e10vq

10-Q 1 c99473e10vq.htm FORM 10-Q e10vq

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, 2005 OR

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

For the transition period from to

Commission File No. 0-2989

COMMERCE BANCSHARES, INC.

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

(Exact name of registrant as specified in its charter)


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

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

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

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

Yes X No

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

Yes X No

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

Yes No X

As of November 1, 2005, the registrant had outstanding 65,186,462 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, 2005 and December 31, 2004		3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2005 and 2004		4
		Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2005 and 2004		5
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004		6
		Notes to Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations		12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		28
	Item 4.	Controls and Procedures		28


Part II	Other Information
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
	Item 6.	Exhibits		29

Signatures				30

Index to Exhibits				31
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certifications of CEO & CFO Pursuant to 18 U.S.C. Section 1350

PART I: FINANCIAL INFORMATION


Item 1.	FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


			September 30			December 31
			2005			2004

			(Unaudited)
			(In thousands)
ASSETS
Loans, net of unearned income			$	8,742,832		$	8,305,359
Allowance for loan losses				(129,306	)		(132,394	)

Net loans				8,613,526			8,172,965

Investment securities:
	Available for sale			4,024,992			4,754,941
	Trading			6,019			9,403
	Non-marketable			79,181			73,024

Total investment securities				4,110,192			4,837,368

Federal funds sold and securities purchased under agreements to resell				115,900			68,905
Cash and due from banks				481,176			585,815
Land, buildings and equipment, net				376,999			336,446
Goodwill				48,522			48,522
Other assets				201,762			200,347

Total assets			$	13,948,077		$	14,250,368


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
	Non-interest bearing demand		$	1,281,470		$	1,943,771
	Savings, interest checking and money market			6,457,502			6,072,115
	Time open and C.D.’s of less than $100,000			1,771,156			1,656,002
	Time open and C.D.’s of $100,000 and over			840,700			762,421

Total deposits				10,350,828			10,434,309

Federal funds purchased and securities sold under agreements to repurchase				1,768,721			1,913,878
Other borrowings				370,729			389,542
Other liabilities				93,761			85,759

Total liabilities				12,584,039			12,823,488

Stockholders’ equity:
	Preferred stock, $1 par value
		Authorized and unissued 2,000,000 shares		—			—
	Common stock, $5 par value
		Authorized 100,000,000 shares; issued 69,409,882 shares		347,049			347,049
	Capital surplus			381,433			388,614
	Retained earnings			822,434			703,293
	Treasury stock of 3,899,382 shares in 2005 and 1,072,098 shares in 2004, at cost			(192,924	)		(51,646	)
	Accumulated other comprehensive income			6,046			39,570

Total stockholders’ equity				1,364,038			1,426,880

Total liabilities and stockholders’ equity			$	13,948,077		$	14,250,368

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME


		For the Three Months					For the Nine Months
		Ended September 30					Ended September 30

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

		(Unaudited)
INTEREST INCOME
Interest and fees on loans		$	134,653	$	106,218		$	378,418	$	312,980
Interest on investment securities			42,722		44,945			130,862		138,885
Interest on federal funds sold and securities purchased under agreements to resell			1,195		429			2,943		954

Total interest income			178,570		151,592			512,223		452,819

INTEREST EXPENSE
Interest on deposits:
	Savings, interest checking and money market		14,461		7,130			37,110		19,622
	Time open and C.D.’s of less than $100,000		13,351		9,525			35,794		29,016
	Time open and C.D.’s of $100,000 and over		7,409		3,883			21,734		10,719
Interest on federal funds purchased and securities sold under agreements to repurchase			14,215		5,466			33,796		14,353
Interest on other borrowings			3,302		1,904			9,093		5,980

Total interest expense			52,738		27,908			137,527		79,690

Net interest income			125,832		123,684			374,696		373,129
Provision for loan losses			8,934		6,606			16,805		23,136

Net interest income after provision for loan losses			116,898		117,078			357,891		349,993

NON-INTEREST INCOME
Deposit account charges and other fees			31,117		27,072			82,894		79,524
Bank card transaction fees			21,981		19,676			62,783		56,624
Trust fees			17,353		16,047			50,787		48,339
Trading account profits and commissions			2,335		2,812			7,399		9,608
Consumer brokerage services			2,440		2,487			7,603		7,426
Loan fees and sales			2,397		2,943			10,642		11,850
Net gains (losses) on securities transactions			289		(148	)		5,273		11,636
Other			8,983		8,031			25,185		24,171

Total non-interest income			86,895		78,920			252,566		249,178

NON-INTEREST EXPENSE
Salaries and employee benefits			66,682		65,549			204,447		199,261
Net occupancy			10,277		9,740			29,582		29,740
Equipment			5,838		5,634			17,230		17,170
Supplies and communication			8,458		9,153			24,928		25,439
Data processing and software			12,108		11,469			35,632		33,901
Marketing			4,486		4,552			13,035		12,680
Other			14,538		14,395			44,467		42,149

Total non-interest expense			122,387		120,492			369,321		360,340

Income before income taxes			81,406		75,506			241,136		238,831
Less income taxes			18,615		12,987			74,131		71,150

Net income		$	62,791	$	62,519		$	167,005	$	167,681

Net income per share — basic		$	.95	$	.89		$	2.50	$	2.38
Net income per share — diluted		$	.94	$	.88		$	2.47	$	2.35

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


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

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

Net income									167,005									167,005
Change in unrealized gain on available for sale securities															(33,524	)		(33,524	)

Total comprehensive income																		133,481

Purchase of treasury stock												(173,004	)					(173,004	)
Issuance of stock under purchase and option plans						(14,608	)					30,511						15,903
Net tax benefit related to stock option plans						3,286												3,286
Stock based compensation						5,356												5,356
Issuance of stock under restricted stock award plan						(1,215	)					1,215						—
Cash dividends paid ($.720 per share)									(47,864	)								(47,864	)

Balance September 30, 2005		69,409,882	$	347,049	$	381,433		$	822,434		$	(192,924	)	$	6,046		$	1,364,038

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

Net income									167,681									167,681
Change in unrealized gain 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 and option plans						(11,934	)					24,155						12,221
Net tax benefit related to stock option plans						1,715												1,715
Stock based compensation						5,204												5,204
Issuance of stock under restricted stock award plan						(1,323	)					1,323						—
Cash dividends paid ($.657 per share)									(46,059	)								(46,059	)

Balance September 30, 2004		68,636,548	$	343,183	$	350,999		$	828,758		$	(115,190	)	$	51,914		$	1,459,664

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)		2005			2004

		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	167,005		$	167,681
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		16,805			23,136
	Provision for depreciation and amortization		30,523			31,044
	Amortization of investment security premiums, net		13,091			20,131
	Net gains on securities transactions^(A)		(5,273	)		(11,636	)
	Net gains on sales of mortgage loans held for sale		(1,022	)		(1,105	)
	Originations of mortgage loans held for sale		(69,318	)		(74,647	)
	Proceeds from sales of mortgage loans held for sale		67,604			71,980
	Net (increase) decrease in trading securities		1,600			(10,709	)
	Stock based compensation		5,356			5,204
	Decrease in interest receivable		4,213			8,631
	Increase (decrease) in interest payable		7,839			(1,145	)
	Increase (decrease) in income taxes payable		3,843			(11,368	)
	Net tax benefit related to stock option plans		(3,286	)		(1,715	)
	Other changes, net		7,695			(24,062	)

