SECURITIES AND EXCHANGE COMMISSION

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Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                                     

Commission File No. 0-2989

COMMERCE BANCSHARES, INC.

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(Exact name of registrant as specified in its charter)

Missouri (State of Incorporation)	43-0889454 (IRS Employer Identification No.)
1000 Walnut, Kansas City, MO (Address of principal executive offices)	64106 (Zip Code)
(816) 234-2000 (Registrant’s telephone number, including area code)

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

Yes  X  No

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

Yes  X  No

As of April 29, 2005, the registrant had outstanding 66,815,760 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q

INDEX
			Page
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004		3
		Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004		4
		Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2005 and 2004		5
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004		6
		Notes to Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations		11
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		26
	Item 4.	Controls and Procedures		27
Part II	Other Information
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27
	Item 6.	Exhibits		27
Signatures				28
Index to Exhibits				29

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PART I: FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

		March 31			December 31
		2005			2004
		(Unaudited)
		(In thousands)
ASSETS
Loans, net of unearned income		$	8,406,110		$	8,305,359
Allowance for loan losses			(130,960	)		(132,394	)
Net loans			8,275,150			8,172,965
Investment securities:
	Available for sale		4,442,210			4,754,941
	Trading		13,154			9,403
	Non-marketable		74,965			73,024
Total investment securities			4,530,329			4,837,368
Federal funds sold and securities purchased under agreements to resell			179,107			68,905
Cash and due from banks			502,362			585,815
Land, buildings and equipment, net			368,512			336,446
Goodwill			48,522			48,522
Other intangible assets, net			118			499
Other assets			199,172			199,848
Total assets		$	14,103,272		$	14,250,368
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
	Non-interest bearing demand	$	1,347,994		$	1,943,771
	Savings, interest checking and money market		6,552,169			6,072,115
	Time open and C.D.’s of less than $100,000		1,700,853			1,656,002
	Time open and C.D.’s of $100,000 and over		1,084,407			762,421
Total deposits			10,685,423			10,434,309
Federal funds purchased and securities sold under agreements to repurchase			1,566,914			1,913,878
Other borrowings			388,328			389,542
Other liabilities			91,038			85,759
Total liabilities			12,731,703			12,823,488
Stockholders’ equity:
	Preferred stock, $1 par value Authorized and unissued 2,000,000 shares		—			—
	Common stock, $5 par value Authorized 100,000,000 shares; issued 69,409,882 shares		347,049			347,049
	Capital surplus		389,945			392,156
	Retained earnings		737,006			703,293
	Treasury stock of 2,153,807 shares in 2005 and 1,072,098 shares in 2004, at cost		(103,696	)		(51,646	)
	Other		(4,153	)		(3,542	)
	Accumulated other comprehensive income		5,418			39,570
Total stockholders’ equity			1,371,569			1,426,880
Total liabilities and stockholders’ equity		$	14,103,272		$	14,250,368

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

		For the Three Months
		Ended March 31
(In thousands, except per share data)		2005		2004
		(Unaudited)
INTEREST INCOME
Interest and fees on loans		$	118,523	$	104,009
Interest on investment securities			41,746		44,592
Interest on federal funds sold and securities purchased under agreements to resell			584		186
Total interest income			160,853		148,787
INTEREST EXPENSE
Interest on deposits:
	Savings, interest checking and money market		10,457		6,172
	Time open and C.D.’s of less than $100,000		10,392		9,899
	Time open and C.D.’s of $100,000 and over		6,352		3,265
Interest on federal funds purchased and securities sold under agreements to repurchase			9,418		4,456
Interest on other borrowings			2,757		2,011
Total interest expense			39,376		25,803
Net interest income			121,477		122,984
Provision for loan losses			2,368		10,250
Net interest income after provision for loan losses			119,109		112,734
NON-INTEREST INCOME
Trust fees			16,394		16,164
Deposit account charges and other fees			24,301		25,522
Bank card transaction fees			19,507		17,600
Trading account profits and commissions			2,614		3,826
Consumer brokerage services			2,497		2,354
Loan fees and sales			3,440		3,653
Net gains on securities transactions			3,612		8,951
Other			8,326		7,899
Total non-interest income			80,691		85,969
NON-INTEREST EXPENSE
Salaries and employee benefits			70,180		68,016
Net occupancy			9,778		10,166
Equipment			5,691		5,858
Supplies and communication			8,213		7,944
Data processing and software			11,455		10,630
Marketing			3,862		3,704
Intangible assets amortization			381		436
Other			14,362		12,158
Total non-interest expense			123,922		118,912
Income before income taxes			75,878		79,791
Less income taxes			26,032		28,467
Net income		$	49,846	$	51,324
Net income per share — basic		$	.74	$	.72
Net income per share — diluted		$	.73	$	.71

See accompanying notes to consolidated financial statements.

4

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																	Accumulated
	Number of																Other
(Dollars in thousands,	Shares		Common		Capital			Retained			Treasury						Comprehensive
except per share data)	Issued		Stock		Surplus			Earnings			Stock			Other			Income			Total
	(Unaudited)
Balance January 1, 2005		69,409,882	$	347,049	$	392,156		$	703,293		$	(51,646	)	$	(3,542	)	$	39,570		$	1,426,880
Net income									49,846												49,846
Change in unrealized gain on available for sale securities																		(34,152	)		(34,152	)
Total comprehensive income																					15,694
Purchase of treasury stock												(60,830	)								(60,830	)
Issuance of stock under purchase and option plans						(4,835	)					7,885									3,050
Net tax benefit related to stock option plans						135															135
Stock based compensation						2,500									273						2,773
Issuance of stock under restricted stock award plan						(11	)					895			(884	)					—
Cash dividends paid ($.240 per share)									(16,133	)											(16,133	)
Balance March 31, 2005		69,409,882	$	347,049	$	389,945		$	737,006		$	(103,696	)	$	(4,153	)	$	5,418		$	1,371,569
Balance January 1, 2004		68,636,548	$	343,183	$	359,300		$	707,136		$	(29,573	)	$	(1,963	)	$	72,871		$	1,450,954
Net income									51,324												51,324
Change in unrealized gain on available for sale securities																		30,367			30,367
Total comprehensive income																					81,691
Purchase of treasury stock												(41,421	)								(41,421	)
Issuance of stock under purchase and option plans						(5,770	)					10,495									4,725
Net tax benefit related to stock option plans						625															625
Stock based compensation						2,512									211						2,723
Issuance of stock under restricted stock award plan						65						1,301			(1,366	)					—
Cash dividends paid ($.219 per share)									(15,501	)											(15,501	)
Balance March 31, 2004		68,636,548	$	343,183	$	356,732		$	742,959		$	(59,198	)	$	(3,118	)	$	103,238		$	1,483,796

