10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

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

For the Fiscal Year Ended December 31, 2004 — 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)

Securities registered pursuant to Section 12(b) of the Act:

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

NONE

Securities registered pursuant to Section 12(g) of the Act:

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

Title of class

$5 Par Value Common Stock

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) þ

As of February 8, 2005, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $2,659,000,000.

As of February 8, 2005, there were 67,487,701 shares of Registrant’s $5 Par Value Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

Portions of the Registrant’s definitive proxy statement for its 2005 annual meeting of shareholders, which will be filed within 120 days of December 31, 2004, are incorporated by reference into Part III of this Report.

Commerce Bancshares, Inc.

Form 10-K

INDEX
			Page
Part I	Item 1.	Business		4
	Item 2.	Properties		8
	Item 3.	Legal Proceedings		9
	Item 4.	Submission of Matters to a Vote of Security Holders		9
Part II	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		10
	Item 6.	Selected Financial Data		11
	Item 7.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations		11
	Item 7a	Quantitative and Qualitative Disclosures about Market Risk		47
	Item 8.	Consolidated Financial Statements and Supplementary Data		47
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		82
	Item 9a	Controls and Procedures		82
	Item 9b	Other Information		84
Part III	Item 10.	Directors and Executive Officers of the Registrant		84
	Item 11.	Executive Compensation		84
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		84
	Item 13.	Certain Relationships and Related Transactions		84
	Item 14.	Principal Accountant Fees and Services		84
Part IV	Item 15.	Exhibits and Financial Statements Schedules		85
Signatures				86
Index to Exhibits				E-1
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
302 Certification of CEO
302 Certification of CFO
906 Certification of CEO and CFO

3

PART I

Item 1. BUSINESS

General

      Commerce Bancshares, Inc. (the “Company”), a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Missouri on August 4, 1966. The Company presently owns all of the outstanding capital stock of three national banking associations, which are headquartered in Missouri (the “Missouri bank”), Kansas (the “Kansas bank”), and Nebraska (the “Nebraska bank”). The Nebraska bank is limited in its activities to the issuance of credit cards. The remaining two banking subsidiaries engage in general banking business, providing a broad range of retail, corporate, investment and private banking products and services to individuals and businesses. The Company also owns, directly or through its banking subsidiaries, various non-banking subsidiaries. Their activities include owning real estate leased to the Company’s banking subsidiaries, underwriting credit life and credit accident and health insurance, selling property and casualty insurance (relating to consumer loans made by the banking subsidiaries), venture capital investment, securities brokerage, mortgage banking, and leasing activities. The Company owns a second tier holding company that is the direct owner of both the Missouri and Kansas banks. A list of the Company’s subsidiaries is included as Exhibit 21.

      The Company is the largest bank holding company headquartered in Missouri. At December 31, 2004, the Company had consolidated assets of $14.3 billion, loans of $8.3 billion, deposits of $10.4 billion, and stockholders’ equity of $1.4 billion.

      The Missouri bank is the Company’s largest, with total assets of $12.8 billion and comprising approximately 92% of the Company’s total banking assets. The bank’s facilities are located throughout Missouri, in eastern Kansas, and in the Peoria and Bloomington areas in Illinois. The Missouri bank now includes the Company’s former Illinois bank, which was merged into the Missouri bank during 2004 in order to improve customer service and minimize operating overhead. The Kansas bank has total assets of $1.1 billion. It has significant operations and banking facilities in the areas of Wichita, Hays, Hutchinson, and Garden City, Kansas.

      The markets these banks serve, being centrally located in the Midwest, provide natural sites for production and distribution facilities and also serve as transportation hubs. The economy has been well-diversified with many major industries represented, including telecommunications, automobile manufacturing, aircraft manufacturing, health care, numerous service industries, food production and agricultural production and related industries. In addition, several of the Illinois markets are located in areas with some of the most productive farmland in the world. The banks operate in areas with stable real estate markets, which in the past have avoided the volatile prices that other parts of the country have experienced.

      The Company regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions eligible for bank holding company ownership or control. In addition, the Company regularly considers the potential disposition of certain of its assets and branches. The Company’s most recent acquisition was in January 2003 when it purchased The Vaughn Group, Inc., a direct equipment lessor based in Cincinnati, Ohio with a portfolio of direct financing, sales type and operating leases. The last bank acquisition was in March 2001, when the Company acquired Breckenridge Bancshares Company and its subsidiary, Centennial Bank. For additional information on acquisition and branch disposition activity, refer to pages 13 and 55.

Operating Segments

      The Company is managed in three operating segments. The Consumer segment includes the retail branch network, consumer installment lending, personal mortgage banking, bank card activities, student lending, and discount brokerage services. It provides services through a network of 187 full-service branches, a large ATM network, and the use of alternative delivery channels such as extensive online banking and telephone banking services. In 2004, this retail segment contributed 49% of total segment pre-

4

tax income. The Commercial segment provides a full array of corporate lending, leasing, and international services, as well as business and government deposit and cash management services. In 2004, it contributed 41% of total segment pre-tax income. The Money Management segment provides traditional trust and estate tax planning services, and advisory and discretionary investment portfolio management services. This segment also manages the Company’s family of proprietary mutual funds, which are available for sale to both trust and general retail customers. Fixed income investments are sold to individuals and institutional investors through the Capital Markets group, which is also included in this segment. At December 31, 2004, the Money Management segment managed investments with a market value of $10.2 billion and administered an additional $8.0 billion in non-managed assets. Additional information relating to operating segments can be found on pages 37 and 71.

Supervision and Regulation

General

      The Company, as a bank holding company, is primarily regulated by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956 (BHC Act). Under the BHC Act, the Federal Reserve Board’s prior approval is required in any case the Company proposes to acquire all or substantially all of the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. The BHC Act also prohibits, with certain exceptions, the Company from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any non-banking company. Under the BHC Act, the Company may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries and may not acquire voting control of non-banking companies unless the Federal Reserve Board determines such businesses and services to be closely related to banking. When reviewing bank acquisition applications for approval, the Federal Reserve Board considers, among other things, each subsidiary bank’s record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended (CRA). The Missouri, Kansas and Nebraska bank charters have current CRA ratings of “outstanding”.

      The Company is required to file with the Federal Reserve Board various reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board also makes regular examinations of the Company and its subsidiaries. The Company’s three banking subsidiaries are organized as national banking associations and are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC). All banks are also subject to regulation by the Federal Deposit Insurance Corporation. In addition, there are numerous other federal and state laws and regulations which control the activities of the Company and its banking subsidiaries, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuance of securities, dividend payments, and extensions of credit. This regulatory framework is intended primarily for the protection of depositors and the preservation of the federal deposit insurance funds, and not for the protection of security holders. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to employ assets and maximize income.

      In addition to its regulatory powers, the Federal Reserve impacts the conditions under which the Company operates by its influence over the national supply of bank credit. The Federal Reserve Board employs open market operations in U.S. government securities, changes in the discount rate on bank borrowings, changes in the federal funds rate on overnight inter-bank borrowings, and changes in reserve requirements on bank deposits in implementing its monetary policy objectives. These instruments are used in varying combinations to influence the overall level of the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets and the level of inflation. The monetary policies of the Federal Reserve have had a significant effect on the operating results of financial institutions in the past, most notably the low rate environment in recent years. In view of changing conditions in the national economy and in the money markets, as well as the effect of credit policies of monetary and

5

fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels or loan demand, or their effect on the financial statements of the Company.

Subsidiary Banks

      Under Federal Reserve policy, the Company is expected to act as a source of financial strength to each of its bank subsidiaries and to commit resources to support each bank subsidiary in circumstances when it might not otherwise do so. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Payment of Dividends

      The principal source of the Company’s cash revenues is dividends from the subsidiary banks. The Federal Reserve Board may prohibit the payment of dividends by bank holding companies if their actions constitute unsafe or unsound practices. The OCC limits the payment of dividends by bank subsidiaries in any calendar year to the net profit of the current year combined with the retained net profits of the preceding two years. The payment of dividends by the bank subsidiaries may also be affected by factors such as the maintenance of adequate capital.

Capital Adequacy

      The Company is required to comply with the capital adequacy standards established by the Federal Reserve. These capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items (the “Total Risk-Based Capital Ratio”), with at least one-half of that amount consisting of Tier I or core capital and the remaining amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common shareholders’ equity, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and other non-qualifying intangible assets. Tier II capital generally consists of hybrid capital instruments, term subordinated debt and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics.

      In addition, the Federal Reserve also requires bank holding companies to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier I capital to its total consolidated quarterly average assets (as defined for regulatory purposes), net of the allowance for loan losses, goodwill and certain other intangible assets. The minimum leverage ratio for bank holding companies is 4%. At December 31, 2004, all of the subsidiary banks were “well-capitalized” under regulatory capital adequacy standards, as further discussed on page 74.

Legislation

      These laws and regulations are under constant review by various agencies and legislatures, and are subject to sweeping change. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB Act) contained major changes in laws that previously kept the banking industry largely separate from the securities and insurance industries. The GLB Act authorized the creation of a new kind of financial institution, known as a “financial holding company” and a new kind of bank subsidiary called a “financial subsidiary”, which may engage in a broader range of investment banking, insurance agency, brokerage, and underwriting activities. The GLB Act also included privacy provisions that limit banks’ abilities to disclose non-public information about customers to non-affiliated entities. Banking organizations are not required to become financial holding companies, but instead may continue to operate as bank holding

6

companies, providing the same services they were authorized to provide prior to the enactment of the GLB Act.

      In 2001, President Bush signed into law comprehensive anti-terrorism legislation known as the USA Patriot Act. Title III of the USA Patriot Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as the Company’s broker-dealer subsidiary. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.

Competition

      The Company’s locations in regional markets throughout Missouri, Kansas and central Illinois face intense competition from hundreds of financial service providers. The Company competes with national and state banks for deposits, loans and trust accounts, and with savings and loan associations and credit unions for deposits. In addition, the Company competes with other financial intermediaries such as securities brokers and dealers, personal loan companies, insurance companies, finance companies, and certain governmental agencies. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and customer convenience, such as location of offices. The passage of the GLB Act, which removed barriers between banking and the securities and insurance industries, has resulted in greater competition among these industries.

Employees

      The Company and its subsidiaries employed 4,381 persons on a full-time basis and 718 persons on a part-time basis at December 31, 2004. The Company provides a variety of benefit programs including retirement and 401K plans as well as group life, health, accident, and other insurance. The Company also maintains training and educational programs designed to prepare employees for positions of increasing responsibility.

Available Information

      The Company’s principal offices are located at 1000 Walnut, Kansas City, Missouri (telephone number 816-234-2000). The Company makes available free of charge, through its web site at www.commercebank.com, reports filed with the Securities and Exchange Commission as soon as reasonably practicable after the electronic filing. These filings include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports.

7

Statistical Disclosure

      The information required by Securities Act Guide 3 – “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below.

			Page
I.	Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential			15, 42-45
II.	Investment Portfolio			28-29, 57-60
III.	Loan Portfolio Types of Loans			20
		Maturities and Sensitivities of Loans to Changes in Interest Rates		21
		Risk Elements		26-28
IV.	Summary of Loan Loss Experience			24-26
V.	Deposits			42-43, 62
VI.	Return on Equity and Assets			12
VII.	Short-Term Borrowings			63-64

Item 2. PROPERTIES

      The bank subsidiaries maintain their main offices in various multi-story office buildings. The Missouri bank owns its main offices and leases unoccupied premises to the public. These buildings, located in the downtown areas of Kansas City and St. Louis, include:

	Net rentable		% occupied			% occupied
Building	square footage		in total			by bank
922 Walnut Kansas City, MO		256,000		92	%		90	%
1000 Walnut Kansas City, MO		403,000		70			34
720 Main Kansas City, MO		194,000		100			100
8000 Forsyth Clayton, MO		178,000		95			90

      During 2004, the Company sold an office building in Peoria, Illinois, which contained bank offices but was largely leased to outside tenants. The bank now leases its offices from the new owner. The Kansas charter sold its main Wichita office during 2004, and is currently leasing those premises during the construction phase of a new facility, expected to be completed in April 2005. The Nebraska credit card bank leases its offices in Omaha, Nebraska. Additionally, certain other installment loan and credit card functions operate out of leased offices in downtown Kansas City. The Company also has an additional 180 branch locations in Missouri, Illinois and Kansas which are owned or leased, and 143 off-site ATM locations.

      On December 22, 2004, the Missouri bank signed an agreement to purchase a multi-story office building and garage in downtown Kansas City. The agreement calls for the purchase of the building, which has 215,000 square feet of rentable area, and the attached garage for a price of $18 million. The property is being acquired from Tower Properties Company of which Commerce senior executives, David W. Kemper, CEO, and Jonathan M. Kemper, Vice-Chairman, also serve as directors. The purchase price is based on an independent outside appraisal and received the approval of the Company’s Board of Directors and independent Audit Committee. The Company expects to move its backroom check operations from its building at 720 Main Street to the new facility and sell the 720 Main building.

8

Item 3.  LEGAL PROCEEDINGS

      The information required by this item is set forth in Item 8 under Note 18, Commitments, Contingencies and Guarantees on page 79.

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

      No matters were submitted during the fourth quarter of 2004 to a vote of security holders through the solicitation of proxies or otherwise.

Executive Officers of the Registrant

      The following are the executive officers of the Company, each of whom is designated annually, and there are no arrangements or understandings between any of the persons so named and any other person pursuant to which such person was designated an executive officer.

Name and Age		Positions with Registrant
	Jeffery D. Aberdeen, 51	Controller of the Company since December 1995. Prior thereto he was Assistant Controller of the Company. He is Controller of the Company’s subsidiary banks, Commerce Bank, N.A. (Missouri, Kansas and Omaha).
	Kevin G. Barth, 44	Senior Vice President of the Company and Executive Vice President of Commerce Bank, N.A. (Missouri), since October 1998. Officer of Commerce Bank, N.A. (Missouri) prior thereto.
	A. Bayard Clark, 59	Chief Financial Officer, Executive Vice President and Treasurer of the Company since December 1995. Executive Vice President of the Company prior thereto.
	Sara E. Foster, 44	Senior Vice President of the Company since February 1998 and Vice President of the Company prior thereto.
	David W. Kemper, 54	Chairman of the Board of Directors of the Company since November 1991, Chief Executive Officer of the Company since June 1986, and President of the Company since April 1982. He is Chairman of the Board, President and Chief Executive Officer of Commerce Bank, N.A. (Missouri). He is the son of James M. Kemper, Jr. (a former Director and former Chairman of the Board of the Company) and the brother of Jonathan M. Kemper, Vice Chairman of the Company.
	Jonathan M. Kemper, 51	Vice Chairman of the Company since November 1991 and Vice Chairman of Commerce Bank, N.A. (Missouri) since December 1997. Prior thereto, he was Chairman of the Board, Chief Executive Officer, and President of Commerce Bank, N.A. (Missouri). He is the son of James M. Kemper, Jr. (a former Director and former Chairman of the Board of the Company) and the brother of David W. Kemper, Chairman, President, and Chief Executive Officer of the Company.
	Charles G. Kim, 44	Executive Vice President of the Company since April 1995 and Executive Vice President of Commerce Bank, N.A. (Missouri) since January 2004. Prior thereto, he was Senior Vice President of Commerce Bank, N.A. (Clayton, MO), a former subsidiary of the Company.
	Seth M. Leadbeater, 54	Vice Chairman of the Company since January 2004. Prior thereto he was Executive Vice President of the Company. He has been Vice Chairman of Commerce Bank, N.A. (Missouri) since September 2004. Prior thereto he was Executive Vice President of Commerce Bank, N.A. (Missouri) and President of Commerce Bank, N.A. (Clayton, MO).

9

Name and Age		Positions with Registrant
	Robert C. Matthews, Jr., 57	Executive Vice President of the Company since December 1989. Executive Vice President of Commerce Bank, N.A. (Missouri) since December 1997.
	Michael J. Petrie, 48	Senior Vice President of the Company since April 1995. Prior thereto, he was Vice President of the Company.
	Robert J. Rauscher, 47	Senior Vice President of the Company since October 1997. Senior Vice President of Commerce Bank, N.A. (Missouri) prior thereto.
	V. Raymond Stranghoener, 53	Senior Vice President of the Company since February 2000. Prior to his employment with the Company in October 1999, he was employed at BankAmerica Corp. as National Executive of the Bank of America Private Bank Wealth Strategies Group. He joined Boatmen’s Trust Company in 1993, which subsequently merged with BankAmerica Corp.

PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Commerce Bancshares, Inc.

Common Stock Data

      The following table sets forth the high and low prices of actual transactions for the Company’s common stock (CBSH) and cash dividends paid for the periods indicated (restated for the 5% stock dividend distributed in December 2004).

						Cash
	Quarter	High		Low		Dividends
2004	First	$	47.62	$	42.62	$	.219
	Second		45.88		41.90		.219
	Third		46.90		42.15		.219
	Fourth		50.24		44.58		.219
2003	First	$	37.35	$	31.93	$	.150
	Second		37.64		32.38		.150
	Third		41.54		34.74		.204
	Fourth		46.99		39.61		.204
2002	First	$	38.49	$	32.48	$	.140
	Second		40.47		36.54		.140
	Third		38.65		31.56		.140
	Fourth		37.61		29.91		.140

      Commerce Bancshares, Inc. common shares are publicly traded on The Nasdaq Stock Market (NASDAQ). NASDAQ is a highly-regulated electronic securities market comprised of competing Market Makers whose trading is supported by a communications network linking them to quotation dissemination, trade reporting, and order execution systems. The Company had 4,776 shareholders of record as of December 31, 2004.

10

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

	Total				Total Number of
	Number		Average		Shares Purchased		Maximum Number that
	of Shares		Price Paid		as Part of Publicly		May Yet Be Purchased
Period	Purchased		per Share		Announced Program		Under the Program
October 1–31, 2004		110,743	$	48.05		110,743		4,889,257
November 1–30, 2004		689,300	$	49.80		689,300		4,199,957
December 1–31, 2004		468,888	$	49.23		468,888		3,731,069
Total		1,268,931	$	49.44		1,268,931		3,731,069

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

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

Item 6.  SELECTED FINANCIAL DATA

      The required information is set forth below in Item 7.

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

      Commerce Bancshares, Inc. (the Company) operates as a super-community bank offering an array of sophisticated financial products delivered with high-quality, personal customer service. It is the largest bank holding company headquartered in Missouri, with its principal offices in Kansas City and St. Louis, Missouri. Customers are served from over 300 locations in Missouri, Kansas, and Illinois, using delivery platforms which include an expansive ATM network, full-featured online banking, and a central contact center.

      The core of the Company’s competitive advantage is its concentration on relationship banking with high service levels and competitive products. In order to enhance shareholder value, the Company focuses on extending its core revenue, expanding its market share, utilizing improved technology, and enhancing customer satisfaction.

      Various indicators are used by management in evaluating the Company’s financial condition and operating performance. Among these indicators are the following:

•  Growth in earnings per share – Diluted earnings per share rose 10.3% over 2003 and has risen 9.3%, compounded annually, over the last 5 years.

•  Growth in total revenue – Total revenue is comprised of net interest income and non-interest income, and grew 2.5% over 2003. Net interest income declined slightly from 2003, mainly due to historically low short-term interest rates and lower loan growth. Non-interest income rose 8.4% on growth in bank card revenues and deposit fee income.

•  Expense control – Total non-interest expense grew by only 2.3% this year due to prudent management and expanded use of technology. Salaries and employee benefits, the largest expense component, grew by only .3%.

•  Asset quality – Net charge-offs in 2004 were $3.4 million less than in 2003, and net charge-offs in 2004 averaged .41% of loans compared to .46% in the previous year.

•  Shareholder return – Total shareholder return, including the stock price and dividends, totaled 15.6% over the past 5 years and 18.4% over the past 10 years.

11

      The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. The historical trends reflected in the financial information presented below are not necessarily reflective of anticipated future results.

Key Ratios

(Based on average balance sheets):	2004			2003			2002			2001			2000
Return on total assets		1.56	%		1.52	%		1.58	%		1.52	%		1.59	%
Return on stockholders’ equity		15.19			14.27			14.42			14.56			15.91
Tier I capital ratio		12.21			12.31			12.67			12.28			12.04
Total capital ratio		13.57			13.70			14.05			13.64			13.36
Leverage ratio		9.60			9.71			10.18			9.81			9.91
Efficiency ratio*		59.16			58.83			58.62			58.79			59.03
Loans to deposits		78.71			79.96			79.29			82.49			87.26
Net yield on interest earning assets (tax equivalent basis)		3.81			4.04			4.39			4.35			4.74
Non-interest bearing deposits to total deposits		12.47			10.81			9.96			11.63			14.89
Equity to total assets		10.25			10.68			10.97			10.46			10.01
Cash dividend payout ratio		28.26			25.19			21.78			22.76			21.74

*  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).

Selected Financial Data

(In thousands, except per share data)
	2004		2003		2002		2001		2000
Net interest income	$	497,331	$	502,392	$	499,965	$	468,775	$	481,646
Provision for loan losses		30,351		40,676		34,108		36,423		35,159
Non-interest income		326,931		301,667		280,572		274,999		255,636
Non-interest expense		482,769		472,144		458,200		443,097		438,448
Net income		220,341		206,524		196,310		178,712		175,558
Net income per share-basic*		3.15		2.84		2.61		2.34		2.26
Net income per share-diluted*		3.10		2.81		2.58		2.31		2.23
Cash dividends		61,135		51,266		42,185		40,254		37,613
Cash dividends per share*		.876		.707		.561		.527		.486
Market price per share*		50.20		46.69		35.64		33.68		34.96
Book value per share*		20.90		20.35		19.25		16.88		15.09
Common shares outstanding*		68,258		71,286		73,900		75,672		75,996
Total assets		14,250,368		14,287,164		13,308,415		12,908,146		11,120,741
Loans		8,305,359		8,142,679		7,875,944		7,638,482		7,906,665
Investment securities		4,837,368		5,039,194		4,275,248		3,732,257		1,956,084
Deposits		10,434,309		10,206,208		9,913,311		10,031,885		9,079,282
Long-term debt		389,542		300,977		338,457		392,586		124,684
Stockholders’ equity		1,426,880		1,450,954		1,422,452		1,277,157		1,147,081
Non-performing assets		18,775		33,685		29,539		30,768		21,324

*  Restated for the 5% stock dividend distributed in December 2004.

Results of Operations

										$ Change						% Change
(Dollars in thousands)	2004			2003			2002			’04-’03			’03-’02			’04-’03			’03-’02
Net interest income	$	497,331		$	502,392		$	499,965		$	(5,061	)	$	2,427			(1.0	)%		.5	%
Provision for loan losses		(30,351	)		(40,676	)		(34,108	)		(10,325	)		6,568			(25.4	)		19.3
Non-interest income		326,931			301,667			280,572			25,264			21,095			8.4			7.5
Non-interest expense		(482,769	)		(472,144	)		(458,200	)		10,625			13,944			2.3			3.0
Income taxes		(90,801	)		(84,715	)		(91,919	)		6,086			(7,204	)		7.2			(7.8	)
Net income	$	220,341		$	206,524		$	196,310		$	13,817		$	10,214			6.7	%		5.2	%

      The Company’s fully diluted earnings per share amounted to $3.10 in 2004 compared to $2.81 in 2003, an increase of 10.3%. Net income for 2004 was $220.3 million, which increased 6.7% over 2003, making 2004 the 20th consecutive year of record earnings. Return on assets amounted to 1.56% compared with

12

1.52% last year and the return on equity totaled 15.19% compared to 14.27% last year. The efficiency ratio was 59.16% in 2004 compared with 58.83% in 2003.

      The increase in net income in 2004 was principally due to growth in non-interest income of $25.3 million, or 8.4%, coupled with lower credit costs and effective expense management. Non-interest expense increased 2.3% over last year and income tax expense increased 7.2%. Net interest income declined slightly, reflecting the effects of slower growth in business and business real estate loans. Also, interest expense on deposit transaction accounts and short-term borrowings rose, mainly due to increases by the Federal Reserve in short-term interest rates during the second half of 2004. The provision for loan losses decreased $10.3 million to $30.4 million, largely due to decreases in business real estate, overdraft and consumer net loan charge-offs. The increase in non-interest income was largely due to increases in bank card fees of 16.6% and deposit account fees of 7.9%, partly offset by declines in bond and mortgage banking revenues. Non-interest expense increased a modest 2.3%, mainly due to increases in data processing costs (up 13.4%) and marketing costs (up 15.9%). Smaller increases were experienced in salaries and benefits and supplies and communications costs, with both increasing less than 1%. Also, equipment costs declined by 5.0%. Income tax expense increased in 2004 due to an increase in taxable income, but reflected an effective tax rate of 29.2% which was comparable with the prior year. Income tax expense in 2004 included tax benefits of $18.9 million, representing the effects of certain corporate restructuring initiatives, and compares to approximately $15.2 million of similar benefits recorded in 2003.

      Net income in 2003 was $206.5 million, which was a $10.2 million, or 5.2%, increase over 2002. Diluted earning per share increased 8.9% to $2.81 compared to $2.58 in 2002. Net income rose in 2003 principally due to growth in non-interest income of $21.1 million, or 7.5%, combined with effective expense management and lower income tax expense. Non-interest expense increased by 3.0% over 2002 and income tax expense declined 7.8%. The provision for loan losses increased $6.6 million to $40.7 million, largely due to increases in consumer credit losses. The increase in non-interest income was largely due to increases in deposit account fees of 8.6% and bank card fees of 13.4%, partly offset by small declines in bond, brokerage, and mortgage banking revenues. Non-interest expense increased 3.0%, mainly due to increases in salaries and benefits costs (up 3.4%), but pressured by higher costs for occupancy (up 11.8%) and equipment (up 5.4%). These increases were partly offset by a 9.8% decline in data processing and software expense. Income tax expense declined in 2003 primarily due to the recognition of additional tax benefits from various corporate reorganization initiatives.

      Effective January 2003, the Company acquired The Vaughn Group, Inc. (Vaughn), a direct equipment lessor based in Cincinnati, Ohio. At acquisition, Vaughn had a lease portfolio that was principally comprised of $32.8 million of direct financing leases. These leases are secured mainly by computer hardware and office equipment. In addition, at the date of acquisition Vaughn serviced approximately $350 million of lease agreements for other institutions involving capital equipment, ranging from production machinery to transportation equipment. The Company issued a combination of cash and stock to complete this purchase. Goodwill of $5.3 million was recognized in the transaction and recorded in the 2003 consolidated balance sheet.