Net cash provided by operating activities			246,675			191,420

INVESTING ACTIVITIES:
Proceeds from sales of investment securities^(A)			1,640,978			192,755
Proceeds from maturities/pay downs of investment securities^(A)			991,912			1,147,168
Purchases of investment securities^(A)			(1,971,575	)		(1,179,915	)
Net increase in federal funds sold and securities purchased under agreements to resell			(46,995	)		(9,385	)
Net increase in loans			(454,637	)		(54,195	)
Purchases of land, buildings and equipment			(56,507	)		(31,893	)
Sales of land, buildings and equipment			1,482			1,150

Net cash provided by investing activities			104,658			65,685

FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing demand, savings, interest checking and money market deposits			(283,882	)		89,688
Net increase in time open and C.D.’s			193,433			17,278
Net decrease in federal funds purchased and securities sold under agreements to repurchase			(145,157	)		(242,985	)
Additional borrowings			—			100,000
Repayment of borrowings			(18,692	)		(109,257	)
Net increase (decrease) in other short-term borrowings			5			(1,878	)
Purchases of treasury stock			(173,004	)		(111,095	)
Issuance of stock under option plans			15,903			12,221
Net tax benefit related to stock option plans			3,286			1,715
Cash dividends paid on common stock			(47,864	)		(46,059	)

Net cash used in financing activities			(455,972	)		(290,372	)

Decrease in cash and cash equivalents			(104,639	)		(33,267	)
Cash and cash equivalents at beginning of year			585,815			567,123

Cash and cash equivalents at September 30		$	481,176		$	533,856

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

Income tax payments, net of refunds		$	70,882		$	82,517
Interest paid on deposits and borrowings		$	129,688		$	80,835

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005 (Unaudited)


1.	Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2004 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature, 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, 2005 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 2004 Annual Report on Form 10-K.


2.	Allowance for Loan Losses

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


		For the Three Months				For the Nine Months
		Ended September 30				Ended September 30

(In thousands)		2005		2004		2005		2004

Balance, beginning of period		$	129,428	$	133,124	$	132,394	$	135,221

Additions:
	Provision for loan losses		8,934		6,606		16,805		23,136

Total additions			8,934		6,606		16,805		23,136

Deductions:
	Loan losses		11,690		10,174		30,944		36,692
	Less recoveries on loans		2,634		3,807		11,051		11,698

Net loan losses			9,056		6,367		19,893		24,994

Balance, September 30		$	129,306	$	133,363	$	129,306	$	133,363


3.	Investment Securities

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



		September 30		December 31
(In thousands)		2005		2004

Available for sale
	U.S. government and federal agency obligations	$	842,108	$	1,746,365
	State and municipal obligations		243,049		66,389
	Mortgage-backed securities		1,753,035		1,336,982
	Other asset-backed securities		918,776		1,323,999
	Other debt securities		40,434		50,240
	Equity securities		227,590		230,966
Trading			6,019		9,403
Non-marketable			79,181		73,024

Total investment securities		$	4,110,192	$	4,837,368

U.S. government and federal agency obligations included government-sponsored agencies of $780,479,000 at September 30, 2005 and $1,344,298,000 at December 31, 2004.

Equity securities included short-term investments in money market mutual funds of $90,126,000 at September 30, 2005 and $187,705,000 at December 31, 2004. Equity securities also included $62,012,000 in FNMA and other corporate preferred stock at September 30, 2005.

Non-marketable securities primarily included securities held for debt and regulatory purposes, which amounted to $49,927,000 and $50,703,000 at September 30, 2005 and December 31, 2004, respectively, in addition to venture capital and private equity investments, which amounted to $29,199,000 and $22,278,000 at the respective dates.


4.	Intangible Assets

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



		September 30, 2005					December 31, 2004

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

Amortized intangible assets:
	Core deposit premium	$	47,930	$	(47,930	)	$	47,930	$	(47,487	)
	Mortgage servicing rights		526		(477	)		539		(483	)

Total		$	48,456	$	(48,407	)	$	48,469	$	(47,970	)

The Company does not have any intangible assets that are not currently being amortized. Aggregate amortization expense on intangible assets was $4,000 and $431,000, respectively, for the three month periods ended September 30, 2005 and 2004, and $452,000 and $1,300,000 for the nine month periods ended September 30, 2005 and 2004. Estimated annual amortization expense for the years 2005 through 2009 is as follows.



(In thousands)

2005	$	463
2006		20
2007		20
2008		20
2009		20


5.	Guarantees

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

At September 30, 2005, a liability in the amount of $5,487,000, 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 $340,367,000 at September 30, 2005.

The Company guarantees payments to holders of certain trust preferred securities issued by a wholly-owned grantor trust. The securities are due in 2030 and may be redeemed beginning in 2010. The maximum potential future payments guaranteed by the Company, which includes future interest and principal payments through maturity, was approximately $14,627,000 at September 30, 2005. At September 30, 2005, 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 (income) is as follows:



	For the						For the
	Three Months						Nine Months
	Ended September 30						Ended September 30

(In thousands)	2005			2004			2005			2004

Service cost – benefits earned during the period	$	(102	)	$	1,235		$	628		$	3,738
Interest cost on projected benefit obligation		1,176			1,075			3,516			3,345
Expected return on plan assets		(1,702	)		(1,607	)		(5,112	)		(4,802	)
Amortization of prior service cost		—			(26	)		—			(76	)
Amortization of unrecognized net loss		311			274			871			906

Net periodic pension cost (income)	$	(317	)	$	951		$	(97	)	$	3,111

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

During the third quarter of 2005, the Company, after consultation with actuarial experts, reduced its estimate of the annual service cost of its defined benefit pension plan due to revisions in demographic factors. The adjustment resulted in income recognition during the current quarter, as shown above.


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)

2005

2004

2005

2004

Weighted average common shares outstanding

65,947

69,705

66,768

70,381

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

905

995

921

1,033

66,852

70,700

67,689

71,414


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 September 30						Ended September 30

(In thousands)	2005			2004			2005			2004

Unrealized holding gains (losses)	$	(29,964	)	$	52,331		$	(49,109	)	$	(22,362	)
Reclassification adjustment for gains included in net income		(1,089	)		(151	)		(4,962	)		(11,439	)

Net unrealized gains (losses) on securities		(31,053	)		52,180			(54,071	)		(33,801	)
Income tax expense (benefit)		(11,800	)		19,829			(20,547	)		(12,844	)

Other comprehensive income (loss)	$	(19,253	)	$	32,351		$	(33,524	)	$	(20,957	)


9.	Segments

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

The following tables present 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, 2005:
Net interest income after provision for loan losses	$	28,975	$	64,450		$	(5,437	)	$	87,988	$	28,910		$	116,898
Cost of funds allocation		48,725		(15,425	)		7,463			40,763		(40,763	)		—
Non-interest income		45,211		18,585			20,844			84,640		2,255			86,895

Total net revenue		122,911		67,610			22,870			213,391		(9,598	)		203,793
Non-interest expense		68,653		33,481			14,261			116,395		5,992			122,387

Income before income taxes	$	54,258	$	34,129		$	8,609		$	96,996	$	(15,590	)	$	81,406

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



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

Nine Months Ended September 30, 2005:
Net interest income after provision for loan losses	$	91,876	$	182,862		$	(15,476	)	$	259,262	$	98,629		$	357,891
Cost of funds allocation		130,918		(37,137	)		21,981			115,762		(115,762	)		—
Non-interest income		127,833		54,358			61,554			243,745		8,821			252,566

Total net revenue		350,627		200,083			68,059			618,769		(8,312	)		610,457
Non-interest expense		207,943		102,787			43,872			354,602		14,719			369,321

Income before income taxes	$	142,684	$	97,296		$	24,187		$	264,167	$	(23,031	)	$	241,136

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

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, 2005, the Company had interest rate swaps with a total notional amount of $121,603,000, of which two swaps with a notional amount of $15,598,000 were designated as fair value hedges of certain fixed rate loans. The remaining swaps consist of paired customer/dealer swaps with offsetting pay/receive terms. Through its International Department, the Company enters into foreign exchange contracts consisting mainly of contracts to purchase or deliver foreign currencies for customers at specific future dates. Also, mortgage loan commitments and forward sales contracts result from the Company’s mortgage banking operation, in which fixed rate personal real estate loans are originated and sold to other institutions.