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Three Months
		Ended March 31
(In thousands)		2005			2004
		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	49,846		$	51,324
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		2,368			10,250
	Provision for depreciation and amortization		10,456			10,213
	Amortization of investment security premiums, net		6,951			9,458
	Net gains on securities transactions(A)		(3,612	)		(8,951	)
	Net gains on sales of mortgage loans held for sale		(261	)		(290	)
	Originations of mortgage loans held for sale		(23,152	)		(16,971	)
	Proceeds from sales of mortgage loans held for sale		16,677			18,463
	Net increase in trading securities		(12,292	)		(7,938	)
	Stock based compensation		2,773			2,723
	Decrease in interest receivable		6,249			5,166
	Increase (decrease) in interest payable		3,115			(302	)
	Increase in income taxes payable		26,047			29,867
	Other changes, net		(4,727	)		(19,306	)
Net cash provided by operating activities			80,438			83,706
INVESTING ACTIVITIES:
Proceeds from sales of investment securities(A)			926,069			152,118
Proceeds from maturities/pay downs of investment securities(A)			304,611			375,056
Purchases of investment securities(A)			(978,281	)		(832,630	)
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell			(110,202	)		36,475
Net increase in loans			(97,982	)		(17,502	)
Purchases of land, buildings and equipment			(32,922	)		(8,597	)
Sales of land, buildings and equipment			404			311
Net cash provided by (used in) investing activities			11,697			(294,769	)
FINANCING ACTIVITIES:
Net decrease in non-interest bearing demand, savings, interest checking and money market deposits			(120,512	)		(58,784	)
Net increase in time open and C.D.’s			366,837			106,442
Net decrease in federal funds purchased and securities sold under agreements to repurchase			(346,964	)		(37,879	)
Additional long-term borrowings			—			100,000
Repayment of long-term borrowings			(1,171	)		(2,723	)
Net decrease in short-term borrowings			—			(1,620	)
Purchases of treasury stock			(60,830	)		(41,421	)
Issuance of stock under purchase and option plans			3,050			4,725
Net tax benefit related to stock option plans			135			625
Cash dividends paid on common stock			(16,133	)		(15,501	)
Net cash provided by (used in) financing activities			(175,588	)		53,864
Decrease in cash and cash equivalents			(83,453	)		(157,199	)
Cash and cash equivalents at beginning of year			585,815			567,123
Cash and cash equivalents at March 31		$	502,362		$	409,924
(A) Available for sale and non-marketable securities
Income tax payments, net of refunds		$	444		$	268
Interest paid on deposits and borrowings		$	36,261		$	26,105

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005 (Unaudited)

1.  Principles of Consolidation and Presentation

      The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). The consolidated statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2004 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2005 are not necessarily indicative of results to be attained for the full year or any other interim periods.

      The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2004 Annual Report on Form 10-K.

2.  Allowance for Loan Losses

      The following is a summary of the allowance for loan losses for the three months ended March 31, 2005 and 2004.

(In thousands)		2005		2004
Balance, January 1		$	132,394	$	135,221
Additions:
	Provision for loan losses		2,368		10,250
Total additions			2,368		10,250
Deductions:
	Loan losses		9,500		16,476
	Less recoveries on loans		5,698		4,097
Net loan losses			3,802		12,379
Balance, March 31		$	130,960	$	133,092

3.  Investment Securities

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

		March 31		December 31
(In thousands)		2005		2004
Available for sale
	U.S. government and federal agency obligations	$	1,210,988	$	1,746,365
	State and municipal obligations		65,882		66,389
	Mortgage-backed securities		1,788,232		1,336,982
	Other asset-backed securities		1,103,938		1,323,999
	Other debt securities		47,778		50,240
	Equity securities		225,392		230,966
Trading			13,154		9,403
Non-marketable			74,965		73,024
Total investment securities		$	4,530,329	$	4,837,368

      U.S. government and federal agency obligations included government-sponsored agencies of $1,001,983,000 at March 31, 2005 and $1,344,298,000 at December 31, 2004.

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      Equity securities included short-term investments in money market mutual funds of $158,567,000 at March 31, 2005 and $187,705,000 at December 31, 2004. Equity securities also included $22,132,000 in FNMA preferred stock at March 31, 2005.

      Non-marketable securities primarily included securities held for debt and regulatory purposes, which amounted to $50,682,000 and $50,703,000 at March 31, 2005 and December 31, 2004, respectively, in addition to venture capital and private equity investments, which amounted to $24,218,000 and $22,278,000 at the respective dates.

4.  Intangible Assets

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

		March 31, 2005					December 31, 2004
		Gross					Gross
		Carrying		Accumulated			Carrying		Accumulated
(In thousands)		Amount		Amortization			Amount		Amortization
Amortized intangible assets:
	Core deposit premium	$	47,930	$	(47,867	)	$	47,930	$	(47,487	)
	Mortgage servicing rights		538		(483	)		539		(483	)
Total		$	48,468	$	(48,350	)	$	48,469	$	(47,970	)

      The Company does not have any intangible assets that are not currently being amortized. Aggregate amortization expense on intangible assets was $381,000 and $436,000, respectively, for the three month periods ended March 31, 2005 and 2004. Estimated annual amortization expense for the years 2005 through 2009 is as follows.

(In thousands)
2005	$	463
2006		20
2007		20
2008		20
2009		20

5.  Guarantees

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

      At March 31, 2005, a liability in the amount of $4,164,000, representing the carrying value of the guarantee obligations associated with the standby letters of credit mentioned above, was recorded in accordance with Financial Accounting Standards Board Interpretation 45. This amount will be amortized into income over the life of the commitment. The contract amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $331,440,000 at March 31, 2005.

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      The Company guarantees payments to holders of certain trust preferred securities issued by a wholly owned grantor trust. The securities are due in 2030 and may be redeemed beginning in 2010. The maximum potential future payments guaranteed by the Company, which include future interest and principal payments through maturity, was approximately $14,845,000 at March 31, 2005. At March 31, 2005, the Company had a recorded liability of $4,036,000 in principal and accrued interest to date, representing amounts owed to the security holders.

6. Pension

      The amount of net pension cost for the three months ended March 31, 2005 and 2004 is as follows:

	For the
	Three Months
	Ended March 31
(In thousands)	2005			2004
Service cost – benefits earned during the period	$	365		$	1,251
Interest cost on projected benefit obligation		1,170			1,135
Expected return on plan assets		(1,705	)		(1,592	)
Amortization of prior service cost		—			(25	)
Amortization of unrecognized net loss		280			316
Net periodic pension cost	$	110		$	1,085

      As discussed in the Company’s 2004 Annual Report on Form 10-K, effective January 1, 2005, substantially all benefits accrued under the Company’s pension plans were frozen. During the first quarter of 2005, the Company made no funding contributions to its defined benefit pension plan, and made minimal funding contributions to its supplemental executive retirement plan, which carries no segregated assets. The Company does not expect to make any further contributions, other than those related to the supplemental executive retirement plan, during the remainder of 2005.