      The Company continually evaluates its network of bank branches throughout Missouri, Kansas and Illinois. As a result of this evaluation process, the Company sold one branch in 2004, realizing a pre-tax gain of $1.1 million. The branch sold during 2004 had loans of $12.9 million and deposits of $16.5 million. The Company also sold three bank facilities during 2004, compared to two in 2003. The gains and losses realized on the sales of these premises were not significant. During 2002, the Company sold two bank branches and a branch facility, realizing pre-tax gains of $2.4 million on these sales. The branches sold in 2002 had loans of $15.0 million, deposits of $38.4 million, and premises of $2.9 million.

      Effective January 1, 2003, the Company voluntarily adopted the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, pursuant to which the cost of stock options are expensed. The Company restated all prior periods to reflect the compensation expense that would have been recognized had the recognition provisions of Statement No. 123 been applied to all

13

options granted to employees after January 1, 1995. The effect of the restatement on 2002 was to lower earnings per share by $.04.

      The Company distributed a 5% stock dividend for the eleventh consecutive year on December 13, 2004. All per share and average share data in this report has been restated to reflect the 2004 stock dividend.

Critical Accounting Policies

      The Company’s consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company’s reported results and financial position for the period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments primarily by using internal cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company’s future financial condition and results of operations.

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

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

      Management is required to make various assumptions in valuing its pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate, and the rate of increase in future compensation levels. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations, and expert opinions in determining the various rates used to estimate pension expense. The Company also considers the Moody’s AA corporate bond yields and other market interest rates in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels. While differences in these rate assumptions could alter pension expense, given not only past history and controls in place including use of expert opinions, it is not expected that such estimates could alter expense by more than $1 to $3 million.

      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

14

Company’s financial position and its results of operations. Discussion of income taxes, including estimates of future income tax expense, is presented on page 20 of this discussion and in Note 9 on Income Taxes in the consolidated financial statements.

Net Interest Income

      Net interest income, the largest source of revenue, results from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. 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.

		2004									2003
		Change due to									Change due to
		Average			Average						Average			Average
(In thousands)		Volume			Rate			Total			Volume			Rate			Total
Interest income, fully taxable equivalent basis
Loans		$	9,864		$	(18,049	)	$	(8,185	)	$	22,005		$	(60,705	)	$	(38,700	)
Investment securities:
	U.S. government and federal agency obligations		7,762			(7,010	)		752			14,395			(4,318	)		10,077
	State and municipal obligations		(506	)		(223	)		(729	)		2,969			(1,909	)		1,060
	Mortgage and asset-backed securities		14,141			(11,995	)		2,146			20,538			(29,560	)		(9,022	)
	Other securities		(1,222	)		(1,191	)		(2,413	)		3,900			(1,283	)		2,617
Federal funds sold and securities purchased under agreements to resell			266			215			481			(364	)		(291	)		(655	)
Total interest income			30,305			(38,253	)		(7,948	)		63,443			(98,066	)		(34,623	)
Interest expense
Interest bearing deposits:
	Savings		78			(179	)		(101	)		163			(958	)		(795	)
	Interest checking and money market		538			(1,222	)		(684	)		853			(16,563	)		(15,710	)
	Time open and C.D.’s of less than $100,000		(3,520	)		(5,996	)		(9,516	)		(6,467	)		(15,460	)		(21,927	)
	Time open and C.D.’s of $100,000 and over		2,073			(1,439	)		634			1,197			(5,171	)		(3,974	)
Federal funds purchased and securities sold under agreements to repurchase			3,185			4,086			7,271			10,848			(5,412	)		5,436
Other borrowings			498			(248	)		250			589			(1,683	)		(1,094	)
Total interest expense			2,852			(4,998	)		(2,146	)		7,183			(45,247	)		(38,064	)
Net interest income, fully taxable equivalent basis		$	27,453		$	(33,255	)	$	(5,802	)	$	56,260		$	(52,819	)	$	3,441

      Net interest income was $497.3 million in 2004, $502.4 million in 2003 and $500.0 million in 2002. Compared to the prior year, net interest income decreased $5.1 million, or 1.0%, in 2004 compared to an increase of $2.4 million, or .5%, in 2003. During 2004, net interest income decreased from amounts recorded last year mainly because of continued downward re-pricing of loans and deposits during 2003 and the first half of 2004 and lower rates on securities purchased during the year. In addition, lower loan demand pressured interest income. However, during the second half of the year, the Federal Reserve initiated five 25 basis point rate increases, which had the effect of raising rates earned on many types of loans in the Company’s portfolio tied to variable rates. The increase in loan yields, however, was partially offset by an increase in the borrowing costs of federal funds purchased due to increases in short-term

15

interest rates. Yields on earning assets declined 29 basis points from the previous year, while rates paid on deposits decreased 12 basis points and rates paid on other borrowings increased 17 basis points. As a result, the Company’s net interest margin narrowed to 3.81% from 4.04% in the previous year. The Company purchased new investment securities, largely during the first part of 2004, as a hedge against lower rates and to generate added interest income. As rates began to rise at mid year, the Company reduced the level of the investment portfolio. As a result, average investment securities were $208.5 million lower during the second half of the year as compared to the first half of the year. However, the average balance of investment securities grew $451.4 million over the full year. Purchases of securities were funded by growth in deposits and other borrowed funds. During 2004, average loans grew by $120.7 million, which increased net interest income.

      During 2003, net interest income increased only slightly over amounts recorded in 2002 mainly because of the continued re-pricing downward of interest earning assets, which moved down faster than rates paid on interest bearing liabilities. Yields on earning assets declined 77 basis points from 2002, while rates paid on deposits and other borrowings declined 48 basis points. During 2003, the Federal Reserve lowered the federal funds target rate once in June by 25 basis points which lowered rates earned on many loans in the Company’s loan portfolio, which were tied to variable rates. Much of the Company’s non-maturity deposit portfolio (i.e., interest checking and money market accounts) was already at low rates and could not be lowered commensurate with the reduction of loan rates. Also putting pressure on net interest income was an acceleration of early payments received on parts of the Company’s mortgage related investment portfolio, which caused increased bond premium amortization. To partly mitigate this result, the Company purchased new investment securities to generate added interest income and grew the year to date average balance by $845.6 million. These purchases were funded by some growth in deposits and other borrowed funds. Also, average loans grew by $247.7 million during 2003 and certificate of deposit balances declined, both of which increased net interest income.

      The net yield on interest earning assets was 3.81% in 2004, 4.04% in 2003 and 4.39% in 2002. Average interest earning assets rose 4.7% in 2004 over 2003, compared to a 9.4% increase in 2003 over 2002. Average interest bearing liabilities increased 3.8% in 2004 compared to a 9.3% increase in 2003.

      Total interest income was $610.1 million in 2004, $617.4 million in 2003 and $652.6 million in 2002. Tax equivalent interest income did not materially differ. Interest income declined $7.3 million, or 1.2%, in 2004 compared to the previous year. As mentioned previously, this decline was primarily due to decreases in rates on loans and investment securities. Average loan balances, which earn higher rates, increased $120.7 million during 2004 and generated $9.9 million of interest income; however, this increase was offset by the effect of lower rates which reduced interest income by over $18 million. Since large sections of the loan portfolio are tied to indices which fluctuate with the prime rate, the rate reductions in 2003 by the Federal Reserve mentioned above caused much of the loan portfolio to re-price downward at the beginning of 2004. During the second half of the year, the Federal Reserve raised rates five times by 25 basis points which provided for additional interest income on variably priced loans. Average yields on loans increased 23 basis points in the fourth quarter of 2004 compared to the same quarter of 2003. Yields on investment securities in the fourth quarter of 2004 were 26 basis points lower than the same quarter in the previous year, as maturing securities were reinvested in lower earning securities. However, due to additional purchases, mainly during the first half of 2004, average balances of investment securities grew $451.4 million, contributing $20.2 million in additional interest income. At December 31, 2004, average balances of investment securities comprised 37% of average earning assets compared to 35% in 2003. Average loans comprised 62% of average earning assets, down from 64% in 2003.

      Total interest income declined $35.1 million, or 5.4% in 2003 compared to 2002. The decline was primarily due to decreases in yields on all loan categories and the Company’s investment securities portfolio as a result of the reduction in market rates occurring in 2003. Average loan balances increased $247.7 million during 2003 and generated $22.0 million of interest income, however this increase was offset by the effect of lower rates which reduced interest income by $60.7 million. Yields on investment securities were also lower, as maturing securities and an acceleration of early premiums were amortized at

16

a faster pace. Additional purchases of securities increased the average by $845.6 million and contributed $41.8 million in additional interest income.

      Total interest expense was $112.8 million in 2004, $115.0 million in 2003 and $152.6 million in 2002. Interest expense declined $2.3 million, or 2.0%, in 2004 compared to 2003. The average rate paid on interest bearing liabilities was 1.00% in 2004 compared to 1.06% in 2003. The changing interest rate environment described above resulted in an interest rate decline in 2004 of 12 basis points on deposits offset by an increase of 24 basis points on overnight borrowings. The largest decline in deposit rates was on the Company’s retail (under $100,000) certificate of deposit accounts, where rates declined 32 basis points. In addition, rates on the Company’s jumbo (over $100,000) certificates of deposit decreased 15 basis points. The continued re-pricing of short-term borrowings, primarily federal funds purchased, resulted in an increase of $4.1 million in interest expense. Growth of $277.2 million in the average balance of short-term borrowings caused interest expense to increase $3.2 million.

      The average rate paid on interest bearing liabilities was 1.06% in 2003 compared to 1.54% in 2002. The lower interest rate environment described above resulted in an interest rate decline of 50 basis points on deposits and 29 basis points on overnight borrowings. The largest decline was the result of a decrease of 80 basis points in average rates paid on retail certificates of deposit. A decline of $207.9 million in average retail certificates of deposit decreased interest expense by $6.5 million. In addition, new certificates of deposit issued in 2003 were at lower rates which further lowered interest expense compared to 2002. This continued re-pricing of deposits was offset by an increase in interest expense of $4.8 million on other borrowings which resulted mainly from growth of $776.2 million in average federal funds purchased and repurchase agreements.

Provision for Loan Losses

      The provision for loan losses was $30.4 million in 2004, compared with $40.7 million in 2003 and $34.1 million in 2002. The provision for loan losses is recorded to bring the allowance for loan losses to a level deemed adequate by management based on the factors mentioned in the following “Allowance for Loan Losses” section of this discussion.

Non-Interest Income

										% Change
(Dollars in thousands)	2004			2003			2002			’04-’03			’03-’02
Trust fees	$	64,257		$	60,921		$	60,682			5.5	%		.4	%
Deposit account charges and other fees		105,382			97,711			89,982			7.9			8.6
Bank card transaction fees		78,253			67,102			59,171			16.6			13.4
Trading account profits and commissions		12,288			14,740			15,954			(16.6	)		(7.6	)
Consumer brokerage services		9,429			9,095			9,744			3.7			(6.7	)
Mortgage banking revenue		1,841			4,007			4,277			(54.1	)		(6.3	)
Net gains on securities transactions		11,092			4,560			2,835			143.2			60.8
Other		44,389			43,531			37,927			2.0			14.8
Total non-interest income	$	326,931		$	301,667		$	280,572			8.4	%		7.5	%
Total non-interest income excluding net gains on securities transactions	$	315,839		$	297,107		$	277,737			6.3	%		7.0	%
Non-interest income as a % of total revenue*		39.7	%		37.5	%		35.9	%
Total revenue per full-time equivalent employee	$	171.0		$	161.9		$	155.7

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

     Non-interest income was $326.9 million in 2004, which was a $25.3 million, or 8.4%, increase over 2003. Trust fees increased $3.3 million, or 5.5%, because of rising values in trust account assets and growing new business. Most of the growth in trust fees occurred in the institutional and private client trust product lines. In 2004, deposit account fees increased 7.9%, or $7.7 million, due to a $9.8 million increase in

17

overdraft and return items fees, partly offset by a $1.5 million decline in fees earned on commercial cash management accounts. Bank card fees increased $11.2 million, or 16.6%, mainly due to growth in fees on credit cardholder transactions, which rose 17.1% over the previous year. Also, merchant fees and debit card fees (components of bank card fees) increased 18.7% and 14.8%, respectively. The strong growth in credit card fees in 2004 was partly attributable to growing credit card transaction fees from commercial businesses and non profit enterprises who are utilizing these electronic transactions in greater proportions. Fees from these transactions grew 32% in 2004 over 2003, and represented 38% of total credit card fee income in 2004. Trading account fees, consisting of fees from sales of fixed income securities, declined 16.6% in 2004 due to lower demand by business and correspondent bank customers. Consumer brokerage service fees increased 3.7% mainly due to higher revenues from equity security sales. Mortgage banking revenues declined $2.2 million as a result of lower personal mortgage loan originations in 2004 versus 2003. Net gains on securities transactions amounted to $11.1 million in 2004, an increase of $6.5 million over the previous year. The 2004 activity included gains of $11.2 million resulting mainly from sales of inflation indexed bonds from the banks’ securities portfolios, and losses of $317 thousand recognized on private equity investments. Other non-interest income included gains on sales of student loans of $8.5 million, compared to a $7.0 million gain in 2003, and a $1.1 million gain on a bank branch sale in the second quarter of 2004. In addition, farm management fees declined $1.2 million due to the sale of the farm management business in the third quarter of 2003.

      In 2003, non-interest income increased $21.1 million, or 7.5%, to $301.7 million. Deposit account fees rose 8.6%, or $7.7 million, as a result of growth in fee income on overdraft and return items, coupled with higher commercial cash management fees. The increase in overdraft fees was due to both pricing increases in the Company’s Missouri markets coupled with improved collection efficiencies. Compared to the previous year, bank card fee income rose $7.9 million, or 13.4%, mainly due to 10.8% growth in cardholder transaction fees and 10.3% growth in merchant interchange revenue. Debit card fees grew 18.3% due to higher online fees, partly offset by lower transaction pricing which went into effect in August 2003 as a result of the WalMart lawsuit settlement with VISA U.S.A., Inc. Trust fee revenue increased slightly in 2003 over 2002 as the value of trust accounts upon which fees are based, which had been depressed for the past year, began to improve. Net gains on securities transactions amounted to $4.6 million in 2003, increasing $1.7 million over the previous year, and included gains of $6.9 million resulting from sales from the securities portfolio, and losses of $2.3 million recognized on private equity investments. Other non-interest income included operating lease revenues of $4.2 million related to a leasing subsidiary which was acquired at the beginning of 2003. Also, sales of student loans resulted in additional gains of $2.4 million during 2003. Trading account fee income declined 7.6% due to lower sales to business and correspondent bank customers. Consumer brokerage service fees declined 6.7% due mainly to lower mutual fund sales by the discount brokerage subsidiary. Mortgage banking revenue fell 6.3%, as loan origination volumes declined, especially in the second half of 2003.

18

Non-Interest Expense

										% Change
(Dollars in thousands)	2004			2003			2002			’04-’03			’03-’02
Salaries	$	225,526		$	224,884		$	217,638			.3	%		3.3	%
Employee benefits		39,943			39,715			38,190			.6			4.0
Net occupancy		39,558			38,736			34,635			2.1			11.8
Equipment		22,903			24,104			22,865			(5.0	)		5.4
Supplies and communication		33,760			33,474			32,929			.9			1.7
Data processing and software		46,000			40,567			44,963			13.4			(9.8	)
Marketing		16,688			14,397			15,001			15.9			(4.0	)
Intangible assets amortization		1,699			1,794			2,323			(5.3	)		(22.8	)
Other		56,692			54,473			49,656			4.1			9.7
Total non-interest expense	$	482,769		$	472,144		$	458,200			2.3	%		3.0	%
Efficiency ratio		59.2	%		58.8	%		58.6	%
Salaries and benefits as a % of total non-interest expense		55.0	%		56.0	%		55.8	%
Number of full-time equivalent employees		4,821			4,967			5,012

      Non-interest expense was $482.8 million in 2004, an increase of $10.6 million, or 2.3%, over 2003. Compared with the prior year, salary and employee benefits expense grew slightly as a result of higher staff salaries expense and workman’s compensation insurance expense, offset by declines in incentive payments and pension plan expense. Net occupancy expense rose 2.1% over the prior year, mainly due to higher net rent expense resulting from the sale of a bank facility earlier in the year, which resulted in lower outside tenant rent income and higher rent expense as the banking operations were moved to other leased facilities. Equipment expense declined $1.2 million, or 5.0%, due to lower depreciation expense on computer hardware. Data processing costs increased $5.4 million, or 13.4%, due to higher bank card processing costs (up $2.3 million and related to the higher bank card revenues) and higher technology software expense. Marketing expense increased $2.3 million, or 15.9%, compared to the previous year as a result of incentives paid on new product offerings and expanded marketing efforts. Other non-interest expense increased $2.2 million over the prior period mainly due to lower capitalized loan costs and increases in loan collection expense and operating losses. These increases were partly offset by lower professional fees and operating lease depreciation. Also, minority interest expense, which results from venture capital activity reported by a 53%-owned affiliate, decreased compared to the previous year when venture capital gains were recorded by this affiliate.

      Non-interest expense rose 3.0% in 2003 to a total of $472.1 million, compared to $458.2 million in 2002. Salary expense increased $7.2 million, or 3.3%, in 2003 compared to 2002, and resulted from normal merit increases, partly offset by lower costs for overtime and contract labor. Benefit costs increased 4.0% due to higher pension plan expense, offset by declines in medical plan and 401K contribution expense. Full-time equivalent employees declined from 5,012 during 2002 to 4,976 during 2003. Occupancy expense rose $4.1 million, or 11.8%, mainly due to higher depreciation and operating costs resulting from a renovated office building, which was re-opened in late 2002, and termination fees paid on vacated rental space. Equipment expense increased $1.2 million, or 5.4%, due to higher maintenance contract expense and higher depreciation expense resulting from purchases of computer mainframe and disaster recovery equipment during 2002. Data processing and software expense fell $4.4 million, or 9.8%, from 2002, largely because of cost savings realized from consolidating the Company’s mainframe computer operations in-house during the second quarter of 2002. These operations had previously been out-sourced to an external vendor. Other non-interest expense included operating lease depreciation and associated costs totaling $3.3 million related to a leasing subsidiary acquired in 2003, which were not present in 2002. In addition, minority interest expense increased $1.7 million due to venture capital gains in 2003, compared to the previous year when venture capital losses were recorded.

19

Income Taxes

      Income tax expense was $90.8 million in 2004, compared to $84.7 million in 2003, and $91.9 million in 2002. Income tax expense in 2004 increased 7.2% over 2003, compared to a 6.8% increase in pre-tax income. The effective tax rate on income from operations was 29.2%, 29.1% and 31.9% in 2004, 2003 and 2002, respectively. The Company’s effective tax rates were lower than the federal statutory rate of 35% mainly due to tax exempt interest on state and municipal obligations, state and federal tax credits realized and the recognition of additional tax benefits from various corporate reorganization initiatives.

      In 2004, total net tax benefits associated with various corporate reorganization initiatives amounted to $18.9 million. The Company also has additional tax benefits related to other reorganization initiatives that will not be recognized in income until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the third quarter of 2005 relating to approximately $13.7 million of the remaining benefits. However, because of the timing of such recognition, it is expected that the effective tax rate will be higher in the first two quarters of 2005. It is not expected that material tax benefits of this nature will continue beyond 2005.

      The decline in the effective tax rate between 2003 and 2002 resulted mainly from the recognition of $11.2 million of additional net tax benefits in 2003 associated with various corporate reorganization initiatives, offset by a $5.3 million reduction in net federal and state rehabilitation credits (recognized in 2002) related to the renovation of an office building. All of the above factors, tending to lower the effective tax rate, were partly offset by state and local income taxes.

Financial Condition

Loan Portfolio Analysis

      A schedule of average balances invested in each category of loans appears on page 42. Classifications of consolidated loans by major category at December 31 for each of the past five years are as follows:

	Balance at December 31
(In thousands)	2004		2003		2002		2001		2000
Business	$	2,196,085	$	2,067,835	$	2,253,312	$	2,375,834	$	2,633,776
Real estate – construction		427,124		427,083		404,519		412,700		377,629
Real estate – business		1,743,293		1,875,069		1,736,646		1,505,443		1,305,397
Real estate – personal		1,340,574		1,338,604		1,282,223		1,287,954		1,397,770
Consumer		1,193,822		1,150,732		1,088,808		1,021,195		1,093,793
Home equity		411,541		352,047		305,274		256,906		222,692
Student		357,991		355,763		268,719		236,549		324,988
Credit card		611,256		561,423		526,111		510,317		524,885
Overdrafts		23,673		14,123		10,332		31,584		25,735
Total loans, net of unearned income	$	8,305,359	$	8,142,679	$	7,875,944	$	7,638,482	$	7,906,665

      At December 31, 2002, the Company elected to reclassify certain segments of its business, construction, business real estate and personal portfolios. The reclassifications were made to better realign the loan reporting with its related collateral and purpose. The adjustments also reclassified certain construction loans that had moved into amortizing term loans following project completion. The table below shows the

20

effect of the reclassifications on the various lending categories at December 31, 2002. Because the information was not readily available, prior periods were not restated.

	Effect of reclassification
(In thousands)	at December 31, 2002
Business	$	(202,574	)
Real estate – construction		(88,593	)
Real estate – business		209,623
Real estate – personal		55,576
Consumer		25,968
Net reclassification	$	—

      The contractual maturities of loan categories at December 31, 2004, and a breakdown of those loans between fixed rate and floating rate loans are as follows:

	Principal Payments Due
	In		After One		After
	One Year		Year Through		Five
(In thousands)	or Less		Five Years		Years		Total
Business	$	1,492,699	$	629,745	$	73,641	$	2,196,085
Real estate – construction		231,890		185,366		9,868		427,124
Real estate – business		519,982		1,120,286		103,025		1,743,293
Real estate – personal		115,701		271,374		953,499		1,340,574
Total business and real estate loans	$	2,360,272	$	2,206,771	$	1,140,033		5,707,076
Consumer (1)								1,193,822
Home equity (2)								411,541
Student (3)								357,991
Credit card (4)								611,256
Overdrafts								23,673
Total loans, net of unearned income							$	8,305,359
Loans with fixed rates	$	498,873	$	1,037,844	$	370,419	$	1,907,136
Loans with floating rates		1,861,399		1,168,927		769,614		3,799,940
Total business and real estate loans	$	2,360,272	$	2,206,771	$	1,140,033	$	5,707,076

(1)	Consumer loans with floating rates totaled $93.0 million
(2)	Home equity loans with floating rates totaled $406.3 million
(3)	Student loans with floating rates totaled $347.5 million
(4)	Credit card loans with floating rates totaled $501.9 million

     Total loans increased $162.7 million, or 2.0%, during 2004 compared to an increase of $266.7 million, or 3.4%, during 2003. Growth in loans during 2004 came principally from business, home equity, consumer and credit card loans, partly offset by a decline in business real estate loans. Business loans grew $128.3 million, or 6.2%, mainly as a result of improving economic conditions, with added borrowings from existing customers and new customer activity. Lease activity, included in the business category, remained flat compared with the previous year. Consumer loans grew $43.1 million, or 3.7%, during the year mainly as a result of increases in marine and recreational vehicle lending. Home equity loans grew to $411.5 million, an increase of $59.5 million, or 16.9% over 2003. Personal real estate loans grew slightly by $2.0 million, as rates began to rise and customer origination activity slowed. Credit card loans increased $49.8 million, or 8.9%, and saw solid growth, especially at year end, when holiday activity is normally at its peak. Business real estate loans declined $131.8 million, or 7.0%, as a result of loan pay-downs, customer re-financing activities, and fewer loan originations, due in part to rising interest rates.

21

      The growth in total loans in 2003 compared to 2002 was primarily the result of increases in business and personal real estate, consumer and student loans.

      The Company currently generates approximately 32% of its loan portfolio in the St. Louis regional market and 28% in the Kansas City regional market. The portfolio is diversified from a business and retail standpoint, with 53% in loans to businesses and 47% in loans to consumers. A balanced approach to loan portfolio management and an historical aversion toward credit concentrations, from an industry, geographic and product perspective, have contributed to low levels of problem loans and loan losses.

Business

      Total business loans amounted to $2.2 billion at December 31, 2004 and include loans used mainly to fund customer accounts receivable, inventories, and capital expenditures. This portfolio also includes sales type and direct financing leases totaling $182.8 million, which are used by commercial customers to finance capital purchases ranging from computer equipment to office and transportation equipment. These leases comprise 2.2% of the Company’s total loan portfolio. Business loans are made primarily to customers in the regional trade area of the Company, generally the central Midwest, encompassing the states of Missouri, Kansas, Illinois, and nearby Midwestern markets, including Iowa, Oklahoma and Indiana. The portfolio is diversified from an industry standpoint and includes businesses engaged in manufacturing, wholesaling, retailing, agribusiness, insurance, financial services, public utilities, and other service businesses. Emphasis is upon middle-market and community businesses with known local management and financial stability. The Company participates in credits of large, publicly traded companies when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. Consistent with management’s strategy and emphasis upon relationship banking, most borrowing customers also maintain deposit accounts and utilize other banking services. There were net loan charge-offs in this category of $5.5 million in 2004 (which included a $6.0 million charge-off on a single loan in the first quarter of 2004) compared to $4.9 million in 2003. Non-accrual business loans decreased to $9.5 million (.4% of business loans) at December 31, 2004, and included $7.0 million in leases. Total business non-accrual loans were $19.2 million (.9% of business loans) at December 31, 2003. Opportunities for growth in business loans will be based upon strong solicitation efforts in a highly competitive market environment for quality loans. Asset quality is, in part, a function of management’s consistent application of underwriting standards and credit terms through stages in economic cycles. Therefore, portfolio growth in 2005 will be dependent upon 1) the strength of the economy, 2) the actions of the Federal Reserve with regard to targets for economic growth, interest rates, and inflationary tendencies, and 3) the competitive environment.

Real Estate-Construction

      The portfolio of loans in this category amounted to $427.1 million at December 31, 2004 and comprised 5.1% of the Company’s total loan portfolio. This group of loans includes residential construction loans totaling $125.9 million at December 31, 2004, or 29% of the category, and commercial construction and land development loans totaling $301.2 million, or 71%. These loans are predominantly made to businesses in the local markets of the Company’s banking subsidiaries. Commercial construction loans are for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, apartment complexes, shopping centers, hotels and motels, and other commercial properties. Exposure to larger speculative office properties remains low. Residential construction and land development loans are primarily for projects located in the Kansas City and St. Louis metropolitan areas. Credit losses in this portfolio are normally low, and the Company experienced net charge-offs of $4 thousand in 2004 compared to $122 thousand net recoveries in 2003. Non-accrual loans in this category decreased to $685 thousand at year end 2004 compared to $795 thousand at year end 2003.