The Company’s derivative instruments are listed below.



		September 30, 2005							December 31, 2004

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

Interest rate swaps		$	121,603	$	496	$	(1,320	)	$	49,963	$	649	$	(1,273	)
Foreign exchange contracts:
	Forward contracts		11,269		194		(37	)		13,031		171		(173	)
	Options written/purchased		2,840		—		—			2,853		12		(12	)
Mortgage loan commitments			14,709		2		(24	)		8,319		1		(13	)
Mortgage loan forward sale contracts			25,473		57		(5	)		15,728		39		(4	)

Total		$	175,894	$	749	$	(1,386	)	$	89,894	$	872	$	(1,475	)


11.	Income Taxes

For the third quarter of 2005, income tax expense amounted to $18,615,000 compared to $12,987,000 in the third quarter of 2004. The overall effective income tax rate for the third quarter of 2005 was 22.9% compared with 17.2% in the third quarter of 2004. For the nine months ended September 30, 2005 and 2004, income tax expense amounted to $74,131,000 and $71,150,000 and represented effective income tax rates of 30.7% and 29.8%, respectively. During the third quarter of 2005, the Company recognized income tax benefits totaling $10,279,000 associated with certain corporate tax reorganization initiatives. The Company will recognize an additional $3,426,000 tax benefit related to these initiatives in the fourth quarter of 2005. It is not expected that material tax benefits of this nature will continue beyond 2005.


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

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

Forward-Looking Information

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

Critical Accounting Policies

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

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

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

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

Selected Financial Data



		Three Months Ended						Nine Months Ended
		September 30						September 30

		2005			2004			2005			2004

Per Share Data
	Net income — basic	$	.95		$	.89		$	2.50		$	2.38
	Net income — diluted		.94			.88			2.47			2.35
	Cash dividends		.240			.219			.720			.657
	Book value								20.85			21.03
	Market price								51.48			45.80
Selected Ratios
(Based on average balance sheets)
	Loans to deposits		82.67	%		77.83	%		80.49	%		78.60	%
	Non-interest bearing deposits to total deposits		5.78			12.45			6.34			12.28
	Equity to loans		15.96			17.69			16.36			17.86
	Equity to deposits		13.19			13.77			13.17			14.04
	Equity to total assets		9.83			10.22			9.90			10.23
	Return on total assets		1.78			1.78			1.59			1.58
	Return on total stockholders’ equity		18.12			17.41			16.09			15.46
(Based on end-of-period data)
	Efficiency ratio*		57.61			59.22			59.30			58.79
	Tier I capital ratio								11.65			12.49
	Total capital ratio								12.99			13.86
	Leverage ratio								9.44			9.83


*	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									Nine Months Ended
	September 30									September 30

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

Net interest income	$	125,832		$	123,684			1.7	%	$	374,696		$	373,129			.4	%
Provision for loan losses		(8,934	)		(6,606	)		35.2			(16,805	)		(23,136	)		(27.4	)
Non-interest income		86,895			78,920			10.1			252,566			249,178			1.4
Non-interest expense		(122,387	)		(120,492	)		1.6			(369,321	)		(360,340	)		2.5
Income taxes		(18,615	)		(12,987	)		43.3			(74,131	)		(71,150	)		4.2

Net income	$	62,791		$	62,519			.4	%	$	167,005		$	167,681			(.4	)%

For the quarter ended September 30, 2005, net income amounted to $62.8 million, an increase of $272 thousand, or .4%, over the third quarter of the previous year. Return on average assets was 1.78% and the return on average equity totaled 18.12%. For the quarter, the efficiency ratio amounted to 57.61%. Net income for the third quarter of 2005 included the recognition of tax benefits of $10.3 million compared to tax benefits of $14.0 million recognized in the third quarter of 2004. During the current quarter, pre-tax income increased 7.8% over the same period last year and resulted from an improving net interest margin, 10.1% growth in non-interest income, and control of non-interest expenses. The growth in non-interest income this quarter compared with third quarter last year was due to solid growth in deposit, bank card and trust fee income. Compared to the third quarter of last year, non-interest expense grew only 1.6%. Diluted earnings per share was $.94, an increase of 6.8% over $.88 per share in the third quarter of 2004.

Net income for the first nine months of 2005 was $167.0 million, a $676 thousand, or .4%, decrease from the first nine months of 2004. The decline in net income was due to a 2.5% increase in non-interest expense and a higher effective tax rate. These effects were partly offset by a decline of $6.3 million in the

provision for loan losses, an increase of $1.4 million in non-interest income, and growth of $1.6 million in net interest income. Diluted earnings per share increased 5.1% to $2.47, compared to $2.35 for the first nine months of last year.

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									Nine Months Ended
			September 30, 2005 vs. 2004									September 30, 2005 vs. 2004

			Change due to									Change due to

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

Interest income, fully taxable equivalent basis:
Loans			$	6,563		$	21,915		$	28,478		$	13,728		$	51,854		$	65,582
Investment securities:
	U.S. government and federal agency securities			(6,946	)		(792	)		(7,738	)		(17,358	)		(1,707	)		(19,065	)
	State and municipal obligations			1,135			(272	)		863			1,063			(467	)		596
	Mortgage and asset-backed securities			727			2,884			3,611			185			6,638			6,823
	Other securities			432			1,041			1,473			968			3,100			4,068

		Total interest on investment securities		(4,652	)		2,861			(1,791	)		(15,142	)		7,564			(7,578	)

Federal funds sold and securities purchased under agreements to resell				127			639			766			324			1,665			1,989

Total interest income				2,038			25,415			27,453			(1,090	)		61,083			59,993

Interest expense:
Deposits:
	Savings			(2	)		3			1			11			3			14
	Interest checking and money market			(55	)		7,385			7,330			321			17,153			17,474
	Time open & C.D.’s of less than $100,000			183			3,643			3,826			(411	)		7,189			6,778
	Time open & C.D.’s of $100,000 and over			233			3,293			3,526			1,962			9,053			11,015

		Total interest on deposits		359			14,324			14,683			1,883			33,398			35,281

Federal funds purchased and securities sold under agreements to repurchase				286			8,463			8,749			(1,335	)		20,778			19,443
Other borrowings				(101	)		1,470			1,369			(648	)		3,824			3,176

Total interest expense				544			24,257			24,801			(100	)		58,000			57,900

Net interest income, fully taxable equivalent basis			$	1,494		$	1,158		$	2,652		$	(990	)	$	3,083		$	2,093

Net interest income for the third quarter of 2005 totaled $125.8 million, a $2.1 million, or 1.7%, increase over the third quarter of 2004. The increase in net interest income was mainly the result of higher interest rates earned on loans and growth in average loan balances, which had a combined effect of increasing net income by $28.5 million. Partly offsetting the increase to net interest income were the effects of higher rates on deposits and short-term borrowing costs, and a reduction in the average balances of investment securities, which had a total combined effect of reducing net interest income by $27.4 million. As a result, the net interest rate margin was 3.86% for the third quarter of 2005, compared to 3.82% in the third quarter of 2004. For the first nine months of 2005, net interest income totaled $374.7 million, an increase of $1.6 million, or .4%, compared with the first nine months of the previous year. The net interest rate margin increased 4 basis points to 3.86% during the first nine months of 2005 compared to the prior year.

