##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Period Ended March 31, 2005
    
    Commission File No. 1-31272
 (COMPANSS BANCSHARES LOGO) (Exact name of registrant as specified in its charter)
 Delaware
    
    63-0593897(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 15 South 20th Street
Birmingham, Alabama 35233 
  (205) 297-3000 
  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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act): Yes þ No o Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date. Class
    
    Outstanding at April 30, 2005Common Stock, $2 Par Value
    
    123,931,618




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Changes In Shareholders Equity for the Three Months Ended March 31, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2
    
    Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    23Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    32Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 5
    
    Other Information
    
    
    32Item 6
    
    Exhibits
    
    
    32EX-10.(y) EXECUTIVE OFFICER COMPENSATION ARRANGEMENTSEX-10.(cc) FORM OF STOCK OPTION AGREEMENT FOR NON-EMPLOYEEE DIRECTORSEX-31(a) SECTION 302 CERTIFICATION OF THE CEOEX-31(b) SECTION 302 CERTIFICATION OF THE CFOEX-32(a) SECTION 906 CERTIFICATION OF THE CEOEX-32(b) SECTION 906 CERTIFICATION OF THE CFO
 - 2 -




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1  Financial Statements
 COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Consolidated Balance Sheets
   March 31, 2005
    
    
    December 31, 2004AssetsCash and due from banks
    
    $
    832,009
    
    
    $
    585,679Federal funds sold and securities purchased
under agreements to resell
    
    
    29,841
    
    
    
    46,948Trading account assets
    
    
    66,046
    
    
    
    60,156Investment securities available for sale
    
    
    4,557,676
    
    
    
    4,398,184Investment securities held to maturity (fair value of
$2,612,343 and $2,768,334 for 2005 and 2004, respectively)
    
    
    2,637,111
    
    
    
    2,767,099Loans
    
    
    19,167,027
    
    
    
    18,856,922Allowance for loan losses
    
    
    (246,565
    )
    
    
    (258,339
    )Net loans
    
    
    18,920,462
    
    
    
    18,598,583Premises and equipment, net
    
    
    537,450
    
    
    
    537,466Bank owned life insurance
    
    
    428,182
    
    
    
    423,942Goodwill
    
    
    315,882
    
    
    
    302,619Other assets
    
    
    470,572
    
    
    
    463,952Total assets
    
    $
    28,795,231
    
    
    $
    28,184,628Liabilities and Shareholders EquityDeposits:Noninterest bearing
    
    $
    5,728,329
    
    
    $
    5,476,140Interest bearing
    
    
    11,909,445
    
    
    
    11,563,011Total deposits
    
    
    17,637,774
    
    
    
    17,039,151Federal funds purchased and securities sold under
agreements to repurchase
    
    
    4,261,366
    
    
    
    4,532,004Other short-term borrowings
    
    
    125,148
    
    
    
    175,771FHLB and other borrowings
    
    
    4,424,287
    
    
    
    4,140,972Accrued expenses and other liabilities
    
    
    264,113
    
    
    
    251,477Total liabilities
    
    
    26,712,688
    
    
    
    26,139,375Shareholders equity:Preferred stock (25,000,000 shares authorized; Issued  none)
    
    
    
    
    
    
    Common stock of $2 par value:Authorized  300,000,000 shares;
Issued  133,167,709 shares in 2005 and
132,903,225 shares in 2004
    
    
    266,335
    
    
    
    265,806Treasury stock, at cost (9,341,046 shares in 2005 and
9,639,194 shares in 2004)
    
    
    (323,040
    )
    
    
    (333,351
    )Surplus
    
    
    272,249
    
    
    
    264,400Loans to finance stock purchases
    
    
    (1,054
    )
    
    
    (1,056
    )Unearned restricted stock
    
    
    (9,453
    )
    
    
    (10,624
    )Accumulated other comprehensive loss
    
    
    (60,468
    )
    
    
    (23,376
    )Retained earnings
    
    
    1,937,974
    
    
    
    1,883,454Total shareholders equity
    
    
    2,082,543
    
    
    
    2,045,253Total liabilities and shareholders equity
    
    $
    28,795,231
    
    
    $
    28,184,628
 See accompanying Notes to Consolidated Financial Statements (Unaudited) - 3 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Consolidated Statements of Income
   Three Months EndedMarch 31,2005
    
    
    2004Interest income:Interest and fees on loans
    
    $
    269,283
    
    
    $
    231,807Interest on investment securities available for sale
    
    
    46,161
    
    
    
    44,012Interest on investment securities held to maturity
    
    
    32,123
    
    
    
    34,568Interest on federal funds sold and securities purchased under
agreements to resell
    
    
    213
    
    
    
    152Interest on trading account assets
    
    
    172
    
    
    
    140Total interest income
    
    
    347,952
    
    
    
    310,679Interest expense:Interest on deposits
    
    
    48,651
    
    
    
    36,035Interest on federal funds purchased and securities sold under
agreements to repurchase
    
    
    26,192
    
    
    
    10,112Interest on other short-term borrowings
    
    
    532
    
    
    
    202Interest on FHLB and other borrowings
    
    
    36,301
    
    
    
    41,469Total interest expense
    
    
    111,676
    
    
    
    87,818Net interest income
    
    
    236,276
    
    
    
    222,861Provision for loan losses
    
    
    20,273
    
    
    
    24,345Net interest income after provision for loan losses
    
    
    216,003
    
    
    
    198,516Noninterest income:Service charges on deposit accounts
    
    
    62,649
    
    
    
    64,328Card and merchant processing fees
    
    
    21,330
    
    
    
    16,569Insurance commissions
    
    
    15,724
    
    
    
    14,587Retail investment sales
    
    
    8,781
    
    
    
    7,558Asset management fees
    
    
    7,061
    
    
    
    5,735Corporate and correspondent investment sales
    
    
    4,120
    
    
    
    5,963Bank owned life insurance
    
    
    4,240
    
    
    
    4,172Investment securities gains, net
    
    
    
    
    
    
    2,207Gain on sale of business
    
    
    4,791
    
    
    
    Other
    
    
    25,865
    
    
    
    20,792Total noninterest income
    
    
    154,561
    
    
    
    141,911Noninterest expense:Salaries, benefits and commissions
    
    
    121,344
    
    
    
    118,137Equipment
    
    
    20,059
    
    
    
    18,353Net occupancy
    
    
    16,652
    
    
    
    16,478Professional services
    
    
    14,080
    
    
    
    13,142Marketing
    
    
    11,885
    
    
    
    8,669Communications
    
    
    5,476
    
    
    
    5,523Amortization of intangibles
    
    
    1,527
    
    
    
    1,626Merger and integration
    
    
    234
    
    
    
    245Other
    
    
    30,615
    
    
    
    27,974Total noninterest expense
    
    
    221,872
    
    
    
    210,147Net income before income tax expense
    
    
    148,692
    
    
    
    130,280Income tax expense
    
    
    49,936
    
    
    
    44,033Net income
    
    $
    98,756
    
    
    $
    86,247Basic earnings per share
    
    $
    0.80
    
    
    $
    0.71Basic weighted average shares outstanding
    
    
    123,286
    
    
    
    122,064Diluted earnings per share
    
    $
    0.78
    
    
    $
    0.69Diluted weighted average shares outstanding
    
    
    126,388
    
    
    
    125,146Dividends per share
    
    $
    0.3500
    
    
    $
    0.3125
 See accompanying Notes to Consolidated Financial Statements (Unaudited) - 4 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Consolidated Statements of Changes In Shareholders Equity
 
 AccumulatedOther
    
    
    
    
    
    
    TotalCommon
    
    
    Treasury
    
    
    
    
    
    
    Retained
    
    
    Comprehensive
    
    
    
    
    
    
    Shareholders
    
    
    ComprehensiveStock
    
    
    Stock
    
    
    Surplus
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Other
    
    
    Equity
    
    
    IncomeBalance, December 31, 2003
    
    $
    263,138
    
    
    $
    (317,669
    )
    
    $
    227,404
    
    
    $
    1,668,998
    
    
    $
    37,306
    
    
    $
    (7,294
    )
    
    $
    1,871,883Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,247
    
    
    
    
    
    
    
    
    
    
    
    86,247
    
    
    $
    86,247Net change in unrealized gains  on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,603
    
    
    
    
    
    
    
    13,603
    
    
    
    13,603Net change in accumulated gains  on
cash-flow hedging instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,165
    
    
    
    
    
    
    
    1,165
    
    
    
    1,165Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    101,015Common dividends declared ($0.3125 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,781
    )
    
    
    
    
    
    
    
    
    
    
    (38,781
    )Exercise of stock options and other issuances
    
    
    1,206
    
    
    
    
    
    
    
    11,742
    
    
    
    (760
    )
    
    
    
    
    
    
    
    
    
    
    12,188Cancellations of restricted stock, net of issuances
    
    
    (41
    )
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    
    
    
    
    (71
    )
    
    
    (511
    )Advances on loans to finance stock purchases,
net of repayments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (248
    )
    
    
    (248
    )Issuance of treasury stock for acquisitions and
stock options
    
    
    
    
    
    
    5,970
    
    
    
    913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,883Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690
    
    
    
    690Purchase of treasury stock
    
    
    
    
    
    
    (25,929
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,929
    )Balance, March 31, 2004
    
    $
    264,303
    
    
    $
    (337,628
    )
    
    $
    239,660
    
    
    $
    1,715,704
    
    
    $
    52,074
    
    
    $
    (6,923
    )
    
    $
    1,927,190Balance, December 31, 2004
    
    $
    265,806
    
    
    $
    (333,351
    )
    
    $
    264,400
    
    
    $
    1,883,454
    
    
    $
    (23,376
    )
    
    $
    (11,680
    )
    
    $
    2,045,253Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,756
    
    
    
    
    
    
    
    
    
    
    
    98,756
    
    
    $
    98,756Net change in unrealized losses on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,824
    )
    
    
    
    
    
    
    (36,824
    )
    
