2004			2003


Provision for loan losses		$	6,606		$	9,655		$	6,280		$	23,136		$	29,674

Net loan charge-offs (recoveries):
	Business		100			1,640			(270	)		5,332			6,040
	Credit card		4,658			4,925			5,040			14,632			14,275
	Personal banking*		1,993			2,062			1,260			5,225			6,002
	Real estate		(638	)		359			73			(463	)		128
	Overdrafts		254			674			145			268			1,646

Total net loan charge-offs		$	6,367		$	9,660		$	6,248		$	24,994		$	28,091

Annualized total net charge-offs as a percentage of average loans			.31	%		.48	%		.31	%		.41	%		.47	%


*	Includes consumer, student and home equity loans

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

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

Net loan charge-offs for the third quarter of 2004 amounted to $6.4 million compared with $6.2 million in the second quarter of 2004 and $9.7 million in the third quarter of last year. The ratio of annualized net loan charge-offs to total average loans in the current quarter was .31% compared with .48% in the same quarter last year and .31% in the second quarter of this year.

For the third quarter of 2004, annualized net charge-offs on average credit card loans decreased to 3.24%, compared with 3.66% in the third quarter of last year. Personal banking loan charge-offs decreased in the current quarter, with a charge-off ratio of .42% compared to .45% in the same quarterly period last year, as delinquencies remained at low levels.

Net charge-offs during the first nine months of 2004 amounted to $25.0 million, compared to $28.1 million in the comparable prior period. Net charge-offs decreased in the business, personal banking, overdraft, and real estate loan categories, with partly offsetting increases in credit card net charge offs. The annualized net charge-off ratio decreased to .41% compared to ..47% in the comparable prior period.

The provision for loan losses for the current quarter totaled $6.6 million, and was up $326 thousand from the provision recorded in the second quarter of this year, and down $3.0 million from the amount recorded in the third quarter of 2003. The provision was $23.1 million in the first nine months of 2004 compared to $29.7 million in the same period in 2003. The allowance for loan losses at September 30, 2004 was $133.4 million, or 1.63% of total loans, and represented 522% of total non-performing loans. The Company considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at September 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.




	September 30			December 31
(Dollars in thousands)	2004			2003


Non-accrual loans	$	25,554		$	32,523
Foreclosed real estate		1,540			1,162

Total non-performing assets	$	27,094		$	33,685

Non-performing assets to total loans		.33	%		.41	%
Non-performing assets to total assets		.19	%		.24	%
Loans past due 90 days and still accruing interest	$	17,625		$	20,901

Non-accrual loans at September 30, 2004 totaled $25.6 million, a decrease of $7.0 million from amounts recorded at December 31, 2003. Most of the decrease occurred in lease-related non-accrual loans, which declined $4.8 million from year end. Lease-related loans comprised 30.3% of the September 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 $17.6 million as of September 30, 2004, and decreased $3.3 million since December 31, 2003. The decline occurred mainly in personal real estate loans ($5.1 million), student loans ($1.1 million) and credit card loans ($906 thousand), but was partly offset by a $3.6 million increase in business and business real estate loans.

Income Taxes

During the third quarter of 2004, income tax expense amounted to $13.0 million, a decrease of $4.9 million from the same period last year. The effective tax rate for the Company was 17.2% for the third quarter of 2004, compared with an effective tax rate of 24.6% in the third quarter of 2003 and 35.5% in the second quarter of 2004. The lower income tax expense in the third quarter of 2004 was the result of the recognition of tax benefits, totaling $14.0 million, associated with certain corporate tax reorganization initiatives. For the nine months ended September 30, 2004 and 2003, income tax expense amounted to $71.2 million and $62.4 million and represented effective income tax rates of 29.8% and 29.0%, respectively. The Company will recognize an additional $5.0 million tax benefit related to these initiatives in the fourth quarter of 2004, resulting in an annual effective tax rate of approximately 29%. The Company has additional income tax benefits totaling approximately $13.7 million associated with other corporate reorganization activities, which will not be recognized into income until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the third quarter of 2005.

Financial Condition

Balance Sheet

Total assets of the Company were $14.1 billion at September 30, 2004 compared to $14.3 billion at December 31, 2003. Earning assets at September 30, 2004 were $13.2 billion and consisted of 62% loans and 37% investment securities, compared to $13.3 billion at December 31, 2003.