Total interest income increased $27.0 million, or 17.8%, over the third quarter of 2004. The increase was the result of growth in average total loan balances and higher rates earned on all lending products. Average rates earned on loans increased 97 basis points, while loan volumes were up especially in the

business, construction, consumer, and credit card categories. Average rates earned on total investment securities increased 25 basis points over the third quarter of 2004, with the largest impact occurring in mortgage and asset-backed securities. Offsetting this increase to interest income was a $717.6 million decrease in the average balances of U.S. government and federal agency securities, which included sales of $359.1 million of inflation-indexed treasury securities during 2005. Inflation-related earnings decreased $2.6 million in the third quarter of 2005 from the third quarter of 2004. The average tax equivalent yield on interest earning assets was 5.46% in the third quarter of 2005 compared to 4.67% in the third quarter of 2004.

Compared to the first nine months of 2004, total interest income increased $59.4 million. The increase reflects similar trends as noted in the quarterly comparison above, with higher average overall rates earned on interest earning assets, which occurred because of the current rising interest rate environment. In addition, growth in loan balances increased interest income. These increases were offset by lower interest income on investment securities due to declining average balances. Average tax equivalent yields on total interest earning assets for the nine months were 5.27% in 2005 and 4.63% in 2004.

Total interest expense increased $24.8 million, or 89.0%, compared to the third quarter of 2004. This increase was mainly the result of higher rates paid on all types of deposit accounts, which rose 52 basis points to an overall rate of 1.42% in the third quarter of 2005. Deposit accounts most significantly affected by the increase included money market accounts and short-term certificates of deposit. Rates paid on overnight borrowings also increased, causing interest expense on federal funds purchased and securities sold under agreements to repurchase to increase $8.7 million. The average rate paid on total interest bearing liabilities increased to 1.76% in the third quarter of 2005 compared to 1.00% in the third quarter of 2004.

For the first nine months of 2005, total interest expense increased $57.8 million, or 72.6%, compared with the previous year. Most of the increase resulted from a 40 basis point increase in average rates paid on deposit balances. Also contributing to the increase were higher rates paid on overnight borrowings and higher average balances in deposits, which increased $825.1 million. Partly offsetting these effects was a $219.1 million decline in average overnight borrowings. The overall average cost of total interest bearing liabilities was 1.55% for the first nine months of 2005 compared to .94% for the same period in 2004.

Summaries of average assets and liabilities and the corresponding average rates earned/paid appear at the end of this discussion.

Non-Interest Income



	Three Months									Nine Months Ended
	Ended September 30									September 30

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

Deposit account charges and other fees	$	31,117		$	27,072			14.9	%	$	82,894		$	79,524			4.2	%
Bank card transaction fees		21,981			19,676			11.7			62,783			56,624			10.9
Trust fees		17,353			16,047			8.1			50,787			48,339			5.1
Trading account profits and commissions		2,335			2,812			(17.0	)		7,399			9,608			(23.0	)
Consumer brokerage services		2,440			2,487			(1.9	)		7,603			7,426			2.4
Loan fees and sales		2,397			2,943			(18.6	)		10,642			11,850			(10.2	)
Net gains (losses) on securities transactions		289			(148	)		N.A.			5,273			11,636			(54.7	)
Other		8,983			8,031			11.9			25,185			24,171			4.2

Total non-interest income	$	86,895		$	78,920			10.1	%	$	252,566		$	249,178			1.4	%

Non-interest income as a % of total revenue*		40.8	%		39.0	%					40.3	%		40.0	%

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

For the third quarter of 2005, total non-interest income amounted to $86.9 million compared with $78.9 million in the same quarter last year, or an increase of 10.1%. The increase resulted from growth in deposit, bank card and trust fee income. Compared with the third quarter of 2004, deposit account fees increased $4.0 million, or 14.9%, mainly due to growth in deposit account overdraft fees, which grew $6.3 million over the same period last year. This strong growth was the result of increasing transaction volumes during the year and pricing changes initiated in the third quarter of 2005. Corporate cash management fee income was down slightly from the same period last year and continued to be affected by an increasing interest rate environment. Bank card fees for the current quarter increased $2.3 million, or 11.7%, over the same period last year, due mainly to higher fees earned on debit card and credit card transactions, which grew by 16.1% and 13.3%, respectively. Trust fees for the quarter increased $1.3 million, or 8.1%, over the same period last year as the result of higher fees on personal trust accounts. Included in loan fees and sales this quarter were $1.1 million in gains on sales of student loans compared with such gains of $1.6 million in the same quarter last year. Other non-interest income increased $1.0 million in the third quarter of 2005 compared to the same period last year partly due to gains on sales of banking premises, partly offset by lower activity in the state tax credit trading program.

Non-interest income for the nine months ended September 30, 2005 increased $3.4 million, or 1.4%, over the first nine months of 2004. Deposit account fees rose $3.4 million, or 4.2%, due to growth of 21.0% in fee income on overdraft and return items. This growth was partly offset by lower cash management revenue. Compared to the previous year, bank card fee income rose $6.2 million, or 10.9%, with debit and credit card fees growing 16.4% and 13.0%, respectively. Trust fees increased $2.4 million, or 5.1%, over the previous year as a result of both proprietary mutual fund administration fees and growth in personal trust accounts. Bond trading income declined $2.2 million due to lower sales activity. Loan fees and sales decreased by $1.2 million as gains on student loan sales declined from $7.9 million in the first nine months of 2004 to $7.0 million in 2005. Other non-interest income included increases in ATM fees and check float income, partly offset by lower operating lease revenues and tax credit sales income.

During the current quarter, net securities gains amounted to $289 thousand compared with net securities losses of $148 thousand in the same period last year. The net securities gains in the third quarter of 2005 included an impairment charge of $800 thousand on a private equity investment held by a venture capital subsidiary. On a year-to-date basis, securities transactions resulted in net gains of $5.3 million and $11.6 million for 2005 and 2004, respectively. During the first nine months of 2005, the Company undertook initiatives to review and re-position its investment securities portfolio to address such things as concentration, duration and interest rate risk. Consequently, during the first nine months of 2005, the Company sold available for sale securities totaling $1.6 billion. These sales were comprised mainly of $533.9 million in U.S. government agency securities, $592.9 million in asset-backed securities, and $359.1 million in inflation-indexed treasury securities. Also as a result of the repositioning, the Company purchased $2.0 billion of available for sale securities during the nine month period. The purchases were comprised mainly of $1.0 billion in mortgage-backed securities and $518.1 million in other asset-backed securities.