    
    (36,824
    )Net change in accumulated losses on
cash-flow hedging instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (268
    )
    
    
    
    
    
    
    (268
    )
    
    
    (268
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    61,664Common dividends declared ($0.3500 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,338
    )
    
    
    
    
    
    
    
    
    
    
    (43,338
    )Exercise of stock options and other issuances
    
    
    528
    
    
    
    
    
    
    
    4,657
    
    
    
    (898
    )
    
    
    
    
    
    
    
    
    
    
    4,287Issuances of restricted stock, net of cancellations
    
    
    1
    
    
    
    
    
    
    
    (215
    )
    
    
    
    
    
    
    
    
    
    
    214
    
    
    
    Repayments on loans to finance stock purchases,
net of advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Issuance of treasury stock for acquisitions and
stock options
    
    
    
    
    
    
    11,842
    
    
    
    3,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,249Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    957
    
    
    
    957Purchase
of treasury stock
    
    
    
    
    
    
    (1,531
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,531
    )Balance, March 31, 2005
    
    $
    266,335
    
    
    $
    (323,040
    )
    
    $
    272,249
    
    
    $
    1,937,974
    
    
    $
    (60,468
    )
    
    $
    (10,507
    )
    
    $
    2,082,543
 See accompanying Notes to Consolidated Financial Statements (Unaudited) - 5 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows
 
 Three Months EndedMarch 31,2005
    
    
    2004Operating Activities:Net income
    
    $
    98,756
    
    
    $
    86,247Adjustments to reconcile net income to cash provided by operations:Depreciation and amortization
    
    
    25,147
    
    
    
    26,350Accretion of discount and loan fees
    
    
    (2,499
    )
    
    
    (6,184
    )Provision for loan losses
    
    
    20,273
    
    
    
    24,345Net change in trading account assets
    
    
    (5,878
    )
    
    
    (17,466
    )Net gain on sale of investment securities available for sale
    
    
    
    
    
    
    (2,207
    )Net gain on sale of business
    
    
    (4,791
    )
    
    
    Decrease (increase) in other assets
    
    
    1,724
    
    
    
    (30,480
    )Increase in other liabilities
    
    
    23,476
    
    
    
    45,153Net cash provided by operating activities
    
    
    156,208
    
    
    
    125,758Investing Activities:Proceeds from maturities/calls of investment securities held to
maturity
    
    
    130,281
    
    
    
    170,750Proceeds from sales of investment securities available for sale
    
    
    21,742
    
    
    
    210,480Proceeds from maturities/calls of investment securities available for
sale
    
    
    158,364
    
    
    
    252,415Purchases of investment securities available for sale
    
    
    (399,041
    )
    
    
    (598,316
    )Net decrease in federal funds sold and securities purchased under
agreements to resell
    
    
    17,107
    
    
    
    57,695Net increase in loan portfolio
    
    
    (334,168
    )
    
    
    (601,903
    )Net cash paid in acquisitions
    
    
    (202
    )
    
    
    Net cash received in sale of business
    
    
    4,726
    
    
    
    Purchases of premises and equipment, net
    
    
    (15,141
    )
    
    
    (16,621
    )Proceeds from sales of other real estate owned
    
    
    4,038
    
    
    
    6,387Net cash used by investing activities
    
    
    (412,294
    )
    
    
    (519,113
    )
 See accompanying Notes to Consolidated Financial Statements (Unaudited) - 6 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows  Continued
(In Thousands)
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Financing Activities:Net increase in demand deposits, NOW accounts
and savings accounts
    
    
    193,556
    
    
    
    710,771Net increase in time deposits
    
    
    407,705
    
    
    
    124,454Net decrease
in federal funds purchased and securities sold
under agreements to repurchase
    
    
    (270,638
    )
    
    
    (237,220
    )Net decrease
in other short-term borrowings
    
    
    (50,623
    )
    
    
    (177,253
    )Proceeds from FHLB advances and other borrowings
    
    
    297,198
    
    
    
    300,100Repayment of FHLB advances and other borrowings
    
    
    (115
    )
    
    
    (300,090
    )Redemption of guaranteed preferred beneficial interests in
Companys junior subordinated deferrable interest debentures
    
    
    
    
    
    
    (18,690
    )Common dividends paid
    
    
    (78,965
    )
    
    
    (38,324
    )Purchase of treasury stock
    
    
    (1,531
    )
    
    
    (25,929
    )Issuance of treasury stock for stock options
    
    
    1,540
    
    
    
    1,905Repayment of loans to finance stock purchases
    
    
    206
    
    
    
    248Proceeds from exercise of stock options
    
    
    4,083
    
    
    
    11,181Net cash provided by financing activities
    
    
    502,416
    
    
    
    351,153Net increase (decrease) in cash and due from banks
    
    
    246,330
    
    
    
    (42,202
    )Cash and due from banks at beginning of period
    
    
    585,679
    
    
    
    726,492Cash and due from banks at end of period
    
    $
    832,009
    
    
    $
    684,290Schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    
    1,899
    
    
    
    6,911Loans to facilitate the sale of other real estate owned
    
    
    150
    
    
    
    Transfers of investment securities available for sale to
securities held to maturity
    
    
    
    
    
    
    588,757Loans to finance stock purchases
    
    
    204
    
    
    
    496Change in unrealized gain (loss) on available for sale
investment securities
    
    
    (58,019
    )
    
    
    25,479Issuance of restricted stock, net of cancellations
    
    
    (214
    )
    
    
    71Treasury stock exchanged for acquisition earnouts
    
    
    5,840
    
    
    
    4,978Allowance transferred to other liabilities
    
    
    12,189
    
    
    
    Business combinations and divestitures:Common stock issued
    
    
    7,869
    
    
    
    Assets acquired
    
    
    8,092
    
    
    
    Liabilities assumed
    
    
    21
    
    
    
    Assets sold
    
    
    13
    
    
    
    Liabilities sold
    
    
    78
    
    
    
    
 See accompanying Notes to Consolidated Financial Statements (Unaudited) - 7 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements (Unaudited)
 NOTE 1  General The term Company is used throughout this report to refer to Compass Bancshares, Inc. and its
subsidiaries. The term Parent Company is used to refer to Compass Bancshares, Inc. wherever a
distinction between Compass Bancshares, Inc. and its subsidiaries aids in the understanding of this
report. The Company has two bank subsidiaries. The Companys principal bank subsidiary is Compass
Bank, an Alabama banking corporation headquartered in Birmingham, Alabama. The Companys other
bank subsidiary is Central Bank of the South, an Alabama banking corporation headquartered in
Anniston, Alabama. Central Bank of the South has limited activities. The bank subsidiaries of the
Company are referred to collectively as the Subsidiary Banks. The consolidated financial statements of the Company in this report have not been audited. In
the opinion of management, all adjustments necessary for a fair
statement of 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 are not necessarily indicative of the results of
operations for the full year or any other interim periods. For further information, refer to the
consolidated financial statements and notes included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the Securities and Exchange Commission (SEC)
on February 28, 2005. Certain reclassifications of prior years amounts have been made to conform to the current
year presentation. Such reclassifications had no effect on net income, total assets, total
liabilities, or shareholders equity. Critical Accounting Policies The accounting principles followed by the Company and the methods of applying these principles
conform with generally accepted accounting principles in the United States and with general
practices within the banking industry. The Companys critical accounting policies relate to (1) the
allowance for loan losses, (2) the assessment of hedge effectiveness of derivatives and other
hedging instruments, (3) the transfer of financial assets and the determination of when special
purpose vehicles should be included in the Consolidated Balance Sheets and Consolidated Statements
of Income, (4) income taxes and (5) goodwill impairment. These critical accounting policies require
the use of estimates, assumptions and judgments which are based on information available as of the
date of the financial statements. Accordingly, as this information changes, the financial
statements could reflect the use of different estimates, assumptions and judgments. Certain
determinations inherently have a greater reliance on the use of estimates, assumptions and
judgments and as such have a greater possibility of producing results that could be materially
different than originally reported. Allowance for Loan Losses: Managements evaluation process to determine the adequacy
of the allowance for loan losses combines four factors which involve the use of estimates,
assumptions and judgment: historical loss experience derived from analytical models, current
trends, economic conditions and reasonably foreseeable events. Since current economic conditions
can change and future events are inherently difficult to predict, the anticipated amount of
estimated loan losses, and therefore the adequacy of the allowance, could change and these
estimates may not reflect actual losses. Management believes the allowance for loan losses is
adequate and properly recorded in the financial statements. Derivative Instruments: In various segments of its business, the Company uses
derivative financial instruments to reduce exposure to changes in interest rates and market prices
for financial instruments. The application of the hedge accounting policy requires judgment in the
assessment of hedge effectiveness, identification of similar hedged item groupings and measurement
of changes in the fair value of hedged items. The Company believes that its methods for addressing
these judgmental areas are in accordance with generally accepted accounting principles in the
United States and are in line with industry practices in assessing hedge effectiveness. However, if
in the future the derivative financial instruments used by the Company no longer qualify for hedge
accounting treatment and, consequently, the change in fair value of hedged items could not be
recognized in earnings, the impact on the consolidated results of operations and reported earnings
could be significant. Management believes hedge effectiveness is evaluated properly in preparation
of the financial statements. All of the derivative financial instruments used by the Company have
active markets and indications of fair value can be readily obtained. Further discussion regarding
the Companys use of derivatives is included in Note 9, Off-Balance Sheet Activities, Derivatives
and Hedging. Consolidation: The Company utilizes certain financing arrangements to meet its
balance sheet management, funding, liquidity and market or credit risk management needs. The
majority of these activities are basic term or revolving securitization vehicles. Because these
financing arrangements are made with separate legal entities, they are not consolidated in the
Companys Consolidated Balance Sheets. The Company evaluates whether these entities should be - 8 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) consolidated by applying various generally accepted accounting principles and interpretations.
In determining whether the financing entity should be consolidated, the Company considers whether
the entity is a Qualifying Special Purpose Entity (QSPE) as defined in the Statement of Financial
Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities. For nonconsolidation, SFAS No. 140 requires the financing entity
to be legally isolated, bankruptcy remote and beyond the control of the seller. Management believes
these financing entities which qualify as QSPEs fulfill the nonconsolidation requirements
specified in SFAS No. 140. Income Taxes: The calculation of the Companys income tax provision is complex and
requires the use of estimates and judgments in its determination. As part of the Companys
evaluation and implementation of business strategies, consideration is given to the regulations and
tax laws that apply to the specific facts and circumstances for any transaction under evaluation.
This analysis includes the amount and timing of the realization of income tax liabilities or
benefits. Management closely monitors tax developments in order to evaluate the effect they may
have on the Companys overall tax position. Management believes the income tax provision is
adequate and properly recorded in the financial statements. Goodwill Impairment: Goodwill represents the excess of the cost of an acquisition over
the fair value of the net assets acquired. The Company tests goodwill on an annual basis, or more
frequently if events or circumstances indicate that there may have been impairment. The goodwill
impairment test estimates the fair value of each reporting unit, through the use of a discounted
cash flows model, and compares this fair value to the reporting units carrying value. The
goodwill impairment test requires management to make judgments in determining the assumptions used
in the calculations. Management believes goodwill is not impaired and is properly recorded in the
financial statements. Stock-Based Compensation The Company has three long-term incentive compensation plans and one employee stock purchase
plan. The Company accounts for these plans under the recognition and measurement principles of
Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees,and related
interpretations. No share-based employee compensation cost is reflected in net income of the
Company for these plans. In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 123R, Share-Based Payments. The provisions of SFAS 123R were effective for all
share-based awards granted, modified, repurchased or cancelled after July 1, 2005. However, on
April 15, 2005, the SEC issued release number 33-8568 which delays the effective date of SFAS 123R
until January 1, 2006. Pro forma information regarding net income and earnings per share is presented as if the
Company had accounted for its employee stock options under the fair value method. The fair value
for these options was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for 2005 and 2004, respectively: risk-free interest
rates of 3.65 percent and 3.64 percent; expected dividend yields of 3.75 percent and 4.13 percent;
volatility factors of the expected market price of the Companys common stock of 0.272 and 0.276;
and a weighted-average expected life of the options of 5 years for both periods. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions, such as expected stock price
volatility. Since the Companys employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, existing models do not necessarily provide a reliable
single measure of the fair value of employee stock options. The Companys options granted in 2005 and 2004 vest either entirely at the end of the third
year after grant or 50 percent at the end of the first year and 25 percent at the end of each of
the next two years. The compensation expense related to these options has been allocated over the
vesting period for purposes of pro forma disclosures. Options expire ten years after the date of
grant. - 9 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) The Companys actual and pro forma information follows (in thousands except per share data): Three Months EndedMarch 31,2005
    