Real Estate-Business

      Total business real estate loans were $1.7 billion at December 31, 2004 and comprised 21.0% of the Company’s total loan portfolio. This category includes mortgage loans for small and medium-sized office

22

and medical buildings, manufacturing and warehouse facilities, shopping centers, hotels and motels, and other commercial properties. Emphasis is placed on owner-occupied and income producing commercial real estate properties which present lower risk levels. The borrowers and/or the properties are generally located in the local and regional markets of the affiliate banks. At December 31, 2004, non-accrual balances amounted to $6.6 million, or .4% of the loans in this category, compared to $9.4 million at year end 2003. The Company experienced $231 thousand net recoveries in 2004 compared to net charge-offs of $516 thousand in 2003.

Real Estate-Personal

      At December 31, 2004, there were $1.3 billion in outstanding personal real estate loans, which comprised 16.1% of the Company’s total loan portfolio. The mortgage loans in this category are extended, predominately, for owner-occupied residential properties. The Company originates both adjustable rate and fixed rate mortgage loans. The Company retains adjustable rate mortgage loans, and also retains certain fixed rate loans (typically 15 year fixed rate loans) as directed by its Asset/ Liability Management Committee. At December 31, 2004, 62% of the portfolio was comprised of adjustable rate loans while 38% was comprised of fixed rate loans. During 2004, mortgage loan originations slowed as a result of the rising rate environment, totaling $366 million compared with $701 million in 2003. The Company typically does not experience significant loan losses in this category. There were net charge-offs of $217 thousand in 2004 compared to $464 thousand in 2003. The non-accrual balances of loans in this category decreased to $458 thousand at December 31, 2004, compared to $2.4 million at year end 2003. The five year history of net charge-offs in the personal real estate loan category reflects nominal losses, and the credit quality of these loans is considered to be strong.

Personal Banking

      Total personal banking loans, which include consumer, home equity and student loans, totaled $2.0 billion at December 31, 2004. These categories comprised 23.6% of the total loan portfolio at December 31, 2004. Consumer loans are associated with auto, marine, recreational vehicle and home improvement, and totaled $1.2 billion at year end 2004. Approximately 68% are originated indirectly from auto and other dealers, while the remaining 32% are direct loans made to consumers. Home equity lines, of which 99% are adjustable rate loans, are secured mainly by second mortgages (and less frequently, first mortgages) on residential property of the borrower. The underwriting terms for the home equity line product permit borrowing availability, in the aggregate, generally up to 80% or 90% of the appraised value of the collateral property, although a small percentage may permit borrowing up to 100% of appraised value. Given reasonably stable real estate values over time, the collateral margin improves with the regular amortization of mortgages against the properties. Home equity loans totaled $411.5 million at year end 2004 and an additional $476.5 million was outstanding in unused lines of credit, which can be drawn at the discretion of the borrower. The Company originates loans to students attending colleges and universities, which totaled $358.0 million at year end 2004. These loans are normally sold to the secondary market when the students graduate and the loans enter into repayment status. Approximately 97% of these loans are based on a variable rate. Net charge-offs for total personal banking loans were $7.5 million in 2004 compared to $8.5 million in 2003. Net charge-offs decreased to .39% of average personal banking loans in 2004 compared to .47% in 2003, and remain below national loss averages. The majority of personal banking loan losses were related to automobile lending, especially from indirect paper purchased from auto dealers.

Credit Card

      Total credit card loans amounted to $611.3 million at December 31, 2004 and comprised 7.4% of the Company’s total loan portfolio. The credit card portfolio is concentrated within regional markets served by the Company. The Company offers a variety of credit card products, including affinity cards, corporate purchase cards, and standard and premium credit cards. It emphasizes its credit card relationship product, Special Connections, in which the customer maintains a deposit relationship with a subsidiary bank. The Special Connections product allows the customer ATM access using the same card. The Company has

23

found this product to be more profitable by incurring fewer credit losses than other card products, and it allows for better cross sale into other bank products. Approximately 60% of the households in Missouri that own a Commerce credit card product also maintain a deposit relationship with a subsidiary bank. Approximately 82% of the outstanding credit card loans have a floating interest rate. Net charge-offs amounted to $19.6 million in 2004, which was a $49 thousand decrease from 2003. The ratio of net loan charge-offs to total average loans of 3.5% in 2004 and 3.7% in 2003 remain significantly below national loss averages. The Company refrains from national pre-approved mailing techniques which have caused some of the credit card problems experienced by other banking companies. Significant changes in loss trends are not currently anticipated by management.

Allowance for Loan Losses

      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. This process provides an allowance consisting of an allocated and an unallocated component. To determine the allocated component of the allowance, the Company combines estimates of the reserves needed for loans evaluated on an individual basis with estimates of reserves needed for pools of loans with similar risk characteristics.

      Loans subject to individual evaluation generally consist of commercial and commercial real estate loans mainly because of their size and complexity. These loans are analyzed and assigned to risk categories according to the Company’s internal risk rating system. Loans with a greater risk of loss are identified and placed on the “watch list” for regular management review. Those loans judged to reflect the highest risk profiles are evaluated individually for the impairment of repayment potential and collateral adequacy, and in conjunction with current economic conditions and loss experience, allowances are estimated. Other loans identified on the Company’s “watch list” but not judged to be individually impaired from a repayment or collateral adequacy perspective are aggregated and reserves are recorded using models that track historical loan losses by loan type. In the case of other more homogeneous loan portfolios, including auto loans, residential mortgages, home equity loans and credit card loans, the determination of the allocated reserve is computed on a pooled basis. For these loan pools, historical loss ratios by loan type, current loss and past due experience, and management’s judgment of recent and forecasted economic effects on portfolio performance are factors utilized to determine the appropriate reserve amounts.

      To mitigate the imprecision inherent in estimates of expected credit losses, the Company also performs analyses of the overall environment in which the Company operates, and maintains the allowance at a level 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. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety.

      The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses rests upon various judgments and assumptions made by management. Factors that influence these judgments include past loan loss experience, current loan portfolio composition and characteristics, trends in portfolio risk ratings, levels of non-performing assets, prevailing regional and national economic conditions, and the Company’s ongoing examination process including that of its regulators. The Company has internal credit administration and loan review staffs that continuously review loan quality and report the results of their reviews and examinations to the Company’s senior management and Board of Directors. Such reviews also assist management in establishing the level of the allowance. The Company’s subsidiary banks continue to be subject to examination by the Office of the Comptroller of the Currency (OCC) and examinations are conducted throughout the year targeting various segments of the loan portfolio for review. In addition to the examination of subsidiary banks by the OCC, the parent holding company and its non-bank subsidiaries are examined by the Federal Reserve Bank.

      The allowance for loan losses was $132.4 million and $135.2 million at December 31, 2004 and 2003, respectively, and was 1.59% and 1.66% of loans outstanding. The decline in the allowance resulted mainly from loan loss provisions recorded in 2003 for loans charged off in 2004. The allowance for loan losses

24

covered non-performing loans by 751% at year end 2004 and 416% at year end 2003. Net charge-offs totaled $33.2 million in 2004, and decreased $3.4 million compared to $36.6 million in 2003. The ratio of net charge-offs to average loans outstanding in 2004 was .41% compared to .46% in 2003 and .43% in 2002. Approximately 59% of total net charge-offs were related to credit card loans. The provision for loan losses was $30.4 million, compared to a provision of $40.7 million in 2003 and $34.1 million in 2002.

      Net credit card charge-offs decreased to 3.5% of average credit card loans in 2004 compared to 3.7% in 2003. As mentioned earlier, the Company’s net charge-off experience for its credit card portfolio has been significantly better than industry averages, mainly due to its emphasis on Special Connections card products which provide other product relationships with the Company. The delinquency rate on credit card loans at year end 2004 was 2.45% and has remained at low levels during the year.

      The Company considers the allowance for loan losses of $132.4 million adequate to cover losses inherent in the loan portfolio at December 31, 2004.

      The schedules which follow summarize the relationship between loan balances and activity in the allowance for loan losses:

				Years Ended December 31
(Dollars in thousands)				2004		2003		2002		2001		2000
Net loans outstanding at end of year(A)				$	8,305,359	$	8,142,679	$	7,875,944	$	7,638,482	$	7,906,665
Average loans outstanding(A)				$	8,130,113	$	8,009,459	$	7,761,742	$	7,809,931	$	7,802,041
Allowance for loan losses:
	Balance at beginning of year			$	135,221	$	130,618	$	129,973	$	128,445	$	123,042
	Additions to allowance through charges to expense				30,351		40,676		34,108		36,423		35,159
	Allowances of acquired companies				—		500		—		2,519		—
	Loans charged off:
		Business			7,787		9,074		7,135		7,404		2,775
		Real estate – construction			7		—		65		127		32
		Real estate – business			747		1,525		973		751		1,162
		Real estate – personal			355		660		296		389		322
		Personal banking(B)			12,764		13,856		11,979		13,959		12,887
		Credit card			23,942		23,912		22,494		23,180		19,896
		Overdrafts			2,551		4,830		4,943		4,985		4,252
			Total loans charged off		48,153		53,857		47,885		50,795		41,326
	Recovery of loans previously charged off:
		Business			2,327		4,146		1,236		1,642		1,095
		Real estate – construction			3		122		123		78		150
		Real estate – business			978		1,009		677		661		73
		Real estate – personal			138		196		66		19		128
		Personal banking(B)			5,288		5,386		5,080		5,144		4,699
		Credit card			4,327		4,248		5,211		4,175		4,101
		Overdrafts			1,914		2,177		2,029		1,662		1,324
			Total recoveries		14,975		17,284		14,422		13,381		11,570
		Net loans charged off			33,178		36,573		33,463		37,414		29,756
	Balance at end of year			$	132,394	$	135,221	$	130,618	$	129,973	$	128,445

(A)	Net of unearned income; before deducting allowance for loan losses
(B)	Personal banking loans include consumer, home equity, and student

25

	Years Ended December 31
	2004		2003		2002		2001		2000
Ratio of net charge-offs to average loans outstanding		.41%		.46%		.43%		.48%		.38%
Ratio of allowance to loans at end of year		1.59%		1.66%		1.66%		1.70%		1.62%
Ratio of provision to average loans outstanding		.37%		.51%		.44%		.47%		.45%

      The following schedule provides a breakdown of the allowance for loan losses by loan category and the percentage of each loan category to total loans outstanding at year end:

(Dollars in thousands)	2004					2003					2002					2001					2000
	Loan Loss		% of Loans			Loan Loss		% of Loans			Loan Loss		% of Loans			Loan Loss		% of Loans			Loan Loss		% of Loans
	Allowance		to Total			Allowance		to Total			Allowance		to Total			Allowance		to Total			Allowance		to Total
	Allocation		Loans			Allocation		Loans			Allocation		Loans			Allocation		Loans			Allocation		Loans
Business	$	39,312		26.4	%	$	39,411		25.4	%	$	36,359		28.6	%	$	36,245		31.1	%	$	31,616		33.3	%
RE – construction		1,420		5.2			4,717		5.3			4,731		5.1			4,732		5.4			4,232		4.8
RE – business		15,910		21.0			20,971		23.0			20,913		22.1			20,907		19.7			19,614		16.5
RE – personal		7,620		16.1			4,423		16.4			3,871		16.3			3,367		16.9			3,335		17.7
Personal banking		22,652		23.6			21,793		22.8			20,343		21.1			18,710		19.8			16,413		20.8
Credit card		28,895		7.4			26,544		6.9			23,337		6.7			21,004		6.7			19,504		6.6
Overdrafts		4,895		.3			4,796		.2			4,498		.1			4,442		.4			4,531		.3
Unallocated		11,690		—			12,566		—			16,566		—			20,566		—			29,200		—
Total	$	132,394		100.0	%	$	135,221		100.0	%	$	130,618		100.0	%	$	129,973		100.0	%	$	128,445		100.0	%

Risk Elements Of Loan Portfolio

      Management reviews the loan portfolio continuously for evidence of problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan loss, and (if appropriate) partial or full loan charge-off. 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. After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. Interest is included in income after the loan is placed on non-accrual status only as interest is received and so long as management is satisfied there is no impairment of collateral values. The loan is returned to accrual status only when the borrower has brought all past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled.

26

      The following schedule shows non-performing assets and loans past due 90 days and still accruing interest.

		December 31
(Dollars in thousands)		2004		2003		2002		2001		2000
Non-accrual loans:
	Business	$	9,547	$	19,162	$	15,224	$	22,633	$	9,598
	Real estate – construction		685		795		301		501		1,834
	Real estate – business		6,558		9,372		10,646		5,377		7,854
	Real estate – personal		458		2,447		1,428		147		264
	Consumer		370		747		466		161		67
Total non-accrual loans			17,618		32,523		28,065		28,819		19,617
Real estate acquired in foreclosure			1,157		1,162		1,474		1,949		1,707
	Total non-performing assets	$	18,775	$	33,685	$	29,539	$	30,768	$	21,324
Non-performing assets as a percentage of total loans			.23%		.41%		.38%		.40%		.27%
Non-performing assets as a percentage of total assets			.13%		.24%		.22%		.24%		.19%
Past due 90 days and still accruing interest:
	Business	$	228	$	702	$	4,615	$	1,570	$	5,080
	Real estate – construction		—		38		—		554		215
	Real estate – business		520		3,934		3,734		1,790		447
	Real estate – personal		3,165		5,750		4,727		6,116		5,499
	Consumer		916		1,079		1,282		1,144		5,878
	Home equity		317		218		91		127		273
	Student		199		1,252		27		533		1,087
	Credit card		7,440		7,850		7,896		7,792		8,077
	Overdrafts		282		78		56		73		114
Total past due 90 days and still accruing interest		$	13,067	$	20,901	$	22,428	$	19,699	$	26,670

      The effect on interest income in 2004 of loans on non-accrual status at year end is presented below:

(In thousands)
Gross amount of interest that would have been recorded at original rate	$	2,874
Interest that was reflected in income		291
Interest income not recognized	$	2,583

      Total non-accrual loans at year end 2004 decreased $14.9 million from 2003 levels. This decline resulted mainly from a reduction of $9.6 million in business non-accrual loans, the largest portion of which came from a negotiated settlement and a payment of $6.0 million on the remaining balance of the Company’s largest non-accrual loan. Most of the remaining non-accrual business loans were leases, which totaled $7.0 million at December 31, 2004. Non-accrual balances of business real estate and personal real estate loans declined $2.8 million and $2.0 million, respectively. Real estate that was acquired in foreclosure, which is comprised mainly of small residential properties, decreased slightly from year end 2003. Total non-performing assets remain low compared to the Company’s peers, with the non-performing loans to total loans ratio at ..21%. Loans past due 90 days and still accruing interest decreased $7.8 million at year end 2004 compared to 2003. This decline was mainly due to lower delinquencies in business real estate, personal real estate and student loans.

      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. These loans totaled $63.9 million at December 31, 2004 compared with $61.2 million at December 31, 2003. 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.

27

      At December 31, 2004, the banking subsidiaries held fixed rate residential real estate loans of approximately $11.0 million at lower of cost or market, which are to be sold to secondary markets within approximately three months.

      There were no loan concentrations of multiple borrowers in similar activities at December 31, 2004, which exceeded 10% of total loans. The Company’s aggregate legal lending limit to any single or related borrowing entities is in excess of $125 million. The largest exposures generally do not exceed $70 million.

Investment Securities Analysis

      During 2004, total investment securities decreased $148.1 million to $4.8 billion (excluding unrealized gains/losses) compared to $4.9 billion at the previous year end. The decrease was due to fewer purchases during the year, as more proceeds from maturities were used to pay down short-term borrowings instead of being reinvested. The decline in investment securities occurred mainly in U.S. government and federal agency securities, which decreased $68.7 million, and in mortgage and asset-backed securities, which decreased $103.7 million. The average tax equivalent yield on total investment securities was 3.78% in 2004 and 4.17% in 2003.

      At December 31, 2004, the fair value of available for sale securities was $4.8 billion, and included a net unrealized gain in fair value of $63.8 million, compared to a net gain of $117.5 million at December 31, 2003. The amount of the related after tax unrealized gain reported in stockholders’ equity was $39.6 million at year end 2004. Approximately 52% of the unrealized gain in fair value related to marketable equity securities held by Commerce Bancshares, Inc., the parent holding company (the “Parent”). The rest of the unrealized gain (45%) related to U.S. government and federal agencies held by bank subsidiaries. The market value of the available for sale portfolio will vary according to changes in market interest rates and the mix and duration of investments in the portfolio. The unrealized gain in fair value at year end 2004 decreased $53.7 million from year end 2003. Available for sale securities which are due during the next 12 months total approximately $786 million, and management expects these proceeds to meet most of the Company’s liquidity needs.

      Non-marketable securities, which totaled $73.0 million at December 31, 2004, included $50.8 million in Federal Reserve Bank stock and Federal Home Loan Bank stock held by bank subsidiaries as a result of debt and regulatory requirements. These are restricted securities which, lacking a market, are carried at cost. Other non-marketable securities are generally held by the Parent and non-bank subsidiaries and include non-marketable venture capital investments, which are carried at estimated fair value.

28

      Investment securities at year end for the past two years are shown below:

	December 31
(In thousands)	2004		2003
Amortized Cost
U.S. government and federal agency obligations	$	1,716,937	$	1,785,649
State and municipal obligations		65,549		72,977
Mortgage-backed securities		1,337,951		1,435,890
Other asset-backed securities		1,325,804		1,331,533
Other debt securities		61,400		73,916
Equity securities		256,502		212,338
Trading securities		9,403		9,356
Total	$	4,773,546	$	4,921,659
Fair Value
U.S. government and federal agency obligations	$	1,746,365	$	1,834,726
State and municipal obligations		66,389		74,593
Mortgage-backed securities		1,336,982		1,449,231
Other asset-backed securities		1,323,999		1,351,203
Other debt securities		61,083		74,422
Equity securities		293,147		245,663
Trading securities		9,403		9,356
Total	$	4,837,368	$	5,039,194

      A summary of maturities by category of investment securities and the weighted average yield for each range of maturities as of December 31, 2004, is presented in Note 4 on Investment Securities in the consolidated financial statements. U.S. government and federal agency obligations comprise 36% of the investment portfolio at December 31, 2004, with a weighted average yield of 3.23% and an estimated average maturity of 3.6 years; mortgage and asset-backed securities comprise 55% with a weighted average yield of 3.82% and an estimated average maturity of 2.5 years.

      Other debt securities, as shown in the table above, include corporate bonds, notes, commercial paper and debentures related to venture capital funding. Equity securities are comprised of short-term investments in money market mutual funds (which totaled $187.7 million at year end 2004), Federal Reserve Bank stock, Federal Home Loan Bank stock, publicly traded stock and venture capital equity investments. Investments in mutual funds and traded equities are primarily held by the Parent. During 2004, the average yield on other debt securities was 5.23%, and the average tax equivalent yield on equity securities was 2.62%.

      The Company engages in private equity and venture capital activities through direct venture investments and two venture capital subsidiaries, which are licensed by the Small Business Administration. The first subsidiary, CFB Venture Fund I, Inc. (CFBI), held $14.5 million in venture capital investments at December 31, 2004. The second subsidiary, CFB Venture Fund II, L.P. (CFBII), is a limited partnership venture fund with 47% outside ownership and no outside debt. CFBII had total venture capital investments of $5.9 million at year end 2004. All funding commitments to this partnership have been satisfied. In addition to investments held by its venture capital subsidiaries, the Company has direct investments in several external private equity concerns, which totaled $5.3 million at year end 2004. Most of the venture capital and private equity investments are not readily marketable. While the nature of these investments carries a higher degree of risk than the normal lending portfolio, management believes the potential for long-term gains in these investments outweighs the potential risks.

      In 2005, the Company created a third venture capital subsidiary, CFB Venture Fund III, L.P. Investments held by CFBI, totaling $11.1 million, were transferred to this new subsidiary. The Company plans to fund an additional $8.7 million to the new subsidiary in the future.

29

Deposits and Borrowings

      Deposits are the primary funding source for the Company’s banks, and are acquired from a broad base of local markets, including both individual and corporate customers. Total deposits were $10.4 billion at December 31, 2004, compared to $10.2 billion last year, reflecting an increase of $228.1 million, or 2.2%. On a yearly average basis, deposits increased $312.5 million, or 3.1%, during 2004 compared to 2003. This increase was fueled by growth in demand, interest checking and jumbo certificate of deposit accounts, with declines in retail certificates of deposit.

      The following table shows year end deposits by type as a percentage of total deposits.

	December 31
	2004			2003
Non-interest bearing demand		18.6	%		16.8	%
Savings, interest checking and money market		58.2			59.6
Time open and C.D.’s of less than $100,000		15.9			16.9
Time open and C.D.’s of $100,000 and over		7.3			6.7
Total deposits		100.0	%		100.0	%

      Core deposits (defined as all non-interest and interest bearing deposits, excluding short-term C.D.’s of $100,000 and over) supported 75% of average earning assets in 2004 and 76% in 2003. Average balances by major deposit category for the last six years appear at the end of this discussion. A maturity schedule of time deposits outstanding at December 31, 2004 is included in Note 7 on Deposits in the consolidated financial statements.

      Short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase. Balances outstanding at year end 2004 were $1.9 billion, a $192.2 million decrease from $2.1 billion outstanding at year end 2003. Balances in these accounts, which generally have overnight maturities, can fluctuate significantly on a day-to-day basis. The average balance of federal funds purchased and repurchase agreements increased $277.2 million in 2004 over 2003, and increased $778.6 million in 2003 over 2002. The average rate paid on these borrowings was 1.23% during 2004 and .99% during 2003.

      Subsidiary banks also borrow from the Federal Home Loan Bank (FHLB). At year end 2004 these advances totaled $366.9 million, of which $115.2 million is due in 2005. The debt maturing in 2005 may be refinanced or may be repaid with funds generated by the loan and securities portfolios. Of the FHLB advances outstanding at year end, $300.0 million had a floating rate and $66.9 million had a fixed rate. The average rate paid on FHLB advances was 1.94% during 2004 and 1.85% during 2003. The weighted average year end rate on outstanding FHLB advances at December 31, 2004 was 2.75%. Long-term debt also includes $11.2 million borrowed from insurance companies by a venture capital subsidiary in order to fund certain investing activity as a Missouri Certified Capital Company. An additional $7.4 million in debt is related to nonrecourse lease financing.

Liquidity and Capital Resources

Liquidity Management

      Liquidity is managed within the Company in order to satisfy cash flow requirements of deposit and borrowing customers while at the same time meeting its own cash flow needs. The Company maintains its liquidity position by providing a variety of sources including:

•  A portfolio of liquid assets including marketable investment securities and overnight investments,

•  A large customer deposit base and limited exposure to large, volatile certificates of deposit,

•  Lower long-term borrowings that might place a demand on Company cash flow,

•  Low relative loan to deposit ratio promoting strong liquidity,

30

•  Excellent debt ratings from both Standard & Poor’s and Moody’s national rating services, and

•  Available borrowing capacity from outside sources.

      The Company’s most liquid assets include available for sale marketable investment securities, federal funds sold, and securities purchased under agreements to resell (resale agreements). At December 31, 2004 and 2003, such assets were as follows:

(In thousands)	2004		2003
Available for sale investment securities	$	4,754,941	$	4,956,668
Federal funds sold and resale agreements		68,905		108,120
	$	4,823,846	$	5,064,788

      Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The Company’s available for sale investment portfolio has maturities of approximately $786 million which come due during 2005 and offers substantial resources to meet either new loan demand or reductions in the Company’s deposit funding base. Furthermore, in the normal course of business the Company will pledge 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. Total pledged investment securities for these purposes comprised 48% of the total investment portfolio, leaving approximately $2.5 billion of unpledged securities.

      Additionally, the Company maintains a large base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At December 31, 2004, such deposits totaled $8.0 billion and represented 77% of the Company’s total deposits. At December 31, 2003 these deposits totaled $7.8 billion. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company promoting long lasting relationships and stable funding sources. Time open and certificates of deposit of $100,000 or greater totaled $762.4 million and $679.2 million at December 31, 2004 and 2003, respectively. These deposits are normally considered more volatile and higher costing, but comprise just 7.3% and 6.7% of total deposits at December 31, 2004 and 2003, respectively.

      At December 31, 2004 and 2003, the Company’s outside borrowings were comprised of federal funds purchased, securities sold under agreements to repurchase, and longer-term debt as follows:

(In thousands)	2004		2003
Federal funds purchased	$	1,557,635	$	1,184,189
Securities sold under agreements to repurchase		356,243		921,855
Other borrowings		389,542		403,853
	$	2,303,420	$	2,509,897

      Federal funds purchased are funds generally borrowed overnight and are obtained mainly from upstream correspondent banks to assist in balancing overall bank liquidity needs. Securities sold under agreements to repurchase are comprised mainly of non-insured customer funds, normally with overnight maturities, and the Company pledges portions of its own investment portfolio to secure these deposits. These funds are offered to customers wishing to earn interest in highly liquid balances and are used by the Company as a funding source considered to be stable, but short-term in nature. The decrease in securities sold under agreements to repurchase in 2004 was the result of fewer customer funds received, including the loss of a large customer during 2004. As a result, federal funds purchased were increased to supplement the necessary level of liquidity. The Company has relationships with various correspondent banks that are considered sources of overnight federal funds borrowings.

      The Company’s long-term debt is comprised mainly of borrowings from the Federal Home Loan Bank (FHLB) and other debt related to the Company’s leasing and venture capital business. At December 31, 2004 and 2003, debt from the FHLB amounted to $366.9 million and $367.1 million respectively. This debt

31

is a combination of fixed and floating rates with maturities of generally less than four years. The overall long-term debt position of the Company is small relative to the Company’s overall liability position.

      In addition to the sources and uses of funds as noted above, the Company had an average loan to deposit ratio of 79% at December 31, 2004, which is considered in the industry to be a conservative measure of good liquidity. Also, the Company receives outside ratings from both Standard & Poor’s and Moody’s on both the consolidated company and its lead bank, Commerce Bank, N.A. (Missouri). These ratings are as follows:

		Standard &
		Poor’s		Moody’s
Commerce Bancshares, Inc.
	Short term/commercial paper		A-1		Prime-1
Commerce Bank, N. A.
	Counterparty credit rating		A/A-1
	Deposits				Aa-3

      The Company considers these ratings to be indications of a sound capital base and good liquidity. The Company believes that these ratings would enable its commercial paper to be readily marketable should the need arise. No commercial paper was outstanding over the past three years.

      In addition to the sources of liquidity as noted above, the Company has temporary borrowing capacity at the Federal Reserve discount window, for which it has pledged $296.8 million in loans and $657.7 million in investment securities. Also, because of its lack of significant long-term debt, the Company believes that through its Capital Markets Group it could generate additional liquidity from sources such as large, jumbo certificates of deposit.