During the first nine months of 2004, total period end loans increased $20.2 million, or .2%, compared with balances at December 31, 2003. The increase was the result of increases of $59.3 million in consumer loans, primarily from increases in marine and recreational vehicle lending. Also, home equity and business loans grew by $47.0 million and $17.7 million, respectively. This growth was offset by decreases of

$90.1 million in business real estate loans and $20.7 million in construction loans. Business real estate loans continued to decline during the third quarter due to larger payoffs and customer refinancing activity.

While period end business loans have increased compared to 2003 year end balances, average business loans continued to decline ($44.4 million) during the third quarter of 2004 as compared to the previous quarter due to weak demand and lower line of credit usage.

Available for sale investment securities, excluding fair value adjustments, decreased $147.0 million, or 3.0%, at September 30, 2004 compared to December 31, 2003. The decrease was due to principal paydowns on mortgage and asset-backed securities of $635.2 million, maturities of securities of $501.6 million and sales of $188.6 million, offset by purchases during the nine months of 2004 of $1.2 billion. The purchases of investment securities, which were funded mainly by increases in federal funds purchased, consisted primarily of mortgage and asset-backed securities ($569.4 million) and U.S. government agency securities ($451.0 million).

Total deposits increased by $75.4 million, or .7%, at September 30, 2004 compared to December 31, 2003. The increase was due mainly to increases of $87.0 million in certificates of deposit of $100,000 and over, $34.7 million in money market accounts, and $18.7 million in savings accounts. This growth was offset by a decline of $75.8 million in certificates of deposit of less than $100,000.

Compared to 2003 year end balances, total borrowings at September 30, 2004 decreased $254.3 million. This decline was due to decreases in repurchase agreements of $529.1 million, offset by an increase in federal funds purchased of $286.1 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 $920 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, primarily to secure public fund deposits, securities sold under agreements to repurchase, and borrowing capacity at the Federal Reserve. Total investment securities pledged for these and other regulatory and legal purposes comprised approximately 50% of the investment portfolio at September 30, 2004.




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


Liquid assets:
	Federal funds sold	$	117,505	$	109,805	$	108,120
	Securities purchased under agreements to resell		—		25,000		—
	Available for sale investment securities		4,775,883		4,792,606		4,956,668

	Total	$	4,893,388	$	4,927,411	$	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 September 30, 2004, such deposits totaled $7.9 billion and represented 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 $766.3 million at September 30, 2004, comprising just 7.5% of total deposits.




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


Core deposit base:
	Non-interest bearing demand	$	1,750,318	$	1,723,109	$	1,716,214
	Interest checking		658,039		669,617		681,405
	Savings and money market		5,452,555		5,460,832		5,399,138

	Total	$	7,860,912	$	7,853,558	$	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. Most of the advances outstanding at September 30, 2004 have a floating rate and mature within two 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.




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


Borrowings:
	Federal funds purchased	$	1,470,254	$	1,431,700	$	1,184,189
	Securities sold under agreements to repurchase		392,805		725,842		921,855
	FHLB advances		366,965		367,004		367,079
	Subordinated debentures		4,000		4,000		4,000
	Other long-term debt		20,623		22,621		29,898
	Other short-term debt		998		—		2,876

	Total	$	2,255,645	$	2,551,167	$	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 $293.1 million in loans and $742.5 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 or privately placed debt offerings. 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 $533.9 million at September 30, 2004, a decrease of $33.3 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 $196.9 million during the first nine 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 $61.9 million. Most of the cash inflow was due to $1.3 billion in sales and maturities

of investment securities, partly offset by purchases of $1.2 billion. Financing activities used cash of $292.1 million, resulting from a $243.0 million net decline in overnight borrowings, $111.1 million required by the Company’s treasury stock repurchase program, and cash dividend payments of $46.1 million. These cash outflows were partly offset by an increase of $107.0 million in deposit balances. 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-
	September 30			December 31			Capitalized
(Dollars in thousands)	2004			2003			Banks


Risk-adjusted assets	$	10,906,821		$	10,813,111
Tier I capital		1,362,325			1,331,439
Total capital		1,512,125			1,481,600
Tier I capital ratio		12.49	%		12.31	%		6.00	%
Total capital ratio		13.86	%		13.70	%		10.00	%
Leverage ratio		9.83	%		9.71	%		5.00	%

The Company maintains a stock buyback program; and in January 2004 was authorized by the Board of Directors to repurchase up to 3,000,000 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 752,000 shares of treasury stock at an average cost of $46.98 per share. At September 30, 2004, approximately 703,000 shares were available for purchase by the Company under the January 2004 authorization. On October 22, 2004, the Board of Directors authorized the Company to purchase 4,296,580 additional shares, bringing the total authorization up to 5,000,000 shares.