7.  Common Stock

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

	For the
	Three Months
	Ended March 31
(In thousands)	2005		2004
Weighted average common shares outstanding		67,641		71,089
Net effect of the assumed exercise of stock options — based on the treasury stock method using average market price for the respective periods		941		1,128
		68,582		72,217

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8.  Comprehensive Income (Loss)

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

	For the
	Three Months
	Ended March 31
(In thousands)	2005			2004
Unrealized holding gains (losses)	$	(52,255	)	$	57,221
Reclassification adjustment for gains included in net income		(2,829	)		(8,242	)
Net unrealized gains (losses) on securities		(55,084	)		48,979
Income tax expense (benefit)		(20,932	)		18,612
Other comprehensive income (loss)	$	(34,152	)	$	30,367

9.  Segments

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

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

						Money			Segment		Other/			Consolidated
(In thousands)	Consumer		Commercial			Management			Totals		Elimination			Totals
Three Months Ended March 31, 2005:
Net interest income after provision for loan losses	$	32,356	$	58,587		$	(4,221	)	$	86,722	$	32,387		$	119,109
Cost of funds allocation		37,917		(9,619	)		6,319			34,617		(34,617	)		—
Non-interest income		38,315		17,651			20,136			76,102		4,589			80,691
Total net revenue		108,588		66,619			22,234			197,441		2,359			199,800
Non-interest expense		69,320		34,553			14,854			118,727		5,195			123,922
Income before income taxes	$	39,268	$	32,066		$	7,380		$	78,714	$	(2,836	)	$	75,878
Three Months Ended March 31, 2004:
Net interest income after provision for loan losses	$	32,025	$	41,035		$	(1,705	)	$	71,355	$	41,379		$	112,734
Cost of funds allocation		27,289		(3,474	)		3,510			27,325		(27,325	)		—
Non-interest income		36,041		18,481			20,770			75,292		10,677			85,969
Total net revenue		95,355		56,042			22,575			173,972		24,731			198,703
Non-interest expense		66,415		33,173			15,128			114,716		4,196			118,912
Income before income taxes	$	28,940	$	22,869		$	7,447		$	59,256	$	20,535		$	79,791

      The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies, which have been developed to reflect the underlying economics of the businesses. The policies address the methodologies applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the

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

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

10.  Derivative Instruments

      The Company uses derivative instruments, on a limited basis, primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. At March 31, 2005, the Company had interest rate swaps with a total notional amount of $57,958,000, of which three swaps with a notional amount of $21,952,000 were designated as fair value hedges of certain fixed rate loans. The remaining swaps are matching stand alone instruments, whose fair values offset each other with no impact to income. Through its International Department, the Company enters into foreign exchange contracts consisting mainly of contracts to purchase or deliver foreign currency transactions for customers at a specific future date. Also, mortgage loan commitments and forward sales contracts are derived from the Company’s mortgage banking operation in which fixed rate personal real estate loans are originated and sold to other institutions.

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

		March 31, 2005							December 31, 2004
				Positive		Negative					Positive		Negative
		Notional		Fair		Fair			Notional		Fair		Fair
(In thousands)		Amount		Value		Value			Amount		Value		Value
Interest rate swaps		$	57,958	$	515	$	(776	)	$	49,963	$	649	$	(1,273	)
Foreign exchange contracts:
	Forward contracts		9,984		95		(31	)		13,031		171		(173	)
	Options written/purchased		2,853		—		—			2,853		12		(12	)
Mortgage loan commitments			8,745		1		(55	)		8,319		1		(13	)
Mortgage loan forward sale contracts			19,230		244		(1	)		15,728		39		(4	)
Total		$	98,770	$	855	$	(863	)	$	89,894	$	872	$	(1,475	)

11.  Income Taxes

      For the first quarter of 2005 income tax expense amounted to $26,032,000, compared to $28,467,000 in the first quarter of 2004. The effective income tax rate for the Company was 34.3% in the current quarter compared to 35.7% in the same quarter last year. The Company has income tax benefits totaling approximately $13,705,000 associated with corporate reorganization activities, which will not be recognized until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the third quarter of 2005. It is not expected that material tax benefits of this nature will continue beyond 2005.

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

      The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company’s 2004 Annual Report on Form  10-K. Results of operations for the three month period ended March 31, 2005 are not necessarily indicative of results to be attained for any other period.

11

Forward Looking Information

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

Critical Accounting Policies

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

      The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, 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 when determining allowances for business, lease, construction and business real estate loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal loans, including personal mortgage, credit card and consumer loans, are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Further discussion of the methodologies used in establishing the allowance is provided in the Provision and Allowance for Loan Losses section of this discussion.

      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

12

periods. The Company takes into account the plan asset mix, funding obligations, and expert opinions in determining the various rates used to estimate pension expense. The Company considers the Moody’s AA corporate bond yields and other market interest rates in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

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

Selected Financial Data

		Three Months
		Ended March 31
		2005			2004
Per Share Data
	Net income — basic	$	.74		$	.72
	Net income — diluted		.73			.71
	Cash dividends		.240			.219
	Book value		20.42			20.99
	Market price		48.20			45.44
Selected Ratios
(Based on average balance sheets)
	Loans to deposits		79.45	%		79.87	%
	Non-interest bearing deposits to total deposits		7.34			12.10
	Equity to loans		16.85			17.99
	Equity to deposits		13.38			14.37
	Equity to total assets		10.01			10.32
	Return on total assets		1.44			1.45
	Return on total stockholders’ equity		14.35			14.09
(Based on end-of-period data)
	Efficiency ratio*		62.22			59.24
	Tier I capital ratio		12.09			12.12
	Total capital ratio		13.45			13.47
	Leverage ratio		9.46			9.53

*  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)

13

Results of Operations

Summary

	Three Months Ended						Increase
	March 31						(decrease)
(Dollars in thousands)	2005			2004			Amount			Percent
Net interest income	$	121,477		$	122,984		$	(1,507	)		(1.2	)%
Provision for loan losses		(2,368	)		(10,250	)		(7,882	)		(76.9	)
Non-interest income		80,691			85,969			(5,278	)		(6.1	)
Non-interest expense		(123,922	)		(118,912	)		5,010			4.2
Income taxes		(26,032	)		(28,467	)		(2,435	)		(8.6	)
Net income	$	49,846		$	51,324		$	(1,478	)		(2.9	)%

      For the quarter ended March 31, 2005, net income amounted to $49.8 million, a decrease of $1.5 million, or 2.9%, from the first quarter of the previous year. The annualized return on assets was 1.44% and the annualized return on equity totaled 14.4%. For the quarter, the efficiency ratio amounted to 62.2%. The decrease in net income from the first quarter of last year resulted mainly from a decrease in gains on investment securities sales, lower net interest income and higher expenses. However, higher expenses were offset by a decrease in the provision for loan losses. Diluted earnings per share was $.73, an increase of 2.8% over $.71 per share in the first quarter of 2004.