      The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash and cash equivalents of $18.7 million in 2004, as reported in the consolidated statements of cash flows on page 50 of this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $264.7 million and has been a stable source of funds over the last three years. Investing activities, consisting mainly of purchases and maturities of available for sale investment securities, changes in levels of federal funds sold and resale agreements and changes in levels of the Company’s loan portfolio, used total cash of $71.0 million in 2004. Investing activities are somewhat unique to financial institutions in that, while large sums of cash flow are normally used to fund growth in investment securities, loans, or other bank assets, they are normally dependent on financing activities described below.

      Financing activities used total cash of $175.0 million, resulting from a $192.2 million decrease in borrowings of federal funds purchased and securities sold under agreements to repurchase. In addition, the Company’s treasury stock repurchase program required $173.8 million, and cash dividend payments amounted to $61.1 million. Partly offsetting these cash outflows was a $248.7 million increase in deposits. Future short-term liquidity needs for daily operations are not expected to vary significantly and the Company maintains adequate liquidity to meet these cash flows. The Company’s sound equity base, along with its low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options.

      Cash requirements for treasury stock purchases, net of cash received in connection with various employee benefit stock programs, and dividends were as follows:

(In millions)	2004			2003			2002
Purchases of treasury stock	$	173.8		$	125.7		$	83.9
Exercise of stock options, sales to affiliate non-employee directors and restricted stock awards		(15.3	)		(8.7	)		(8.9	)
Cash dividends		61.1			51.3			42.2

32

      The Parent faces unique liquidity constraints due to legal limitations on its ability to borrow funds from its banking subsidiaries. The Parent obtains funding to meet its obligations from two main sources: dividends received from bank and non-bank subsidiaries (within regulatory limitations) and from management fees charged to subsidiaries as reimbursement for services provided by the Parent, as presented below:

(In millions)	2004		2003
Dividends received from subsidiaries	$	253.3	$	195.7
Management fees		33.0		35.3

      These sources of funds are used mainly to purchase treasury stock and pay cash dividends on outstanding common stock as noted above. At December 31, 2004, the Parent had no third party short-term borrowings or long-term debt and maintained $279.7 million in available for sale investment securities, consisting of money market mutual funds, publicly traded stock, and debt securities with estimated maturities of less than 2 years.

      Company senior management is responsible for measuring and monitoring the liquidity profile of the organization with oversight by the Company’s Asset/ Liability Committee (ALCO). This is done through a series of controls, including a written Contingency Funding Policy and risk monitoring procedures including daily, weekly and monthly reporting. In addition, the Company prepares forecasts, which project changes in the balance sheet affecting liquidity, and which allow the Company to better plan for forecasted changes.

Capital Management

      The Company maintains strong regulatory capital ratios, including those of its principal banking subsidiaries, in excess of the well-capitalized guidelines under federal banking regulations. The Company’s capital ratios at the end of the last three years are as follows:

											Well-Capitalized
											Regulatory
		2004			2003			2002			Guidelines
Risk-based capital ratios:
	Tier I capital		12.21	%		12.31	%		12.67	%		6.00	%
	Total capital		13.57			13.70			14.05			10.00
	Leverage ratio		9.60			9.71			10.18			5.00
	Common equity/assets		10.25			10.68			10.97
	Dividend payout ratio		28.26			25.19			21.78

      The components of the Company’s regulatory risked-based capital and risk-weighted assets at the end of the last three years are as follows:

(In thousands)		2004		2003		2002
Regulatory risk-based capital:
	Tier I capital	$	1,342,275	$	1,331,439	$	1,277,116
	Tier II capital		149,734		150,161		139,723
	Total capital		1,492,009		1,481,600		1,416,839
	Total risk-weighted assets		10,993,542		10,813,111		10,083,075

      In October 2004, the Board of Directors authorized the Company to purchase additional shares of common stock under its repurchase program, which brought the total purchase authorization to 5,000,000 shares. The Company has routinely used these shares to fund the Company’s annual 5% stock dividend and various employee benefit programs. During 2004, approximately 3,621,000 shares were acquired under Board authorizations at an average price of $48.01.

33

      The Company’s common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital levels and alternative investment options. Per share cash dividends paid by the Company increased 23.9% during 2004 compared with 2003.

Commitments, Contractual Obligations, 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 totaling $6.3 billion (including approximately $3.1 billion in unused approved credit card lines) and standby letters of credit, net of participations to non-affiliated companies, totaling $328.9 million at December 31, 2004. The Company has various other financial instruments with off-balance sheet risk, such as commercial letters of credit and commitments to purchase and sell when-issued securities. Since many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. 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.

      A table summarizing contractual cash obligations of the Company at December 31, 2004 and the expected timing of these payments follows:

Payments Due by Period
	In One		After One				After
	Year or		Year Through		After Three Years		Five
(In thousands)	Less		Three Years		Through Five Years		Years		Total
Long-term debt obligations*	$	116,556	$	259,931	$	1,540	$	11,515	$	389,542
Operating lease obligations		5,275		8,929		5,525		30,960		50,689
Purchase obligations		29,240		19,489		4,583		110		53,422
Time open and C.D.’s *		1,838,865		475,621		100,745		3,192		2,418,423
Total	$	1,989,936	$	763,970	$	112,393	$	45,777	$	2,912,076

*  Includes principal payments only.

     During 2004, the Company contributed $6.0 million to its pension plan. The contribution was made to mitigate the effect of increasing pension fund obligations. The contribution had no significant effect on the Company’s overall liquidity. In determining pension expense, the Company makes several assumptions, including the discount rate and long-term rate of return on assets. These assumptions are determined at the beginning of the plan year based on interest rate levels and financial market performance. For 2004 these assumptions were as follows:

Discount rate	6.00%
Annual salary increase rate	5.20%
Long-term rate of return on assets	8.00%

      In October 2004, the Company’s Board of Directors approved a change to its employee benefits plans. Effective January 1, 2005, the benefits accrued under the pension plan were frozen and enhancements were made to the employee 401K plan. The minimum required pension plan contribution for 2005 is expected to be zero. The changes are not expected to have a material effect on the Company’s financial statements, as reductions in expense for the Company’s pension plan are expected to be offset by enhancements to the Company’s 401K plan. Additional information is included in Note 10 on the Employee Benefit Plans in the consolidated financial statements.

      The Company has investments in several low-income housing partnerships within the area served by the banking affiliates. These investments are properly not consolidated in accordance with Financial Accounting Standards Board Interpretation No. 46R. At December 31, 2004, these investments totaled $3.1 million and were recorded as other assets in the Company’s consolidated balance sheet. These partnerships supply funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the population with lower family income. If these developments successfully

34

attract a specified percentage of residents falling in that lower income range, state and/or federal income tax credits are made available to the partners. The tax credits are normally spread over ten years, and they play an important part in the anticipated yield from these investments. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained. Under the terms of the partnership agreements, the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements, which ranges from 10 to 15 years. These unfunded commitments are recorded as liabilities on the Company’s consolidated balance sheet, and aggregated $2.1 million at December 31, 2004.

      The Parent has investments in several private equity concerns which are classified as non-marketable securities in the Company’s consolidated balance sheet. Under the terms of the agreements with six of these concerns, the Parent has unfunded commitments outstanding of $4.0 million at December 31, 2004.

Interest Rate Sensitivity

      The Asset/ Liability Management Committee (ALCO) measures and manages the Company’s interest rate risk sensitivity on a monthly basis to maintain stability in earnings throughout various rate environments. Analytical modeling techniques provide management insight into the Company’s exposure to changing rates. These techniques include net interest income simulations and market value analyses. Management has set guidelines specifying acceptable limits within which net interest income and market value may change under various rate change scenarios. These measurement tools indicate that the Company is currently within acceptable risk guidelines as set by management.

      The Company’s main interest rate measurement tool, income simulations, projects net interest income under various rate change scenarios in order to quantify the magnitude and timing of potential rate-related changes. Income simulations are able to capture option risks within the balance sheet where expected cash flows may be altered under various rate environments. Modeled rate movements include “shocks, ramps and twists”. Shocks are intended to capture interest rate risk under extreme conditions by immediately shifting rates up and down, while ramps measure the impact of gradual changes and twists measure yield curve risk. The size of the balance sheet is assumed to remain constant so that results are not influenced by growth predictions. The table below shows the expected effect that gradual basis point shifts in the LIBOR/swap curve over a twelve month period would have on the Company’s net interest income, given a static balance sheet.

	December 31, 2004						September 30, 2004						December 31, 2003
(Dollars in	Increase			% of Net			Increase			% of Net			Increase			% of Net
millions)	(Decrease)			Interest Income			(Decrease)			Interest Income			(Decrease)			Interest Income
200 basis points rising	$	(8.7	)		(1.78	)%	$	(8.9	)		(1.85	)%	$	(6.9	)		(1.40	)%
100 basis points rising		(4.3	)		(.88	)		(4.8	)		(1.00	)		(2.0	)		(.40	)
100 basis points falling		2.6			.53			.9			.19			(1.9	)		(.38	)

      The Company also employs a sophisticated simulation technique known as a stochastic income simulation. This technique allows management to see a range of results from hundreds of income simulations. The stochastic simulation creates a vector of potential rate paths around the market’s best guess (forward rates) concerning the future path of interest rates and allows rates to randomly follow paths throughout the vector. This allows for the modeling of non-biased rate forecasts around the market consensus. Results give management insight into a likely range of rate-related risk as well as worst and best-case rate scenarios.

      The Company also uses market value analyses to help identify longer-term risks that may reside on the balance sheet. This is considered a secondary risk measurement tool by management. The Company measures the market value of equity as the net present value of all asset and liability cash flows discounted along the current LIBOR/swap curve plus appropriate market risk spreads. It is the change in the market value of equity under different rate environments, or effective duration, that gives insight into the

35

magnitude of risk to future earnings due to rate changes. Market value analyses also help management understand the price sensitivity of non-marketable bank products under different rate environments.

      The Company continues to be susceptible to lower net interest income in a rising rate environment. Over the last twelve months the Company has reduced its interest rate risk somewhat. At December 31, 2004, the Company calculated that a gradual increase in rates of 100 basis points would reduce net interest income by $4.3 million compared with a reduction of $4.8 million calculated at September 30, 2004. Also, a 200 basis point gradual rise in rates calculated at December 31, 2004 would reduce net interest income by $8.7 million compared to $8.9 million at September 30, 2004.

      During 2003 and in the beginning of 2004, the Federal Reserve monetary policy was to maintain a low rate environment in order to combat a weak economy, slow employment gains and declining inflation. The federal funds target rate was set at a historic low rate of 1%. With the Company’s loan portfolio containing many loans tied to variable rates and the inability to meaningfully lower deposit rates further, the Company’s greatest interest rate risk was to lower rates. To address this risk, the Company grew its fixed rate investment securities portfolio from January 2003 to March 2004 by $1.0 billion in monthly averages, increasing interest income and lowering its risk to lower rates. This increase was funded by growth in deposits, coupled with an increase in short-term borrowings. The increase in the investment portfolio was accomplished with the overall duration of the portfolio kept short (less than 2.6 years) and with good liquidity to enable future funding of loan growth.

      Beginning in June 2004, with an improving economy the Federal Reserve altered its targets and began to raise the federal funds target rate. By December 31, 2004, rates were increased five times, totaling 125 basis points. With this higher rate environment and a larger fixed rate investment securities portfolio, the Company became more sensitive to a rise in rates. In response, the Company began decreasing its investment securities portfolio through targeted sales and normal maturities, and as a result, during the period May 2004 through December 2004 average monthly balances declined $240 million. Loan growth during this period totaled $113 million and rates earned on the loan portfolio increased by 50 basis points, thus improving the overall asset mix and profitability of the balance sheet. Also, rates on deposits grew moderately, increasing overall by 18 basis points. Short-term borrowings, however, quickly re-priced upwards, increasing 110 basis points. Towards the end of 2004, greater uncertainties about the economy began again, due to higher oil prices and a growing account deficit, causing a flatter bond yield curve and lower long-term rates.

      Given these conditions, at December 31, 2004 the Company’s simulation models, assuming a 100 basis points gradual increase in rates and no increase in volume, reflected a decline in net interest income over the next twelve months of $4.3 million. The Company believes that, with the relatively short duration of the overall investment securities portfolio and maturities of over $700 million coming due in the next twelve months, growth in the loan portfolio can be adequately funded, further improving the balance sheet mix and mitigating some of these risks to higher rates. Also, because of the shorter duration of the loan portfolio, its ability to re-price quickly will help grow interest income in 2005. Should the economy falter in 2005, causing loan growth to be more limited and with a flatter yield curve, the Company’s rate risk will remain higher as bonds maturing will likely be reinvested at similar or lower rates. Longer term simulations extending into 2006 continue to show eventual growth in net interest income as both loans and investment securities are able to re-price upward.

      Overall, the Company’s balance sheet remains well diversified with moderate interest rate risk and is well positioned for future growth. The use of derivative products is limited and the deposit base is strong and stable. The loan to deposit ratio is still at relatively low levels, which should present the Company with opportunities to fund future loan growth at reasonable costs as a strong economy increases business borrowing.

Derivative Financial Instruments

      The Company maintains an overall interest rate risk management strategy that permits the use of derivative instruments to modify exposure to interest rate risk. The Company’s interest rate risk manage-

36

ment strategy includes the ability to modify the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Interest rate swaps are used on a limited basis as part of this strategy. At present the Company has interest rate swaps with a total notional amount of $50.0 million, of which two swaps with a notional amount of $12.6 million are designated as fair value hedges of certain fixed rate loans.

      The Company enters into foreign exchange derivative instruments as an accommodation to customers and offsets the related foreign exchange risk by entering into offsetting third-party forward contracts with approved reputable counterparties. In addition, the Company takes proprietary positions in such contracts based on market expectations. This trading activity is managed within a policy of specific controls and limits. Most of the foreign exchange contracts outstanding at December 31, 2004 mature within 30 days, and the longest period to maturity is 9 months.

      Additionally, interest rate lock commitments issued on residential mortgage loans intended to be held for resale are considered derivative instruments. The interest rate exposure on these commitments is economically hedged primarily with forward sale contracts in the secondary market.

      The Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures. Because the Company generally enters into transactions only with high quality counterparties, there have been no losses associated with counterparty nonperformance on derivative financial instruments. The amount of credit risk associated with these instruments is limited to the cost of replacing a contract in a gain position, on which a counterparty may default.

      The following table summarizes the notional amounts and estimated fair values of the Company’s derivative instruments at December 31, 2004 and 2003. Notional amount, along with the other terms of the derivative, is used to determine the amounts to be exchanged between the counterparties. Because the notional amount does not represent amounts exchanged by the parties, it is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk. Positive fair values are recorded in other assets and negative fair values are recorded in other liabilities in the consolidated balance sheets.

		2004							2003
				Positive		Negative					Positive		Negative
		Notional		Fair		Fair			Notional		Fair		Fair
(In thousands)		Amount		Value		Value			Amount		Value		Value
Interest rate swaps		$	49,963	$	649	$	(1,273	)	$	28,910	$	405	$	(1,487	)
Interest rate caps			—		—		—			4,319		—		—
Foreign exchange contracts:
	Forward contracts		13,031		171		(173	)		8,254		490		(551	)
	Options written/purchased		2,853		12		(12	)		2,500		38		(38	)
Mortgage loan commitments			8,319		1		(13	)		7,542		54		(1	)
Mortgage loan forward sale contracts			15,728		39		(4	)		7,298		8		(4	)
Total at December 31		$	89,894	$	872	$	(1,475	)	$	58,823	$	995	$	(2,081	)

Operating Segments

      The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The results are determined based on the Company’s management accounting process, which assigns balance sheet and income statement items to each responsible segment. These segments are defined by customer base and product type. The management process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Each segment is managed by executives who, in conjunction with the Chief Executive Officer, make strategic business decisions regarding that segment. The three reportable operating segments are Consumer, Com-

37

mercial and Money Management. Additional information is presented in Note 13 on Segments in the consolidated financial statements.

      Beginning in 2002, the Company implemented a new funds transfer pricing method to value funds used (e.g., loans, fixed assets, cash, etc.) and funds provided (deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to each new source or use of funds with a maturity, based on current LIBOR interest rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are assigned to LIBOR based funding pools. Previous methodology used funding pools based on average rates to assign and determine value. The new method provides a more accurate means of valuing fund sources and uses in a varying interest rate environment. The segment most affected by the change was the Consumer segment, whose credit for funds was significantly lower in 2002.

Consumer

      The Consumer segment includes the retail branch network, consumer finance, bankcard, student loans and discount brokerage services. Pre-tax income for 2004 was $137.0 million, an increase of $28.4 million, or 26.1%, over 2003. Part of the increase was due to higher allocated funding credits of $11.5 million, which resulted from the rising interest rate environment and its effect on the funds transfer pricing calculations. Direct net interest income increased $8.9 million due to lower interest expense on deposits coupled with higher consumer loan balances. Net charge-offs decreased $3.4 million. Non-interest income increased $13.0 million, mainly due to higher overdraft and return item fees and bank card fees. Also, higher gains were reported on sales of student loans and fixed assets. This increase in revenue was partly offset by lower mortgage banking revenue. Non-interest expense increased $8.4 million mainly due to higher management fees, marketing expense, loan servicing fees, occupancy expense, lower deferred loan origination costs, and a higher allocation for online banking expenses than in 2003. These increases were partly offset by decreases in check processing and data processing charges. Total average assets directly related to the segment rose 5.0% over 2003. Average segment loans increased 5.2% compared to 2003 mainly as a result of growth in consumer loans, while average deposits remained flat.

      Pre-tax income in 2003 was $108.6 million, a decrease of $20.6 million, or 15.9%, from 2002. Most of the decrease was due to lower allocated funding credits of $41.3 million, which resulted from the low interest rate environment and its effect on the funds transfer pricing calculations. Direct net interest income increased $23.1 million due to lower rates on deposits and higher average consumer loan balances. Net charge-offs increased $4.0 million. Non-interest income declined $6.7 million, mainly due to lower bank card fees. Consumer segment bank card fees were lower in 2003 compared to 2002 because, in order to improve segment accountability, certain fee income which is more related to commercial activity was assigned to the Commercial segment in 2003. This decrease in revenue was partly offset by higher overdraft and return item fees and gains on the sales of student loans. Non-interest expense decreased $8.4 million mainly due to declines in data processing charges, loan servicing fees related to lower bank card activity, and management fees. These decreases were partly offset by an increase in check processing charges and higher costs for salaries and employee benefits. Total average assets directly related to the segment rose 5.4% over 2002. Average segment loans increased 5.6% compared to 2002 mainly as a result of growth in consumer loans, while average deposits remained flat.

Commercial

      The Commercial segment provides corporate lending, leasing, international services, and corporate cash management services. Pre-tax income decreased $6.1 million, or 5.0%, from 2003 mainly due to increased non-interest expense. Direct net interest income declined 2.8%, mainly due to lower levels of business loans. Non-interest expense increased $16.6 million due to higher check processing fees, internal management fees, and bank card and commercial loan servicing costs. Partly offsetting these expense increases, the assigned funding costs decreased $11.0 million compared to the previous year due to lower average loan balances and higher average deposits attributed to the Commercial segment. There was also a $5.0 million, or 7.0%, increase in non-interest income, mainly in higher commercial bank card fee income

38

attributed to this segment, while commercial cash management fees declined. During 2004, total average loans decreased 1.6%, compared to a 1.4% increase during 2003. Average deposits increased 9.0% during 2004, compared to a 9.4% increase during 2003.

      In 2003, pre-tax income increased $9.0 million, or 8.1%, over 2002. Assigned funding costs declined $21.8 million compared to the previous year, due to the interest rate decline mentioned above. Non-interest income rose $30.4 million, mainly due to higher bank card fees assigned to this unit, higher cash management fees, and operating lease revenues related to the CBI Leasing subsidiary, which was acquired at the beginning of 2003. Partly offsetting these effects was a $21.6 million, or 9.8%, decline in direct net interest income due to lower levels of business loans. In addition, non-interest expense increased $22.4 million due to higher bank card loan servicing costs, salaries and benefits, check processing fees, and operating lease depreciation and related costs associated with CBI Leasing. During 2003, total average loans increased 1.4%, compared to a .2% decrease during 2002. Average deposits increased 9.4% during 2003, compared to an 8.4% increase during 2002.

Money Management

      The Money Management segment consists of the trust and capital markets activities. The Trust group provides trust and estate planning services, and advisory and discretionary investment management services. It also provides investment management services to The Commerce Funds, a series of mutual funds with $2.0 billion in total assets. The Capital Markets group sells primarily fixed-income securities to individuals, corporations, correspondent banks, public institutions, and municipalities, and also provides investment safekeeping and bond accounting services. Pre-tax income for the segment was $29.1 million in 2004 compared to $26.5 million in 2003, an increase of $2.6 million, or 9.8%. The increase was due to higher non-interest income of $1.2 million, mainly in private client and institutional trust revenues, partly offset by lower bond trading revenues. Non-interest expense decreased $1.6 million due to lower costs for salaries and benefits. Direct net interest income declined $1.5 million, but was offset by an increase of $1.3 million in the assigned credit for funds. Average assets decreased slightly during 2004 because of lower trading account investments, partly offset by higher overnight investments of liquid funds. Average deposits increased $62.6 million during 2004, mainly due to higher balances in short-term certificates of deposit over $100,000 and in non-interest bearing demand deposit accounts.

      Pre-tax income for the segment was $26.5 million in 2003 compared to $29.3 million in 2002, a decrease of $2.8 million. The decrease was due to lower non-interest income of $1.6 million, mainly in bond trading revenues. Non-interest expense increased $408 thousand due to higher costs for salaries and benefits. The assigned credit for funds declined $2.3 million, partly offset by an increase of $1.6 million in direct net interest income. Average assets decreased $5.9 million during 2003 because of lower overnight investments. Average deposits increased $47.3 million during 2003 and $164.6 million during 2002, mainly due to sales of short-term certificates of deposit over $100,000 in the commercial sector.

Impact of Recently Issued Accounting Standards

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

      As mentioned in the 2003 Annual Report on Form 10-K, the Company has several Small Business Investment Company (SBIC) related private equity investments and other investments in low-income housing partnerships which would receive consolidated treatment under provisions of FIN 46R. The FASB,

39

however, has elected to reconsider provisions of FIN 46R concerning SBIC related private equity investments. The FASB does not currently require these types of investments to be consolidated and has not resolved the accounting treatment for the investments. If consolidation is ultimately required for any of these investments, the Company’s assets, liabilities, revenues and expenses would be adjusted to reflect the consolidation of these investments; however, it is not expected that net income would be significantly affected. The Company does not have any other significant investments in unconsolidated entities meeting the requirements of FIN 46R.

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

      In March 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (SAB 105). SAB 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments, as is discussed further in Note 17 to the consolidated financial statements. The Company’s adoption of SAB 105 effective April 1, 2004 resulted in the recognition of a pre-tax loss of $227 thousand.

      In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment”. The revision requires entities to recognize in their statements of income the cost 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. The Statement is effective as of the beginning of the first interim or annual reporting period beginning after June 15, 2005. 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.

Effects of Inflation

      The impact of inflation on financial institutions differs significantly from that exerted on industrial entities. Financial institutions are not heavily involved in large capital expenditures used in the production, acquisition or sale of products. Virtually all assets and liabilities of financial institutions are monetary in nature and represent obligations to pay or receive fixed and determinable amounts not affected by future changes in prices. Changes in interest rates have a significant effect on the earnings of financial institutions. Higher interest rates generally follow the rising demand of borrowers and the corresponding increased funding requirements of financial institutions. Although interest rates are viewed as the price of borrowing funds, the behavior of interest rates differs significantly from the behavior of the prices of goods and services. Prices of goods and services may be directly related to that of other goods and services while the price of borrowing relates more closely to the inflation rate in the prices of those goods and services. As a result, when the rate of inflation slows, interest rates tend to decline while absolute prices for goods and services remain at higher levels. Interest rates are also subject to restrictions imposed through monetary policy, usury laws and other artificial constraints. The rate of inflation has been relatively low in recent years.

40

Corporate Governance

      The Company has adopted a number of corporate governance measures. Information on corporate governance is available on the Company’s web site www.commercebank.com under Investor Relations.

Forward-Looking Statements

      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 which 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; changes in accounting and tax principles; estimates made on income taxes; and competition with other entities that offer financial services.