Non-Interest Expense



	Three Months Ended							Nine Months Ended
	September 30							September 30

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

Salaries and employee benefits	$	66,682	$	65,549		1.7	%	$	204,447	$	199,261		2.6	%
Net occupancy		10,277		9,740		5.5			29,582		29,740		(.5	)
Equipment		5,838		5,634		3.6			17,230		17,170		.3
Supplies and communication		8,458		9,153		(7.6	)		24,928		25,439		(2.0	)
Data processing and software		12,108		11,469		5.6			35,632		33,901		5.1
Marketing		4,486		4,552		(1.4	)		13,035		12,680		2.8
Other		14,538		14,395		1.0			44,467		42,149		5.5

Total non-interest expense	$	122,387	$	120,492		1.6	%	$	369,321	$	360,340		2.5	%

Non-interest expense for the quarter amounted to $122.4 million, an increase of $1.9 million, or 1.6%, compared with $120.5 million recorded in the third quarter of last year. Compared to the third quarter of last year, salaries and benefits expense increased $1.1 million, or 1.7%, as a result of normal merit increases, partly offset by lower retirement and medical insurance costs. Costs for supplies and communication declined $695 thousand, or 7.6%, from amounts recorded in the third quarter of last year mainly due to lower costs for supplies, postage and telephone. Occupancy costs grew by $537 thousand, or 5.5%, due to higher costs for depreciation and utilities. Data processing and software costs increased $639 thousand, or 5.6%, as a result of higher costs for bank card and online banking processing fees, partly offset by lower costs for software license fees and amortization.

Non-interest expense increased $9.0 million, or 2.5%, in the first nine months of 2005 over the same period in 2004. Salaries and benefits increased $5.2 million, or 2.6%, due to merit increases, partly offset by lower retirement and medical insurance costs. Full-time equivalent employees totaled 4,827 and 4,821 at September 30, 2005 and 2004, respectively. Data processing and software costs increased $1.7 million, or 5.1%, due to the reasons mentioned above. Smaller variances occurred in marketing and equipment expense, which increased $355 thousand and $60 thousand, respectively, and supplies and communication and occupancy, which declined $511 thousand and $158 thousand, respectively. Other non-interest expense increased $2.3 million, or 5.5%, over the prior period due to increases in recruiting expense, proprietary mutual funds expense subsidies, and minority interest expense relating to investment gains recorded by venture capital affiliates. These increases were partly offset by lower loan collection expense, lower intangible asset amortization, and higher capitalized loan costs.

Provision and Allowance for Loan Losses



		Three Months Ended									Nine Months Ended
											September 30
		Sept. 30			Sept. 30			June 30
(Dollars in thousands)		2005			2004			2005			2005			2004

Provision for loan losses		$	8,934		$	6,606		$	5,503		$	16,805		$	23,136

Net loan charge-offs (recoveries):
	Business		133			145			(48	)		(2,536	)		5,482
	Credit card		5,879			4,613			5,430			15,906			14,482
	Personal banking *		1,837			1,993			1,474			5,259			5,225
	Real estate		492			(638	)		(19	)		267			(463	)
	Overdrafts		715			254			198			997			268

Total net loan charge-offs		$	9,056		$	6,367		$	7,035		$	19,893		$	24,994

Annualized total net charge-offs as a percentage of average loans			.42	%		.31	%		.33	%		.31	%		.41	%


*	Includes consumer, student and home equity loans

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

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

Net loan charge-offs for the third quarter of 2005 amounted to $9.1 million compared with $7.0 million in the second quarter of 2005 and $6.4 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 .42%, compared with .31% in the same quarter last year and .33% in the second quarter of this year. The increase in net charge-offs in the third quarter of 2005 compared to the previous quarter occurred mainly in credit card, overdraft, and personal banking loans.

For the third quarter of 2005, annualized net charge-offs on average credit card loans increased to 4.19%, compared with 3.53% in the third quarter of last year. Personal banking loan charge-offs decreased in the current quarter, with a charge-off ratio of .36% compared to .42% in the same quarterly period last year, as delinquencies in 2005 remained at comparatively low levels.

Net charge-offs during the first nine months of 2005 amounted to $19.9 million, compared to $25.0 million in the comparable prior period. Net charge-offs decreased in the business loan category, partly because a $6.0 million charge-off of a single business loan was recorded in the prior year, coupled with a $1.4 million recovery on the same loan during the current year. This decrease was partly offset by increases in credit card and overdraft loan net charge-offs. The annualized net charge-off ratio decreased to .31% compared to .41% in the comparable prior period.

The provision for loan losses for the current quarter totaled $8.9 million, and was up $3.4 million over the provision recorded in the second quarter of this year, and up $2.3 million over the amount recorded in the third quarter of 2004. The provision was $16.8 million in the first nine months of 2005 compared to $23.1 million in the same period in 2004. The allowance for loan losses at September 30, 2005 was $129.3 million, or 1.48% of total loans, and represented 635% 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, 2005.

Risk Elements of Loan Portfolio

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



	September 30			December 31
(Dollars in thousands)	2005			2004

Non-accrual loans	$	20,365		$	17,618
Foreclosed real estate		675			1,157

Total non-performing assets	$	21,040		$	18,775

Non-performing assets to total loans		.24	%		.23	%
Non-performing assets to total assets		.15	%		.13	%

Loans past due 90 days and still accruing interest	$	15,388		$	13,067

Non-accrual loans, which are also considered impaired, totaled $20.4 million at September 30, 2005, and increased $2.7 million over amounts recorded at December 31, 2004. Most of the increase occurred because a $4.7 million business real estate credit was placed on non-accrual status in September 2005. However, the increase was partly offset by an overall decline in lease-related non-accrual loans. Business real estate loans comprised 56.6% of the September 30, 2005 non-accrual loan total, with the remainder primarily relating to business and lease-related loans.

Total loans past due 90 days or more and still accruing interest amounted to $15.4 million as of September 30, 2005, and increased $2.3 million since December 31, 2004. The increase in past due loans

occurred primarily because of increases of $1.8 million and $1.0 million, respectively, in business and business real estate loan delinquencies, partly offset by a $552 thousand decrease in personal real estate loan delinquencies.

In addition to the non-accrual loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are primarily classified as substandard for regulatory purposes. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $45.6 million at September 30, 2005 compared with $63.9 million at December 31, 2004 and $81.2 million at June 30, 2005. The lower balance at September 30, 2005 resulted primarily from customer payments or from further downgrading to non-accrual status.

Income Taxes

Income tax expense was $18.6 million in the third quarter of 2005 compared to $29.5 million in the second quarter of 2005 and $13.0 million in the third quarter of 2004, resulting in effective tax rates on income from operations of 22.9%, 35.2% and 17.2%, respectively. Income tax expense was $74.1 million in the first nine months of 2005 compared to $71.2 million in the first nine months of 2004, with effective tax rates of 30.7% and 29.8%, respectively.

The $10.9 million decline in income tax expense in the current quarter compared to the previous quarter was the result of the recognition of tax benefits totaling $10.3 million, associated with certain corporate tax reorganization initiatives. The Company will recognize an additional $3.4 million in tax benefits related to these initiatives in the fourth quarter of this year. It is not expected that material tax benefits of this nature will continue beyond 2005.

Tax credits of a similar nature, totaling $14.0 million, were recognized in the third quarter of 2004. The effect of the lower tax credits, in addition to higher taxable income, resulted in a $5.6 million increase in income tax expense in the third quarter of 2005 over the third quarter of 2004.