Net Interest Income

      The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income

			Three Months Ended March 31,
			2005 vs. 2004
			Change due to
			Average			Average
(In thousands)			Volume			Rate			Total
Interest income, fully taxable equivalent basis:
Loans			$	3,042		$	11,518		$	14,560
Investment securities:
	U.S. government and federal agency securities			(3,492	)		(750	)		(4,242	)
	State and municipal obligations			(90	)		(89	)		(179	)
	Mortgage and asset-backed securities			24			362			386
	Other securities			304			837			1,141
		Total interest on investment securities		(3,254	)		360			(2,894	)
Federal funds sold and securities purchased under agreements to resell				75			323			398
Total interest income				(137	)		12,201			12,064
Interest expense:
Deposits:
	Savings			9			(3	)		6
	Interest checking and money market			219			4,060			4,279
	Time open & C.D.’s of less than $100,000			(494	)		987			493
	Time open & C.D.’s of $100,000 and over			906			2,181			3,087
		Total interest on deposits		640			7,225			7,865
Federal funds purchased and securities sold under agreements to repurchase				(549	)		5,511			4,962
Other borrowings				(219	)		1,034			815
Total interest expense				(128	)		13,770			13,642
Net interest income, fully taxable equivalent basis			$	(9	)	$	(1,569	)	$	(1,578	)

14

     Net interest income for the first quarter of 2005 was $121.5 million, a 1.2% decrease from the first quarter of 2004. The decline in net interest income was mainly the result of higher rates on deposits and short-term borrowings and a reduction in average balances of investment securities, the total of which reduced net interest income by $16.0 million. Offsetting these reductions to net interest income were the effects of higher average rates earned on loans and growth in average loan balances, which had the combined effect of increasing net interest income by $14.6 million. The net interest rate margin was 3.79% for the first quarter of 2005, compared to 3.78% in the first quarter of 2004 and 3.80% in the fourth quarter of 2004.

      Total interest income increased $12.1 million, or 8.1%, over the first quarter of 2004. The increase was the result of a 61 basis point increase in rates earned on loans and a $216.4 million increase in average loan balances. The growth in average loans occurred mainly due to increases of $141.5 million in business, $54.4 million in credit card, and $55.3 million in home equity loans. This growth was partially offset by decreases in interest income due to a reduction in average balances of investment securities. Compared to the first quarter of 2004, investment securities declined on average by $347.7 million mainly due to sales of U.S. government agency, asset-backed, and inflation-indexed treasury securities. The average tax equivalent yield on interest earning assets was 5.02% in the first quarter of 2005 compared to 4.57% in the first quarter of 2004.

      Total interest expense increased $13.6 million, or 52.6% compared to the first quarter of 2004, due mainly to a 26 basis point increase in average rates paid on interest bearing deposits, with the largest effects shown in the Company’s Premium Money Market deposit accounts as well as short-term certificates of deposit. Interest expense also increased because of higher average rates paid on short-term borrowings of federal funds purchased and repurchase agreements. Average rates paid on all interest bearing liabilities increased to 1.36% in the first quarter of 2005 compared to .91% in the first quarter of 2004.

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

Non-Interest Income

	Three Months						Increase
	Ended March 31						(decrease)
(Dollars in thousands)	2005			2004			Amount			Percent
Trust fees	$	16,394		$	16,164		$	230			1.4	%
Deposit account charges and other fees		24,301			25,522			(1,221	)		(4.8	)
Bank card transaction fees		19,507			17,600			1,907			10.8
Trading accounts profits and commissions		2,614			3,826			(1,212	)		(31.7	)
Consumer brokerage services		2,497			2,354			143			6.1
Loan fees and sales		3,440			3,653			(213	)		(5.8	)
Net gains on securities transactions		3,612			8,951			(5,339	)		(59.6	)
Other		8,326			7,899			427			5.4
Total non-interest income	$	80,691		$	85,969		$	(5,278	)		(6.1	)%
Non-interest income as a % of total revenue*		39.9	%		41.1	%
Total revenue per full-time equivalent employee	$	41.8		$	43.1
* Total revenue is calculated as net interest income plus non-interest income.

      For the first quarter of 2005, total non-interest income amounted to $80.7 million compared with $86.0 million in the same quarter last year, or a decrease of 6.1%. This decrease resulted primarily from lower net securities gains. Excluding the effect of net securities gains, non-interest income grew slightly. Other declines in non-interest income occurred in deposit account fees and bond trading income, which were partly offset by higher bank card fees. Deposit account fees in the first quarter of 2005 declined by 4.8% from the same quarter last year as a result of lower commercial cash management fees, which were down $1.5 million this year. Since many of these services are paid for with compensating balances, rising

15

interest rates have made deposits more valuable thus lowering fees paid by customers for these services. Bond trading income decreased 31.7% due to lower demand by business and correspondent bank customers. Bank card fees for the quarter increased 10.8% over the same period last year, primarily resulting from a 17.8% increase in debit card interchange fees and a 13.5% increase in credit card interchange fees, reflecting continued strong payment systems transaction volumes. Trust fees for the quarter showed modest growth of 1.4% compared to the same period last year, while revenues from brokerage activities increased by 6.1%. Loan fees and sales revenue declined 5.8% mainly due to a seasonal decline in mortgage loan originations during the quarter, which resulted in fewer sales to the secondary market. Loan fees and sales also included gains on the sales of student loans, which totaled $2.3 million in the first quarters of both 2005 and 2004. Other non-interest income for the quarter included higher revenues from insurance activities.

      Net securities gains in the first quarter of 2005 amounted to $3.6 million compared with net securities gains of $9.0 million in the same period last year. During the first quarter of 2005, the Company undertook initiatives to review and re-position its investment securities portfolio to address such things as concentration, duration and interest rate risk. Consequently, during the first quarter of 2005, the Company sold available for sale investment securities totaling $922.3 million. These sales were comprised mainly of $322.5 million in U.S. government agency securities, $338.1 million in asset-backed securities, and $170.0 million in inflation-indexed treasury securities. During the first quarter of 2004 a net gain of $9.0 million was recognized, resulting principally from the sale of $115.3 million in inflation-indexed treasury securities and $26.2 million in mortgage-backed securities.