41

AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

		Years Ended December 31
		2004								2003								2002
							Average								Average								Average
					Interest		Rates						Interest		Rates						Interest		Rates
		Average			Income/		Earned/			Average			Income/		Earned/			Average			Income/		Earned/
(Dollars in thousands)		Balance			Expense		Paid			Balance			Expense		Paid			Balance			Expense		Paid
ASSETS
Loans:(A)
	Business(B)	$	2,071,128		$	87,153		4.21	%	$	2,137,250		$	90,071		4.21	%	$	2,404,367		$	114,275		4.75	%
	Real estate – construction		427,976			18,068		4.22			404,058			17,324		4.29			474,307			23,894		5.04
	Real estate – business		1,823,302			90,601		4.97			1,831,575			93,731		5.12			1,483,012			88,645		5.98
	Real estate – personal		1,334,859			69,273		5.19			1,304,677			73,568		5.64			1,247,209			82,382		6.61
	Consumer		1,188,018			75,633		6.37			1,129,267			79,571		7.05			1,046,173			83,266		7.96
	Home equity		381,111			17,481		4.59			324,375			14,372		4.43			283,466			14,336		5.06
	Student		326,120			9,790		3.00			339,577			9,606		2.83			316,910			13,124		4.14
	Credit card		564,280			58,158		10.31			527,049			56,099		10.64			492,148			53,120		10.79
	Overdrafts		13,319			—		—			11,631			—		—			14,150			—		—
Total loans			8,130,113			426,157		5.24			8,009,459			434,342		5.42			7,761,742			473,042		6.09
Investment securities:
	U.S. government & federal agency		1,721,301			67,988		3.95			1,543,269			67,236		4.36			1,233,040			57,159		4.64
	State & municipal obligations(B)		70,846			3,410		4.81			80,687			4,139		5.13			41,103			3,079		7.49
	Mortgage and asset-backed securities		2,846,093			105,827		3.72			2,504,514			103,681		4.14			2,118,460			112,703		5.32
	Trading securities		14,250			498		3.50			17,003			662		3.90			10,931			532		4.86
	Other marketable securities(B)		163,843			3,747		2.29			220,499			4,603		2.09			124,648			4,258		3.42
	Non-marketable securities		75,542			3,530		4.67			74,501			4,923		6.61			66,666			2,781		4.17
Total investment securities			4,891,875			185,000		3.78			4,440,473			185,244		4.17			3,594,848			180,512		5.02
Federal funds sold and securities purchased under agreements to resell			84,113			1,312		1.56			63,232			831		1.31			84,278			1,486		1.76
Total interest earning assets			13,106,101			612,469		4.67			12,513,164			620,417		4.96			11,440,868			655,040		5.73
Less allowance for loan losses			(132,554	)							(132,057	)							(129,960	)
Unrealized gain (loss) on investment securities			90,692								143,309								114,908
Cash and due from banks			553,074								513,733								511,798
Land, buildings and equipment – net			340,188								336,665								329,553
Other assets			191,655								167,944								146,671
Total assets		$	14,149,156							$	13,542,758							$	12,413,838
LIABILITIES AND EQUITY
Interest bearing deposits:
	Savings	$	401,935			1,250		.31		$	380,323			1,351		.36		$	353,779			2,146		.61
	Interest checking and money market		6,171,456			26,707		.43			6,015,827			27,391		.46			5,762,465			43,101		.75
	Time open & C.D.’s of less than $100,000		1,678,659			38,924		2.32			1,838,137			48,440		2.64			2,046,041			70,367		3.44
	Time open & C.D.’s of $100,000 and over		788,800			14,912		1.89			699,241			14,278		2.04			651,336			18,252		2.80
Total interest bearing deposits			9,040,850			81,793		.90			8,933,528			91,460		1.02			8,813,621			133,866		1.52
Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,827,428			22,560		1.23			1,550,211			15,289		.99			771,646			9,853		1.28
	Other borrowings(C)		419,215			8,519		2.03			395,026			8,269		2.09			371,902			9,363		2.52
Total borrowings			2,246,643			31,079		1.38			1,945,237			23,558		1.21			1,143,548			19,216		1.68
Total interest bearing liabilities			11,287,493			112,872		1.00	%		10,878,765			115,018		1.06	%		9,957,169			153,082		1.54	%
Non-interest bearing demand deposits			1,288,434								1,083,207								974,941
Other liabilities			123,048								133,813								120,143
Stockholders’ equity			1,450,181								1,446,973								1,361,585
Total liabilities and equity		$	14,149,156							$	13,542,758							$	12,413,838
Net interest margin (T/E)					$	499,597							$	505,399							$	501,958
Net yield on interest earning assets								3.81	%							4.04	%							4.39	%
Percentage increase (decrease) in net interest margin (T/E) compared to the prior year								(1.15	)%							.69	%							6.58	%

(A)	Loans on non-accrual status are included in the computation of average balances. Included in interest income above are loan fees and late charges, net of amortization of deferred loan origination costs, which are immaterial. Credit card income from merchant discounts and net interchange fees are not included in loan income.
(B)	Interest income and yields are presented on a fully-taxable equivalent basis using the Federal statutory income tax rate. Business loan interest income includes tax free loan income of $2,379,000 in 2004, $2,466,000 in 2003, $3,355,000 in 2002, $3,937,000 in 2001 and $3,587,000 in 2000, including tax equivalent adjustments of $819,000 in 2004, $847,000 in 2003, $1,142,000 in 2002,

42

Years Ended December 31
2001									2000								1999
																									Average
						Average								Average								Average			Balance
				Interest		Rates						Interest		Rates						Interest		Rates			Five Year
	Average			Income/		Earned/			Average			Income/		Earned/			Average			Income/		Earned/			Compound
	Balance			Expense		Paid			Balance			Expense		Paid			Balance			Expense		Paid			Growth Rate
	$	2,536,843		$	168,868		6.66	%	$	2,608,813		$	215,199		8.25	%	$	2,400,519		$	177,298		7.39	%		(2.91	)%
		409,262			29,598		7.23			382,106			33,364		8.73			352,767			27,612		7.83			3.94
		1,398,366			103,551		7.41			1,267,872			104,757		8.26			1,075,335			85,661		7.97			11.14
		1,339,436			98,283		7.34			1,417,548			105,229		7.42			1,337,578			97,051		7.26			(.04	)
		1,095,809			92,339		8.43			1,126,886			94,084		8.35			1,087,975			87,661		8.06			1.77
		239,599			18,077		7.54			214,655			20,364		9.49			189,112			15,692		8.30			15.04
		280,846			18,223		6.49			267,254			21,717		8.13			248,575			19,723		7.93			5.58
		489,817			62,668		12.79			497,519			70,256		14.12			501,109			65,193		13.01			2.40
		19,953			—		—			19,388			—		—			23,897			—		—			(11.03	)
		7,809,931			591,607		7.58			7,802,041			664,970		8.52			7,216,867			575,891		7.98			2.41
		892,248			48,666		5.45			913,285			56,486		6.18			1,263,601			75,865		6.00			6.38
		55,379			4,225		7.63			72,209			5,641		7.81			91,390			7,273		7.96			(4.97	)
		1,284,355			77,066		6.00			1,034,172			64,336		6.22			1,162,167			71,805		6.18			19.62
		15,924			774		4.86			11,000			765		6.95			13,163			845		6.42			1.60
		159,897			6,742		4.22			86,133			5,895		6.84			116,431			6,993		6.01			7.07
		68,299			3,246		4.75			68,013			3,786		5.57			51,976			2,901		5.58			7.76
		2,476,102			140,719		5.68			2,184,812			136,909		6.27			2,698,728			165,682		6.14			12.63
		541,930			22,386		4.13			227,623			14,517		6.38			287,305			14,297		4.98			(21.78	)
		10,827,963			754,712		6.97			10,214,476			816,396		7.99			10,202,900			755,870		7.41			5.14
		(129,978	)							(125,887	)							(119,567	)							2.08
		56,296								(3,146	)							41,438								NM
		532,715								533,028								590,367								(1.30	)
		286,166								244,877								228,236								8.31
		162,661								162,709								169,748								2.46
	$	11,735,823							$	11,026,057							$	11,113,122								4.95
	$	323,462			3,345		1.03		$	316,532			5,484		1.73		$	336,845			5,765		1.71			3.60
		5,253,024			97,746		1.86			4,896,337			144,398		2.95			5,073,867			126,014		2.48			3.99
		2,259,161			121,851		5.39			2,068,653			112,182		5.42			2,182,804			109,857		5.03			(5.12	)
		530,874			27,699		5.22			328,652			18,275		5.56			293,926			14,572		4.96			21.83
		8,366,521			250,641		3.00			7,610,174			280,339		3.68			7,887,442			256,208		3.25			2.77
		601,865			19,164		3.18			772,296			44,594		5.77			616,164			27,582		4.48			24.29
		301,363			13,956		4.63			110,444			6,955		6.30			31,623			1,129		3.57			67.68
		903,228			33,120		3.67			882,740			51,549		5.84			647,787			28,711		4.43			28.24
		9,269,749			283,761		3.06	%		8,492,914			331,888		3.91	%		8,535,229			284,919		3.34	%		5.75
		1,101,174								1,331,220								1,372,100								(1.25	)
		137,832								98,208								124,566								(.24	)
		1,227,068								1,103,715								1,081,227								6.05
	$	11,735,823							$	11,026,057							$	11,113,122								4.95	%
				$	470,951							$	484,508							$	470,951
							4.35	%							4.74	%							4.62	%
							(2.80	)%							2.88	%							8.58	%

	$1,266,000 in 2001 and $1,118,000 in 2000. State and municipal interest income includes tax equivalent adjustments of $1,093,000 in 2004, $1,301,000 in 2003, $999,000 in 2002, $1,325,000 in 2001 and $1,753,000 in 2000. Interest income on other marketable securities includes tax equivalent adjustments of $467,000 in 2004, $859,000 in 2003, $346,000 in 2002, $332,000 in 2001 and $424,000 in 2000.
(C)	Interest expense of $113,000, $494,000, $747,000 and $433,000 which was capitalized on construction projects in 2004, 2002, 2001 and 2000, respectively, is not deducted from the interest expense shown above.

43

QUARTERLY AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

		Year Ended December 31, 2004
		Fourth Quarter						Third Quarter						Second Quarter						First Quarter
					Average						Average						Average						Average
					Rates						Rates						Rates						Rates
		Average			Earned/			Average			Earned/			Average			Earned/			Average			Earned/
(Dollars in millions)		Balance			Paid			Balance			Paid			Balance			Paid			Balance			Paid
ASSETS
Loans:
	Business(A)	$	2,130			4.57	%	$	2,032			4.19	%	$	2,077			4.05	%	$	2,045			4.00	%
	Real estate - construction		420			4.73			427			4.21			439			3.95			426			4.00
	Real estate - business		1,756			5.24			1,806			4.99			1,851			4.80			1,881			4.86
	Real estate - personal		1,340			5.17			1,339			5.15			1,329			5.20			1,331			5.25
	Consumer		1,205			6.32			1,210			6.25			1,184			6.35			1,152			6.55
	Home equity		406			4.91			390			4.64			371			4.37			357			4.38
	Student		344			3.71			290			3.09			289			2.58			382			2.61
	Credit card		577			10.49			571			10.23			557			10.00			552			10.51
	Overdrafts		14			—			11			—			11			—			18			—
Total loans			8,192			5.47			8,076			5.24			8,108			5.11			8,144			5.15
Investment securities:
	U.S. government & federal agency		1,717			3.85			1,637			3.84			1,756			4.58			1,776			3.53
	State & municipal obligations(A)		69			4.46			72			4.87			70			4.97			72			4.95
	Mortgage and asset-backed securities		2,726			3.67			2,829			3.76			2,986			3.65			2,845			3.79
	Trading securities		13			3.10			10			3.45			25			3.67			8			3.67
	Other marketable securities(A)		195			2.78			158			2.23			138			2.08			164			1.92
	Non-marketable securities		75			4.70			75			5.23			78			4.18			75			4.59
Total investment securities			4,795			3.73			4,781			3.77			5,053			3.96			4,940			3.66
Federal funds sold and securities purchased under agreements to resell			64			2.23			101			1.69			111			1.23			61			1.24
Total interest earning assets			13,051			4.81			12,958			4.67			13,272			4.64			13,145			4.57
Less allowance for loan losses			(132	)					(132	)					(133	)					(133	)
Unrealized gain on investment securities			81						55						97						131
Cash and due from banks			576						557						550						529
Land, buildings and equipment - net			344						341						338						337
Other assets			192						190						200						185
Total assets		$	14,112					$	13,969					$	14,324					$	14,194
LIABILITIES AND EQUITY
Interest bearing deposits:
	Savings	$	398			.31		$	406			.31		$	411			.31		$	393			.31
	Interest checking and money market		6,205			.51			6,205			.44			6,164			.39			6,111			.39
	Time open & C.D.’s under $100,000		1,657			2.38			1,657			2.29			1,686			2.29			1,715			2.32
	Time open & C.D.’s $100,000 & over		754			2.21			815			1.90			841			1.71			745			1.76
Total interest bearing deposits			9,014			.99			9,083			.90			9,102			.86			8,964			.87
Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,792			1.82			1,662			1.31			1,912			.93			1,947			.92
	Other borrowings		390			2.53			392			1.96			454			1.84			441			1.85
Total borrowings			2,182			1.95			2,054			1.43			2,366			1.11			2,388			1.09
Total interest bearing liabilities			11,196			1.18	%		11,137			1.00	%		11,468			.91	%		11,352			.91	%
Non-interest bearing demand deposits			1,351						1,292						1,276						1,234
Other liabilities			110						111						128						143
Stockholders’ equity			1,455						1,429						1,452						1,465
Total liabilities and equity		$	14,112					$	13,969					$	14,324					$	14,194
Net interest margin (T/ E)		$	125					$	124					$	127					$	124
Net yield on interest earning assets						3.80	%					3.82	%					3.85	%					3.78	%

(A) Includes tax equivalent calculations.

44

		Year Ended December 31, 2003
		Fourth Quarter						Third Quarter						Second Quarter						First Quarter
					Average						Average						Average						Average
					Rates						Rates						Rates						Rates
		Average			Earned/			Average			Earned/			Average			Earned/			Average			Earned/
(Dollars in millions)		Balance			Paid			Balance			Paid			Balance			Paid			Balance			Paid
ASSETS
Loans:
	Business(A)	$	1,997			4.16	%	$	2,061			4.17	%	$	2,234			4.23	%	$	2,261			4.29	%
	Real estate – construction		410			4.11			399			4.18			404			4.36			403			4.51
	Real estate – business		1,870			4.87			1,852			5.05			1,832			5.17			1,771			5.40
	Real estate – personal		1,336			5.28			1,313			5.42			1,294			5.75			1,275			6.13
	Consumer		1,162			6.74			1,152			6.88			1,114			7.17			1,087			7.44
	Home equity		343			4.31			329			4.35			318			4.49			307			4.60
	Student		348			2.62			356			2.60			326			3.01			328			3.13
	Credit card		538			10.49			533			10.65			518			10.49			518			10.96
	Overdrafts		11			—			12			—			11			—			13			—
Total loans			8,015			5.24			8,007			5.33			8,051			5.46			7,963			5.66
Investment securities:
	U.S. government & federal agency		1,674			4.23			1,554			3.55			1,555			5.42			1,386			4.24
	State & municipal obligations(A)		77			4.95			80			5.23			82			5.15			84			5.18
	Mortgage and asset-backed securities		2,719			3.97			2,535			3.64			2,442			4.30			2,317			4.73
	Trading securities		9			4.49			11			3.61			20			4.18			29			3.60
	Other marketable securities(A)		224			1.79			232			2.53			226			1.85			200			2.17
	Non-marketable securities		78			4.92			78			10.22			72			5.46			70			5.60
Total investment securities			4,781			3.99			4,490			3.69			4,397			4.60			4,086			4.46
Federal funds sold and securities purchased under agreements to resell			86			1.23			65			1.28			60			1.39			42			1.42
Total interest earning assets			12,882			4.75			12,562			4.72			12,508			5.14			12,091			5.24
Less allowance for loan losses			(132	)					(132	)					(132	)					(131	)
Unrealized gain on investment securities			112						140						156						165
Cash and due from banks			522						524						503						506
Land, buildings and equipment – net			335						336						337						339
Other assets			166						161						178						166
Total assets		$	13,885					$	13,591					$	13,550					$	13,136
LIABILITIES AND EQUITY
Interest bearing deposits:
	Savings	$	388			.31		$	386			.31		$	384			.40		$	362			.40
	Interest checking and money market		6,135			.39			6,076			.39			5,970			.52			5,879			.53
	Time open & C.D.’s under $100,000		1,756			2.38			1,806			2.49			1,872			2.72			1,921			2.93
	Time open & C.D.’s $100,000 & over		634			1.92			652			2.05			779			2.01			734			2.18
Total interest bearing deposits			8,913			.88			8,920			.93			9,005			1.10			8,896			1.18
Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,813			.91			1,555			.89			1,525			1.10			1,302			1.08
	Other borrowings		412			2.07			413			1.95			390			2.13			365			2.25
Total borrowings			2,225			1.12			1,968			1.11			1,915			1.31			1,667			1.33
Total interest bearing liabilities			11,138			.93	%		10,888			.97	%		10,920			1.14	%		10,563			1.20	%
Non-interest bearing demand deposits			1,184						1,113						1,039						995
Other liabilities			117						133						146						138
Stockholders’ equity			1,446						1,457						1,445						1,440
Total liabilities and equity		$	13,885					$	13,591					$	13,550					$	13,136
Net interest margin (T/ E)		$	128					$	123					$	129					$	125
Net yield on interest earning assets						3.95	%					3.89	%					4.15	%					4.19	%

(A) Includes tax equivalent calculations.

45

SUMMARY OF QUARTERLY STATEMENTS OF INCOME

	For the Quarter Ended
Year Ended December 31, 2004
(In thousands, except per share data)	12/31/04			9/30/04			6/30/04			3/31/04
Interest income	$	157,271		$	151,592		$	152,440		$	148,787
Interest expense		(33,069	)		(27,908	)		(25,979	)		(25,803	)
Net interest income		124,202			123,684			126,461			122,984
Non-interest income		77,753			78,920			84,289			85,969
Salaries and employee benefits		(66,208	)		(65,549	)		(65,696	)		(68,016	)
Other expense		(56,221	)		(54,943	)		(55,240	)		(50,896	)
Provision for loan losses		(7,215	)		(6,606	)		(6,280	)		(10,250	)
Income before income taxes		72,311			75,506			83,534			79,791
Income taxes		(19,651	)		(12,987	)		(29,696	)		(28,467	)
Net income	$	52,660		$	62,519		$	53,838		$	51,324
Net income per share – basic*	$	.77		$	.89		$	.77		$	.72
Net income per share – diluted*	$	.75		$	.88		$	.76		$	.71
Weighted average shares – basic*		68,974			69,705			70,355			71,089
Weighted average shares – diluted*		70,029			70,700			71,334			72,217

	For the Quarter Ended
Year Ended December 31, 2003
(In thousands, except per share data)	12/31/03			9/30/03			6/30/03			3/31/03
Interest income	$	153,649		$	148,529		$	159,648		$	155,584
Interest expense		(26,142	)		(26,541	)		(30,961	)		(31,374	)
Net interest income		127,507			121,988			128,687			124,210
Non-interest income		76,420			76,940			73,701			74,606
Salaries and employee benefits		(64,964	)		(65,036	)		(66,006	)		(68,593	)
Other expense		(51,801	)		(51,394	)		(52,209	)		(52,141	)
Provision for loan losses		(11,002	)		(9,655	)		(9,999	)		(10,020	)
Income before income taxes		76,160			72,843			74,174			68,062
Income taxes		(22,299	)		(17,895	)		(23,687	)		(20,834	)
Net income	$	53,861		$	54,948		$	50,487		$	47,228
Net income per share – basic*	$	.75		$	.76		$	.69		$	.64
Net income per share – diluted*	$	.74		$	.75		$	.69		$	.63
Weighted average shares – basic*		71,734			72,478			72,934			73,716
Weighted average shares – diluted*		72,855			73,432			73,703			74,499

	For the Quarter Ended
Year Ended December 31, 2002
(In thousands, except per share data)	12/31/02			9/30/02			6/30/02			3/31/02
Interest income	$	161,907		$	163,760		$	163,050		$	163,836
Interest expense		(33,977	)		(36,979	)		(38,484	)		(43,148	)
Net interest income		127,930			126,781			124,566			120,688
Non-interest income		72,500			69,547			69,427			69,098
Salaries and employee benefits		(63,614	)		(64,214	)		(62,073	)		(65,927	)
Other expense		(52,435	)		(47,806	)		(51,719	)		(50,412	)
Provision for loan losses		(10,848	)		(9,193	)		(6,668	)		(7,399	)
Income before income taxes		73,533			75,115			73,533			66,048
Income taxes		(22,634	)		(24,698	)		(24,021	)		(20,566	)
Net income	$	50,899		$	50,417		$	49,512		$	45,482
Net income per share – basic*	$	.69		$	.67		$	.65		$	.60
Net income per share – diluted*	$	.68		$	.66		$	.65		$	.59
Weighted average shares – basic*		74,128			74,992			75,833			75,847
Weighted average shares – diluted*		74,980			75,879			76,890			76,844

*  Restated for the 5% stock dividend distributed in 2004.

46

Item 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The information required by this item is set forth on pages 35 through 37 of Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations.

Item 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Commerce Bancshares, Inc.:

      We have audited the accompanying consolidated balance sheets of Commerce Bancshares, Inc. and Subsidiaries (Company) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Kansas City, Missouri

February 25, 2005

47

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

		December 31
		2004			2003
		(In thousands)
ASSETS
Loans, net of unearned income		$	8,305,359		$	8,142,679
Allowance for loan losses			(132,394	)		(135,221	)
Net loans			8,172,965			8,007,458
Investment securities:
	Available for sale		4,754,941			4,956,668
	Trading		9,403			9,356
	Non-marketable		73,024			73,170
Total investment securities			4,837,368			5,039,194
Federal funds sold and securities purchased under agreements to resell			68,905			108,120
Cash and due from banks			585,815			567,123
Land, buildings and equipment – net			336,446			336,366
Goodwill			48,522			48,522
Other intangible assets – net			499			2,184
Other assets			199,848			178,197
Total assets		$	14,250,368		$	14,287,164
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
	Non-interest bearing demand	$	1,943,771		$	1,716,214
	Savings, interest checking and money market		6,072,115			6,080,543
	Time open and C.D.’s of less than $100,000		1,656,002			1,730,237
	Time open and C.D.’s of $100,000 and over		762,421			679,214
Total deposits			10,434,309			10,206,208
Federal funds purchased and securities sold under agreements to repurchase			1,913,878			2,106,044
Other borrowings			389,542			403,853
Other liabilities			85,759			120,105
Total liabilities			12,823,488			12,836,210
Stockholders’ equity:
	Preferred stock, $1 par value Authorized and unissued 2,000,000 shares		—			—
	Common stock, $5 par value Authorized 100,000,000 shares; issued 69,409,882 shares in 2004 and 68,636,548 shares in 2003		347,049			343,183
	Capital surplus		392,156			359,300
	Retained earnings		703,293			707,136
	Treasury stock of 1,072,098 shares in 2004 and 668,539 shares in 2003, at cost		(51,646	)		(29,573	)
	Other		(3,542	)		(1,963	)
	Accumulated other comprehensive income		39,570			72,871
Total stockholders’ equity			1,426,880			1,450,954
Total liabilities and stockholders’ equity		$	14,250,368		$	14,287,164

See accompanying notes to consolidated financial statements.

48

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

		For the Years Ended December 31
(In thousands, except per share data)		2004		2003		2002
INTEREST INCOME
Interest and fees on loans		$	425,338	$	433,495	$	471,900
Interest on investment securities			183,440		183,084		179,167
Interest on federal funds sold and securities purchased under agreements to resell			1,312		831		1,486
Total interest income			610,090		617,410		652,553
INTEREST EXPENSE
Interest on deposits:
	Savings, interest checking and money market		27,957		28,742		45,247
	Time open and C.D.’s of less than $100,000		38,924		48,440		70,367
	Time open and C.D.’s of $100,000 and over		14,912		14,278		18,252
Interest on federal funds purchased and securities sold under agreements to repurchase			22,560		15,289		9,853
Interest on other borrowings			8,406		8,269		8,869
Total interest expense			112,759		115,018		152,588
Net interest income			497,331		502,392		499,965
Provision for loan losses			30,351		40,676		34,108
Net interest income after provision for loan losses			466,980		461,716		465,857
NON-INTEREST INCOME
Trust fees			64,257		60,921		60,682
Deposit account charges and other fees			105,382		97,711		89,982
Bank card transaction fees			78,253		67,102		59,171
Trading account profits and commissions			12,288		14,740		15,954
Consumer brokerage services			9,429		9,095		9,744
Mortgage banking revenue			1,841		4,007		4,277
Net gains on securities transactions			11,092		4,560		2,835
Other			44,389		43,531		37,927
Total non-interest income			326,931		301,667		280,572
NON-INTEREST EXPENSE
Salaries and employee benefits			265,469		264,599		255,828
Net occupancy			39,558		38,736		34,635
Equipment			22,903		24,104		22,865
Supplies and communication			33,760		33,474		32,929
Data processing and software			46,000		40,567		44,963
Marketing			16,688		14,397		15,001
Intangible assets amortization			1,699		1,794		2,323
Other			56,692		54,473		49,656
Total non-interest expense			482,769		472,144		458,200
Income before income taxes			311,142		291,239		288,229
Less income taxes			90,801		84,715		91,919
Net income		$	220,341	$	206,524	$	196,310
Net income per share – basic		$	3.15	$	2.84	$	2.61
Net income per share – diluted		$	3.10	$	2.81	$	2.58

See accompanying notes to consolidated financial statements.

49

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Years Ended December 31
(In thousands)		2004			2003			2002
OPERATING ACTIVITIES
Net income		$	220,341		$	206,524		$	196,310
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		30,351			40,676			34,108
	Provision for depreciation and amortization		41,562			41,378			35,310
	Amortization of investment security premiums, net		25,840			29,646			18,913
	Provision (benefit) for deferred income taxes		2,717			(11,626	)		10,911
	Net gains on securities transactions		(11,092	)		(4,560	)		(2,835	)
	Net gains on sales of loans held for sale		(1,535	)		(4,016	)		(3,361	)
	Proceeds from sales of loans held for sale		98,792			238,002			219,795
	Originations of loans held for sale		(95,802	)		(205,393	)		(220,791	)
	Net (increase) decrease in trading securities		1,289			(633	)		1,985
	Stock based compensation		6,465			6,092			5,965
	Decrease in interest receivable		1,630			392			868
	Decrease in interest payable		(372	)		(8,837	)		(11,559	)
	Increase (decrease) in income taxes payable		(22,344	)		5,469			(8,999	)
	Other changes, net		(33,187	)		(35,898	)		(20,544	)
Net cash provided by operating activities			264,655			297,216			256,076
INVESTING ACTIVITIES
Net cash received in acquisitions			—			5,199			—
Cash paid in sales of branches			(2,280	)		—			(20,252	)
Proceeds from sales of available for sale securities			252,464			243,456			299,626
Proceeds from maturities of available for sale securities			1,451,726			1,683,626			1,408,251
Purchases of available for sale securities			(1,570,659	)		(2,755,260	)		(2,179,276	)
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell			39,215			(91,175	)		358,115
Net increase in loans			(210,252	)		(290,450	)		(273,063	)
Purchases of land, buildings and equipment			(33,471	)		(36,111	)		(54,035	)
Sales of land, buildings and equipment			2,260			3,373			3,644
Net cash used in investing activities			(70,997	)		(1,237,342	)		(456,990	)
FINANCING ACTIVITIES
Net increase in non-interest bearing demand, savings, interest checking and money market deposits			233,672			447,080			102,783
Net increase (decrease) in time open and C.D.’s			15,042			(146,750	)		(218,730	)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase			(192,166	)		654,110			372,638
Repayment of long-term borrowings			(111,260	)		(285,186	)		(103,937	)
Additional long-term borrowings			100,000			225,248			50,000
Net increase (decrease) in short-term borrowings			(2,876	)		69,125			(172	)
Purchases of treasury stock			(173,829	)		(125,724	)		(83,879	)
Issuance under stock purchase, option and benefit plans			15,281			8,682			8,916
Net tax benefit related to stock option plans			2,305			1,524			1,668
Cash dividends paid on common stock			(61,135	)		(51,266	)		(42,185	)
Net cash provided by (used in) financing activities			(174,966	)		796,843			87,102
Increase (decrease) in cash and cash equivalents			18,692			(143,283	)		(113,812	)
Cash and cash equivalents at beginning of year			567,123			710,406			824,218
Cash and cash equivalents at end of year		$	585,815		$	567,123		$	710,406

See accompanying notes to consolidated financial statements.