    
    2004Net income:As reported
    
    $
    98,756
    
    
    $
    86,247Deduct: Total share-based employee compensation
expense determined under fair value based method
for all awards, net of tax
    
    
    1,918
    
    
    
    2,611Pro forma net income
    
    $
    96,838
    
    
    $
    83,636Basic earnings per share:As reported
    
    $
    0.80
    
    
    $
    0.71Pro forma
    
    
    0.79
    
    
    
    0.69Diluted earnings per share:As reported
    
    $
    0.78
    
    
    $
    0.69Pro forma
    
    
    0.77
    
    
    
    0.67
 Website Availability of Reports Filed with the SEC The Company maintains an Internet website located at www.compassweb.com on
which, among other things, the Company makes available, free of charge, various reports that it
files with, or furnishes to, the SEC, including its Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports. These reports are made
available as soon as reasonably practicable after these reports are filed with, or furnished to,
the SEC. To access these reports, users may visit the following Internet address:
http://ir.shareholder.com/cbss/sec.cfm. The information contained at this Internet address
is not and should not be considered part of this filing. NOTE 2  Business Combinations and Divestitures Business Combinations On January 7, 2005, the Company completed the acquisition of Stavis, Margolis Advisory
Services, Inc. (SMA), a Houston, Texas based investment advisory firm with approximately $500
million in assets under management. SMA specializes in providing independent financial planning
advisory services including investment, estate, retirement and business succession planning for
high net worth individuals, corporate executives, business owners and professionals. On January 5, 2005, the Company completed the acquisition of Warren Benefits Group, LP, a
Houston, Texas based insurance brokerage firm, which specializes in providing broad-based group
health and welfare plans as well as health and life insurance products. On October 4, 2004, the Company completed the acquisition of Sevier Insurance Agency
(Sevier), a Birmingham, Alabama based full-line general insurance brokerage firm, which services
commercial and retail customers in the southeastern United States. Sevier specializes in providing
property and casualty insurance, personal insurance, life insurance and surety products. Several of the acquisition agreements include contingent consideration provisions. These
provisions are generally based upon future revenue or earnings goals for a period of typically
three years. At March 31, 2005, the maximum potential amount of future undiscounted payments the
Company could be required to make under outstanding contingent payment provisions is approximately
$27 million, primarily in the form of the Companys common stock. Divestitures On March 31, 2005, the Company completed the sale of a non-core business unit that specialized
in the brokerage of oil and gas properties. A gain of $4.8 million was recognized on the sale and
is included in noninterest income in the Consolidated Statements of Income for the three-month
period ending March 31, 2005. - 10 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) NOTE 3  Capital Securities and Preferred Stock Capital Securities The Company currently has two subsidiary business trusts (Compass Trust I and Compass Trust
III) which have issued mandatorily redeemable preferred capital securities (Trust Preferred Securities).
As guarantor, the Company unconditionally guarantees payment of: accrued and unpaid distributions
required to be paid on the Trust Preferred Securities; the redemption price when the Trust
Preferred Securities are called for redemption; and amounts due if a trust is liquidated or
terminated. The
Company owns all of the outstanding common stock of each of the two trusts. The
trusts used the proceeds from the issuance of their Trust Preferred Securities and common
securities to buy debentures issued by the Parent Company (Capital Securities). These Capital
Securities are the trusts only assets and the interest payments the subsidiary business trusts
receive from the Capital Securities are used to finance the distributions paid on the Trust
Preferred Securities. In December of 2003, the Company adopted the provisions of FASB
Interpretation No. 46R (FIN 46R). The adoption of FIN 46R required the Company to deconsolidate
the subsidiary business trusts Trust Preferred Securities. The Capital Securities are reflected
as FHLB and other borrowings in the Consolidated Balance Sheets as of March 31, 2005 and December
31, 2004. The Trust Preferred Securities must be redeemed when the related Capital Securities mature, or
earlier, if provided in the governing indenture. Each issue of Trust Preferred Securities carries
an interest rate identical to that of the related Capital Securities. The Trust Preferred
Securities qualify as Tier 1 Capital, subject to regulatory limitations, under guidelines
established by the Board of Governors of the Federal Reserve System (Federal Reserve). The subsidiary business trusts have the right to redeem their Trust Preferred Securities: (i)
in whole or in part, on or after January 15, 2007 (for
debentures owned by Compass Trust I) and
March 22, 2007 (for debentures owned by Compass Trust III); and (ii) in whole at any time within
90 days following the occurrence and during the continuation of a tax event or a capital treatment
event (as defined in the offering circulars). If the Trust Preferred Securities issued by Compass
Trust I or Compass Trust III are redeemed before they mature, the redemption price will be the
principal amount, plus a premium, plus any accrued but unpaid interest. Class B Preferred Stock In
December 2000, a subsidiary of the Parent Company issued $21 million of Class B Preferred Stock
(Preferred Stock). The Preferred Stock, net of discount, was approximately $18 million at both
March 31, 2005 and December 31, 2004. The Preferred Stock qualifies as Tier I Capital under
Federal Reserve guidelines. The Preferred Stock dividends are preferential, non-cumulative and
payable semi-annually in arrears on June 15 and December 15 of each year, at a rate per annum equal
to 9.875 percent of the liquidation preference of $1,000 per share when, and if declared by the
Board of Directors of the subsidiary, in its sole discretion, out of funds legally available for
such payment. The Preferred Stock is redeemable for cash, at the option of the subsidiary, in whole or in
part, at any time on or after June 15, 2021. Prior to June 15, 2021, the Preferred Stock is not
redeemable, except that prior to such date, the Preferred Stock may be redeemed for cash, at the
option of the subsidiary, in whole but not in part, only upon the occurrence of certain tax or
regulatory events. Any such redemption is subject to the
prior approval of the Federal Reserve. The Preferred Stock is not redeemable at the option of the
holders thereof at any time. The Companys Capital Securities and Preferred Stock are summarized below. Maturity
    
    
    March 31,
    
    
    December 31,Dates
    
    
    2005
    
    
    2004(in Thousands)Capital Securities:8.23% debentures payable to Compass Trust I
    
    
    2027
    
    
    $
    103,093
    
    
    $
    103,0937.35% debentures payable to Compass Trust III
    
    
    2032
    
    
    
    309,279
    
    
    
    309,279Fair value of hedged Capital Securities
    
    
    2027, 2032
    
    
    
    11,536
    
    
    
    17,657Class B Preferred Stock
    
    
    
    
    
    
    18,023
    
    
    
    18,012Total Capital Securities and Preferred Stock
    
    
    
    
    
    $
    441,931
    
    
    $
    448,041
 -11-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) NOTE 4  Earnings Per Share Three Months EndedMarch 31,2005
    
    
    2004(In Thousands Except Per Share Data)BASIC EARNINGS PER SHARE:Net income
    
    $
    98,756
    
    
    $
    86,247Weighted average shares outstanding
    
    
    123,286
    
    
    
    122,064Basic earnings per share
    
    $
    0.80
    
    
    $
    0.71DILUTED EARNINGS PER SHARE:Net income and assumed conversions
    
    $
    98,756
    
    
    $
    86,247Weighted average shares outstanding
    
    
    123,286
    
    
    