Non-Interest Expense

	Three Months				Increase
	Ended March 31				(decrease)
(Dollars in thousands)	2005		2004		Amount			Percent
Salaries and employee benefits	$	70,180	$	68,016	$	2,164			3.2	%
Net occupancy		9,778		10,166		(388	)		(3.8	)
Equipment		5,691		5,858		(167	)		(2.9	)
Supplies and communication		8,213		7,944		269			3.4
Data processing and software		11,455		10,630		825			7.8
Marketing		3,862		3,704		158			4.3
Intangible assets amortization		381		436		(55	)		(12.6	)
Other		14,362		12,158		2,204			18.1
Total non-interest expense	$	123,922	$	118,912	$	5,010			4.2	%

      Non-interest expense for the first quarter of 2005 amounted to $123.9 million, an increase of $5.0 million, or 4.2%, compared with $118.9 million recorded in the first quarter of last year. Compared with the first quarter of last year, salaries and benefits expense increased 3.2% mainly due to normal merit increases. Full-time equivalent employees totaled 4,836 and 4,847 at March 31, 2005 and 2004, respectively. Data processing and software costs increased 7.8% mainly as a result of higher bank card processing costs (related to the higher bank card revenues). Costs also increased for supplies and communication and marketing, while equipment and occupancy expenses decreased somewhat. Other non-interest expense increased $2.2 million, or 18.1%, over the same quarter last year primarily due to increases in operating losses, professional fees and minority interest expense relating to venture capital gains reported by a 53%-owned affiliate.

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Provision and Allowance for Loan Losses

		Three Months Ended
		Mar. 31			Mar. 31			Dec. 31
(Dollars in thousands)		2005			2004			2004
Provision for loan losses		$	2,368		$	10,250		$	7,215
Net loan charge-offs (recoveries):
	Business		(2,796	)		5,502			128
	Credit card		4,622			4,934			4,983
	Personal banking*		1,948			1,972			2,251
	Real estate		(56	)		102			453
	Overdrafts		84			(131	)		369
Total net loan charge-offs		$	3,802		$	12,379		$	8,184
Annualized total net charge-offs as a percentage of average loans			.18	%		.61	%		.40	%

*  Includes consumer, student and home equity loans

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

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

      Net loan charge-offs were $3.8 million in the first three months of 2005, an $8.6 million decrease from the same period in the prior year. Total annualized net charge-offs for the first three months of 2005 were .18% of total average loans, compared to .40% in the fourth quarter of 2004 and .61% in the first quarter of 2004. The decrease in net loan charge-offs compared to the first quarter of 2004 resulted principally from a $6.0 million charge-off of a single business loan in the prior year coupled with a $1.4 million recovery on this same loan during the current year. Compared to the fourth quarter of 2004, net charge-offs were down this quarter due to an increase in business loan recoveries, as well as lower personal and credit card loan net charge-offs.

      For the first quarter of 2005, net charge-offs on average credit card loans amounted to 3.09%, compared with 3.44% in the fourth quarter of 2004 and 3.60% in the first quarter of 2004. Personal banking loan net charge-offs amounted to .39% of average personal banking loans this quarter compared to .46% in the fourth quarter of 2004 and .42% in the first quarter of 2004.

      The provision for loan losses was $2.4 million in the first three months of 2005, compared to $10.3 million in the same period in 2004 and $7.2 million in the fourth quarter of 2004. The allowance for loan losses at March 31, 2005 was $131.0 million, or 1.56% of total outstanding loans, and represented 756% of total non-performing loans. The Company considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at March 31, 2005.

17

Risk Elements of Loan Portfolio

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

	March 31			March 31			December 31
(Dollars in thousands)	2005			2004			2004
Non-accrual loans	$	17,333		$	33,292		$	17,618
Foreclosed real estate		1,262			2,593			1,157
Total non-performing assets	$	18,595		$	35,885		$	18,775
Non-performing assets to total loans		.22	%		.44	%		.23	%
Non-performing assets to total assets		.13	%		.25	%		.13	%
Loans past due 90 days and still accruing interest	$	15,972		$	14,772		$	13,067

      Non-accrual loans, which are also considered impaired, totaled $17.3 million at March 31, 2005, and declined $16.0 million from March 31, 2004 and $285 thousand from December 31, 2004. The decline from March 31, 2004 was the result of decreases in non-accrual business and lease-related loans, which occurred in 2004. The decline from the previous year end resulted mainly from the sale of a $2.1 million lease loan, partly offset by an increase in business real estate non-accrual loans. Lease-related loans comprised 24.5% of the March 31, 2005 non-accrual loan total, with the remainder primarily relating to business and business real estate loans.

      Total loans past due 90 days or more and still accruing interest amounted to $16.0 million as of March 31, 2005, which was $1.2 million higher than at March 31, 2004 and $2.9 million higher than at December 31, 2004. The increase in the past due totals at March 31, 2005 compared to the previous year end resulted from growth of $4.7 million in business and business real estate delinquencies, partly offset by declines in personal real estate, consumer and home equity delinquencies.

      In addition to the non-accrual loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. These loans totaled $68.9 million at March 31, 2005 compared with $63.9 million at December 31, 2004. 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.

Income Taxes

      Income tax expense was $26.0 million in the first quarter of 2005, compared to $19.7 million in the fourth quarter of 2004 and $28.5 million in the first quarter of 2004. The effective income tax rate on income from operations was 34.3% in the first quarter of 2005, compared with 27.2% in the fourth quarter of 2004 and 35.7% in the first quarter of 2004.

      The Company recognized tax benefits pertaining to certain corporate tax reorganization initiatives of $5.0 million in the fourth quarter of 2004. The Company has additional income tax benefits totaling approximately $13.7 million associated with other corporate reorganization activities, which will not be recognized into income until certain conditions are satisfied. It is projected that such conditions may be resolved as early as the third quarter of 2005. It is not expected that material tax benefits of this nature will continue beyond 2005.

18

Financial Condition

Balance Sheet

      Total assets of the Company were $14.1 billion at March 31, 2005 compared to $14.3 billion at December 31, 2004. Earning assets at March 31, 2005 were $13.1 billion, consisting of 64% loans and 35% investments, compared to $13.2 billion at December 31, 2004.

      During the first quarter of 2005, average loans increased $168.5 million, or 2.1%, compared with the previous quarter, and were up $216.4 million, or 2.7%, compared to the same period last year. Compared to the fourth quarter of 2004, average business (includes commercial, lease and tax-free), construction, and business real estate loans grew by $57.0 million, $22.3 million, and $2.4 million, respectively. As a result of lower levels of mortgage loan originations during the quarter, personal real estate loans declined by $4.8 million. Moderate growth in the economy during the current quarter helped increase loan demand for business and construction loans and improved line of credit usage. Average student loans increased $65.8 million due to seasonal borrowing activity, while credit card loans showed continued growth over the previous quarter. Average consumer banking loans declined from the previous quarter by $12.3 million as a result of weaker demand for auto lending, offset by continued growth in marine and recreational vehicle loans.