Financial Condition

Balance Sheet

Total assets of the Company were $13.9 billion at September 30, 2005 compared to $14.3 billion at December 31, 2004. Earning assets at September 30, 2005 were $13.0 billion, consisting of 67% loans and 32% investment securities, compared to $13.2 billion at December 31, 2004.

During the first nine months of 2005, total period end loans increased $437.5 million, or 5.3%, compared with balances at December 31, 2004. Excluding the effects of certain reclassifications among loan categories, the growth was the result of increases of $184.7 million in business loans, $81.5 million in business real estate loans, $83.0 million in consumer loans, $77.5 million in construction loans, $32.1 million in home equity loans, and $25.0 million in personal real estate loans. This growth was partly offset by a decrease of $34.7 million in student loans. The reclassifications mentioned above transferred approximately $11 million and $27 million, respectively, from the business and construction loan categories to the business real estate loan category at September 30, 2005. The reclassifications were made to better realign the loan reporting with its related collateral and purpose and to reclassify certain construction loans that had moved into amortizing term loans following project completion.

Available for sale investment securities, excluding fair value adjustments, decreased $675.9 million, or 14.4%, at September 30, 2005 compared to December 31, 2004 as the Company continued to modify its investment securities portfolio to address such things as concentration, duration and interest rate risk. Accordingly, since December 31, 2004, sales, maturities, and paydowns of available for sale securities totaled $2.6 billion. During the same period, purchases of securities totaled $2.0 billion and consisted primarily of mortgage-backed ($1.0 billion) and asset-backed ($518.1 million) securities.

Total deposits decreased by $83.5 million, or .8%, at September 30, 2005 compared to December 31, 2004. At the beginning of 2005, the Company re-characterized certain additional demand and interest checking accounts as money market accounts, in accordance with Federal Reserve rules. As a result, an additional $530 million of demand deposits and $344 million of interest checking accounts were reclassified as money market accounts during the first quarter of 2005. Exclusive of these and other ongoing reclassifications permissible under Federal Reserve rules, the decrease in deposits from year end balances was due mainly to declines of $219.0 million in money market accounts, $31.4 million in demand deposits, and $30.4 million in interest checking. These declines were partly offset by increases of $115.2 million in retail certificates of deposit and $78.3 million in jumbo certificates of deposit.

Compared to 2004 year end balances, total short-term borrowings at September 30, 2005 decreased $145.2 million. This change was due to a decline in repurchase agreements of $252.0 million, offset by an increase in federal funds purchased of $106.8 million.

Liquidity and Capital Resources

Liquidity Management

The Company’s most liquid assets are comprised of available for sale marketable investment securities, federal funds sold, and securities purchased under agreements to resell (resale agreements). Federal funds sold and resale agreements totaled $115.9 million at September 30, 2005. These investments normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available for sale investment portfolio was $4.0 billion at September 30, 2005, and included an unrealized gain of $9.8 million. The portfolio includes maturities of approximately $850 million over the next 12 months, and offer substantial resources to meet either new loan demand or reductions in the Company’s deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowing capacity at the Federal Reserve. Investment securities pledged for these purposes comprised approximately 46% of the investment portfolio at September 30, 2005, leaving $2.2 billion of unpledged securities.



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

Liquid assets:
	Federal funds sold	$	115,900	$	128,204	$	68,905
	Securities purchased under agreements to resell		—		—		—
	Available for sale investment securities		4,024,992		4,358,178		4,754,941

	Total	$	4,140,892	$	4,486,382	$	4,823,846

Liquidity is also available from the Company’s large base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At September 30, 2005, such deposits totaled $7.7 billion and represented 75% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships. Time open and certificates of deposit of $100,000 and over totaled $841.7 million at September 30, 2005. These accounts are normally considered more volatile and higher costing, but comprised just 8.1% of total deposits at September 30, 2005.



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

Core deposit base:
	Non-interest bearing demand	$	1,281,470	$	1,351,186	$	1,943,771
	Interest checking		428,257		470,083		820,027
	Savings and money market		6,029,245		6,077,857		5,252,088

	Total	$	7,738,972	$	7,899,126	$	8,015,886

Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, and longer-term debt. Federal funds purchased and securities sold under agreements to repurchase are generally borrowed overnight, and amounted to $1.8 billion at September 30, 2005. Federal funds purchased are obtained mainly from upstream correspondent banks with whom the Company maintains approved lines of credit, while securities sold under agreements to repurchase are comprised of non-insured customer funds secured by a portion of the Company’s investment portfolio. The Company’s long-term debt is relatively small compared to its overall liability position. It is comprised mainly of advances from the Federal Home Loan Bank (FHLB), which totaled $351.8 million at September 30, 2005. Most of these advances have floating rates and mature in 2006. Other outstanding long-term borrowings relate to the Company’s leasing and venture capital operations.



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

Borrowings:
	Federal funds purchased	$	1,305,685	$	1,184,920	$	1,557,635
	Securities sold under agreements to repurchase		463,036		409,815		356,243
	FHLB advances		351,818		351,859		366,926
	Subordinated debentures		4,000		4,000		4,000
	Other long-term debt		14,906		15,922		18,616
	Other short-term debt		5		—		—

	Total	$	2,139,450	$	1,966,516	$	2,303,420

In addition to those mentioned above, several other sources of liquidity are available. The Company believes that its sound debt ratings of A-1 from Standard & Poor’s and Prime-1 from Moody’s would ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been issued or outstanding during the past ten years. In addition, the Company has temporary borrowing capacity at the Federal Reserve discount window, for which it has pledged $356.4 million in loans and $359.3 million in investment securities. Also, because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed debt offerings. Future financing could also include the issuance of common or preferred stock.

Cash and cash equivalents (defined as “Cash and due from banks” on the accompanying balance sheets) was $481.2 million at September 30, 2005, a decrease of $104.6 million compared to December 31, 2004. The cash flow provided by operating activities is considered a very stable source of funds and consists of net income adjusted for certain non-cash items. Operating activities provided cash flow of $246.7 million during the first nine months of 2005. Investing activities, consisting mainly of purchases, sales 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 $104.7 million. Most of the cash inflow was due to $2.6 billion in sales and maturities of investment securities, partly offset by purchases of $2.0 billion. In addition, loan growth required $454.6 million net of repayments. Financing activities used cash of $456.0 million, resulting from a $145.2 million net decline in overnight borrowings, $173.0 million required by the Company’s treasury stock repurchase program, and cash dividend payments of $47.9 million. Future short-term liquidity needs arising from daily operations are not expected to vary significantly, and the Company believes it will be able to meet these cash flow needs.

Capital Management

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



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

Risk-adjusted assets	$	11,242,298		$	10,993,542
Tier I capital		1,310,165			1,342,275
Total capital		1,460,414			1,492,009
Tier I capital ratio		11.65	%		12.21	%		6.00	%
Total capital ratio		12.99	%		13.57	%		10.00	%
Leverage ratio		9.44	%		9.60	%		5.00	%

The Company maintains a treasury stock buyback program, and in October 2004 was authorized by the Board of Directors to repurchase up to 5,000,000 shares of its common stock. The Company has routinely used these shares to fund its annual 5% stock dividend and various employee benefit programs. During the current quarter, the Company purchased 966,711 shares of treasury stock at an average cost of $53.20 per share. At September 30, 2005, 248,457 shares remained available for purchase under the current Board authorization. In October 2005, the Company’s Board of Directors updated its authorization to allow the Company to purchase 5,000,000 shares of its common stock.