50

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

															Accumulated
															Other
	Common		Capital			Retained			Treasury						Comprehensive
(In thousands, except per share data)	Stock		Surplus			Earnings			Stock			Other			Income (Loss)			Total
Balance, December 31, 2001	$	327,878	$	237,528		$	681,264		$	(5,187	)	$	(1,749	)	$	37,423		$	1,277,157
Net income							196,310												196,310
Other comprehensive income, net of tax																58,670			58,670
Total comprehensive income																			254,980
Purchase of treasury stock										(83,879	)								(83,879	)
Cash dividends paid ($.561 per share)							(42,185	)											(42,185	)
Net tax benefit related to stock option plans				1,668															1,668
Stock based compensation				5,273									692						5,965
Issuance under stock purchase, option and award plans, net		341		(7,161	)					16,479			(743	)					8,916
5% stock dividend, net		7,973		52,733			(127,956	)		67,080									(170	)
Balance, December 31, 2002		336,192		290,041			707,433			(5,507	)		(1,800	)		96,093			1,422,452
Net income							206,524												206,524
Other comprehensive income, net of tax																(23,222	)		(23,222	)
Total comprehensive income																			183,302
Purchase of treasury stock										(125,724	)								(125,724	)
Cash dividends paid ($.707 per share)							(51,266	)											(51,266	)
Net tax benefit related to stock option plans				1,524															1,524
Stock based compensation				5,371									721						6,092
Issuance under stock purchase, option and award plans, net				(8,822	)					18,388			(884	)					8,682
Purchase acquisition		748		5,252															6,000
5% stock dividend, net		6,243		65,934			(155,555	)		83,270									(108	)
Balance, December 31, 2003		343,183		359,300			707,136			(29,573	)		(1,963	)		72,871			1,450,954
Net income							220,341												220,341
Other comprehensive income, net of tax																(33,301	)		(33,301	)
Total comprehensive income																			187,040
Purchase of treasury stock										(173,829	)								(173,829	)
Cash dividends paid ($.876 per share)							(61,135	)											(61,135	)
Net tax benefit related to stock option plans				2,305															2,305
Stock based compensation				5,538									927						6,465
Issuance under stock purchase, option and award plans, net				(15,344	)					33,131			(2,506	)					15,281
5% stock dividend, net		3,866		40,357			(163,049	)		118,625									(201	)
Balance, December 31, 2004	$	347,049	$	392,156		$	703,293		$	(51,646	)	$	(3,542	)	$	39,570		$	1,426,880

See accompanying notes to consolidated financial statements.

51

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Nature of Operations

      Commerce Bancshares, Inc. (the Company) conducts its principal activities through its banking and non-banking subsidiaries from approximately 330 locations throughout Missouri, Illinois and Kansas. Principal activities include retail and commercial banking, investment management, securities brokerage, mortgage banking, credit related insurance, venture capital and real estate activities.

Basis of Presentation

      The Company follows accounting principles generally accepted in the United States of America (GAAP) and reporting practices applicable to the banking industry. The preparation of financial statements under GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. While the consolidated financial statements reflect management’s best estimates and judgment, actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its substantially wholly-owned subsidiaries (after elimination of all material intercompany balances and transactions). Certain amounts for prior years have been reclassified to conform to the current year presentation.

Intangible Assets

      The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, on January 1, 2002. This Statement established new accounting and reporting for acquired goodwill and other intangible assets. Under Statement No. 142, goodwill and intangible assets that have indefinite useful lives are not amortized, but are tested at least annually for impairment. Intangible assets that have finite useful lives, such as core deposit intangibles and mortgage servicing rights, continue to be amortized over their useful lives. Prior to the adoption of Statement No. 142, goodwill had been amortized using the straight-line method over periods of 15-25 years. Core deposit intangibles are amortized over a maximum of 10 years using accelerated methods for all periods presented.

      When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the asset carrying value, using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss is measured by the excess of carrying value over fair value. Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. In these tests, the fair values of each reporting unit, or segment, is compared to the carrying amount of that reporting unit in order to determine if impairment is indicated. If so, the implied fair value of the reporting unit’s goodwill is compared to its carrying amount and the impairment loss is measured by the excess of the carrying value over fair value.

Cash and Cash Equivalents

      In the accompanying consolidated statements of cash flows, cash and cash equivalents include only “Cash and due from banks” as segregated in the accompanying consolidated balance sheets.

Loans and Related Earnings

      Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances, net of undisbursed loan proceeds, the allowance for loan losses, and any deferred fees or costs on originated loans. Both origination fee income received on loans and amounts representing the estimated costs of origination are deferred and amortized to interest income using the interest method or recognized when the loan is sold.

52

      Interest on loans is accrued based upon the principal amount outstanding. Interest income is recognized primarily on the level yield method. Loan and commitment fees, net of costs, are deferred and recognized in income over the term of the loan or commitment as an adjustment of yield.

      Residential mortgage loans held for sale are valued at the lower of aggregate cost or fair value. The Company generally has commitments to sell fixed rate residential mortgage loans held for sale in the secondary market. Gains or losses on sales are recognized upon delivery in mortgage banking revenue.

      Loans, including those that are considered to be impaired, are reviewed regularly by management, and business, lease, construction and business real estate loans are placed on non-accrual status when the collection of interest or principal is 90 days or more past due, unless the loan is adequately secured and in the process of collection. Accrual of interest on consumer installment loans is suspended when any payment of principal or interest is more than 120 days delinquent. Credit card loans and the related accrued interest are charged off when the receivable is more than 180 days past due. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed against current income. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments received on non-accrual loans are generally applied to principal unless the remaining principal balance has been determined to be fully collectible.

Allowance/Provision for Loan Losses

      The allowance for loan losses is maintained at a level believed to be appropriate by management to provide for probable loan losses inherent in the portfolio as of the balance sheet date, including known or anticipated problem loans as well as for loans which are not currently known to require specific allowances. Management’s judgment as to the amount of the allowance, including the allocated and unallocated elements, is a result of ongoing review of larger individual loans, the overall risk characteristics of the portfolio, changes in the character or size of the portfolio, the level of impaired and non-performing assets, historical charge-off amounts, geographic location, prevailing economic conditions and other relevant factors. Loans are considered impaired when it becomes probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Included in impaired loans are all non-accrual business, lease, construction, and business real estate loans. Consumer, personal real estate, home equity, student and credit card loans (collectively personal loans) are excluded from the definition of an impaired loan. Impairment is measured as the present value of the expected future cash flows at the loan’s initial effective interest rate or the fair value of the collateral for collateral-dependent loans. Personal loans are segregated by loan type and by sub-type, and are evaluated on a group basis. Loans are charged off to the extent they are deemed to be uncollectible. The amount of the allowance for loan losses is highly dependent on management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amount and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations, and cash flows may be subject to frequent adjustments due to changing economic prospects of borrowers or properties. These estimates are reviewed periodically and adjustments, if necessary, are recorded in the provision for loan losses in the periods in which they become known.

Investments in Debt and Equity Securities

      Securities classified as available for sale are carried at fair value. Their related unrealized gains and losses, net of tax, are reported in accumulated other comprehensive income, a component of stockholders’ equity. Premiums and discounts are amortized to interest income over the estimated lives of the securities. Realized gains and losses, including other-than-temporary declines in value, are calculated using the specific identification method and included in non-interest income.

      Non-marketable securities include certain venture capital investments, consisting of both debt and equity, and are accounted for at fair value. Fair value is determined based on observable market values or

53

at estimated fair values, in the absence of readily ascertainable market values. Other non-marketable securities acquired for debt and regulatory purposes are accounted for at cost.

      Trading account securities, which are bought and held principally for the purpose of resale in the near term, are carried at fair value. Gains and losses, both realized and unrealized, are recorded in non-interest income.

Operating, Direct Financing and Sales Type Leases

      The net investment in direct financing and sales type leases is included in loans on the Company’s consolidated balance sheet, and consists of the present value of the future minimum lease payments plus the present value of the estimated residual. Revenue consists of interest earned on the present value of the lease payments and residual, and is recognized over the lease term as a constant percentage return on the net investment. The net investment in operating leases is included in other assets on the Company’s consolidated balance sheet. It is carried at cost, less the amount depreciated to date. Depreciation is recognized, on the straight-line basis, over the lease term to the Company’s estimate of the equipment’s residual value at lease termination. Operating lease revenue consists of the contractual lease payments and is recognized over the lease term. Residual value, representing the estimated value of the equipment upon termination of the lease, is recorded at the inception of each lease based on an amount estimated by management utilizing contract terms, past customer experience, and general market data. It is reviewed, and adjusted if necessary, on an annual basis.

Land, Buildings and Equipment

      Land is stated at cost, and buildings and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line and accelerated methods. The Company generally assigns depreciable lives of 30 years for buildings, 10 years for building improvements, and 3 to 8 years for equipment. Maintenance and repairs are charged to expense as incurred.

Foreclosed Assets

      Foreclosed assets consist of property that has been formally repossessed. Collateral obtained through foreclosure is comprised of commercial and residential real estate and other non-real estate property, including automobiles. The assets are initially recorded at the lower of cost or fair value less estimated selling costs at the time of foreclosure, with any valuation adjustments charged to the allowance for loan losses. Subsequent operating results, including unrealized losses and realized gains and losses on sale, are recorded in other non-interest expense.

Income Taxes

      Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income taxes are provided on temporary differences between the financial reporting bases and income tax bases of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using the tax rates and laws that are expected to be in effect when the differences are anticipated to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the change.

      The Company and its eligible subsidiaries file consolidated income tax returns. Accordingly, amounts equal to tax benefits of those subsidiaries having taxable losses or credits are reimbursed by other subsidiaries that incur tax liabilities. A valuation allowance is recorded when necessary to reduce deferred tax assets to amounts which are deemed more likely than not to be realized.

54

Derivatives

      The Company is exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, the Company’s risk management policies permit its use of derivative products. The Company manages potential credit exposure through established credit approvals, risk control limits and other monitoring procedures. The Company uses derivatives on a limited basis mainly to stabilize interest rate margins and hedge against interest rate movements, or to facilitate customers’ foreign exchange requirements. The Company more often manages normal asset and liability positions by altering the products it offers and by selling portions of specific loan or investment portfolios as necessary.

      Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, requires that all derivative financial instruments be recorded on the balance sheet at fair value, with the adjustment to fair value recorded in current earnings. Derivatives that qualify under the Statement in a hedging relationship are designated, based on the exposure being hedged, as fair value or cash flow hedges. Under the fair value hedging model, gains or losses attributable to the change in fair value of the derivative, as well as gains and losses attributable to the change in fair value of the hedged item, are recognized in current earnings. Under the cash flow hedging model, the effective portion of the gain or loss related to the derivative is recognized as a component of other comprehensive income. The ineffective portion is recognized in current earnings.

Employee Stock Options and Awards

      The Company has several stock-based employee compensation plans, which are described more fully in Note 11, Stock Option Plans, Restricted Stock Awards and Directors Stock Purchase Plan. The Company accounts for these plans under the fair value recognition provisions of Statement No. 123, “Accounting for Stock-Based Compensation”.

      In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment”. The revision disallows the expense recognition alternatives permitted in the original statement and requires entities to recognize stock-based compensation cost in their statements of income. The revision contains additional guidance in several areas including award modifications and forfeitures, measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. It also contains additional disclosure requirements. The Company does not expect that adoption of the revision in 2005 will have a material effect on its consolidated financial statements.

Treasury Stock

      Purchases of the Company’s common stock are recorded at cost. Upon re-issuance, treasury stock is reduced based upon the average cost basis of shares held.

Income per Share

      Basic income per share is computed using the weighted average number of common shares outstanding during each year. Diluted income per share includes the effect of all dilutive potential common shares (primarily stock options) outstanding during each year. All per share data has been restated to reflect the 5% stock dividend distributed in December 2004.

2. Acquisitions

      Effective January 1, 2003, the Company acquired 100% of the outstanding stock of The Vaughn Group, Inc. (Vaughn), a direct equipment lessor based in Cincinnati, Ohio. At acquisition, Vaughn had a lease portfolio which included direct financing leases, sales type leases, and operating leases. The largest component was direct financing leases of $32.8 million, consisting mainly of data processing hardware. In addition, Vaughn serviced approximately $350 million of lease agreements for other institutions involving

55

capital equipment, ranging from production machinery to transportation equipment. The Company issued stock valued at $6.0 million and paid cash of $2.5 million in the acquisition. The acquisition was accounted for as a purchase. Goodwill of $5.3 million was recognized as a result of the transaction.

3. Loans and Allowance for Loan Losses

      Major classifications of loans at December 31, 2004 and 2003 are as follows:

(In thousands)	2004		2003
Business	$	2,196,085	$	2,067,835
Real estate – construction		427,124		427,083
Real estate – business		1,743,293		1,875,069
Real estate – personal		1,340,574		1,338,604
Consumer		1,193,822		1,150,732
Home equity		411,541		352,047
Student		357,991		355,763
Credit card		611,256		561,423
Overdrafts		23,673		14,123
Total loans	$	8,305,359	$	8,142,679

      Loans to directors and executive officers of the Parent and its significant subsidiaries and to their associates are summarized as follows:

(In thousands)
Balance at January 1, 2004	$	100,552
Additions		91,639
Amounts collected		(88,401	)
Amounts written off		—
Balance at December 31, 2004	$	103,790

      Management believes all loans to directors and executive officers have been made in the ordinary course of business with normal credit terms, including interest rate and collateral considerations, and do not represent more than a normal risk of collection. There were no outstanding loans at December 31, 2004 to principal holders of the Company’s common stock.

      The Company’s lending activity is generally centered in Missouri, Illinois, Kansas and other states contiguous to Missouri. The Company maintains a diversified portfolio with limited industry concentrations of credit risk. Loans and loan commitments are extended under the Company’s normal credit standards, controls, and monitoring features. Most loan commitments are short and intermediate term in nature. Loan maturities, with the exception of residential mortgages, generally do not exceed five years. Collateral is commonly required and would include such assets as marketable securities and cash equivalent assets, accounts receivable and inventory, equipment, other forms of personal property, and real estate. At December 31, 2004, unfunded loan commitments totaled $6,304,719,000 (which included $3,102,137,000 in unused approved lines of credit related to credit card loan agreements) which could be drawn by customers subject to certain review and terms of agreement. At December 31, 2004, loans of $1,102,040,000 were pledged at the Federal Home Loan Bank (FHLB) by subsidiary banks as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $296,805,000 were pledged at the Federal Reserve as collateral for discount window borrowings. There were no discount window borrowings at December 31, 2004.

      The Company has a net investment in direct financing and sales type leases of $182,799,000 and $190,665,000, at December 31, 2004 and 2003, respectively, which is included in loans on the Company’s consolidated balance sheets. A net investment in operating leases, which was acquired with the Vaughn

56

acquisition in 2003, amounted to $7,453,000 and $8,665,000 at December 31, 2004 and 2003, respectively. This investment is included in other assets on the Company’s consolidated balance sheets.

      Residential mortgage loans held for sale amounted to $11,030,000 at December 31, 2004 and $12,485,000 at December 31, 2003. These are comprised of fixed rate loans which are sold to the secondary market, generally within three months.

      A summary of the allowance for loan losses is as follows:

		Years Ended December 31
(In thousands)		2004		2003		2002
Balance, January 1		$	135,221	$	130,618	$	129,973
Additions:
	Provision for loan losses		30,351		40,676		34,108
	Allowance of acquired companies		—		500		—
Total additions			30,351		41,176		34,108
Deductions:
	Loan losses		48,153		53,857		47,885
	Less recoveries		14,975		17,284		14,422
Net loan losses			33,178		36,573		33,463
Balance, December 31		$	132,394	$	135,221	$	130,618

      The Company had ceased recognition of interest income on loans with a carrying value of $17,618,000 and $32,523,000 at December 31, 2004 and 2003, respectively. The interest income not recognized on non-accrual loans was $2,583,000, $2,311,000 and $2,609,000 during 2004, 2003 and 2002, respectively. Loans 90 days delinquent and still accruing interest amounted to $13,067,000 and $20,901,000 at December 31, 2004 and 2003, respectively.

      The following table presents information on impaired loans at December 31:

(In thousands)	2004		2003
Impaired loans for which an allowance has been provided	$	36,788	$	32,867
Impaired loans for which no specific allowance has been provided		8,111		12,420
Total impaired loans	$	44,899	$	45,287
Allowance related to impaired loans	$	12,286	$	9,949

      Average impaired loans were $37,768,000 during 2004, $76,687,000 during 2003 and $61,374,000 during 2002. The amount of interest income recorded on these loans during their impairment period was not significant.

4. Investment Securities

      A summary of the available for sale investment securities by maturity groupings as of December 31, 2004 is shown below. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security at December 31, 2004. Yields on tax exempt securities have not been adjusted for tax exempt status. The investment portfolio includes fixed and floating-rate mortgage-related securities, predominantly underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they have uncertain maturity dates and

57

are priced based on estimated prepayment rates on the underlying mortgages. Also included are certain other asset-backed securities (primarily credit card, automobile and commercial loan backed securities).

						Weighted
		Amortized		Fair		Average
(Dollars in thousands)		Cost		Value		Yield
U.S. government and federal agency obligations:
	Within 1 year	$	234,754	$	236,438		4.20	%
	After 1 but within 5 years		1,164,106		1,159,129		3.15
	After 5 but within 10 years		268,017		292,096		2.77
	After 10 years		50,060		58,702		2.92
Total U.S. government and federal agency obligations			1,716,937		1,746,365		3.23
State and municipal obligations:
	Within 1 year		11,792		11,782		2.75
	After 1 but within 5 years		51,445		52,129		3.12
	After 5 but within 10 years		1,497		1,643		5.15
	After 10 years		815		835		5.95
Total state and municipal obligations			65,549		66,389		3.13
Mortgage and asset-backed securities			2,663,755		2,660,981		3.82
Other debt securities:
	Within 1 year		8,719		8,673
	After 1 but within 5 years		41,838		41,567
Total other debt securities			50,557		50,240
Equity securities			194,321		230,966
Total available for sale investment securities		$	4,691,119	$	4,754,941

58

      The unrealized gains and losses by type are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
December 31, 2004
U.S. government and federal agency obligations	$	1,716,937	$	39,568	$	10,140	$	1,746,365
State and municipal obligations		65,549		928		88		66,389
Mortgage and asset- backed securities		2,663,755		16,815		19,589		2,660,981
Other debt securities		50,557		237		554		50,240
Equity securities		194,321		36,645		—		230,966
Total	$	4,691,119	$	94,193	$	30,371	$	4,754,941
December 31, 2003
U.S. government and federal agency obligations	$	1,785,649	$	56,197	$	7,120	$	1,834,726
State and municipal obligations		72,977		1,644		28		74,593
Mortgage and asset- backed securities		2,767,423		40,589		7,578		2,800,434
Other debt securities		63,081		506		—		63,587
Equity securities		150,003		33,325		—		183,328
Total	$	4,839,133	$	132,261	$	14,726	$	4,956,668

      The table above shows that some of the securities in the available for sale investment portfolio had unrealized losses, or were temporarily impaired, as of December 31, 2004 and 2003. This temporary impairment represents the amount of loss that would be realized if the securities were sold at valuation date, and occurs as a result of changes in overall bond yields between the date the bond was acquired and the valuation date. Securities which were temporarily impaired at December 31, 2004 are shown below, along with the length of the impairment period. At year end 2004, the total available for sale portfolio consisted of over 800 individual securities. The table below includes 25 positions that were in an unrealized loss position for 12 months or longer.

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
U.S. government and federal agency obligations	$	910,217	$	9,129	$	29,755	$	1,011	$	939,972	$	10,140
State and municipal obligations		17,374		88		—		—		17,374		88
Mortgage and asset-backed securities		1,592,109		17,877		88,006		1,712		1,680,115		19,589
Other debt securities		37,665		554		—		—		37,665		554
Total temporarily impaired securities	$	2,557,365	$	27,648	$	117,761	$	2,723	$	2,675,126	$	30,371

      In addition to the available for sale portfolio, investment securities held by the Company include certain securities which are not readily marketable. These securities are carried at fair value, which in the absence of readily ascertainable market values or indications of impairment, may be represented by estimated fair value. These securities are shown in a separate non-marketable category of investment

59

securities on the Company’s consolidated balance sheets, which at December 31, 2004 totaled $73,024,000. They included holdings of Federal Reserve Bank (FRB) stock totaling $23,282,000 and Federal Home Loan Bank (FHLB) stock of $27,421,000, which are required to be held for regulatory purposes and for borrowing availability. Investment in FRB stock is based on the capital structure of the bank, and investment in FHLB stock is tied to the borrowings level. The remainder of the securities in the non-marketable category were comprised of investments in venture capital and private equity concerns.

      The following table presents proceeds from sales of securities and the components of net securities gains.

(In thousands)	2004		2003		2002
Proceeds from sales	$	252,464	$	243,456	$	299,626
Realized gains	$	12,517	$	8,599	$	7,281
Realized losses		1,425		4,039		4,446
Net realized gains	$	11,092	$	4,560	$	2,835

      Investment securities with a fair value of $2,343,700,000 and $1,990,831,000 were pledged at December 31, 2004 and 2003, respectively, to secure public deposits, securities sold under repurchase agreements, trust funds, and borrowings at the Federal Reserve discount window. Except for U.S. government and federal agency obligations, no investment in a single issuer exceeds 10% of stockholders’ equity.

5.  Land, Buildings and Equipment

      Land, buildings and equipment consist of the following at December 31, 2004 and 2003:

(In thousands)	2004		2003
Land	$	72,194	$	68,677
Buildings and improvements		393,711		384,826
Equipment		180,204		181,996
Total		646,109		635,499
Less accumulated depreciation and amortization		309,663		299,133
Net land, buildings and equipment	$	336,446	$	336,366

      Depreciation expense of $30,674,000, $30,918,000 and $28,140,000 for 2004, 2003 and 2002, respectively, was included in net occupancy expense, equipment expense and other expense in the consolidated income statements. Repairs and maintenance expense of $17,723,000, $18,369,000 and $17,107,000 for 2004, 2003 and 2002, respectively, was included in net occupancy expense, equipment expense and other expense. Interest expense capitalized on construction projects was $113,000 and $494,000 in 2004 and 2002, respectively.

      On December 22, 2004, the Missouri bank signed an agreement to purchase a multi-story office building and garage in downtown Kansas City. The agreement calls for the purchase of the 12-story building, which has 215,000 square feet of rentable area, and the attached garage for a price of $18 million. The property is being acquired from Tower Properties Company of which Commerce senior executives, David W. Kemper, CEO, and Jonathan M. Kemper, Vice-Chairman, also serve as directors. The purchase price is based on an independent outside appraisal and received the approval of the Company’s Board of Directors and independent Audit Committee.

6. Intangible Assets and Goodwill

      Statement of Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. It also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for

60

impairment. The transition requirements of Statement No. 142 required the Company to perform an assessment of whether there was an indication that goodwill was impaired as of January 1, 2002. To accomplish this, the Company first identified its reporting units, which were determined to be the three reportable segments of Consumer, Commercial, and Money Management. The carrying value of each reporting unit was then established by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The fair value of each reporting unit was determined and compared to the carrying amount of the reporting unit. Because the fair value of each of the reporting units exceeded the carrying value of the unit, no impairment of reporting unit goodwill was indicated. As a result, no impairment loss was recognized as a cumulative effect of a change in accounting principle in the Company’s 2002 consolidated statement of income.

      In conjunction with the acquisition of The Vaughn Group, Inc. in January 2003, the Company recorded goodwill of $5,298,000. The goodwill was allocated to the Company’s Commercial segment. During the second quarter of 2002, the Company sold several bank branches. Goodwill and other intangible assets, net of accumulated amortization, amounting to $1,273,000 were allocated to the assets sold in the determination of the gain. These intangible assets had previously been allocated to the Consumer segment.

      The following table presents information about the Company’s intangible assets.

		December 31, 2004					December 31, 2003
		Gross					Gross
		Carrying		Accumulated			Carrying		Accumulated
(In thousands)		Amount		Amortization			Amount		Amortization
Amortized intangible assets:
	Core deposit premium	$	47,930	$	(47,487	)	$	47,930	$	(45,812	)
	Mortgage servicing rights		539		(483	)		567		(501	)
Total		$	48,469	$	(47,970	)	$	48,497	$	(46,313	)

      As of December 31, 2004, the Company does not have any intangible assets that are not currently being amortized. Aggregate amortization expense on intangible assets for the years ended December 31, 2004, 2003 and 2002 was $1,699,000, $1,794,000 and $2,323,000, respectively. 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

      As a result of routine annual assessments, no impairment of intangible assets was recorded in 2004, 2003 or 2002. Further, the January 1, 2005 review revealed no impairments as of that date.

61

7. Deposits

      At December 31, 2004, the scheduled maturities of total time open and certificates of deposit were as follows:

(In thousands)
Due in 2005	$	1,838,865
Due in 2006		373,624
Due in 2007		101,997
Due in 2008		51,852
Due in 2009		48,893
Thereafter		3,192
Total	$	2,418,423

      At December 31, 2004, the scheduled maturities of time open and certificates of deposit over $100,000 were as follows:

	Certificates		Other Time
	of Deposit over		Deposits over
(In thousands)	$100,000		$100,000		Total
Due in 3 months or less	$	303,920	$	3,844	$	307,764
Due in over 3 through 6 months		148,511		2,670		151,181
Due in over 6 through 12 months		191,707		6,752		198,459
Due in over 12 months		90,420		14,597		105,017
Total	$	734,558	$	27,863	$	762,421

      Regulations of the Federal Reserve System require reserves to be maintained by all banking institutions according to the types and amounts of certain deposit liabilities. These requirements restrict a portion of the amounts shown as consolidated “Cash and due from banks” from everyday usage in the operation of the banks. The minimum reserve requirements for the subsidiary banks at December 31, 2004 totaled $157,567,000.

62

8. Borrowings

      Short-term borrowings of the Company consisted of federal funds purchased, securities sold under agreements to repurchase, and certain advances from the FHLB. All securities underlying the agreements to repurchase are under the Company’s control. The following table presents balance and interest rate information on these and other short-term borrowings.

				Year								Maximum
				End			Average			Average		Outstanding
				Weighted			Weighted			Balance		at any		Balance at
(Dollars in thousands)		Borrower		Rate			Rate			Outstanding		Month End		December 31
Federal funds purchased and securities sold under agreements to repurchase			Subsidiary banks
	2004				2.0	%		1.2	%	$	1,827,428	$	2,157,542	$	1,913,878
	2003				.9			1.0			1,550,211		2,106,044		2,106,044
	2002				1.0			1.3			771,646		1,451,934		1,451,934
FHLB advances			Subsidiary banks
	2004				—			—			—		—		—
	2003				1.2			1.2			61,918		100,000		100,000
	2002				—			—			—		—		—

      Debt of the Company which had an original term of greater than one year consisted of the following at December 31, 2004.