      Available for sale investment securities, excluding fair value adjustments, decreased on average $203.3 million, or 4.3%, this quarter compared with the previous quarter. During the current quarter, the Company undertook initiatives to review and re-position its investment securities portfolio to address such things as concentration, duration and interest rate risk. Accordingly, during the current quarter the Company sold available for sale investment securities totaling $922.3 million, comprised mainly of U.S. government agency ($322.5 million), asset-backed ($338.1 million), and inflation-indexed treasury ($170.0 million) securities. Purchases of investment securities during the current quarter totaled $975.8 million, and consisted mainly of mortgage-backed ($653.1 million), asset-backed ($258.6 million) and treasury and agency ($55.7 million) securities.

      Total average deposits grew by $157.3 million, or 1.5%, during the first quarter of 2005 compared to the fourth quarter of last year, and were up 3.2% compared to the same period last year. At the beginning of the current quarter, the Company re-characterized certain additional demand and interest checking accounts as money market accounts, in accordance with Federal Reserve rules. As a result, an additional $530 million of average demand deposits and $344 million of average interest checking accounts were reclassified as money market accounts during the first quarter of 2005. Exclusive of these reclassifications, the increase over the fourth quarter of last year was the result of growth in personal demand, interest checking and short-term jumbo certificates of deposit.

      During the first quarter of 2005, average borrowings decreased $137.9 million from the previous quarter, primarily due to a decrease in federal funds purchased of $113.6 million and a decrease in repurchase agreements of $23.0 million.

Liquidity and Capital Resources

Liquidity Management

      The Company’s most liquid assets are comprised of available for sale marketable investment securities, federal funds sold, and securities purchased under agreements to resell (resale agreements). Federal funds sold and resale agreements totaled $179.1 million at March 31, 2005. These investments normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available for sale investment portfolio was $4.4 billion at March 31, 2005, and included an unrealized gain of $8.7 million. The portfolio includes maturities of approximately $824 million which come due during the next 12 months, which offer substantial resources to meet either new loan demand or reductions in the Company’s deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowing

19

capacity at the Federal Reserve. At March 31, 2005, total investment securities pledged for these purposes comprised 45% of the total investment portfolio, leaving $2.5 billion of unpledged securities.

		March 31		March 31		December 31
(In thousands)		2005		2004		2004
Liquid assets:
	Federal funds sold	$	179,107	$	71,645	$	68,905
	Securities purchased under agreements to resell		—		—		—
	Available for sale investment securities		4,442,210		5,307,223		4,754,941
	Total	$	4,621,317	$	5,378,868	$	4,823,846

      Liquidity is also available from the Company’s large base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At March 31, 2005, such deposits totaled $7.9 billion and represented 74% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships. Time open and certificates of deposit of $100,000 and over totaled $1.1 billion at March 31, 2005. These accounts are normally considered more volatile and higher costing, but comprise just 10.1% of total deposits at March 31, 2005.

		March 31		March 31		December 31
(In thousands)		2005		2004		2004
Core deposit base:
	Non-interest bearing demand	$	1,347,994	$	1,697,680	$	1,943,771
	Interest checking		438,419		614,175		820,027
	Savings and money market		6,113,750		5,424,887		5,252,088
	Total	$	7,900,163	$	7,736,742	$	8,015,886

      Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, and longer-term debt. Federal funds purchased and securities sold under agreements to repurchase are generally borrowed overnight, and amounted to $1.6 billion at March 31, 2005. Federal funds purchased are obtained mainly from upstream correspondent banks with whom the Company maintains approved lines of credit, while securities sold under agreements to repurchase are comprised of non-insured customer funds secured by a portion of the Company’s investment portfolio. The Company’s long-term debt is relatively small compared to the Company’s overall liability position. It is comprised mainly of borrowings from the Federal Home Loan Bank (FHLB), which totaled $366.9 million at March 31, 2005. These borrowings were a combination of fixed and floating rates with maturities of less than four years. Other outstanding long-term borrowings relate mainly to the Company’s leasing and venture capital operations.

		March 31		March 31		December 31
(In thousands)		2005		2004		2004
Borrowings:
	Federal funds purchased	$	1,225,070	$	1,268,170	$	1,557,635
	Securities sold under agreements to repurchase		341,844		799,995		356,243
	FHLB advances		366,886		467,042		366,926
	Subordinated debentures		4,000		4,000		4,000
	Other long-term debt		17,442		27,241		18,616
	Other short-term debt		—		1,182		—
	Total	$	1,955,242	$	2,567,630	$	2,303,420

      In addition to those mentioned above, several other sources of liquidity are available. The Company believes that its sound debt ratings of A-1 from Standard & Poor’s and Prime-1 from Moody’s would enable

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its commercial paper to be readily marketable should the need arise. No commercial paper has been issued or outstanding during the past ten years. In addition, the Company has temporary borrowing capacity at the Federal Reserve discount window, for which it has pledged $299.0 million in loans and $461.5 million in investment securities. Also, because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed debt offerings. Future financing could also include the issuance of common or preferred stock.

      Cash and cash equivalents (defined as “Cash and due from banks” on the accompanying balance sheets) was $502.4 million at March 31, 2005 compared to $585.8 million at December 31, 2004. The $83.5 million decline resulted from changes in the various cash flows produced by the operating, investing and financing activities of the Company, as shown in the accompanying statement of cash flows for March 31, 2005. The cash flow provided by operating activities is considered a very stable source of funds and consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $80.4 million during the current quarter. Investing activities, consisting mainly of purchases, sales and maturities of available for sale securities, changes in levels of overnight investments in federal funds sold and resale agreements, and changes in the level of the loan portfolio, provided cash of $11.7 million. Most of the cash inflow was due to $1.2 billion in proceeds from sales and maturities of investment securities, partly offset by $978.3 million in purchases. Financing activities used cash of $175.6 million, mainly due to a $347.0 million decrease in overnight borrowings. In addition, cash of $60.8 million was required by the Company’s treasury stock repurchase program. These cash outflows were partly offset by a $246.3 million increase in deposits. Future short-term liquidity needs arising from daily operations are not expected to vary significantly, and the Company believes it will be able to meet these cash flow needs.

      While cash requirements for the purchase of bank facilities and equipment are relatively insignificant compared to the Company’s other investment activities, these purchases amounted to $32.9 million in the first quarter of 2005. The purchases included the acquisition of a multi-story building and garage in downtown Kansas City, construction costs for a new bank facility in Wichita, Kansas, and payments related to a deposit imaging system. As mentioned in the 2004 Annual Report on Form 10-K, the Kansas City office building and garage was 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 of $18 million was based on an independent outside appraisal and received the approval of the Company’s Board of Directors and independent Audit Committee.