    122,064Net effect of nonvested restricted stock and the assumed
exercise of stock options  based on the treasury stock
method using average market price for the period
    
    
    3,102
    
    
    
    3,082Weighted average diluted shares outstanding
    
    
    126,388
    
    
    
    125,146Diluted earnings per share
    
    $
    0.78
    
    
    $
    0.69
 NOTE 5  Segment Information The Companys segment information is presented by line of business. Each line of business is
a strategic unit that serves a particular group of customers that have certain common
characteristics, by offering various products and services. The segment results include certain
overhead allocations and intercompany transactions. All intercompany transactions have been
eliminated to determine the consolidated balances. The Companys reportable operating segments are
Corporate Banking, Retail Banking, Wealth Management and Treasury. The Corporate Banking segment is responsible for providing a full array of banking and
investment services to business banking, commercial banking and other institutional clients in each
of the Companys major metropolitan markets. The Corporate Banking segment also includes a
National Industries unit that is responsible for serving larger national accounts, principally in
targeted industries. In addition to traditional credit and deposit products, the Corporate Banking
segment also supports its customers with capabilities in treasury management, leasing, accounts
receivable purchasing, asset-based lending, international services, insurance and interest rate
protection and investment products. The Retail Banking segment serves the Companys consumer customers through its 385
full-service banking centers and through the use of alternative delivery channels such as personal
computer and telephone banking. The Retail Banking segment provides individuals with comprehensive
products and services, including home mortgages, credit cards, deposit accounts, mutual funds, and
brokerage services. In addition, Retail Banking serves the Companys small business customers and
the Companys indirect automobile portfolio. The Wealth Management segment provides specialized investment portfolio management,
traditional credit products, financial counseling and customized services to the Companys private
clients and foundations, as well as investment management and retirement services to companies and
their employees. The Treasury segments primary function is to manage the investment securities portfolio,
public entity deposits, the interest rate sensitivity of the Companys Consolidated Balance Sheets
and the liquidity and funding positions of the Company. Activities that are not directly attributable to the reportable operating segments, for
example, the activities of the Parent Company and support functions, including accounting, loan
review and the elimination of intercompany transactions, are presented under Corporate Support and
Other. -12-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) The financial information presented 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. Funds transfer pricing was used in the determination of
net interest income by assigning a standard cost (credit) for funds used (provided) to assets and
liabilities based on their maturity, prepayment, and/or repricing characteristics. The development and application of these methodologies is a dynamic process. Accordingly,
financial results have been revised to reflect management accounting enhancements and changes in
the Companys organizational structure. The segment information for 2004 has been revised to
conform to the 2005 presentation. In addition, unlike financial accounting, there is no
authoritative literature for management accounting similar to generally accepted accounting
principles in the United States. Consequently, reported results are not necessarily comparable
with those presented by other financial institutions. -13-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) The following table presents information for the Companys segments as of and for the three
months ended March 31, 2005 and 2004. For the Three Months Ended March 31, 2005
(in Thousands) CorporateCorporate
    
    
    Retail
    
    
    Wealth
    
    
    
    
    
    
    Support andBanking
    
    
    Banking
    
    
    Management
    
    
    Treasury
    
    
    Other
    
    
    ConsolidatedIncome StatementNet interest income
    
    $
    92,347
    
    
    $
    109,659
    
    
    $
    14,256
    
    
    $
    21,009
    
    
    $
    (995
    )
    
    $
    236,276Noninterest income
    
    
    43,570
    
    
    
    99,460
    
    
    
    9,414
    
    
    
    7,019
    
    
    
    (4,902
    )
    
    
    154,561Noninterest expense
    
    
    50,002
    
    
    
    105,280
    
    
    
    11,798
    
    
    
    4,457
    
    
    
    50,335
    
    
    
    221,872Segment income (loss)
    
    $
    85,915
    
    
    $
    103,839
    
    
    $
    11,872
    
    
    $
    23,571
    
    
    $
    (56,232
    )
    
    
    168,965Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,273Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,692Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,936Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    98,756Balance SheetAverage assets
    
    $
    10,279,538
    
    
    $
    8,132,283
    
    
    $
    1,306,642
    
    
    $
    7,746,227
    
    
    $
    1,057,898
    
    
    $
    28,522,588Average loans
    
    
    10,150,121
    
    
    
    7,871,194
    
    
    
    1,297,114
    
    
    
    
    
    
    
    (304,659
    )
    
    
    19,013,770Average deposits
    
    
    4,747,689
    
    
    
    9,714,376
    
    
    
    1,207,383
    
    
    
    1,933,917
    
    
    
    (65,081
    )
    
    
    17,538,284Period-end assets
    
    $
    10,320,661
    
    
    $
    8,272,114
    
    
    $
    1,303,966
    
    
    $
    7,884,408
    
    
    $
    1,014,082
    
    
    $
    28,795,231Period-end loans
    
    
    10,171,455
    
    
    
    7,993,061
    
    
    
    1,294,466
    
    
    
    
    
    
    
    (291,955
    )
    
    
    19,167,027Period-end deposits
    
    
    4,894,181
    
    
    
    9,910,223
    
    
    
    1,223,191
    
    
    
    1,672,907
    
    
    
    (62,728
    )
    
    
    17,637,774
 For the Three Months Ended March 31, 2004
(in Thousands) CorporateCorporate
    
    
    Retail
    
    
    Wealth
    
    
    
    
    
    
    Support andBanking
    
    
    Banking
    
    
    Management
    
    
    Treasury
    
    
    Other
    
    
    ConsolidatedIncome StatementNet interest income
    
    $
    81,145
    
    
    $
    78,651
    
    
    $
    10,334
    
    
    $
    20,465
    
    
    $
    32,266
    
    
    $
    222,861Noninterest income
    
    
    36,654
    
    
    
    88,967
    
    
    
    7,305
    
    
    
    9,070
    
    
    
    (85
    )
    
    
    141,911Noninterest expense
    
    
    50,562
    
    
    
    96,544
    
    
    
    10,482
    
    
    
    3,628
    
    
    
    48,931
    
    
    
    210,147Segment income (loss)
    
    $
    67,237
    
    
    $
    71,074
    
    
    $
    7,157
    
    
    $
    25,907
    
    
    $
    (16,750
    )
    
    
    154,625Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,345Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,280Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,033Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    86,247Balance SheetAverage assets
    
    $
    9,663,169
    
    
    $
    7,682,586
    
    
    $
    1,126,249
    
    
    $
    7,497,071
    
    
    $
    989,134
    
    
    $
    26,958,209Average loans
    
    
    9,508,392
    
    
    
    7,427,080
    
    
    
    1,117,554
    
    
    
    
    
    
    
    (468,932
    )
    
    
    17,584,094Average deposits
    
    
    4,408,091
    
    
    
    9,117,918
    
    
    
    1,259,270
    
    
    
    930,377
    
    
    
    (41,500
    )
    
    
    15,674,156Period-end assets
    
    $
    9,811,143
    
    
    $
    7,230,175
    
    
    $
    1,173,106
    
    
    $
    7,672,962
    
    
    $
    1,593,198
    
    
    $
    27,480,584Period-end loans
    
    
    9,654,355
    
    
    
    6,975,000
    
    
    
    1,165,157
    
    
    
    
    
    
    
    (442,369
    )
    
    
    17,352,143Period-end deposits
    
    
    4,869,435
    
    
    
    9,311,071
    
    
    
    1,265,514
    
    
    
    1,127,653
    
    
    
    (49,228
    )
    
    
    16,524,445
 -14-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) NOTE 6  Loans and Allowance for Loan Losses The following presents the composition of the loan portfolio at March 31, 2005 and December
31, 2004. March 31,
    
    
    December 31,2005
    
    
    2004(in Thousands)Commercial loans:Commercial, financial and agricultural
    
    $
    3,681,208
    
    
    $
    3,750,063Real estate  construction
    
    
    3,212,730
    
    
    
    3,027,228Commercial real estate  mortgage
    
    
    4,006,237
    
    
    
    3,943,163Total commercial loans
    
    
    10,900,175
    
    
    
    10,720,454Consumer loans:Residential real estate  mortgage
    
    
    1,632,475
    
    
    
    1,566,370Equity lines of credit
    
    
    1,438,809
    
    
    
    1,401,604Equity loans
    
    
    1,059,820
    
    
    
    1,069,614Credit card
    
    
    498,749
    
    
    
    505,090Consumer installment  direct
    
    
    396,303
    
    
    
    484,657Consumer installment  indirect
    
    
    3,240,696
    
    
    
    3,109,133Total consumer loans
    
    
    8,266,852
    
    
    
    8,136,468Total
    
    $
    19,167,027
    
    
    $
    18,856,922
 A summary of the activity in the allowance for loan losses for the three months ended March
31, 2005 and 2004 follows: Three Months Ended March 31,2005
    
    
    2004(in Thousands)Balance at beginning of period
    
    $
    258,339
    
    
    $
    244,882Add: Provision charged to income
    
    
    20,273
    
    
    
    24,345Deduct: Allowance for loans securitized
    
    
    
    
    
    
    591Allowance
transferred to other liabilities
    
    
    12,189
    
    
    
    Net charge-offs (recoveries):Commercial, financial and agricultural
    
    
    726
    
    
    
    3,602Commercial real estate  mortgage
    
    
    164
    
    
    
    107Real estate  construction
    
    
    (50
    )
    
    
    145Residential real estate  mortgage
    
    
    459
    
    
    
    356Equity lines of credit
    
    
    612
    
    
    
    726Equity loans
    
    
    520
    
    
    
    573Credit card
    
    
    7,911
    
    
    
    9,579Consumer installment  direct
    
    
    2,257
    
    
    
    1,623Consumer installment  indirect
    
    
    7,259
    
    
    
    7,270Total net charge-offs
    
    
    19,858
    
    
    
    23,981Balance at end of period
    
    $
    246,565
    
    
    $
    244,655
 Nonperforming assets at March 31, 2005 and December 31, 2004 are detailed in the following
table. March 31,
    