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 and third quarters of 2004. Overall cash dividends paid for the first nine months of 2004 have increased $9.4 million, or 25.7%, over amounts paid in the previous year. 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 September 30, 2004 totaled $6.0 billion (including approximately $3.0 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts amounted to $332.0 million and $20.9 million, respectively, at September 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 $4.8 million at September 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 a discretionary contribution from the Company in order to better manage its future pension plan

costs. The contribution had no significant effect on the Company’s overall liquidity. The minimum required contribution for 2004 is expected to be zero, and the Company does not expect to make any additional contributions during the remainder of 2004. On October 22, 2004, the Company’s Board of Directors approved a change to its employee benefits plans effective January 1, 2005. With this change, the benefits accrued under the Company’s defined benefit pension plan will be frozen and enhancements will be made to its employee 401k plan, thereby increasing contributions to this 401k plan. These changes are not expected to have a material effect on the Company’s financial statements.

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 pre-tax income results for the first nine 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.





		Nine Months Ended
		September 30				Increase (decrease)

(Dollars in thousands)		2004		2003		Amount			Percent


Consumer		$	98,705	$	78,702	$	20,003			25.4	%
Commercial			83,951		86,861		(2,910	)		(3.4	)
Money management			21,684		19,711		1,973			10.0

	Total segments		204,340		185,274		19,066			10.3
Other/elimination			34,491		29,805		4,686			15.7

Income before income taxes		$	238,831	$	215,079	$	23,752			11.0	%

For the nine months ended September 30, 2004, income before income taxes for the Consumer segment increased $20.0 million, or 25.4%, mainly due to higher net interest income (including allocated credit for funds provided) and lower assigned loan loss costs, coupled with a 10.7% increase in non-interest income. The increase in net interest income resulted from growth in credit card, home equity and consumer lending products, coupled with stable interest expense. The increase in non-interest income resulted mainly from higher overdraft fees. Also, non-interest expense grew 1.9% over the previous year mainly due to higher corporate overhead expense allocations, occupancy and marketing expense, partly offset by lower processing and loan servicing allocations.

For the nine months ended September 30, 2004, income before taxes for the Commercial segment declined 3.4% mainly due to higher non-interest expense, but was offset by growth in net interest income and non-interest income. Net interest income for the first nine months of 2004 grew $3.2 million mainly due to lower assigned interest costs. Non-interest income also grew $5.9 million, or 11.2%, as a result of growth in fees on merchant and corporate credit card transactions. Non-interest expense increased 14.6% largely due to higher assigned costs for check processing and other internally allocated overhead costs.

Money Management segment pre-tax profitability for the nine months ended September 30, 2004 was up 10.0% over the previous year mainly due to higher non-interest income, up 1.4%, coupled with lower non-interest expense, which was down 2.8%. The reduction in expense was mainly due to lower salaries and benefits expense, which resulted largely from a staffing reduction in the trust administration area as part of a department restructuring. Higher trust revenue, partly offset by lower bond trading revenue, resulted in higher overall fee 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 invest-

ments 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 December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-3, “Accounting for Certain Loans and Debt Securities Acquired in a Transfer.” SOP 03-3 addresses the accounting for acquired loans that show evidence of having deteriorated in terms of credit quality since their origination (i.e. impaired loans). SOP 03-3 requires acquired loans to be recorded at their fair value defined as the present value of future cash flows. SOP 03-3 prohibits the carryover of an allowance for loan loss on certain acquired loans as credit losses are considered in the future cash flows assessment. SOP 03-3 is effective for loans that are acquired in fiscal years beginning after December 15, 2004. The Company will evaluate the applicability of this SOP for all prospective loans acquired in fiscal years beginning after December 15, 2004. The Company does not anticipate this Statement will have a material effect on its consolidated financial statements.

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 September 30, 2004 and 2003



		Third Quarter 2004								Third 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)	$	2,032,375		$	21,429		4.19	%	$	2,060,389		$	21,637		4.17	%
	Real estate – construction		426,562			4,516		4.21			399,141			4,206		4.18
	Real estate – business		1,806,227			22,654		4.99			1,851,866			23,564		5.05
	Real estate – personal		1,338,895			17,323		5.15			1,312,740			17,941		5.42
	Consumer		1,210,117			19,019		6.25			1,152,436			19,989		6.88
	Home equity		390,005			4,548		4.64			329,301			3,611		4.35
	Student		289,730			2,250		3.09			355,771			2,331		2.60
	Credit card		571,264			14,687		10.23			533,213			14,313		10.65
	Overdrafts		10,659			—		—			12,277			—		—