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

Commitments and Off-Balance Sheet Arrangements

Various commitments and contingent liabilities arise in the normal course of business which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at September 30, 2005 totaled $6.6 billion (including approximately $3.3 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts amounted to $340.4 million and $21.8 million, respectively, at September 30, 2005. Since many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the balance sheet, amounted to $5.5 million at September 30, 2005. Management does not anticipate any material losses arising from commitments and contingent liabilities and believes there are no material commitments to extend credit that represent risks of an unusual nature.

The Company periodically purchases various state tax credits, most of which are resold to third parties. During 2004, the tax credits purchased and sold amounted to $31.7 million and $32.2 million, respectively. During the first nine months of 2005, the tax credits purchased and sold amounted to $46.8 million and $45.8 million, respectively. At September 30, 2005, the Company had outstanding purchase commitments totaling $50.0 million. Also, the Company has additional funding commitments arising from investments in several private equity concerns and low-income housing partnerships. These unfunded commitments amounted to $5.6 million at September 30, 2005.

Segment Results

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



		Nine Months Ended
		September 30					Increase (decrease)

(Dollars in thousands)		2005			2004		Amount			Percent

Consumer		$	142,684		$	98,705	$	43,979			44.6	%
Commercial			97,296			83,951		13,345			15.9
Money management			24,187			21,684		2,503			11.5

	Total segments		264,167			204,340		59,827			29.3
Other/elimination			(23,031	)		34,491		(57,522	)		N.A.

Income before income taxes		$	241,136		$	238,831	$	2,305			1.0	%

For the nine months ended September 30, 2005, income before income taxes for the Consumer segment increased $44.0 million, or 44.6%, mainly due to a higher allocated net credit for funds provided of $43.1 million, coupled with a 10.0% increase in non-interest income. Partly offsetting these increases were a 3.5% increase in non-interest expense, a $1.3 million increase in credit card loan net charge-offs, and a slight decline in direct net interest income. The increase in allocated funding credits resulted from the higher interest rate environment, which assigns a greater value, and thus income, to customer deposits in this segment. The increase in non-interest income resulted mainly from higher overdraft fees and bank card transaction fees, partly offset by a decline in gains on student loan sales. Non-interest expense increased over the previous year mainly due to higher salaries expense, bank card processing expense, online banking processing costs, and corporate management fees. These increases were partly offset by declines in assigned overhead costs and retail deposit account processing fees.

For the nine months ended September 30, 2005, income before taxes for the Commercial segment increased $13.3 million, or 15.9%, compared to the same period in the prior year. This resulted mainly from higher loan recoveries (used in assigning credit costs to the segment) and higher direct net interest income. Higher funding credits were allocated to the segment, which rose for the same reasons as mentioned in the Consumer segment above. While interest on loans grew by $42.3 million, this growth was offset by higher assigned funding costs. Net loan recoveries were $2.2 million in the first nine months of 2005, compared to net charge-offs of $4.9 million in the first nine months of 2004. Non-interest income decreased by $4.0 million, or 6.9%, as a result of declines in commercial cash management fees, lease-related income, and tax credit sales income. These decreases were partly offset by higher commercial bank card transaction fee income. Non-interest expense grew by $1.3 million, or 1.3%, largely due to increases in salaries expense, commercial deposit account processing fees, bank card servicing charges, and overhead cost allocations. These expense increases were partly offset by a decline in operating losses and higher deferred origination costs.

Money Management segment pre-tax profitability for the nine months ended September 30, 2005 was up 11.5% over the previous year mainly due to higher net interest income, coupled with lower non-interest expense, which was down 2.3%. Net interest income increased 17.7% over the prior year mainly due to higher assigned credit for funds resulting from the rising interest rates as described above. The reduction in non-interest expense was mainly due to lower incentive compensation costs and trust processing costs, partly offset by higher proprietary mutual funds expense subsidies. Non-interest income increased slightly over the prior year mainly due to higher trust fee revenue, partly offset by lower bond trading income.

As shown in the table above, the pre-tax profitability in the Other/elimination category decreased $57.5 million in the first nine months of 2005 compared to the same period in 2004. This decrease was mainly the result of higher cost of funds charges assigned to this category, coupled with lower net gains on securities transactions.

Impact of Recently Issued Accounting Standards

The Financial Accounting Standards Board (FASB) issued Interpretation No. 46R (FIN 46R), “Consolidation of Variable Interest Entities”, in December 2003. FIN 46R clarified the requirements that investments in variable interest entities (VIE) be consolidated by the entity that has a variable interest that will absorb a majority of the VIE’s expected losses if they occur, receive a majority of the VIE’s expected returns, or both. Public companies were required to apply the unmodified provisions of the Interpretation to “special-purpose entities” by the end of the first reporting period ending after December 15, 2003. Public companies, other than small business issuers, were required to apply the revised Interpretation by the end of the first reporting period beginning after March 15, 2004 to all entities that were not special-purpose entities.

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

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

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment”. The revision requires entities to recognize the cost in their statements of income of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards. The Statement requires several accounting changes in the areas of award modifications and forfeitures. It contains additional guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. For calendar year companies, the Statement is effective January 1, 2006. The Company implemented provisions of the original Statement 123 beginning in 2003 and has recorded the cost of such awards in its statements of income. The Company does not expect that adoption of the revised Statement will have a material effect on its consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections”. The Statement changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The Statement carries forward previously issued guidance on reporting changes in accounting estimate (which shall be accounted for in the period of change and future periods, if affected) and errors in previously issued financial statements (which shall be reported as a prior period adjustment by restating the prior period financial statements). For calendar year companies, the Statement is effective for accounting changes and corrections of errors made after January 1, 2006. The Company does not expect that adoption of the Statement will have a material effect on its consolidated financial statements.

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Three Months Ended September 30, 2005 and 2004


		Third Quarter 2005								Third Quarter 2004

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

ASSETS:
Loans:
	Business(A)	$	2,356,938		$	32,675		5.50	%	$	2,083,407		$	21,658		4.14	%
	Real estate — construction		518,638			7,970		6.10			426,562			4,516		4.21
	Real estate — business		1,775,132			26,920		6.02			1,806,227			22,654		4.99
	Real estate — personal		1,366,817			18,301		5.31			1,338,895			17,323		5.15
	Consumer		1,267,466			20,827		6.52			1,210,117			19,019		6.25
	Home equity		437,359			6,991		6.34			390,005			4,548		4.64
	Student		321,283			4,111		5.08			289,730			2,250		3.09
	Credit card		556,235			17,109		12.20			520,232			14,458		11.06
	Overdrafts		14,973			—		—			10,659			—		—

Total loans			8,614,841			134,904		6.21			8,075,834			106,426		5.24

Investment securities:
	U.S. government & federal agency		918,993			8,041		3.47			1,636,629			15,779		3.84
	State & municipal obligations(A)		164,282			1,742		4.21			71,838			879		4.87
	Mortgage and asset-backed securities		2,905,599			30,334		4.14			2,828,924			26,723		3.76
	Trading securities		10,696			108		4.01			10,326			90		3.45
	Other marketable securities(A)		221,623			2,615		4.68			158,119			886		2.23
	Non-marketable securities		80,613			713		3.51			75,123			987		5.23

Total investment securities			4,301,806			43,553		4.02			4,780,959			45,344		3.77

Federal funds sold and securities purchased under agreements to resell			126,930			1,195		3.74			101,152			429		1.69