    
    December 31,2005
    
    
    2004(in Thousands)Nonaccrual loans
    
    $
    49,908
    
    
    $
    49,947Renegotiated loans
    
    
    722
    
    
    
    734Total nonperforming loans
    
    
    50,630
    
    
    
    50,681Other real estate
    
    
    18,452
    
    
    
    19,998Total nonperforming assets
    
    $
    69,082
    
    
    $
    70,679
 -15-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) NOTE 7  Securitized Assets The Company enters into securitization transactions involving its residential loan portfolio,
including home equity loans, and participations in the guaranteed portion of its Small Business
Administration loans. The sale of the participations in the guaranteed portion of Small Business
Administration loans are to external investors. Generally, the residential loan portfolio
securitization activities are not sold to external investors, but rather are securitized and
reclassified from loans to investment securities. These assets, which the Company continues to
manage and service, approximated $1.5 billion and $1.6 billion at March 31, 2005 and December 31,
2004, respectively. Included in securitized assets were $11 million and $10 million of nonaccrual loans and
accruing loans 90 days or more past due at March 31, 2005 and December 31, 2004, respectively.
Also included in securitized assets were $3 million in foreclosed assets at both March 31, 2005 and
December 31, 2004, respectively. NOTE 8  Investments (Other than Temporary Impairment) The following table summarizes the Companys investment securities available for sale that are
in a loss position at March 31, 2005. The table below discloses the market value and the gross
unrealized losses of the Companys available for sale securities in a loss position at March 31,
2005 and aggregates this information by investment category and length of time the individual
securities have been in an unrealized loss position. Securities in a loss position
    
    
    Securities in a loss positionfor less than 12 months
    
    
    for 12 months or longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(in Thousands)Investment securities available for sale:Debt securities:U.S. Treasury and other U.S. Government
agencies and corporations
    
    $
    45,495
    
    
    $
    89
    
    
    $
    
    
    
    $
    
    
    
    $
    45,495
    
    
    $
    89Mortgage-backed pass-through securities
    
    
    306,536
    
    
    
    7,111
    
    
    
    137,625
    
    
    
    4,226
    
    
    
    444,161
    
    
    
    11,337Collateralized mortgage obligations
    
    
    2,434,556
    
    
    
    41,784
    
    
    
    1,127,875
    
    
    
    27,827
    
    
    
    3,562,431
    
    
    
    69,611Asset-backed securities and corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    States and political subdivisions
    
    
    645
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    645
    
    
    
    16Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securities
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    1Total
    
    $
    2,787,235
    
    
    $
    49,001
    
    
    $
    1,265,500
    
    
    $
    32,053
    
    
    $
    4,052,735
    
    
    $
    81,054
 Management does not believe that any individual unrealized loss at March 31, 2005 represents
an other-than-temporary impairment. The unrealized losses reported for collateralized mortgage
obligations and mortgage-backed securities relate primarily to securities issued by FNMA, FHLMC and
GNMA. These unrealized losses are primarily attributable to changes in interest rates and were
individually not significant relative to their respective amortized cost. Additionally, the
Company has the ability to hold these securities for a time necessary to recover the amortized cost
or until maturity when full repayment would be received. -16-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) NOTE 9  Off-Balance Sheet Activities, Derivatives and Hedging Accounting for Derivative Instruments and Hedging Activities The Company is a party to derivative instruments in the normal course of business for trading
purposes and for purposes other than trading to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. The following table summarizes the
contractual or notional amount of all derivative instruments as of March 31, 2005 and December 31,
2004. March 31,
    
    
    December 31,2005
    
    
    2004Other
    
    
    
    
    
    
    OtherThan
    
    
    
    
    
    
    ThanTrading
    
    
    Trading
    
    
    Trading
    
    
    Trading(in Thousands)Forward and futures contracts
    
    $
    267,505
    
    
    $
    26,915
    
    
    $
    271,863
    
    
    $
    18,708Interest rate swap agreements:Pay fixed versus receive float
    
    
    1,438,485
    
    
    
    
    
    
    
    1,384,586
    
    
    
    Receive fixed versus pay float
    
    
    1,441,781
    
    
    
    1,792,471
    
    
    
    1,402,189
    
    
    
    1,503,836Written options
    
    
    101,417
    
    
    
    30,622
    (1)
    
    
    63,229
    
    
    
    19,812
    (1)Purchased options
    
    
    146,388
    
    
    
    
    
    
    
    97,358
    
    
    
    
   (1)
    
    Written options classified as other than trading represent interest rate loan commitments related to the Companys
mortgage banking activities For the three months ended March 31, 2005 and 2004, there were no credit losses associated
with derivative instruments. The following table presents the notional value and carrying value amounts of the Companys
derivative positions held for hedging purposes at both March 31, 2005 and December 31, 2004. These
derivative positions are primarily executed in the over-the-counter market. March 31, 2005
    
    
    December 31, 2004Notional
    
    
    Carrying
    
    
    Notional
    
    
    CarryingValue
    
    
    Value
    
    
    Value
    
    
    Value(in Thousands)Cash Flow Hedges:Interest rate swap agreements
    
    $
    700,000
    
    
    $
    (4,917
    )
    
    $
    700,000
    
    
    $
    (3,654
    )Fair Value Hedges:Interest rate swap agreements
    
    
    1,092,471
    
    
    
    30,017
    
    
    
    803,836
    
    
    
    47,291Forward contracts (1)
    
    
    26,915
    
    
    
    150
    
    
    
    18,708
    
    
    
    9
  (1)
    Derivatives related to the Companys mortgage banking activities Interest-Rate Risk The Company uses derivative instruments to manage the risk of earnings fluctuations caused by
interest rate volatility. The effect of interest rate movements on hedged assets or liabilities
will generally be offset by the derivative instrument. Fair-Value Hedges The Company enters into interest rate swaps to convert its fixed rate long-term debt to
floating rate debt. The critical terms of the interest rate swaps match the terms of the
corresponding fixed rate long-term debt. All components of each derivative instruments gain or
loss are included in the assessment of hedge effectiveness, unless otherwise noted. There were no
fair-value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the three
months ended March 31, 2005 and 2004. The Company recognized a decrease in interest expense of
$7.3 million and $11.1 million for the three months ended March 31, 2005 and 2004, respectively,
related to interest rate swaps
accounted for as fair value hedges. At March 31, 2005, the fair value hedges had a carrying
value of $30 million and a weighted average remaining term of 6.9 years. -17-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) Additionally, in the first quarter of 2004 the Company began entering into forward sales
commitments, which are commitments for future sales of closed mortgage loans to third parties at a
specified price. The change in the value of the forward sales commitments is recognized through
current period earnings. The recognition of the change in value of the closed mortgage loans
depends on the effectiveness of the hedge. When hedge effectiveness is met, the change in value of
the loans is recognized through current period earnings. When hedge effectiveness is not met, the
change in the value of the loans is not recognized, but instead is based on the lower of cost or
market guidelines. Therefore, any potential gain will not be recognized until the sale of the
loan. Fair value hedging gains or losses related to the forward sales commitments were immaterial
for the three months ended March 31, 2005 and 2004. Cash-Flow Hedges The Company uses interest rate swaps and options, such as caps and floors, to hedge the
repricing characteristics of floating rate assets and liabilities. All components of each
derivative instruments gain or loss are included in the assessment of hedge effectiveness, unless
otherwise noted. The initial assessment of expected hedge effectiveness was based on regression
analysis. The ongoing periodic measures of hedge ineffectiveness are based on the expected change
in cash flows of the hedged item caused by changes in the benchmark interest rate. There were no
cash flow hedging gains or losses, as a result of hedge ineffectiveness, recognized for the
three-month periods ended March 31, 2005 or 2004. During 2004, the Company terminated interest
rate swaps that were hedging floating rate commercial loans. At March 31, 2005, a deferred loss of
$2 million, net of tax, was included in other comprehensive income and will be amortized into
income over the next 14 months as the related loan interest income is recognized. As of March 31,
2005, there were no gains or losses which were reclassified from other comprehensive income to
other income as a result of the discontinuance of cash flow hedges related to certain forecasted
transactions that are probable of not occurring. The Company recognized a decrease in interest
income of $1.0 million and an increase in interest income of $6.6 million related to interest rate
swaps accounted for as cash flow hedges for the three months ended March 31, 2005 and 2004,
respectively. At March 31, 2005, the cash-flow hedges not terminated had a deferred net loss of
$4.9 million included in other comprehensive income and a weighted average life of 0.6 years.
Based on the current interest rate environment, these losses are expected to be reclassified to
interest income over the next 14 months as net settlements occur. Off-Balance Sheet Activities During 2000, the Company sponsored the establishment of Sunbelt Funding Corporation
(Sunbelt), an asset-backed commercial paper conduit, created as a wholly-owned subsidiary of an
independent third party. The purpose of the conduit is to diversify the Companys funding sources.
Sunbelt was structured as a Qualifying Special Purpose Entity (QSPE), as defined by SFAS No.
140, with a limited business purpose of purchasing highly-rated investment grade debt securities
from the Companys trading account securities portfolio and financing its purchases through the
issuance of P-1/F1 rated commercial paper. All assets sold to the conduit were performing and no
significant gains or losses were recognized on the sale. At March 31, 2005, all securities held by Sunbelt were AAA or Aaa rated by at least two of the
following nationally recognized statistical ratings organizations: Moodys Investor Service,
Standard & Poors and Fitch Ratings. Approximately 99 percent of the securities held by Sunbelt at
March 31, 2005 were variable rate. Sunbelts total assets, which approximated market value, were
$1.7 billion at March 31, 2005 and $1.8 billion at December 31, 2004, respectively. The Company
realized fee income of $1.6 million and $1.5 million for the three months ended March 31, 2005 and
2004, respectively, from Sunbelt for providing various services including serving as liquidity
provider, investment advisor and administrative agent. At both March 31, 2005 and December 31,
2004, receivables from Sunbelt were $2 million. There were no outstanding payables to Sunbelt at
either March 31, 2005 or December 31, 2004. The Company, under agreements with Sunbelt, may be
required to purchase assets or provide alternative funding to the conduit in certain limited
circumstances, including the conduits inability to place commercial paper or a downgrade in the
Companys short-term debt rating. Management believes if such an event occurs, the Company has the
ability to provide funding without any material adverse effect. The underlying assets are eligible
investments for Compass Bank. The commitments, which are renewable annually at the Companys
option, are for amounts up to $2 billion. No funding or purchase of assets had occurred as of
March 31, 2005. There is currently a proposed amendment to SFAS 140, which could result in Sunbelt no longer
qualifying as a QSPE. If this amendment is finalized as currently proposed, and Sunbelt does not
change its structure, Sunbelt would be consolidated into the Company. Consolidation of Sunbelts
assets into the Company, as of March 31, 2005, would not have had a significant impact on the
Companys regulatory capital ratios, which would have still exceeded the minimum ratios required
for well-capitalized banks as defined by federal banking regulators. See Note 14  Recently Issued
Accounting Standards. -18-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) NOTE 10  Shareholders Equity In January and August of 2003, the Company announced that its board of directors authorized
share repurchase programs allowing for the purchase of 5.0 percent and 3.3 percent, respectively,
or approximately 6.3 million shares and 4.1 million shares, respectively, of the Companys
outstanding common stock. Through March 31, 2005, 6.1 million shares had been repurchased under the
January 2003 program at a cost of $228 million. Approximately 1.1 million of the total shares
repurchased had been reissued for acquisitions and employee benefit plans. At March 31, 2005,
approximately 4.3 million shares remained available for repurchase under the programs. The timing
and amount of purchases is dependent upon the availability and alternative uses of capital, market
conditions, and other factors. In February 2005, the Company increased its quarterly dividend 12 percent to $0.3500 per
common share, from $0.3125 per common share in 2004. At
March 31, 2005, accumulated other comprehensive income included a deferred loss of $8
million primarily from the effective portion of cash flow hedges and $53 million of net unrealized losses on
investment securities available for sale. At December 31, 2004, accumulated other comprehensive
income included a deferred loss of $7 million primarily associated with the effective portion of cash flow
hedges and $16 million of net unrealized losses on investment securities available for sale. NOTE 11  Goodwill and Other Acquired Intangible Assets As of March 31, 2005, the Company had four reporting units with goodwill, including Corporate
Banking with $137 million, Retail Banking with $96 million, Insurance with $68 million and Wealth
Management with $15 million. During the three months ended March 31, 2005, goodwill increased $8
million, $5 million and $550,000 within the Wealth Management reporting unit, Insurance reporting
unit, and the Corporate Banking reporting unit, respectively. These amounts increased primarily
due to acquisitions and the payment of contingent consideration payments in the current year in connection with
prior acquisitions. Acquired intangible assets as of March 31, 2005 are detailed in the following table. As of March 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Value(in Thousands)Nonamortizing goodwill
    