Capital Management

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

							Minimum Ratios
							for Well-
	March 31			December 31			Capitalized
(Dollars in thousands)	2005			2004			Banks
Risk-adjusted assets	$	10,934,008		$	10,993,542
Tier I capital		1,321,487			1,342,275
Total capital		1,470,757			1,492,009
Tier I capital ratio		12.09	%		12.21	%		6.00	%
Total capital ratio		13.45	%		13.57	%		10.00	%
Leverage ratio		9.46	%		9.60	%		5.00	%

      Commerce maintains a treasury stock buyback program, and in October 2004 was authorized by the Board of Directors to repurchase up to 5,000,000 shares of its common stock. The Company has routinely used these shares to fund the Company’s annual 5% stock dividend and various employee benefit programs. During the quarter ended March 31, 2005 the Company purchased 1,264,287 shares of treasury

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stock at an average cost of $48.11 per share. At March 31, 2005, 2,466,782 shares remained available for purchase under the current Board authorization.

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

Commitments and Off-Balance Sheet Arrangements

      Various commitments and contingent liabilities arise in the normal course of business which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at March 31, 2005 totaled $6.6 billion (including approximately $3.2 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts amounted to $331.4 million and $22.2 million, respectively, at March 31, 2005. Since many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the balance sheet, amounted to $4.2 million at March 31, 2005. Management does not anticipate any material losses arising from commitments and contingent liabilities and believes there are no material commitments to extend credit that represent risks of an unusual nature.

      The Company has additional funding commitments arising from investments in several private equity concerns, classified as non-marketable investment securities, and low-income housing partnerships. These unfunded commitments amounted to $6.1 million at March 31, 2005.

      As mentioned above, an affiliate bank purchased a multi-story building and garage in downtown Kansas City in February 2005. The bank occupies office space in this building and as a result of the purchase, the Company’s operating lease commitments in 2005, 2006 and 2007 are expected to decline by $533 thousand, $639 thousand and $373 thousand, respectively.

Segment Results

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

		Three Months Ended
		March 31					Increase (decrease)
(Dollars in thousands)		2005			2004		Amount			Percent
Consumer		$	39,268		$	28,940	$	10,328			35.7	%
Commercial			32,066			22,869		9,197			40.2
Money management			7,380			7,447		(67	)		(.9	)
	Total segments		78,714			59,256		19,458			32.8
Other/elimination			(2,836	)		20,535		(23,371	)		(113.8	)
Income before income taxes		$	75,878		$	79,791	$	(3,913	)		(4.9	)%

      For the three months ended March 31, 2005, income before income taxes for the Consumer segment increased $10.3 million, or 35.7%, mainly due to a $10.6 million increase in allocated funding credits, coupled with a 6.3% increase in non-interest income. The increase in allocated funding credits resulted from the higher interest rate environment which assigns a greater value, and thus income, to customer deposits in this segment. The increase in non-interest income resulted mainly from increases in bank card transaction fees, overdraft charges, brokerage and insurance revenues. Non-interest expense grew 4.4% over the previous year mainly due to higher salary expense, loan servicing costs, assigned overhead costs, and expense related to brokerage and insurance activities. These increases were partly offset by declines in check processing fees and data processing and network expense.

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      For the three months ended March 31, 2005, income before taxes for the Commercial segment increased $9.2 million, or 40.2%, compared to the same period in the previous year. Most of the increase was due to higher loan recoveries (used in assigning credit costs to the segment) and higher net interest income. Included in net interest income were higher allocated funding credits, which increased for the same reasons as mentioned in the Consumer segment above. Also, while interest on loans grew by $9.6 million, most of this growth was offset by higher assigned funding costs. Net loan recoveries were $2.8 million in the first three months of 2005, compared to net charge-offs of $5.6 million in the first three months of 2004. Non-interest income decreased 4.5% as a result of declines in commercial cash management fees and lease-related income, partly offset by higher commercial bank card fee income. Non-interest expense increased 4.2%, largely due to higher loan servicing costs and additional provision for off-balance sheet credit exposures.

      Money Management segment pre-tax profitability for the three months ended March 31, 2005 declined slightly from the previous year mainly due to lower non-interest income, which was down 3.1%. The decline in non-interest income was mainly due to lower bond trading income offset by only slightly higher trust fee income in this segment. Net interest income, which increased 16.2% over the prior year, was higher mainly due to higher assigned credit for funds due to rising interest rates as described above. Non-interest expense decreased by 1.8% due mainly to lower salaries and benefits expense.

      As shown in the table above, the pre-tax profitability in the Other/ elimination category decreased $23.4 million in the first three months of 2005 compared to the same period in 2004. This decrease was mainly the result of lower net investment securities gains, coupled with higher cost of fund charges assigned to this category.

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

      In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-03, “Accounting for Certain Loans and Debt Securities Acquired in a Transfer.” SOP 03-03 addresses the accounting for acquired loans that show evidence of having deteriorated in terms of credit quality since their origination (i.e. impaired loans). SOP 03-03 requires acquired loans to be recorded at their fair value defined as the present value of future cash flows. SOP 03-03 prohibits the carryover of an allowance for loan loss on certain acquired loans as credit losses are considered in the future cash flows assessment. SOP 03-03 is effective for loans that are acquired in fiscal years beginning after December 15, 2004. The Company will evaluate the applicability of