Total loans			8,075,834			106,426		5.24			8,007,134			107,592		5.33

Investment securities:
	U.S. government & federal agency		1,636,629			15,779		3.84			1,554,510			13,892		3.55
	State & municipal obligations^(A)		71,838			879		4.87			80,105			1,056		5.23
	Mortgage and asset-backed securities		2,828,924			26,723		3.76			2,534,563			23,266		3.64
	Trading securities		10,326			90		3.45			10,565			96		3.61
	Other marketable securities^(A)		158,119			886		2.23			232,234			1,480		2.53
	Non-marketable securities		75,123			987		5.23			78,180			2,014		10.22

Total investment securities			4,780,959			45,344		3.77			4,490,157			41,804		3.69

Federal funds sold and securities purchased under agreements to resell			101,152			429		1.69			65,026			210		1.28

Total interest earning assets			12,957,945			152,199		4.67			12,562,317			149,606		4.72

Less allowance for loan losses			(132,165	)							(132,174	)
Unrealized gain on investment securities			54,874								140,147
Cash and due from banks			556,811								523,308
Land, buildings and equipment, net			341,382								336,144
Other assets			190,274								161,160

Total assets		$	13,969,121							$	13,590,902

LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	406,112			317		.31		$	386,470			303		.31
	Interest checking and money market		6,205,268			6,813		.44			6,076,076			5,989		.39
	Time open & C.D.’s of less than $100,000		1,657,022			9,525		2.29			1,806,005			11,354		2.49
	Time open & of $100,000 and over		814,984			3,883		1.90			651,504			3,363		2.05

Total interest bearing deposits			9,083,386			20,538		.90			8,920,055			21,009		.93

Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,661,568			5,466		1.31			1,555,161			3,500		.89
	Other borrowings^(B)		392,374			1,933		1.96			413,284			2,032		1.95

Total borrowings			2,053,942			7,399		1.43			1,968,445			5,532		1.11

Total interest bearing liabilities			11,137,328			27,937		1.00	%		10,888,500			26,541		.97	%

Non-interest bearing demand deposits			1,292,276								1,112,998
Other liabilities			110,609								132,546
Stockholders’ equity			1,428,908								1,456,858

Total liabilities and equity		$	13,969,121							$	13,590,902

Net interest margin (T/E)					$	124,262							$	123,065

Net yield on interest earning assets								3.82	%							3.89	%


(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

Nine Months Ended September 30, 2004 and 2003



		Nine Months 2004								Nine 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)	$	2,051,422		$	62,678		4.08	%	$	2,184,576		$	69,148		4.23	%
	Real estate – construction		430,594			13,069		4.05			401,964			13,076		4.35
	Real estate – business		1,845,978			67,479		4.88			1,818,562			70,760		5.20
	Real estate – personal		1,333,178			51,866		5.20			1,294,129			55,772		5.76
	Consumer		1,182,188			56,476		6.38			1,118,114			59,828		7.15
	Home equity		372,811			12,468		4.47			318,079			10,644		4.47
	Student		320,030			6,582		2.75			336,875			7,308		2.90
	Credit card		560,124			42,959		10.24			523,254			41,863		10.70
	Overdrafts		12,963			—		—			11,927			—		—

Total loans			8,109,288			313,577		5.17			8,007,480			328,399		5.48

Investment securities:
	U.S. government & federal agency		1,722,594			51,364		3.98			1,499,208			49,392		4.40
	State & municipal obligations^(A)		71,383			2,634		4.93			82,007			3,181		5.19
	Mortgage and asset-backed securities		2,886,438			80,656		3.73			2,432,139			76,480		4.20
	Trading securities		14,621			396		3.62			19,576			556		3.80
	Other marketable securities^(A)		153,375			2,382		2.07			219,407			3,591		2.19
	Non-marketable securities		75,810			2,647		4.66			73,474			3,962		7.21

Total investment securities			4,924,221			140,079		3.80			4,325,811			137,162		4.24

Federal funds sold and securities purchased under agreements to resell			90,944			954		1.40			55,726			565		1.36

Total interest earning assets			13,124,453			454,610		4.63			12,389,017			466,126		5.03

Less allowance for loan losses			(132,677	)							(131,987	)
Unrealized gain on investment securities			93,998								153,870
Cash and due from banks			545,389								510,713
Land, buildings and equipment, net			338,798								337,194
Other assets			191,518								168,449