    $
    369,614
    
    
    $
    (53,732
    )
    
    $
    315,882Amortizing intangible assets:Core deposit intangibles
    
    $
    63,890
    
    
    $
    (54,094
    )
    
    $
    9,796Other customer intangibles
    
    
    42,954
    
    
    
    (11,372
    )
    
    
    31,582Total amortizing intangible assets
    
    $
    106,844
    
    
    $
    (65,466
    )
    
    $
    41,378
 The Company recognized $1.5 million and $1.6 million in amortization expense on acquired
intangible assets for the three months ended March 31, 2005 and 2004, respectively. Aggregate
amortization expense for the years ending December 31, 2005 through December 31, 2009 is estimated
to be $6.1 million, $4.8 million, $4.1 million, $3.8 million, and $3.5 million, respectively. NOTE 12  Commitments and Contingencies Commitments to extend credit are agreements to lend to customers as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and generally require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent expected future cash flows. Standby and commercial letters of credit are commitments issued by the Company to guarantee
the performance of a customer to a third party. These guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond financing and similar
transactions, and expire in decreasing amounts with terms ranging from one to four years. The
credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The fair value of the commitment typically approximates the
fee received from the customer for issuing such commitments. These fees are deferred and are
recognized over the commitment period. As of March 31, 2005, the recorded amount of these deferred
fees was $5 million. The Company holds various assets as collateral supporting those commitments
for which collateral is deemed necessary. At March
31, 2005, the maximum -19-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) potential amount of future undiscounted payments the Company could be
required to make under outstanding standby and commercial letters of
credit was $755 million. The following represents the Companys commitments to extend credit and standby and commercial
letters of credit as of March 31, 2005 and December 31, 2004: March 31,
    
    
    December 31,2005
    
    
    2004(in Thousands)Commitments to extend credit
    
    $
    11,991,446
    
    
    $
    11,265,440Standby and commercial letters of credit
    
    
    754,795
    
    
    
    716,195
 At March 31, 2005, the Company has potential recourse related to FNMA securitizations of
approximately $22 million. Certain acquisition agreements related to the insurance agencies and an investment advisory
firm include contingent consideration provisions. These provisions are generally based upon future
revenue or earnings goals for a period of typically three years. At March 31, 2005, the maximum
potential amount of future undiscounted payments the Company could be required to make under
outstanding contingent payment provisions is approximately $27 million, primarily in the form of
the Companys common stock. In the ordinary course of business, the Company is subject to legal proceedings, which involve
claims for substantial monetary relief. However, based upon the advice of legal counsel, management
is of the opinion that any legal proceedings, individually or in the aggregate, will not have a
material adverse effect on the Companys financial condition or results of operations. The Company is subject to review and examination from various tax authorities. The Company is
currently under examination by a number of states and has received notices of proposed adjustments
related to state income taxes due for prior years. Management intends to challenge the proposed
adjustments and expects that the final resolution of the examinations will not have a material
impact on the Companys financial position. The Parent Company and its Subsidiary Banks are subject to regulation by the Board of
Governors of the Federal Reserve System. The Subsidiary Banks are also subject to regulation by
the Alabama State Banking Department. Various federal and state laws and regulations affect the
manner in which the Company operates including minimum capital requirements, limitations on loans
and transactions with affiliates and management, and prohibitions on certain tie-in arrangements in
connection with an extension of credit. The Company is also regularly reviewed with respect to its
compliance with various consumer protection laws and regulations. The USA Patriot Act, which is designed to address potential terrorist threats, requires the
Company to establish an anti-money laundering program, including customer identification programs,
and establish due diligence requirements with respect to its private banking operations. The Bank
Secrecy Act requires the filing of currency transaction reports and suspicious activity reports
with appropriate governmental authorities identifying possible criminal activity conducted through
depository institutions. If the Company fails to comply with these or other applicable laws and regulations, it may be
subject to civil monetary penalties, imposition of cease and desist orders or other written
directives, removal of management and in certain circumstances criminal penalties. -20-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) NOTE 13  Defined Benefit Pension Plan The following table provides certain information with respect to the Companys defined benefit
pension plan for the three-month period ending March 31, 2005 and 2004. Three Months EndedMarch 31,2005
    
    
    2004(in Thousands)Service cost
    
    $
    1,971
    
    
    $
    1,720Interest cost
    
    
    2,430
    
    
    
    2,108Expected return on plan assets
    
    
    (3,046
    )
    
    
    (2,582
    )Amortization of prior service cost
    
    
    11
    
    
    
    8Amortization of net loss
    
    
    859
    
    
    
    555Net periodic benefit cost
    
    $
    2,225
    
    
    $
    1,809
 For
the three months ended March 31, 2005, the Company has not made any
contributions to the defined benefit pension plan. For the remainder
of 2005, the Company anticipates contributing amounts to the defined benefit pension
plan sufficient to satisfy minimum funding requirements of the Employee Retirement Security Act of
1974. NOTE 14  Recently Issued Accounting Standards Consolidation of Variable Interest Entities On January 15, 2003, the FASB completed its redeliberations of the project related to the
consolidation of variable interest entities which culminated with the issuance of FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 states that
if a business enterprise has a controlling financial interest in a variable interest entity, the
assets, liabilities and results of the activities of the variable interest entity should be
included in the consolidated financial statements of the business enterprise. FIN 46 explains how
to identify variable interest entities and how an enterprise assesses its interests in a variable
interest entity to determine whether to consolidate that entity. FIN 46 also requires existing
unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the parties involved. Variable interest entities
that effectively disperse risks will not be consolidated unless a single party holds an interest or
a combination of interests that effectively recombines risks that were previously dispersed. FIN
46 applies immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that date. FIN 46
originally applied in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that it acquired before
February 1, 2003. However, in December 2003, the FASB issued FIN 46R, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51,which revised FIN 46 and required the adoption
of FIN 46 or FIN 46R for periods ending after December 15, 2003. FIN 46 and FIN 46R do not apply
to securitization structures that are QSPEs as defined within SFAS No. 140. The Company adopted
the provisions of FIN 46R on December 31, 2003. The Companys securitization structure, as of
March 31, 2005, met QSPE standards, and therefore, was not affected by the adoption of FIN 46 or
FIN 46R. Additionally, in June 2003, the FASB issued a proposed amendment to SFAS 140, which would
amend the requirements for QSPE status. Sunbelt Funding Corporation (Sunbelt), the Company
sponsored asset-backed commercial paper conduit, would no longer meet QSPE requirements if the
proposed amendment were finalized as currently written. Sunbelt is investigating potential
modifications to its structure in order to continue off-balance sheet treatment. Accounting for Certain Loans or Debt Securities Acquired in a Transfer In December 2003, the Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.The
SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The SOP
addresses accounting for differences between contractual cash flows and cash flows expected to be
collected from an investors initial investment in loans or debt securities acquired in a transfer
if those differences are attributable, at least in part, to credit quality. The SOP applies to
loans acquired in business combinations but does not apply to loans originated by the Company. The
initial adoption of this standard did not have an impact on the financial condition or the results
of operations of the Company. -21-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) Application of Accounting Principles to Loan Commitments On March 9, 2004, the SEC issued Staff Accounting Bulletin (SAB) No. 105, Application of
Accounting Principles to Loan Commitments. SAB No. 105 requires that when a company is recognizing
and valuing a loan commitment at fair value, only differences between the guaranteed interest rate
in the loan commitment and a market interest rate should be included. Any expected future cash
flows related to the customer relationships or loan servicing should be excluded from the fair
value measurement. The expected future cash flows that are excluded from the fair value
determination include anticipated fees for servicing the funded loan, late-payment charges, other
ancillary fees, or other cash flows from servicing rights. The guidance in SAB No. 105 is
effective for mortgage loan commitments that are accounted for as derivatives and are entered into
after March 31, 2004. The adoption of this standard did not have an impact on the financial
condition or the results of operations of the Company. Share-Based Payments On December 15, 2004, the FASB issued SFAS 123R, Share-Based Payments.SFAS 123R requires that
the cost resulting from all share-based payment transactions be recognized in the financial
statements. This Statement establishes the fair value method for measurement and requires all
entities to apply this fair value method in accounting for share-based payment transactions. The
provisions of the SFAS 123R were effective for all share-based awards granted after July 1, 2005
and to share-based awards modified, repurchased, or cancelled after that date. However, on April
15, 2005, the SEC issued release number 33-8568 which delays the effective date of SFAS 123R an
additional six months, requiring that companies adopt the provisions of SFAS 123R for annual
periods beginning after June 15, 2005. Management does not believe the results of the adoption of
this standard will differ materially from the pro-forma disclosures in Note 1  General. Exchanges of Nonmonetary Assets On
December 16 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion No. 29. SFAS 153 amends the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged and more broadly provides exceptions regarding exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance when the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions
of SFAS 153 are effective for nonmonetary asset exchanges occurring in periods
beginning after June 15, 2005. Management does not believe the adoption of
this standard will have a material impact on the financial condition or the
results of operations of the Company. -22-