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

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AVERAGE BALANCE SHEETS – AVERAGE RATES AND YIELDS

Three Months Ended March 31, 2005 and 2004

		First Quarter 2005								First Quarter 2004
					Interest		Avg. Rates						Interest		Avg. Rates
		Average			Income/		Earned/			Average			Income/		Earned/
(Dollars in thousands)		Balance			Expense		Paid			Balance			Expense		Paid
ASSETS:
Loans:
	Business(A)	$	2,186,828		$	27,140		5.03	%	$	2,045,287		$	20,320		4.00	%
	Real estate — construction		442,471			5,664		5.19			426,182			4,236		4.00
	Real estate — business		1,758,141			24,083		5.56			1,881,209			22,750		4.86
	Real estate — personal		1,335,024			17,447		5.30			1,331,014			17,368		5.25
	Consumer		1,193,063			18,556		6.31			1,151,911			18,751		6.55
	Home equity		412,356			5,560		5.47			357,103			3,886		4.38
	Student		410,020			4,355		4.31			382,057			2,477		2.61
	Credit card		606,406			15,965		10.68			551,957			14,422		10.51
	Overdrafts		16,297			—		—			17,477			—		—
Total loans			8,360,606			118,770		5.76			8,144,197			104,210		5.15
Investment securities:
	U.S. government & federal agency		1,374,440			11,343		3.35			1,775,670			15,585		3.53
	State & municipal obligations(A)		64,506			705		4.43			71,833			884		4.95
	Mortgage and asset-backed securities		2,847,744			27,196		3.87			2,845,192			26,810		3.79
	Trading securities		11,369			102		3.66			8,433			77		3.67
	Other marketable securities(A)		217,628			1,680		3.13			164,431			786		1.92
	Non-marketable securities		76,853			1,074		5.67			74,651			852		4.59
Total investment securities			4,592,540			42,100		3.72			4,940,210			44,994		3.66
Federal funds sold and securities purchased under agreements to resell			84,987			584		2.79			60,398			186		1.24
Total interest earning assets			13,038,133			161,454		5.02			13,144,805			149,390		4.57
Less allowance for loan losses			(131,872	)							(133,105	)
Unrealized gain on investment securities			47,966								130,786
Cash and due from banks			560,346								529,522
Land, buildings and equipment, net			353,732								336,881
Other assets			202,080								184,711
Total assets		$	14,070,385							$	14,193,600
LIABILITIES AND EQUITY:
Interest bearing deposits:
	Savings	$	403,844			310		.31		$	392,690			304		.31
	Interest checking and money market		6,702,221			10,147		.61			6,110,565			5,868		.39
	Time open & C.D.’s of less than $100,000		1,664,823			10,392		2.53			1,715,038			9,899		2.32
	Time open & C.D.’s of $100,000 and over		979,011			6,352		2.63			745,101			3,265		1.76
Total interest bearing deposits			9,749,899			27,201		1.13			8,963,394			19,336		.87
Borrowings:
	Federal funds purchased and securities sold under agreements to repurchase		1,655,050			9,418		2.31			1,947,207			4,456		.92
	Other borrowings(B)		388,771			2,841		2.96			441,019			2,026		1.85
Total borrowings			2,043,821			12,259		2.43			2,388,226			6,482		1.09
Total interest bearing liabilities			11,793,720			39,460		1.36	%		11,351,620			25,818		.91	%
Non-interest bearing demand deposits			772,869								1,233,919
Other liabilities			95,382								143,146
Stockholders’ equity			1,408,414								1,464,915
Total liabilities and equity		$	14,070,385							$	14,193,600
Net interest margin (T/ E)					$	121,994							$	123,572
Net yield on interest earning assets								3.79	%							3.78	%

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

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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

	March 31, 2005						March 31, 2004						December 31, 2004
	$ Change in			% Change in			$ Change in			% Change in			$ Change in			% Change in
	Net Interest			Net Interest			Net Interest			Net Interest			Net Interest			Net Interest
(Dollars in millions)	Income			Income			Income			Income			Income			Income
200 basis points rising	$	(8.4	)		(1.69	)%	$	(9.6	)		(1.96	)%	$	(8.7	)		(1.78	)%
100 basis points rising		(3.8	)		(.77	)		(3.3	)		(.67	)		(4.3	)		(.88	)
100 basis points falling		1.4			.30			(.6	)		(.13	)		2.6			.53

      The table shown above reflects a slight decrease in the exposure of the Company’s net interest income to rising rates during the first quarter of 2005. As of March 31, 2005, under a 200 basis point rising rate scenario, net interest income is expected to decrease by $8.4 million compared with a decline of $8.7 million at December 31, 2004 and a decline of $9.6 million at March 31, 2004. Under a 100 basis point increase, as of March 31, 2005 net interest income is expected to decline by $3.8 million compared with declines of $4.3 million at December 31, 2004 and $3.3 million at March 31, 2004. The Company’s exposure to declining rates during the current quarter was increased somewhat, as under a 100 basis point falling rate scenario net interest income would increase by $1.4 million, a reduction of $1.2 million from estimated amounts at December 31, 2004.

      During the current quarter, the Federal Reserve continued its monetary policies and raised its target federal funds rate by .25% in both February and March. Virtually all of the Company’s loan products realized higher rates, as many of the Company’s variable rate loans re-priced higher. During the current quarter, average rates earned on the Company’s loan portfolio increased by 29 basis points. Additionally, average loans grew by $168.5 million over the previous quarter, providing greater interest income but also higher levels of earning assets tied to shorter maturities and variable rates. At the same time, the Company undertook initiatives described on page 16 to review and re-position its investment securities portfolio to address such things as concentration, duration and interest rate risk. As a result, securities purchases and sales of over $920 million were effected, and through normal maturities the Company’s average investment securities portfolio was lowered $203.0 million Also during the quarter, average deposits increased by $157.3 million, mostly due to higher personal demand, interest checking and short-term jumbo certificates of deposit, and average borrowings declined by $137.9 million mainly due to lower federal funds purchased.

      As a result of these changes during the quarter, as rates rise the combination of lower balances in fixed rate investment securities and higher loan levels should afford the Company greater re-pricing opportunities. Also, lower levels of overnight borrowings and growth in non-maturity deposits should help limit growth in interest expense. These two factors are mainly responsible for the Company’s overall decreased risk to rising interest rates.

      The Company performs monthly simulations modeling interest rate risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations included in the Company’s 2004 Annual Report on Form 10-K.

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Item 4.  CONTROLS AND PROCEDURES

      An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2005. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were not any significant changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

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

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

	Total				Total Number of		Maximum Number
	Number		Average		Shares Purchased		that May Yet Be
	of Shares		Price Paid		as part of Publicly		Purchased Under the
Period	Purchased		per Share		Announced Program		Program
January 1 – 31, 2005		474,294	$	47.31		474,294		3,256,775
February 1 – 28, 2005		787,568	$	48.60		787,568		2,469,207
March 1 – 31, 2005		2,425	$	47.88		2,425		2,466,782
Total		1,264,287	$	48.11		1,264,287		2,466,782

      On October 22, 2004, the Company announced that its Board of Directors had approved the additional purchase of up to 4,296,580 shares of Company common stock. This, coupled with the shares available under the prior authorization, provided the Company with authority to purchase up to 5,000,000 shares.

Item 6.  EXHIBITS

      See Index to Exhibits

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SIGNATURES

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

Commerce Bancshares, Inc.

By  /s/ J. Daniel Stinnett

J. Daniel Stinnett

Vice President & Secretary

Date: May 6, 2005

By  /s/ Jeffery D. Aberdeen

Jeffery D. Aberdeen

Controller

(Chief Accounting Officer)

Date: May 6, 2005

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INDEX TO EXHIBITS

       10.1 – Commerce Executive Retirement Plan, amended and restated effective January 1, 2005, was filed on Form 8-K dated January 4, 2005, and the same is hereby incorporated by reference.

      10.2 – A description of Executive Officer Compensation Arrangements was filed on Form 8-K dated February 3, 2005, and the same is hereby incorporated by reference.

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

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

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

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