Total interest earning assets			13,043,577			179,652		5.46			12,957,945			152,199		4.67

Less allowance for loan losses			(128,228	)							(132,165	)
Unrealized gain on investment securities			19,786								54,874
Cash and due from banks			478,428								556,811
Land, buildings and equipment, net			376,289								341,382
Other assets			197,053								190,274

Total assets		$	13,986,905							$	13,969,121

LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	404,019			318		.31		$	406,112			317		.31
	Interest checking and money market		6,759,046			14,143		.83			6,205,268			6,813		.44
	Time open & C.D.’s of less than $100,000		1,752,749			13,351		3.02			1,657,022			9,525		2.29
	Time open & C.D.’s of $100,000 and over		902,654			7,409		3.26			814,984			3,883		1.90

Total interest bearing deposits			9,818,468			35,221		1.42			9,083,386			20,538		.90

Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,724,082			14,215		3.27			1,661,568			5,466		1.31
	Other borrowings(B)		370,961			3,302		3.53			392,374			1,933		1.96

Total borrowings			2,095,043			17,517		3.32			2,053,942			7,399		1.43

Total interest bearing liabilities			11,913,511			52,738		1.76	%		11,137,328			27,937		1.00	%

Non-interest bearing demand deposits			602,016								1,292,276
Other liabilities			96,667								110,609
Stockholders’ equity			1,374,711								1,428,908

Total liabilities and equity		$	13,986,905							$	13,969,121

Net interest margin (T/E)					$	126,914							$	124,262

Net yield on interest earning assets								3.86	%							3.82	%


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

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Nine Months Ended September 30, 2005 and 2004


		Nine Months 2005								Nine Months 2004

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

ASSETS:
Loans:
	Business(A)	$	2,303,147		$	89,577		5.20	%	$	2,098,079		$	63,345		4.03	%
	Real estate — construction		480,207			20,410		5.68			430,594			13,069		4.05
	Real estate — business		1,766,452			76,262		5.77			1,845,978			67,479		4.88
	Real estate — personal		1,348,798			53,452		5.30			1,333,178			51,866		5.20
	Consumer		1,228,911			58,877		6.41			1,182,188			56,476		6.38
	Home equity		424,209			18,762		5.91			372,811			12,468		4.47
	Student		368,168			12,728		4.62			320,030			6,582		2.75
	Credit card		552,416			49,091		11.88			513,467			42,292		11.00
	Overdrafts		14,302			—		—			12,963			—		—

Total loans			8,486,610			379,159		5.97			8,109,288			313,577		5.17

Investment securities:
	U.S. government & federal agency		1,139,490			32,299		3.79			1,722,594			51,364		3.98
	State & municipal obligations(A)		100,210			3,230		4.31			71,383			2,634		4.93
	Mortgage and asset-backed securities		2,893,077			87,479		4.04			2,886,438			80,656		3.73
	Trading securities		9,974			288		3.86			14,621			396		3.62
	Other marketable securities(A)		219,528			6,386		3.89			153,375			2,382		2.07
	Non-marketable securities		77,825			2,819		4.84			75,810			2,647		4.66

Total investment securities			4,440,104			132,501		3.99			4,924,221			140,079		3.80

Federal funds sold and securities purchased under agreements to resell			119,171			2,943		3.30			90,944			954		1.40

Total interest earning assets			13,045,885			514,603		5.27			13,124,453			454,610		4.63

Less allowance for loan losses			(130,018	)							(132,677	)
Unrealized gain on investment securities			31,187								93,998
Cash and due from banks			513,569								545,389
Land, buildings and equipment, net			366,952								338,798
Other assets			199,298								191,518

Total assets		$	14,026,873							$	14,161,479


LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	408,308			953		.31		$	403,364			939		.31
	Interest checking and money market		6,760,803			36,157		.72			6,160,152			18,683		.41
	Time open & C.D.’s of less than $100,000		1,716,942			35,794		2.79			1,685,776			29,016		2.30
	Time open & C.D.’s of $100,000 and over		988,865			21,734		2.94			800,509			10,719		1.79

Total interest bearing deposits			9,874,918			94,638		1.28			9,049,801			59,357		.88

Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,620,341			33,796		2.79			1,839,469			14,353		1.04
	Other borrowings(B)		379,860			9,217		3.24			428,974			6,041		1.88

Total borrowings			2,000,201			43,013		2.88			2,268,443			20,394		1.20

Total interest bearing liabilities			11,875,119			137,651		1.55	%		11,318,244			79,751		.94	%

Non-interest bearing demand deposits			668,827								1,267,346
Other liabilities			94,822								127,347
Stockholders’ equity			1,388,105								1,448,542

Total liabilities and equity		$	14,026,873							$	14,161,479

Net interest margin (T/E)					$	376,952							$	374,859

Net yield on interest earning assets								3.86	%							3.82	%


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


Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest sensitivity to movements in interest rates. The Company performs monthly simulations which model interest rates movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations included in the Company’s 2004 Annual Report on Form 10-K.

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, 2005						June 30, 2005						December 31, 2004

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

200 basis points rising	$	(7.0	)		(1.40	)%	$	(8.8	)		(1.76	)%	$	(8.7	)		(1.78	)%
100 basis points rising		(2.9	)		(.58	)		(3.9	)		(.77	)		(4.3	)		(.88	)
100 basis points falling		(.4	)		(.07	)		.4			.10			2.6			.53

The above scenarios reflect a slight decrease in the exposure of the Company’s net interest income to rising rates at September 30, 2005 compared to previous quarters. As of September 30, 2005, a two hundred basis point rising rate scenario would cause net interest income to decrease $7.0 million compared with a decline of $8.8 million at June 30, 2005 and a decline of $8.7 million at December 31, 2004. Under a 100 basis point increase, as of September 30, 2005, net interest income is expected to decline by $2.9 million compared with declines of $3.9 million at June 30, 2005 and $4.3 million at December 31, 2004. The Company’s exposure to declining rates at September 30, 2005 was such that a 100 basis point falling rate scenario would cause net interest income to decrease by $400 thousand, a reduction of $800 thousand from estimated amounts at June 30, 2005.

Compared with the second quarter of 2005, relative to a rise in rates, the Company’s overall interest rate risk profile improved somewhat as a result of loan growth in the quarter, especially in those shorter-term and variably priced loans. Also, the continued decline in the investment securities portfolio helped shift earning assets away from fixed rate assets toward assets with greater re-pricing opportunities. Offsetting this somewhat was the fact that average short-term overnight borrowings increased, mainly as a result of lower average deposit balances.


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, 2005. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were not any significant changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION


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

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



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

July 1 – 31, 2005		125,857	$	53.93		125,857		1,089,311
August 1 – 31, 2005		523,224	$	53.09		523,224		566,087
September 1 – 30, 2005		317,630	$	53.10		317,630		248,457

Total		966,711	$	53.20		966,711		248,457

The Company recently completed the repurchase of 5,000,000 shares pursuant to an authorization by the Board of Directors in October 2004. The table above reflects activity and balances relating to that prior authorization only, as of and for the three months ended September 30, 2005. At its October 21, 2005 meeting, the Board of Directors approved a new purchase of up to 5,000,000 shares of Company common stock.


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 7, 2005


	By	/s/ Jeffery D. Aberdeen



	Jeffery D. Aberdeen
	Controller
	(Chief Accounting Officer)

Date: November 7, 2005

INDEX TO EXHIBITS

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

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

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

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