					Year
					End			Year
			Maturity		Weighted			End
(Dollars in thousands)	Borrower		Date		Rate			Balance
FHLB advances		Subsidiary banks		2005		3.0	%	$	115,165
				2006		2.6			238,177
				2007		3.6			12,191
				2008		5.5			1,393
Nonrecourse lease financing notes		Bank leasing subsidiary		2005		6.0			1,391
				2006		5.6			3,071
				2007		5.0			2,766
				2008		6.0			147
Structured notes payable		Venture capital subsidiary		2007		0.0			3,726
				2012		0.0			7,515
Subordinated debentures		Subsidiary holding company		2030		10.9			4,000
Total long-term debt								$	389,542

      Banking subsidiaries of the Company are members of the FHLB and have access to term financing from the FHLB. These borrowings are secured under a blanket collateral agreement including primarily residential mortgages as well as all unencumbered assets and stock of the respective borrowing bank. Rates in effect on these borrowings at December 31, 2004 ranged from 2.4% on floating rate debt to 7.1% on fixed rate debt. Approximately $66,926,000 of FHLB advances outstanding at December 31, 2004 had a fixed interest rate. All of the Company’s outstanding borrowings with the FHLB have prepayment penalties in their terms.

63

      Specified amounts of the Company’s lease receivables and underlying equipment in leasing transactions serve as collateral for nonrecourse lease financing notes from other financial institutions, which totaled $7,375,000 at December 31, 2004. In the event of a default by a lessee, the other financial institution has a first lien on the underlying lease equipment and chattel paper, with no further recourse against the Company.

      In 2001, the Company assumed $4,000,000 of subordinated debentures as a result of its acquisition of Breckenridge Bancshares Company (Breckenridge). These debentures, which are due in 2030 and are redeemable beginning in 2010, were issued to a wholly owned grantor trust (the Trust). Breckenridge had previously formed the Trust to issue preferred securities representing undivided beneficial interests in the assets of the Trust and to invest the gross proceeds of such preferred securities in the debentures of Breckenridge. While the Trust is accounted for as an unconsolidated equity investment under the requirements of Financial Interpretation 46 (revised), the trust preferred securities issued by the Trust qualify as Tier 1 Capital for regulatory purposes.

      Other long-term debt includes funds borrowed from third-party insurance companies by a venture capital subsidiary, a Missouri Certified Capital Company, to support its investment activities. Because the insurance companies receive tax credits, the borrowings do not bear interest. This debt is secured by assets of the subsidiary and letters of credit from an affiliate bank.

      Cash payments for interest on deposits and borrowings during 2004, 2003 and 2002 on a consolidated basis amounted to $113,131,000, $124,022,000 and $164,147,000, respectively.

9. Income Taxes

      Income tax expense (benefit) from operations for the years ended December 31, 2004, 2003 and 2002 consists of:

(In thousands)		Current			Deferred			Total
Year ended December 31, 2004:
	U.S. federal	$	80,515		$	2,957		$	83,472
	State and local		7,569			(240	)		7,329
		$	88,084		$	2,717		$	90,801
Year ended December 31, 2003:
	U.S. federal	$	92,053		$	(11,513	)	$	80,540
	State and local		4,288			(113	)		4,175
		$	96,341		$	(11,626	)	$	84,715
Year ended December 31, 2002:
	U.S. federal	$	84,080		$	11,033		$	95,113
	State and local		(3,072	)		(122	)		(3,194	)
		$	81,008		$	10,911		$	91,919

64

      Income tax expense (benefit) allocated directly to stockholders’ equity for the years ended December 31, 2004, 2003 and 2002 consists of:

(In thousands)	2004			2003			2002
Unrealized gain (loss) on securities available for sale	$	(20,410	)	$	(14,233	)	$	33,830
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes		(2,305	)		(1,524	)		(1,668	)
Minimum pension liability		—			—			2,129
Income tax expense (benefit) allocated to stockholders’ equity	$	(22,715	)	$	(15,757	)	$	34,291

      The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented below.

(In thousands)		2004			2003
Deferred tax assets:
	Loans, principally due to allowance for loan losses	$	58,449		$	59,900
	Unearned fee income		672			704
	Deferred compensation		1,893			1,389
	Accrued expenses		2,793			2,094
	Stock options		7,937			7,464
	Net operating loss carryforwards of acquired companies		1,356			1,356
	Core deposit intangibles		98			—
	Other		7,512			9,352
Total deferred tax assets			80,710			82,259
	Valuation allowance		8,317			8,317
Adjusted deferred tax assets			72,393			73,942
Deferred tax liabilities:
	Accretion on investment securities		652			299
	Capitalized interest		692			456
	Unrealized gain on securities available for sale		24,253			44,663
	Land, buildings and equipment		49,631			50,280
	Core deposit intangible		—			383
	Pension benefit obligations		8,622			9,833
Total deferred tax liabilities			83,850			105,914
Net deferred tax liability		$	(11,457	)	$	(31,972	)

      Included in other deferred tax assets in the table above at December 31, 2004 and 2003 are certain assets which result from corporate reorganization activities. A valuation allowance of $8,317,000 has been recorded in the accompanying consolidated balance sheets to reduce those deferred tax assets because of uncertainty regarding the ultimate realization of tax benefits associated with capital losses. If certain conditions are satisfied and it becomes more likely than not that those deferred tax assets will be realized, the valuation allowance will be reversed, resulting in a reduction of income tax expense. Additionally, the Company acquired certain net operating loss carryforwards (NOLs) of approximately $4,343,000 in connection with the 2003 acquisition of The Vaughn Group, Inc. Remaining tax benefits from NOLs are $1,356,000. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize those NOLs, which expire no earlier than 2020.

65

      Actual income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:

(In thousands)		2004			2003			2002
Computed “expected” tax expense		$	108,900		$	101,934		$	100,880
Increase (reduction) in income taxes resulting from:
	Amortization of goodwill		—			—			455
	Tax exempt income		(1,226	)		(1,376	)		(1,324	)
	Tax deductible dividends on allocated shares held by the Company’s ESOP		(994	)		(861	)		(703	)
	Contribution of appreciated assets		(136	)		(356	)		(420	)
	Federal tax credits		(406	)		(437	)		(1,312	)
	State and local income taxes		4,764			2,712			(2,076	)
	Corporate reorganization activities		(18,910	)		(15,204	)		(4,000	)
	Other, net		(1,191	)		(1,697	)		419
Total income tax expense		$	90,801		$	84,715		$	91,919

      Cash payments of income taxes, net of refunds and interest received, amounted to $107,529,000, $89,181,000 and $102,635,000 on a consolidated basis during 2004, 2003 and 2002, respectively. The Parent had net receipts of $5,500,000, $2,682,000 and $14,968,000 during 2004, 2003 and 2002, respectively, from tax benefits.

10.  Employee Benefit Plans

      Employee benefits charged to operating expenses aggregated $39,943,000, $39,715,000 and $38,190,000 for 2004, 2003 and 2002, respectively. Substantially all of the Company’s current employees are covered by a noncontributory defined benefit pension plan, except that participation in the pension plan is not available to employees hired after June 30, 2003. Participants are fully vested after five years of service and the benefits are based on years of participation and average annualized earnings. Certain key executives also participate in a second pension plan that the Company funds only as retirement benefits are disbursed. The executive plan carries no segregated assets.

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

      The Company’s funding policy is to make contributions to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution may not be made in a particular year. The Company elected to make cash contributions of $6,009,000, $6,606,000 and $19,314,000 during fiscal 2004, 2003 and 2002, respectively. The minimum required contribution for 2005 is expected to be zero. The Company does not expect to make any further contributions other than minimal funding contributions to the executive pension plan.

      At December 31, 2001, the Company recorded a liability and offsetting charge to stockholders’ equity, net of deferred taxes, of $3,474,000 for the pension plan’s unfunded accumulated benefit obligation (ABO), as required by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”. As a result of the Company’s contributions in 2002, the fair value of the plan assets exceeded the ABO, and the liability was reversed in the 2002 consolidated financial statements.

66

      Benefit obligations of the executive pension plan at the September 30 valuation date are shown in the table immediately below. In all other tables presented, the two pension plans are presented on a combined basis.

(In thousands)	2004		2003
Projected benefit obligation	$	839	$	691
Accumulated benefit obligation	$	839	$	665

      The following items are components of the net pension cost for the years ended December 31, 2004, 2003 and 2002.

(In thousands)	2004			2003			2002
Service cost-benefits earned during the year	$	4,984		$	3,921		$	3,330
Interest cost on projected benefit obligation		4,460			4,829			4,530
Expected return on plan assets		(6,403	)		(5,198	)		(5,075	)
Amortization of transition asset		—			—			(638	)
Amortization of prior service cost		(101	)		(101	)		(128	)
Amortization of unrecognized net loss		1,208			2,044			752
Net periodic pension cost	$	4,148		$	5,495		$	2,771

      The following table sets forth the pension plans’ funded status, using valuation dates of September 30, 2004 and 2003. In 2003, the actuarial method used to determine the benefit obligation was revised to the Traditional Unit Credit method in accordance with conclusions reached by the FASB Emerging Issues Task Force as described in Issue No. 03-4 regarding accounting for cash balance pension plans. The impact of this change was reflected as an actuarial gain as of the September 30, 2003 measurement.

(In thousands)	2004			2003
Change in projected benefit obligation
Projected benefit obligation at beginning of plan year	$	77,190		$	72,277
Service cost		4,884			3,821
Interest cost		4,460			4,829
Curtailments		(840	)		—
Benefits paid		(4,495	)		(4,112	)
Actuarial (gain) loss		2,414			375
Projected benefit obligation at end of plan year		83,613			77,190
Change in plan assets
Fair value of plan assets at beginning of plan year		78,893			67,238
Actual return (loss) on plan assets		7,170			9,161
Employer contributions		6,009			6,606
Benefits paid		(4,495	)		(4,112	)
Fair value of plan assets at September 30		87,577			78,893
Funded status		3,964			1,703
Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions		19,832			20,516
Prior service benefit not yet recognized in net pension cost		—			(334	)
Prepaid pension cost at September 30	$	23,796		$	21,885

67

      Employer contributions made after the September 30 valuation date but before the December 31 fiscal year end amounted to $2,000 in both 2004 and 2003. Amounts recognized on the December 31 balance sheets are as follows:

(In thousands)		2004			2003
	Prepaid pension cost	$	24,635		$	22,670
	Accrued benefit liability		(837	)		(783	)
Net amount recognized at December 31		$	23,798		$	21,887

      The accumulated benefit obligation was $83,613,000 and $76,414,000 on September 30, 2004 and 2003, respectively.

      The following assumptions, on a weighted average basis, were used in accounting for the plans.

		2004		2003		2002
Determination of benefit obligation at year end:
	Discount rate		5.75%		6.00%		6.75%
	Rate of increase in future compensation levels		5.20%		5.20%		5.70%
Determination of net periodic benefit cost for year ended:
	Discount rate		6.00%		6.75%		7.25%
	Rate of increase in future compensation levels		5.20%		5.70%		5.70%
	Long-term rate of return on assets		8.00%		8.00%		9.00%

      The weighted average asset allocation as of September 30 by asset category were as follows:

	2004			2003
Equity securities		63	%		62	%
Debt securities		34	%		33	%
Money market		3	%		5	%
Total		100	%		100	%

      The investment policy of the pension plan is designed for growth in value within limits designed to safeguard against significant losses within the portfolio. The current long-term investment mix target for the plan is 60% equity securities and 40% fixed income; equities may range 15% above or below the 60% target. There are guidelines regarding the type of investments held that may change from time to time, currently including items such as holding bonds rated investment grade or better, and prohibiting investment in Company stock. The plan does not utilize derivatives.

      The assumed overall expected long-term rate of return on pension plan assets used in calculating 2004 pension plan expense was 8%. Determination of the plan’s rate is based upon historical returns for equities and fixed income indexes. The average 10-year rolling return for an asset mix comparable to the Company’s pension plan is 9.3%. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. As shown above, with a target of over half of the plan’s investment to be in equities, the actual return for any one plan year may fluctuate significantly with changes in the stock market.

68

      The following future benefit payments are expected to be paid:

(In thousands)
2005	$	4,649
2006		4,815
2007		5,002
2008		5,189
2009		5,347
2010-2014		28,848

      In addition to the pension plans, substantially all of the Company’s employees are covered by a contributory defined contribution (401K) plan, the Participating Investment Plan. Under the plan, the Company makes matching contributions, which aggregated $4,197,000 in 2004, $4,081,000 in 2003 and $4,955,000 in 2002.

11.  Stock Option Plans, Restricted Stock Awards and Directors Stock Purchase Plan*

      The Company has several stock option plans, all of which have been approved by shareholders, under which options are granted to certain key employees of the Company and its subsidiaries. Options are granted, by action of the Board of Directors, to acquire common stock at fair market value at the date of the grant, for a term of 10 years.

      At December 31, 2004, 1,988,239 shares remain available for option grants under these programs. The following tables summarize option activity over the last three years and current options outstanding.

	2004					2003					2002
				Weighted					Weighted					Weighted
				Average					Average					Average
				Option					Option					Option
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		3,884,854		$	28.57		3,845,474		$	26.62		3,769,923		$	23.64
Granted		479,464			47.49		597,253			33.81		652,961			36.62
Cancelled		(49,938	)		39.03		(47,980	)		34.21		(44,013	)		31.78
Exercised		(765,355	)		24.17		(509,893	)		19.53		(533,397	)		17.31
Outstanding at end of year		3,549,025		$	31.92		3,884,854		$	28.57		3,845,474		$	26.62

	Options Outstanding						Options Exercisable
			Weighted		Weighted				Weighted
	Number		Average		Average		Number		Average
	Outstanding at		Remaining		Exercise		Exercisable at		Exercise
Range of Exercise Prices	December 31, 2004		Contractual Life		Price		December 31, 2004		Price
$11.87 - $21.14		518,635		1.5 years	$	17.73		518,635	$	17.73
$23.75 - $28.54		644,157		4.6 years		26.08		644,157		26.08
$28.84 - $33.76		1,352,028		6.3 years		32.85		1,079,166		32.62
$33.85 - $46.87		575,556		7.1 years		36.67		428,142		36.62
$47.51		458,649		9.2 years		47.51		114,621		47.51
$11.87 - $47.51		3,549,025		5.8 years	$	31.92		2,784,721	$	29.56

      Effective January 1, 2003, the Company voluntarily adopted the fair value recognition provisions of Statement No. 123 for stock-based employee compensation. All prior periods presented have been restated to reflect compensation cost recognized under the provisions of Statement No. 123 for all options granted to employees after January 1, 1995. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of options on date of grant. The Black-Scholes model was developed

69

to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective assumptions used in the model can result in materially different fair value estimates. Below are the fair values of options granted using the Black-Scholes option-pricing model, the model assumptions, and the compensation cost recognized under employee compensation option plans.

(Dollars in thousands, except per share data)		2004			2003			2002
Weighted per share average fair value at grant date			$12.38			$8.97			$9.35
Assumptions:
	Dividend yield		1.9	%		1.8	%		1.6	%
	Volatility		24.1	%		24.4	%		24.6	%
	Risk-free interest rate		3.5	%		3.5	%		3.5	%
	Expected life		7.3 years			7.3 years			7.0 years
Compensation cost			$5,538			$5,371			$5,273

      The Company has a restricted stock award plan under which 647,320 shares of common stock were reserved, and 322,305 shares remain available for grant at December 31, 2004. The plan allows for awards to key employees, by action of the Board of Directors, with restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the restriction period. The restriction period may not exceed 10 years.

(Dollars in thousands)	2004		2003		2002
Awarded shares		56,491		29,008		20,965
Deferred compensation	$	2,673	$	1,014	$	771
Compensation cost	$	927	$	721	$	692
Unamortized deferred compensation at end of year	$	3,542	$	1,963	$	1,800

      The Company has a directors stock purchase plan whereby outside directors of the Company and its subsidiaries may elect to use their directors’ fees to purchase Company stock at market value each month end. Remaining shares available for this plan total 137,442 at December 31, 2004. In 2004, 14,901 shares were purchased at an average price of $45.67 and in 2003, 18,436 shares were purchased at an average price of $38.07.

*  All share and per share amounts in this note have been restated for the 5% stock dividend distributed in 2004.

12.  Comprehensive Income

      Statement of Financial Accounting Standards No. 130 requires the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. The components of other comprehensive income as shown below are unrealized holding gains and losses on available for sale securities and a minimum liability pension adjustment arising from an accumulated benefit obligation in excess of the fair value of plan assets.

70

      The amount of income tax expense or benefit allocated to each component of other comprehensive income is as follows:

			Unrealized			Tax
			Before-Tax			(Expense)			Net of Tax
(In thousands)			Amount			or Benefit			Amount
Year ended December 31, 2004:
	Unrealized gains on securities:
		Unrealized holding gains (losses)	$	(42,452	)	$	16,021		$	(26,431	)
		Reclassification adjustment for (gains) losses included in net income		(11,259	)		4,389			(6,870	)
		Net unrealized gains (losses)		(53,711	)		20,410			(33,301	)
	Other comprehensive income (loss)		$	(53,711	)	$	20,410		$	(33,301	)
Year ended December 31, 2003:
	Unrealized gains on securities:
		Unrealized holding gains (losses)	$	(30,629	)	$	11,577		$	(19,052	)
		Reclassification adjustment for (gains) losses included in net income		(6,826	)		2,656			(4,170	)
		Net unrealized gains (losses)		(37,455	)		14,233			(23,222	)
	Other comprehensive income (loss)		$	(37,455	)	$	14,233		$	(23,222	)
Year ended December 31, 2002:
	Unrealized gains on securities:
		Unrealized holding gains (losses)	$	95,078		$	(36,190	)	$	58,888
		Reclassification adjustment for (gains) losses included in net income		(6,052	)		2,360			(3,692	)
		Net unrealized gains		89,026			(33,830	)		55,196
	Minimum pension liability adjustment			5,603			(2,129	)		3,474
	Other comprehensive income		$	94,629		$	(35,959	)	$	58,670

      The end of period components of accumulated other comprehensive income (loss) are as follows:

					Minimum		Accumulated
		Unrealized			Pension		Other
		Gains (Losses)			Liability		Comprehensive
(In thousands)		on Securities			Adjustment		Amount
Balance at December 31, 2002		$	96,093		$	—	$	96,093
	Current period change		(23,222	)		—		(23,222	)
Balance at December 31, 2003			72,871			—		72,871
	Current period change		(33,301	)		—		(33,301	)
Balance at December 31, 2004		$	39,570		$	—	$	39,570

13.  Segments

      The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The Consumer segment includes the retail branch network, consumer finance, bankcard, student loans and discount brokerage services. The Commercial segment provides corporate lending, leasing, and international services, as well as business, government deposit and cash management services. The Money Management segment provides traditional trust and estate tax planning services, and advisory and discretionary investment management services. The Money Management segment also includes the Capital Markets group, which sells fixed-income securities and provides investment safekeeping and bond accounting services.

71

      The Company’s business line reporting system derives segment information by specifically attributing most assets and income statement items to a segment. The Company’s internal funds transfer pricing methodology makes specific assignment of an interest spread to each new source or use of funds with a maturity date. Income and expense that directly relate to segment operations are recorded in the segment when incurred. Expenses that indirectly support the segments are allocated based on the most appropriate method available.

      The Company’s reportable segments are strategic lines of business that offer different products and services. They are managed separately because each line services a specific customer need, requiring different performance measurement analyses and marketing strategies.

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

Segment Income Statement Data

						Money			Segment		Other/			Consolidated
(In thousands)	Consumer		Commercial			Management			Totals		Elimination			Totals
Year ended December 31, 2004:
Net interest income after provision for loan losses	$	127,757	$	187,545		$	(7,584	)	$	307,718	$	159,262		$	466,980
Cost of funds allocation		123,234		(15,075	)		14,893			123,052		(123,052	)		—
Non-interest income		155,625		76,594			81,030			313,249		13,682			326,931
Total net revenue		406,616		249,064			88,339			744,019		49,892			793,911
Non-interest expense		269,644		134,179			59,205			463,028		19,741			482,769
Income before income taxes	$	136,972	$	114,885		$	29,134		$	280,991	$	30,151		$	311,142
Year ended December 31, 2003:
Net interest income after provision for loan losses	$	115,488	$	192,980		$	(6,101	)	$	302,367	$	159,349		$	461,716
Cost of funds allocation		111,688		(26,071	)		13,586			99,203		(99,203	)		—
Non-interest income		142,654		71,600			79,834			294,088		7,579			301,667
Total net revenue		369,830		238,509			87,319			695,658		67,725			763,383
Non-interest expense		261,221		117,537			60,788			439,546		32,598			472,144
Income before income taxes	$	108,609	$	120,972		$	26,531		$	256,112	$	35,127		$	291,239
Year ended December 31, 2002:
Net interest income after provision for loan losses	$	96,401	$	213,771		$	(7,700	)	$	302,472	$	163,385		$	465,857
Cost of funds allocation		153,012		(47,909	)		15,913			121,016		(121,016	)		—
Non-interest income		149,350		41,175			81,454			271,979		8,593			280,572
Total net revenue		398,763		207,037			89,667			695,467		50,962			746,429
Non-interest expense		269,588		95,107			60,380			425,075		33,125			458,200
Income before income taxes	$	129,175	$	111,930		$	29,287		$	270,392	$	17,837		$	288,229

      The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/ Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments.

72

Segment Balance Sheet Data

					Money		Segment		Other/			Consolidated
(In thousands)	Consumer		Commercial		Management		Totals		Elimination			Totals
Average balances for 2004:
Assets	$	3,843,987	$	4,473,030	$	29,166	$	8,346,183	$	5,802,973		$	14,149,156
Loans		3,714,404		4,409,467		184		8,124,055		6,058			8,130,113
Goodwill and other intangible assets		34,896		14,236		746		49,878		—			49,878
Deposits		7,557,998		2,363,811		371,195		10,293,004		36,280			10,329,284
Average balances for 2003:
Assets	$	3,659,344	$	4,543,115	$	29,547	$	8,232,006	$	5,310,752		$	13,542,758
Loans		3,529,827		4,479,000		305		8,009,132		327			8,009,459
Goodwill and other intangible assets		36,754		14,236		746		51,736		—			51,736
Deposits		7,543,048		2,169,359		308,548		10,020,955		(4,220	)		10,016,735

      The above segment balances include only those items directly associated with the segment. The “Other/ Elimination” column includes unallocated bank balances not associated with a segment (such as investment securities, federal funds sold, goodwill and core deposit intangible), balances relating to certain other administrative and corporate functions, and eliminations between segment and non-segment balances. This column also includes the resulting effect of allocating such items as float, deposit reserve and capital for the purpose of computing the cost or credit for funds used/provided.

      Beginning in 2002, the Company implemented a new funds transfer pricing method to value funds used (e.g., loans, fixed assets, cash, etc.) and funds provided (deposits, borrowings, and equity) by the business segments and their components. This new process assigns a specific value to each new source or use of funds with a maturity, based on current LIBOR interest rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are assigned to LIBOR based funding pools. Previous methodology used funding pools based on average rates to assign and determine value. The new method provides a more accurate means of valuing fund sources and uses in a varying interest rate environment. The most evident change resulting from adopting the new method was a reduction of the credit for funds allocation to the Consumer segment.

14. Common Stock

      On December 13, 2004, the Company distributed a 5% stock dividend on its $5 par common stock for the eleventh consecutive year. All per share data in this report has been restated to reflect the stock dividend.

      Basic income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted income per share gives effect to all dilutive potential common shares that were outstanding during the year. The shares used in the calculation of basic and diluted income per share, which have been restated for all stock dividends, are as follows:

	For the Years Ended
	December 31
(In thousands)	2004		2003		2002
Weighted average common shares outstanding		70,027		72,710		75,195
Net effect of the assumed exercise of stock options – based on the treasury stock method using average market price for the respective periods		1,039		907		947
		71,066		73,617		76,142

73

      The table below shows activity in the outstanding shares of the Company’s common stock during 2004. Shares in the table below are presented on an historical basis and have not been restated for the 5% stock dividend in 2004.

(In thousands)
Shares outstanding at January 1, 2004		67,891
Issuance of stock:
	Sales and awards under employee and director plans	718
	5% stock dividend	3,274
Purchases of treasury stock		(3,621	)
Other		(4	)
Shares outstanding at December 31, 2004		68,258

      Under a Rights Agreement dated August 23, 1988, as amended in the amended and restated rights agreement with Commerce Bank, N.A. as rights agent, dated as of July 19, 1996, certain rights have attached to the common stock. Under certain circumstances relating to the acquisition of, or tender offer for, a specified percentage of the Company’s outstanding common stock, holders of the common stock may exercise the rights and purchase shares of Series A Preferred Stock or, at a discount, common stock of the Company or an acquiring company.

      In October 2004, the Board of Directors approved additional purchases of the Company’s common stock, bringing the total purchase authorization to 5,000,000 shares. At December 31, 2004, 3,731,069 shares remain available to be purchased under this authorization. The Company has routinely used these reacquired shares to fund employee benefit programs and annual stock dividends.

15. Regulatory Capital Requirements

      The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that could have a direct material effect on the Company’s financial statements. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

      Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiaries to maintain minimum amounts and ratios of Tier 1 capital to total average assets (leverage ratio), and minimum ratios of Tier 1 and Total capital to risk-weighted assets (as defined). To meet minimum, adequately capitalized regulatory requirements, an institution must maintain a Tier 1 capital ratio of 4.00%, a Total capital ratio of 8.00% and a leverage ratio of 4.00%. The minimum required ratios for well-capitalized banks (under prompt corrective action provisions) are 6.00% for Tier 1 capital, 10.00% for Total capital and 5.00% for the leverage ratio.