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Forward-Looking Information This quarterly report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. Forward-looking statements are typically identified by words or
phrases such as believe, expect, anticipate, intend, estimate, may increase, may
fluctuate, and similar expressions or future or conditional verbs such as will, should,
would, and could. Forward looking statements are subject to numerous assumptions, estimates,
risks and uncertainties that could cause actual conditions, events or results to differ materially
from those stated or implied by such forward-looking statements. A variety of factors may affect the operations, performance, business strategy and results of
the Company including, but not limited to: financial market volatility including the level of
interest rates and effects of such interest rates on derivative contracts; the strength of the US
economy in general and the strength of the local economies in which Compass operates may be
different than expected resulting in deteriorating credit quality, a reduced demand for credit or a
weakened ability to generate deposits; the impact of changes in financial services laws and
regulations; technological changes; unfavorable judicial or regulatory proceedings or rulings; the
impact of changes in accounting principles and practices; actions and initiatives by current and
potential competitors; the ability to retain key personnel; the failure of assumptions underlying
the establishment of reserves for loan losses; and significant delay in or inability to execute
strategic initiatives designed to grow revenues and/or control expenses. If the Companys assumptions and estimates are incorrect, or if the Company or the Subsidiary
Banks become subject to significant limitations as the result of litigation or regulatory action
then the Companys actual results could vary materially from the forward-looking statements made
herein. Investors are cautioned not to place undue reliance on any forward-looking statements and
to read this Quarterly Report on Form 10-Q in conjunction with the Companys other filings with the
SEC including the Companys Annual Report on Form 10-K which is available on the Commissions
website, http://www.sec.gov, as well as on the Companys website
http://ir.shareholder.com/cbss/sec.cfm. The Company disclaims any obligation to update any
such forward-looking statements. Overview The Company had net income of $98.8 million for the three months ended March 31, 2005, a 15
percent increase over the $86.2 million earned during the three months ended March 31, 2004. For
the same time period, diluted earnings per share increased 13 percent to $0.78 from $0.69 earned in
the prior year. The Company operates 385 full-service banking centers including 139 in Texas, 89 in Alabama,
73 in Arizona, 42 in Florida, 32 in Colorado and 10 in New Mexico. Net Interest Income Net interest income is the principal component of a financial institutions income stream and
represents the difference or spread between interest and fee income generated from earning assets
and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as
well as changes in the volume and mix of earning assets and interest bearing liabilities can
materially impact net interest income. The following discussion of net interest income is presented
on a taxable equivalent basis, unless otherwise noted, to facilitate performance comparisons among
various taxable and tax-exempt assets. Net interest income for the three months ended March 31, 2005, increased to $237.2 million
from $223.7 million for the three months ended March 31, 2004, as interest income increased $37.3
million and interest expense increased $23.9 million. The increase in interest income was due to a
$1.5 billion increase in average earning assets and a 32 basis point increase in the average yield
on earning assets from 5.07 percent to 5.39 percent. The increase in average earning assets from
the first quarter of 2004 was driven primarily by an increase of $1.4 billion in average loans.
The increase in average loans was due to continued strong loan production throughout all of the
Companys major markets. The 27 percent increase in interest expense over the first quarter of 2004
was primarily the result of a 44 basis point increase in the average rate paid on interest bearing
liabilities coupled with a $565 million increase in the average interest bearing liabilities. The
increase in total interest bearing liabilities was driven by an increase of $1.0 billion in average
interest bearing deposits and an increase of $149 million in fed funds purchased, partially offset
by a decrease of $624 million in FHLB and other borrowings. -23-




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##### Table of Contents



Net interest margin, stated as a percentage, is the yield obtained by dividing the difference
between interest income on earning assets and the interest expense paid on all funding sources by
average earning assets. The following discussion of net interest margin is presented on a taxable
equivalent basis. The net interest margin increased to 3.66 percent for the first quarter of 2005,
compared to 3.64 percent for the first quarter of 2004. This increase was caused by changes in the
rates and volume of earning assets and the corresponding funding sources noted previously. During
the first quarter of 2005, the Companys net interest margin was impacted by the Companys use of
interest rate contracts, increasing taxable equivalent net interest margin by 9 basis points as
compared to a 29 basis point positive impact for the first quarter of 2004. The following table presents the actual and projected impact of the Companys derivatives held
for hedging purposes on net interest margin by quarter for fiscal years 2004 and 2005, excluding
derivatives entered into by the Company related to the Companys mortgage banking activities. The
derivatives included in the table below are both cash flow hedges and fair value hedges, including
terminated cash flow hedges. The table assumes interest rates remain at March 31, 2005, levels. For the Quarter EndingMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2004
    
    
    2004
    
    
    2004
    
    
    2004Actual
    
    
    Actual
    
    
    Actual
    
    
    Actual
    
    
    Total(in Thousands)Hedging derivatives positive
impact to net interest margin
    
    $
    17,668
    
    
    $
    13,931
    
    
    $
    12,012
    
    
    $
    9,121
    
    
    $
    52,732
 For the Quarter EndingMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    TotalActual
    
    
    Projected*
    
    
    Projected*
    
    
    Projected*
    
    
    Projected*(in Thousands)Hedging derivatives positive
impact to net interest margin
    
    $
    6,329
    
    
    $
    6,046
    
    
    $
    5,749
    
    
    $
    5,913
    
    
    $
    24,037
   *
    
    Projected impact based on March 31, 2005 interest rates. Derivative instruments are subject to market risk. While the Company utilizes trading
derivatives to facilitate customer transactions, the Company does not utilize derivative
instruments for speculative purposes. The following table details information regarding the
notional amount, maturity date, and the receive fixed coupon rate for derivative instruments used
for hedging activities as of March 31, 2005, excluding derivatives entered into by the Company
related to the Companys mortgage banking activities. The maturity date used in the table below is
the first call date, when applicable. See Note 9  Off-Balance Sheet Activities, Derivatives and
Hedging for further information about the Companys use of derivatives and the fair value of those
instruments. April 1, 2005throughDecember 31,
    
    
    For the Year Ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    ThereafterNon-trading interest rate contracts
    
    ($ in Thousands)Cash Flow HedgesNotional maturity
    
    $
    500,000
    
    
    $
    200,000
    
    
    $
    
    
    
    $
    Weighted average coupon received
on maturities
    
    
    2.60
    %
    
    
    2.13
    %
    
    
    
    %
    
    
    
    %Weighted
average time to maturity (months)
    
    
    4
    
    
    
    14
    
    
    
    
    
    
    
    Fair Value HedgesNotional maturity
    
    $
    105,000
    
    
    $
    
    
    
    $
    323,500
    
    
    $
    663,973Weighted average coupon received
on maturities
    
    
    4.71
    %
    
    
    
    %
    
    
    7.55
    %
    
    
    5.88
    %Weighted
average time to maturity (months)
    
    
    2
    
    
    
    
    
    
    
    24
    
    
    
    111
 -24-




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##### Table of Contents



The notional amounts shown in the table above should be viewed in the context of the Companys
overall interest rate risk management activities to assess the impact on net interest margin. As is
the case with cash securities, the market value of derivative instruments is largely a function of
the financial markets expectations regarding the future direction of interest rates. Accordingly,
current market values are not necessarily indicative of the future impact of the derivative
instruments on net interest income. This will depend, in large part, on the shape of the yield
curve as well as the absolute levels of interest rates. The following table details the components of the changes in net interest income (on a
tax-equivalent basis) by major category of interest earning assets and interest bearing liabilities
for the three month period ended March 31, 2005, as compared to the same period in 2004 (in
thousands): Three Months EndedMarch 31, 2005Change2004To
    
    
    Attributed to2005
    
    
    Volume
    
    
    Rate
    
    
    MixInterest income:Federal funds sold and securities
purchased
under agreements to resell
    
    $
    61
    
    
    $
    (38
    )
    
    $
    132
    
    
    $
    (33
    )Trading account assets
    
    
    31
    
    
    
    29
    
    
    
