if I connect to another HDMI source
Another HDMI source, such as a Blu-ray player? You connected another video source and got the same letter-boxing (top/bottom black bars)? This means your TV is altering the aspect ratio. Unless you meant you connected Contour to another HDMI port on your TV. Perhaps swap the HDMI cable.
There is no "Reset" on Contour. Did you Restart or Refresh?
"Prefer Best Available Resolution" is the number of horizontal and vertical pixels on a screen. This should be "On."
Cox didn't go 720p. The networks decide the format of their programming. Some networks are SD, 720p or 1080i. Contour "de-interlaces" 1080i to 1080p. If it's an HD program, however, the aspect ratio is 16:9.
Commercials don't letter-box...unless they're being crafty to get your attention. I haven't seen this, yet.
I think the issue is with your TV. Check its setting for Closed Caption or Extended Data Services (XDS) being enabled. Again, try another HDMI cable.
What's the make/model of your TV?