Total assets		$	14,161,479							$	13,427,256

LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	403,364			939		.31		$	377,585			1,047		.37
	Interest checking and money market		6,160,152			18,683		.41			5,975,635			21,432		.48
	Time open & C.D.’s of less than $100,000		1,685,776			29,016		2.30			1,865,995			37,915		2.72
	Time open & C.D.’s of $100,000 and over		800,509			10,719		1.79			721,161			11,214		2.08

Total interest bearing deposits			9,049,801			59,357		.88			8,940,376			71,608		1.07

Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,839,469			14,353		1.04			1,461,653			11,141		1.02
	Other borrowings^(B)		428,974			6,041		1.88			389,514			6,127		2.10

Total borrowings			2,268,443			20,394		1.20			1,851,167			17,268		1.25

Total interest bearing liabilities			11,318,244			79,751		.94	%		10,791,543			88,876		1.10	%

Non-interest bearing demand deposits			1,267,346								1,049,274
Other liabilities			127,347								139,266
Stockholders’ equity			1,448,542								1,447,173

Total liabilities and equity		$	14,161,479							$	13,427,256

Net interest margin (T/ E)					$	374,859							$	377,250

Net yield on interest earning assets								3.82	%							4.07	%


(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.





	September 30, 2004						June 30, 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	$	(8.9	)		(1.85	)%	$	(9.3	)		(1.94	)%	$	(6.9	)		(1.40	)%
100 basis points rising		(4.8	)		(1.00	)		(5.1	)		(1.06	)		(2.0	)		(.40	)
100 basis points falling		.9			.19			2.7			.57			(1.9	)		(.38	)

The table shown above continues to reflect somewhat greater exposure of the Company’s net interest income to rising rates during the first nine months of 2004. As currently projected, a two hundred basis points rising rate scenario would cause net interest income to decline $8.9 million, or 1.85%, and is slightly less than the amount reported at June 30, 2004. Under a scenario whereby rates increase one hundred basis points, it is projected net interest income would decline by $4.8 million, or 1.00%, as compared with a projected decline of $5.1 million in the previous quarter. Under current projections, the Company’s exposure to declining rates was such that a one hundred basis points decline in rates would cause net interest income to increase by $900 thousand.

During the quarter, average loans decreased $32.4 million from the previous quarter mainly as a result of a decline in business, construction and business real estate loans during the quarter, offset by some growth in consumer lending. The Company’s average available for sale investment securities portfolio, excluding fair value adjustments, also decreased by $254.7 million during the third quarter of 2004 mainly due to actions occurring late in the second quarter of 2004, including sales and maturities of securities. Also, average interest bearing deposit balances declined by $18.9 million during the third quarter due to lower certificate of deposit balances, but were partly offset by higher average balances in premium money market and interest checking accounts. Total borrowings also declined on average by $311.6 million mainly as a result of lower investment securities averages, which had been funded by overnight borrowings. During the third quarter of 2004, the Federal Reserve increased its target federal funds rate by 50 basis points, which was in addition to the 25 basis point increase occurring in June 2004.

As a result of these changes to the Company’s balance sheet and the effects of changes to the interest rate environment, the Company’s interest simulation results changed only slightly from the previous quarter. While the reduction in average borrowings in the third quarter of 2004 positively reduced interest expense as calculated in the rising rate simulations, the Company’s net interest income is still negatively impacted as a result of rate increases projected on non-maturity deposits and short-term borrowings. Also, while much of the Company’s loan portfolio does re-price higher under this scenario due to significant portions of variable rate loans, the higher balance of investment securities causes interest income to grow more slowly and not enough to offset the quicker re-pricing of liabilities. However, a change in the mix of the balance sheet, in which maturities and re-payments of investment securities are reinvested into lending products, could improve the overall profitable 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 September 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 changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION


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

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




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


July 1 – 31, 2004		211,551	$	45.83		211,551		1,243,885
August 1 – 31, 2004		474,265	$	47.24		474,265		769,620
September 1 – 30, 2004		66,200	$	48.81		66,200		703,420

Total		752,016	$	46.98		752,016		703,420

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.

At its October 22, 2004 meeting, the Board of Directors approved the additional purchase of 4,296,580 shares, which brought the total current authorization up to 5,000,000 shares.


Item 6.	EXHIBITS

See Index to Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMMERCE BANCSHARES, INC.

By /s/ J. DANIEL STINNETT

J. Daniel Stinnett

Vice President & Secretary

Date: November 5, 2004

By /s/ JEFFERY D. ABERDEEN

Jeffery D. Aberdeen

Controller

(Chief Accounting Officer)

Date: November 5, 2004

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

32.1 – 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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