74

      The capital amounts and ratios for the Company (on a consolidated basis) and its full-service banking subsidiaries at the last two year ends are as follows:

	2004							2003
	Actual							Actual
						Minimum							Minimum
(Dollars in thousands)	Amount		Ratio			Required(A)		Amount		Ratio			Required(A)
Total Capital (to risk-weighted assets):
Commerce Bancshares, Inc. (consolidated)	$	1,492,009		13.57	%	$	879,499	$	1,481,600		13.70	%	$	865,049
Commerce Bank, N.A. (Missouri)		1,044,869		10.39			804,514		972,708		10.45			744,855
Commerce Bank, N.A. (Illinois)(B)		N.A.		N.A.			N.A.		96,139		16.34			47,073
Commerce Bank, N.A. (Kansas)		106,652		16.01			53,291		107,763		15.94			54,092
Tier 1 Capital (to risk-weighted assets):
Commerce Bancshares, Inc. (consolidated)	$	1,342,275		12.21	%	$	439,749	$	1,331,439		12.31	%	$	432,525
Commerce Bank, N.A. (Missouri)		922,867		9.18			402,257		856,857		9.20			372,428
Commerce Bank, N.A. (Illinois)(B)		N.A.		N.A.			N.A.		88,771		15.09			23,537
Commerce Bank, N.A. (Kansas)		98,294		14.76			26,645		99,282		14.68			27,046
Tier 1 Capital (to adjusted quarterly average assets):
(Leverage Ratio)
Commerce Bancshares, Inc. (consolidated)	$	1,342,275		9.60	%	$	559,119	$	1,331,439		9.71	%	$	548,759
Commerce Bank, N.A. (Missouri)		922,867		7.28			507,085		856,857		7.39			463,662
Commerce Bank, N.A. (Illinois)(B)		N.A.		N.A.			N.A.		88,771		10.03			35,413
Commerce Bank, N.A. (Kansas)		98,294		8.81			44,615		99,282		8.85			44,856

(A)	Dollar amount required to meet guidelines for adequately capitalized institutions.
(B)	The Illinois charter was merged into the Missouri charter in 2004.

     Management believes that the Company meets all capital requirements to which it is subject at December 31, 2004.

16. Fair Value of Financial Instruments

      Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments”, requires disclosure of the carrying amounts and estimated fair values for financial instruments held by the Company. Fair value estimates, the methods used and assumptions made in computing those estimates, and the carrying amounts recorded in the balance sheet are set forth below.

Loans

      Fair values are estimated for various groups of loans segregated by 1) type of loan, 2) fixed/adjustable interest terms and 3) performing/non-performing status. The fair value of performing loans is calculated by discounting all simulated cash flows. Cash flows include all principal and interest to be received, taking embedded optionality such as the customer’s right to prepay into account. Discount rates are computed for each loan category using implied forward market rates adjusted to recognize each loan’s approximate credit risk. Fair value of impaired loans approximates their carrying value because such loans are recorded at the appraised or estimated recoverable value of the collateral or the underlying cash flow.

75

Investment Securities

      The fair values of the debt and equity instruments in the available for sale and trading sections of the investment security portfolio are estimated based on prices published in financial newspapers or bid quotations received from securities dealers. The fair value of those equity investments for which a market source is not readily available is estimated at carrying value.

      A schedule of investment securities by category and maturity is provided in Note 4 on Investment Securities. Fair value estimates are based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership, possible tax ramifications or estimated transaction costs.

Federal Funds Sold and Securities Purchased under Agreements to Resell and Cash and Due From Banks

      The carrying amounts of federal funds sold and securities purchased under agreements to resell and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell generally mature in 90 days or less.

Accrued Interest Receivable/ Payable

      The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values because of the relatively short time period between the accrual period and the expected receipt or payment due date.

Derivative Instruments

      The fair value of derivative financial instruments is based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date (i.e., mark-to-market value). Fair values are based on dealer quotes or pricing models.

Deposits

      Statement No. 107 specifies that the fair value of deposits with no stated maturity is equal to the amount payable on demand. Such deposits include savings and interest and non-interest bearing demand deposits. These fair value estimates do not recognize any benefit the Company receives as a result of being able to administer, or control, the pricing of these accounts. The fair value of certificates of deposit is based on the discounted value of cash flows, taking early withdrawal optionality into account. Discount rates are based on the Company’s approximate cost of obtaining similar maturity funding in the market.

Borrowings

      Federal funds purchased and securities sold under agreements to repurchase mature or reprice within 90 days; therefore, their fair value approximates carrying value. The fair value of long-term debt is estimated by discounting contractual maturities using an estimate of the current market rate for similar instruments.

76

      The estimated fair values of the Company’s financial instruments are as follows:

	2004				2003
	Carrying		Estimated		Carrying		Estimated
(In thousands)	Amount		Fair Value		Amount		Fair Value
Financial Assets
Loans	$	8,305,359	$	8,410,136	$	8,142,679	$	8,252,145
Available for sale investment securities		4,754,941		4,754,941		4,956,668		4,956,668
Trading securities		9,403		9,403		9,356		9,356
Non-marketable securities		73,024		73,024		73,170		73,170
Federal funds sold and securities purchased under agreements to resell		68,905		68,905		108,120		108,120
Accrued interest receivable		66,656		66,656		68,342		68,342
Derivative instruments		872		872		995		995
Cash and due from banks		585,815		585,815		567,123		567,123
Financial Liabilities
Non-interest bearing demand deposits	$	1,943,771	$	1,943,771	$	1,716,214	$	1,716,214
Savings, interest checking and money market deposits		6,072,115		6,072,115		6,080,543		6,080,543
Time open and C.D.’s		2,418,423		2,423,112		2,409,451		2,442,602
Federal funds purchased and securities sold under agreements to repurchase		1,913,878		1,913,878		2,106,044		2,106,044
Other borrowings		389,542		391,075		403,853		407,636
Accrued interest payable		20,294		20,294		20,706		20,706
Derivative instruments		1,475		1,475		2,081		2,081

Off-Balance Sheet Financial Instruments

      The fair value of letters of credit and commitments to extend credit is based on the fees currently charged to enter into similar agreements. The aggregate of these fees is not material. These instruments are also referenced in Note 18 on Commitments, Contingencies and Guarantees.

Limitations

      Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

17.  Derivative Instruments

      One of the Company’s primary risks associated with its lending activity is interest rate risk. Interest rates contain an ever-present volatility, as they are affected by the public’s perception of the economy’s health at any one point in time, as well as by specific actions of the Federal Reserve. These fluctuations can either compress or enhance fixed rate interest margins depending on the liability structure of the funding organization. Over the longer term, rising interest rates have a negative effect on interest margins as funding sources become more expensive relative to these fixed rate loans that do not re-price as quickly with the change in interest rates. However, in order to maintain its competitive advantage, in certain circumstances the Company offers fixed rate commercial financing whose term extends beyond its traditional three to five year parameter. This exposes the Company to the risk that the fair value of the fixed rate loan may fall if market interest rates increase. To reduce this exposure for certain specified loans, the Company enters into interest rate swaps, paying interest based on a fixed rate in exchange for interest

77

based on a variable rate. Certain swaps have been designated as fair value hedges. The amount of hedge ineffectiveness on these swaps was recorded in interest income in the accompanying consolidated income statements. The Company also has several matching stand alone swaps, whose fair values offset each other with no impact to income.

      The Company’s mortgage banking operation makes commitments to extend fixed rate loans secured by 1-4 family residential properties, which are considered to be derivative instruments. These commitments have an average term of 60 to 90 days. The Company’s general practice is to sell such loans in the secondary market. During the term of the loan commitment, the value of the loan commitment changes in inverse proportion to changes in market interest rates. The Company obtains forward sale contracts with investors in the secondary market in order to manage these risk positions. Most of the contracts are matched to a specific loan on a “best efforts” basis, in which the Company is obligated to deliver the loan only if the loan closes. Hedge accounting has not been applied to these activities. These unrealized gains and losses were recorded in mortgage banking revenue.

      The Company’s foreign exchange activity involves the purchase and sale of forward foreign exchange contracts, which are commitments to purchase or deliver a specified amount of foreign currency at a specific future date. This activity enables customers involved in international business to hedge their exposure to foreign currency exchange rate fluctuations. The Company minimizes its related exposure arising from these customer transactions with offsetting contracts for the same currency and time frame. In addition, the Company uses foreign exchange contracts, to a limited extent, for trading purposes, including taking proprietary positions. Risk arises from changes in the currency exchange rate and from the potential for counterparty nonperformance. These risks are controlled by adherence to a foreign exchange trading policy which contains control limits on currency amounts, open positions, maturities and losses, and procedures for approvals, record-keeping, monitoring and reporting. Hedge accounting has not been applied to these foreign exchange activities. The changes in fair value of the foreign exchange derivative instruments were recorded in other non-interest income.

      At December 31, 2004, the total notional amount of derivatives held by the Company amounted to $89,894,000. Derivatives with positive fair values of $872,000 were recorded in other assets and derivatives with negative fair values of $1,475,000 were recorded as other liabilities at December 31, 2004. Changes in the fair values of the derivatives and hedged loans, as shown in the table below, were recognized in current earnings.

(In thousands)
Unrealized gain (loss)
resulting from change in fair value	2004			2003			2002
Swaps/hedged loans	$	(1	)	$	7		$	30
Mortgage loan commitments		(65	)		(292	)		429
Mortgage loan sale contracts		31			63			(979	)
Foreign exchange contracts		58			(59	)		(34	)
Total	$	23		$	(281	)	$	(554	)

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

78

18. Commitments, Contingencies and Guarantees

      The Company leases certain premises and equipment, all of which were classified as operating leases. The rent expense under such arrangements amounted to $5,505,000, $4,440,000 and $4,122,000 in 2004, 2003 and 2002, respectively. A summary of minimum lease commitments follows:

(In thousands)
		Type of Property
		Real
Year Ended December 31		Property		Equipment		Total
	2005	$	5,055	$	220	$	5,275
	2006		4,796		208		5,004
	2007		3,741		184		3,925
	2008		2,892		73		2,965
	2009		2,558		2		2,560
	After		30,960		—		30,960
Total minimum lease payments						$	50,689

      All leases expire prior to 2055. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, the future minimum lease commitments are not expected to be less than the amounts shown for 2005.

      The Company engages in various transactions and commitments with off-balance sheet risk in the normal course of business to meet customer financing needs. The Company uses the same credit policies in making the commitments and conditional obligations described below as it does for on-balance sheet instruments. The following table summarizes these commitments at December 31:

(In thousands)		2004		2003
Commitments to extend credit:
	Credit card	$	3,102,137	$	2,962,369
	Other		3,202,582		2,974,215
Standby letters of credit, net of participations			328,870		306,730
Commercial letters of credit			24,076		25,942

      Commitments to extend credit are legally binding agreements to lend to a borrower providing there are no violations of any conditions established in the contract. As many of the commitments are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash requirements. Refer to Note 3 on Loans and Allowance for Loan Losses for further discussion.

      Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods to a buyer. Although commercial letters of credit are used to effect payment for domestic transactions, the majority are used to settle payments in international trade. Typically, letters of credit require presentation of documents which describe the commercial transaction, evidence shipment, and transfer title.

      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 December 31, 2004, a liability in the amount of $4.6 million, representing the carrying value of the guarantee obligations associated with the standby letters of credit, was recorded in accordance with Financial Accounting Standards Board Interpretation 45. This amount will be amortized into income over

79

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 $328.9 million at December 31, 2004.

      The Company guarantees payments to holders of certain trust preferred securities issued by a wholly owned grantor trust. The securities are due in 2030 and are redeemable beginning in 2010. The maximum potential future payments guaranteed by the Company, which includes future interest and principal payments through maturity, was $15.0 million at December 31, 2004. At December 31, 2004, the Company had a recorded liability of $4.1 million in principal and accrued interest to date, representing amounts owed to the security holders.

      In the normal course of business, the Company had certain lawsuits pending at December 31, 2004. In the opinion of management, after consultation with legal counsel, none of these suits will have a significant effect on the financial condition and results of operations of the Company.

19.  Parent Company Condensed Financial Statements

      Following are the condensed financial statements of Commerce Bancshares, Inc. (Parent only) for the periods indicated:

Condensed Balance Sheets

		December 31
(In thousands)		2004		2003
Assets
Investment in consolidated subsidiaries:
	Banks	$	1,072,601	$	1,132,287
	Non-banks		42,196		40,349
Receivables from subsidiaries, net of borrowings			367		3,566
Cash			26		26
Investment securities:
	Available for sale		279,707		247,053
	Non-marketable		4,612		3,907
Prepaid pension cost			24,635		22,670
Other assets			14,811		11,785
Total assets		$	1,438,955	$	1,461,643
Liabilities and stockholders’ equity
Accounts payable, accrued taxes and other liabilities		$	12,075	$	10,689
Total liabilities			12,075		10,689
Stockholders’ equity			1,426,880		1,450,954
Total liabilities and stockholders’ equity		$	1,438,955	$	1,461,643

80

Condensed Statements of Income

		For the Years Ended December 31
(In thousands)		2004			2003			2002
Income
Dividends received from consolidated subsidiaries:
	Banks	$	253,017		$	195,482		$	199,781
	Non-banks		280			200			245
Earnings of consolidated subsidiaries, net of dividends			(22,786	)		18,756			4,128
Interest and dividends on investment securities			3,494			2,930			3,452
Interest on securities purchased under agreements to resell			—			—			33
Management fees charged subsidiaries			32,989			35,253			38,483
Net gains (losses) on securities transactions			50			657			(675	)
Other			1,481			1,468			2,755
Total income			268,525			254,746			248,202
Expense
Salaries and employee benefits			32,378			34,302			36,834
Professional fees			3,033			3,890			3,385
Data processing fees paid to affiliates			12,678			10,708			11,337
Other			7,695			5,782			7,288
Total expense			55,784			54,682			58,844
Income tax expense (benefit)			(7,600	)		(6,460	)		(6,952	)
Net income		$	220,341		$	206,524		$	196,310

Condensed Statements of Cash Flows

		For the Years Ended December 31
(In thousands)		2004			2003			2002
Operating Activities
Net income		$	220,341		$	206,524		$	196,310
Adjustments to reconcile net income to net cash provided by operating activities:
	(Earnings) losses of consolidated subsidiaries, net of dividends		22,786			(18,756	)		(4,128	)
	Other adjustments, net		1,880			830			617
Net cash provided by operating activities			245,007			188,598			192,799
Investing Activities
Increase in investment in subsidiaries, net			(146	)		(13,897	)		(696	)
(Increase) decrease in receivables from subsidiaries, net			3,199			2,547			(8,469	)
Proceeds from sales of investment securities			580			12,275			554
Proceeds from maturities of investment securities			99,260			390,070			802,031
Purchases of investment securities			(130,493	)		(410,064	)		(885,592	)
Net decrease in securities purchased under agreements to resell			—			—			14,816
Net purchases of equipment			(29	)		(2,778	)		(31	)
Net cash used in investing activities			(27,629	)		(21,847	)		(77,387	)
Financing Activities
Purchases of treasury stock			(173,829	)		(125,724	)		(83,879	)
Issuance under stock purchase, option and benefit plans			15,281			8,682			8,916
Net tax benefit related to stock option plans			2,305			1,524			1,668
Cash dividends paid on common stock			(61,135	)		(51,266	)		(42,185	)
Net cash used in financing activities			(217,378	)		(166,784	)		(115,480	)
Decrease in cash			—			(33	)		(68	)
Cash at beginning of year			26			59			127
Cash at end of year		$	26		$	26		$	59

81

      Dividends paid by the Parent were substantially provided from subsidiary bank dividends. The subsidiary banks may distribute dividends without prior regulatory approval that do not exceed the sum of net income for the current year and retained net income for the preceding two years, subject to maintenance of minimum capital requirements. The Parent charges fees to its subsidiaries for management services provided, which are allocated to the subsidiaries based primarily on total average assets. The Parent makes advances to non-banking subsidiaries and subsidiary bank holding companies. Advances are made to the Parent by subsidiary bank holding companies for investment in temporary liquid securities. Interest on such advances is based on market rates.

      In 2003, the Parent paid $2,500,000 related to the Vaughn acquisition and contributed $10,000,000 to this new subsidiary for the reduction of third-party debt. In 2004, subsidiary banks distributed dividends in excess of current year net income, while remaining within regulatory capital guidelines.

      At December 31, 2004, the Parent had a $20,000,000 line of credit for general corporate purposes with a subsidiary bank. During 2004, the Parent had no borrowings from the subsidiary bank.

      Available for sale investment securities held by the Parent consist of short-term investments in mutual funds, U.S. government and federal agency securities, mortgage-backed securities, common stock and commercial paper. The fair value of these securities included an unrealized gain of $32,826,000 at December 31, 2004. The corresponding net of tax unrealized gain included in stockholders’ equity was $20,350,000. Also included in stockholders’ equity was the unrealized net of tax gain in fair value of investment securities held by subsidiaries, which amounted to $19,220,000 at December 31, 2004.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

      There were no changes in or disagreements with accountants on accounting and financial disclosure.

Item 9a.  CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

      Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting

      Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

      Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which follows.

82

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Commerce Bancshares, Inc.:

      We have audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that Commerce Bancshares, Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on COSO.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 25, 2005 expressed an unqualified opinion on those consolidated financial statements.

Kansas City, Missouri

February 25, 2005

83

Item 9b.  OTHER INFORMATION

      None

PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by Items 401 and 405 of Regulation S-K regarding executive officers is included in Part I under the caption “Executive Officers of the Registrant” and under the captions “Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Audit Committee”, and “Audit Committee Report” in the definitive proxy statement, which is incorporated herein by reference.

      The Company’s financial officer code of ethics for the chief executive officer and senior financial officers of the Company is available at www.commercebank.com. Amendments to, and waivers of, the code of ethics are posted on this website.

Item 11.  EXECUTIVE COMPENSATION

      The information required by Item 402 of Regulation S-K regarding executive compensation is included under the captions “Executive Compensation”, “Retirement Benefits”, “Compensation Committee Report on Executive Compensation”, and “Compensation Committee Interlocks and Insider Participation” in the definitive proxy statement, which is incorporated herein by reference.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

      The information required by Items 201(d) and 403 of Regulation S-K is covered under the captions “Equity Compensation Plan” and “Voting Securities and Ownership Thereof by Certain Beneficial Owners and Management” in the definitive proxy statement, which is incorporated herein by reference.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by Item 404 of Regulation S-K is covered under the caption “Election of Directors” in the definitive proxy statement, which is incorporated herein by reference.

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information required is included under the caption “Approval of Independent Auditors” in the definitive proxy statement, which is incorporated herein by reference.

84

PART IV

Item 15.  EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

      (a) The following documents are filed as a part of this report:

		Page
(1)	Financial Statements:
	Consolidated Balance Sheets		48
	Consolidated Statements of Income		49
	Consolidated Statements of Cash Flows		50
	Consolidated Statements of Stockholders’ Equity		51
	Notes to Consolidated Financial Statements		52
	Summary of Quarterly Statements of Income		46
(2)	Financial Statements Schedules:
	All schedules are omitted as such information is inapplicable or is included in the financial statements.

      (b) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits (pages E-1 through E-2.)

85

SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) 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 this 25th day of February 2005.

Commerce Bancshares, Inc.

By:  /s/ J. Daniel Stinnett

J. Daniel Stinnett

Vice President and Secretary

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 25th day of February 2005.

By:  /s/ Jeffery D. Aberdeen

Jeffery D. Aberdeen

Controller

(Chief Accounting Officer)

By:  /s/ A. Bayard Clark

A. Bayard Clark

Chief Financial Officer

David W. Kemper
	(Chief Executive Officer)
Giorgio Balzer
John R. Capps
W. Thomas Grant II
James B. Hebenstreit
Jonathan M. Kemper		A majority of the Board of Directors*
Thomas A. McDonnell
Terry O. Meek
Benjamin F. Rassieur III
Andrew C. Taylor
Mary Ann Van Lokeren
Robert H. West

*  David W. Kemper, Director and Chief Executive Officer, and the other Directors of Registrant listed, executed a power of attorney authorizing J. Daniel Stinnett, their attorney-in-fact, to sign this report on their behalf.

By:  /s/ J. Daniel Stinnett

J. Daniel Stinnett

Attorney-in-Fact

86

INDEX TO EXHIBITS

       3 – Articles of Incorporation and By-Laws:

      (a) Restated Articles of Incorporation, as amended, were filed in quarterly report on Form 10-Q dated August 10, 1999, and the same are hereby incorporated by reference.

      (b) Restated By-Laws were filed in quarterly report on Form 10-Q dated May 8, 2001, and the same are hereby incorporated by reference.

      4 – Instruments defining the rights of security holders, including indentures:

      (a) Pursuant to paragraph (b)(4)(iii) of Item 601 Regulation S-K, Registrant will furnish to the Commission upon request copies of long-term debt instruments.

      (b) Shareholder Rights Plan contained in an Amended and Restated Rights Agreement was filed on Form 8-A12G/ A dated June 7, 1996, and the same is hereby incorporated by reference.

      (c) Form of Rights Certificate and Election to Exercise was filed on Form 8-A12G/ A dated June 7, 1996, and the same is hereby incorporated by reference.

      (d) Form of Certificate of Designation of Preferred Stock was filed on Form 8-A12G/ A dated June 7, 1996, and the same is hereby incorporated by reference.

      10 – Material Contracts (Each of the following is a management contract or compensatory plan arrangement):

      (a) Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of July 31, 1998 was filed in quarterly report on Form 10-Q dated May 10, 2002, and the same is hereby incorporated by reference.

      (b) Commerce Bancshares, Inc. Incentive Stock Option Plan of 1986 amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference.

      (c) Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option Plan amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference.

      (d) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors amended and restated as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference.

      (e) Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan amended and restated as of April 2001 was filed in quarterly report on Form 10-Q dated May 8, 2001, and the same is hereby incorporated by reference.

      (f) Commerce Executive Retirement Plan amended and restated as of January 1, 2005 was filed in current report on Form 8-K dated January 4, 2005, and the same is hereby incorporated by reference.

      (g) Commerce Bancshares, Inc. Restricted Stock Plan amended and restated as of April 21, 2004 was filed in quarterly report on Form 10-Q dated August 4, 2004, and the same is hereby incorporated by reference.

      (h) Form of Severance Agreement between Commerce Bancshares, Inc. and certain of its executive officers entered into as of October 4, 1996 was filed in quarterly report on Form 10-Q dated November 8, 1996, and the same is hereby incorporated by reference.

      (i) Trust Agreement for the Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of January 1, 2001 was filed in quarterly report on Form 10-Q dated May 8, 2001, and the same is hereby incorporated by reference.

E-1

      (j) Commerce Bancshares, Inc. 2005 Compensatory Arrangement with CEO and Named Executive Officers was filed in current report on Form 8-K dated February 3, 2005, and the same is hereby incorporated by reference.

      21 – Subsidiaries of the Registrant

      23 – Consent of Independent Registered Public Accounting Firm

      24 – Power of Attorney

      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

E-2 EX-21 2 c91980exv21.htm SUBSIDIARIES OF THE REGISTRANT

Exhibit 21

      The consolidated subsidiaries of the Registrant at February 1, 2005 were as follows:

						State or Other
						Jurisdiction of
Name					Location	Incorporation
CBI-Kansas, Inc.					Kansas City, MO		Kansas
	Commerce Bank, National Association				Kansas City, MO		United States
		Commerce Brokerage Services, Inc.			Clayton, MO		Missouri
		Commerce Financial Corp.			Clayton, MO		Missouri
		Clayton Holdings, LLC			Kansas City, MO		Missouri
			Clayton Financial Corp.		Clayton, MO		Missouri
				Clayton Realty Corp.	Clayton, MO		Missouri
		Illinois Financial, LLC			Peoria, IL		Delaware
			Illinois Realty, LLC		Peoria, IL		Delaware
		Commerce Insurance Services, Inc.			Fenton, MO		Missouri
		Commerce Investment Advisors, Inc.			Kansas City, MO		Missouri
		CBI Leasing, Inc.			Kansas City, MO		Missouri
		Tower Redevelopment Corporation			Kansas City, MO		Missouri
	Shawnee State, Inc.				Shawnee, KS		Kansas
	Commerce Bank, National Association				Wichita, KS		United States
		21st Street Redevelopment Company, L.C.			Wichita, KS		Kansas
Commerce Bank, National Association					Omaha, NE		United States
CBI Insurance Company					Kansas City, MO		Arizona
CFB Partners II, LLC					Kansas City, MO		Missouri
CFB Partners III, LLC					Clayton, MO		Delaware
CFB Venture Fund I, Inc.					Clayton, MO		Missouri
CFB Venture Fund II, L.P.					Kansas City, MO		Missouri
CFB Venture Fund III, L.P.					Clayton, MO		Delaware
Capital for Business, Inc.					Kansas City, MO		Missouri
Commerce Mortgage Corp.					Kansas City, MO		Missouri
Mid-America Financial Corp.					Kansas City, MO		Missouri
UBI Financial Services, Inc.					Wichita, KS		Kansas

EX-21

exv21

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Commerce Bancshares, Inc.:

       We consent to the incorporation by reference in the Registration Statements No. 33-28294, No. 33-82692, No. 33-8075, No. 33-78344, No. 33-61499, No. 33-61501 and No. 333-14651, each on Form S-8 of Commerce Bancshares, Inc. of our reports dated February 25, 2005, with respect to the consolidated balance sheets of Commerce Bancshares, Inc. and Subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004 and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004 annual report on Form 10-K of Commerce Bancshares, Inc.

KPMG LLP

Kansas City, Missouri

February 25, 2005

EX-24

Exhibit 24

POWER OF ATTORNEY

       KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby appoint J. Daniel Stinnett and Jeffery D. Aberdeen, or either of them, attorney for the undersigned to sign the Annual Report on Form 10-K of Commerce Bancshares, Inc., for the fiscal year ended December 31, 2004, together with any and all amendments which might be required from time to time with respect thereto, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, with respect to Commerce Bancshares, Inc., with full power and authority in either of said attorneys to do and perform in the name of and on behalf of the undersigned every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person.

      IN WITNESS WHEREOF, the undersigned have executed these presents this 28th day of January 2005.

/s/ Giorgio Balzer

/s/ John R. Capps

/s/ W. Thomas Grant II

/s/ James B. Hebenstreit

/s/ David W. Kemper

/s/ Jonathan M. Kemper

/s/ Thomas A. McDonnell

/s/ Terry O. Meek

/s/ Benjamin F. Rassieur III

/s/ Andrew C. Taylor

/s/ Mary Ann Van Lokeren

/s/ Robert H. West

EX-31.1

Exhibit 31.1

CERTIFICATION

I, David W. Kemper, certify that:

      1. I have reviewed this annual report on Form 10-K of Commerce Bancshares, Inc.;

      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

      (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

      (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ David W. Kemper

David W. Kemper

Chairman, President and

Chief Executive Officer

February 25, 2005

EX-31.2

Exhibit 31.2

CERTIFICATION

I, A. Bayard Clark, certify that:

      1. I have reviewed this annual report on Form 10-K of Commerce Bancshares, Inc.;

      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

      (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

      (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ A. Bayard Clark

A. Bayard Clark

Executive Vice President, Treasurer

and Chief Financial Officer

February 25, 2005

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

       In connection with the Annual Report of Commerce Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David W. Kemper and A. Bayard Clark, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, hereby certify, pursuant to 18 U.S.C. § 1350 as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:

      (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David W. Kemper

David W. Kemper

Chief Executive Officer

/s/ A. Bayard Clark

A. Bayard Clark

Chief Financial Officer

February 25, 2005

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.