    2
    
    
    
    Investment securities available for sale
    
    
    2,136
    
    
    
    2,791
    
    
    
    (616
    )
    
    
    (39
    )Investment securities held to maturity
    
    
    (2,552
    )
    
    
    (1,986
    )
    
    
    (599
    )
    
    
    33Loans
    
    
    37,619
    
    
    
    18,859
    
    
    
    17,349
    
    
    
    1,411Increase in interest income
    
    $
    37,295
    
    
    $
    19,655
    
    
    $
    16,268
    
    
    $
    1,372Interest expense:Deposits
    
    $
    12,616
    
    
    $
    5,028
    
    
    $
    4,578
    
    
    $
    3,010Federal funds purchased and securities
sold under agreements to repurchase
    
    
    16,080
    
    
    
    361
    
    
    
    15,178
    
    
    
    541Other short-term borrowings
    
    
    330
    
    
    
    35
    
    
    
    251
    
    
    
    44FHLB and other borrowings*
    
    
    (5,168
    )
    
    
    (5,448
    )
    
    
    322
    
    
    
    (42
    )Increase (decrease) in interest expense
    
    $
    23,858
    
    
    $
    (24
    )
    
    $
    20,329
    
    
    $
    3,553
   *
    
    Includes Capital Securities and Preferred Stock. Noninterest Income and Noninterest Expense During the first quarter of 2005, noninterest income increased $12.7 million, or nine percent,
to $154.6 million, from the $141.9 million earned in the first quarter 2004. The increase in
noninterest income is attributed to a $4.8 million gain on sale of a non-core business unit, a $4.8
million increase in card and merchant processing fees, a $1.3 million increase in asset management
fees, a $1.2 million increase in retail investment sales and a $5.1 million increase in other
income, partially offset by a decrease of $1.8 million in corporate and correspondent investment
sales. The increase in card and merchant processing fees was due to increased volume of activity
in credit card and debit card business, while the increase in asset management fees was primarily
driven by the Companys acquisition of Stavis, Margolis Advisory Services, Inc., an investment
advisory firm in Houston in January 2005. The increase in other income was primarily attributable
to activity associated with the Companys SBA and student loan portfolios. Corporate and
correspondent investment sales is comprised of commissions on the sales of bonds to approximately
750 correspondent banks and matched interest rate protection contracts to corporate customers. The
decrease in this caption is due to a decrease in sales of matched interest rate contracts. Noninterest expense, for the quarter ended March 31, 2005, increased $11.7 million, or six percent,
compared to the first quarter of 2004. This increase in noninterest expense is attributed to a
$3.2 million increase in salaries and benefits, a $3.2 million increase in marketing expense and a
$1.7 million increase in equipment expense. The increase in salaries and benefits and equipment
expense was due primarily to the acquisitions of Warren Benefits Group, LP, and Stavis, Margolis
Advisory Services Group, Inc. in January 2005, as well as the opening of three de novo banking -25-




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##### Table of Contents



centers in the first quarter of 2005. The increase in marketing expense was due to the Companys
focused efforts to increase exposure in new and existing markets the Company serves. Income Taxes Income tax expense totaled $49.9 million and $44.0 million for the first quarter of 2005 and
2004, respectively. The effective tax rate for the quarter ended March 31, 2005 was 33.6 percent
compared to 33.8 percent for the same period in 2004. Provision and Allowance for Loan Losses The provision for loan losses for the three-month period ended March 31, 2005 decreased $4.1
million from the same period in 2004. The allowance for loan losses and the corresponding
provision for loan losses were based on changes in the size and character of the loan portfolio,
changes in nonperforming and past due loans, historical loan loss experience, the existing risk of
individual loans, concentrations of loans to specific borrowers or industries, and existing
economic conditions. Additionally, on March 31, 2005 the Company transferred $12 million of
allowance for loan losses related to unfunded commitments, letters of credit and fees to other
liabilities. The allowance for loan losses at March 31, 2005, was $247 million and at December 31,
2004, was $258 million. The ratio of the allowance for loan losses to loans outstanding was 1.29
percent at March 31, 2005 and 1.37 percent at December 31, 2004. Management believes that the
allowance for loan losses at March 31, 2005 is adequate. Nonperforming Assets and Past Due Loans Stated as a percentage of total loans and other real estate owned, nonperforming assets at
March 31, 2005, were 0.36 percent, compared to 0.37 percent at December 31, 2004. At March 31,
2005, the allowance for loan losses as a percentage of nonperforming loans was 487 percent,
compared to 510 percent at December 31, 2004. The allowance for loan losses as a percentage of
nonperforming assets was 357 percent at March 31, 2005, compared to 366 percent at December 31,
2004. Nonperforming assets, comprised of nonaccrual loans, renegotiated loans, and other real
estate, totaled $69 million at March 31, 2005, compared to $71 million at December 31, 2004. Loans
past due ninety days or more but still accruing interest were $14 million at March 31, 2005,
compared to $16 million at December 31, 2004. The Company regularly monitors selected accruing loans for which general economic conditions
or changes within a particular industry could cause the borrowers financial difficulties. This
continuous monitoring of the loan portfolio and the related identification of loans with a high
degree of credit risk are essential parts of the Companys credit management. Management continues
to emphasize maintaining a low level of nonperforming assets and returning current nonperforming
assets to an earning status. -26-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Allowance for Loan Losses/Nonperforming Assets
(In Thousands)
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Allowance for Loan LossesBalance at beginning of period
    
    $
    258,339
    
    
    $
    244,882Add: Provision charged to income
    
    
    20,273
    
    
    
    24,345Deduct: Allowance for loans securitized
    
    
    
    
    
    
    591Allowance transferred to other liabilities
    
    
    12,189
    
    
    
    Loans charged off
    
    
    28,506
    
    
    
    30,062Loan recoveries
    
    
    (8,648
    )
    
    
    (6,081
    )Net charge-offs
    
    
    19,858
    
    
    
    23,981Balance at end of period
    
    $
    246,565
    
    
    $
    244,655Net charge-offs as a percentage of
average loans (annualized)
    
    
    0.42
    %
    
    
    0.55
    %
 March 31, 2005
    
    
    December 31, 2004Nonperforming AssetsNonaccrual loans
    
    $
    49,908
    
    
    $
    49,947Renegotiated loans
    
    
    722
    
    
    
    734Total nonperforming loans
    
    
    50,630
    
    
    
    50,681Other real estate
    
    
    18,452
    
    
    
    19,998Total nonperforming assets
    
    $
    69,082
    
    
    $
    70,679Accruing loans ninety days or more past due
    
    $
    14,257
    
    
    $
    15,509Other repossessed assets
    
    
    740
    
    
    
    656Allowance as a percentage of loans
    
    
    1.29
    %
    
    
    1.37
    %Total nonperforming loans as a percentage
of loans
    
    
    0.26
    
    
    
    0.27Total nonperforming assets as a percentage
of loans and ORE
    
    
    0.36
    
    
    
    0.37Accruing loans ninety days or more past due as a
percentage of loans
    
    
    0.07
    
    
    
    0.08Allowance for loan losses as a percentage of
nonperforming loans
    
    
    486.99
    
    
    
    509.74Allowance for loan losses as a percentage of
nonperforming assets
    
    
    356.92
    
    
    
    365.51
 -27-




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Financial Condition Overview Total assets at March 31, 2005 were $28.8 billion, up from $28.2 billion at December 31, 2004.
The increase in assets was due primarily to internal loan growth. Assets and Funding At March 31, 2005, earning assets totaled $26.4 billion, an increase of approximately $328
million from the $26.1 billion in earning assets at December 31, 2004. The mix of earning assets
remained relatively consistent with total investment securities and loans comprising 27 percent and
73 percent, respectively, of total earning assets at March 31, 2005, while at December 31, 2004
total investment securities and loans were 27 percent and 72 percent, respectively, of earning
assets. The $310 million growth in loans was funded by a $599 million increase in deposits and a
$283 million increase in FHLB and other borrowings, partially offset by a decrease of $271 million
of fed funds purchased and securities sold under agreements to repurchase. The increase in
deposits is due to the Companys continued emphasis on funding earning asset growth through
internal deposit generation. The increase in FHLB and other borrowings was primarily due to the
Companys lead bank subsidiary issuing approximately $300 million of 15 year subordinated notes. Liquidity and Capital Resources Liquidity is the ability of the Company to convert assets into cash or cash equivalents
without significant loss and to raise additional funds by increasing liabilities. Liquidity
management involves maintaining the Companys ability to meet the day-to-day cash flow requirements
of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring
funds to meet their credit needs. Without proper liquidity management, the Company would not be
able to perform the primary function of a financial intermediary and would, therefore, not be able
to meet the needs of the communities it serves. Additionally, the Parent Company requires cash for
various operating needs including: dividends to shareholders; business combinations; capital
injections to its subsidiaries; the servicing of debt; and the payment of general corporate
expenses. The primary source of liquidity for the Parent Company is dividends from the Subsidiary
Banks. At March 31, 2005, the Companys Subsidiary Banks could have paid additional dividends to
the Parent Company of approximately $352 million while continuing to meet the capital requirements
for well-capitalized banks. Also, the Company has access to various capital markets. During the
quarter, the Company enhanced its liquidity position by issuing, at the Companys lead bank
subsidiary level, approximately $300 million of 15 year subordinated notes. The Company does not
anticipate any liquidity requirements in the near future that it will not be able to meet. Asset and liability management functions not only serve to assure adequate liquidity in order
to meet the needs of the Companys customers, but also to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that the Company can earn a return
that meets the investment requirements of its shareholders. The asset portion of the balance sheet provides liquidity primarily through loan principal
repayments, maturities, and paydowns of investment securities and, to a lesser extent, sales of
investment securities available for sale and trading account securities. Other short-term
investments such as federal funds sold, securities purchased under agreements to resell, and
maturing interest-bearing deposits with other banks, are additional sources of liquidity funding. The liability portion of the balance sheet provides liquidity through various customers
interest bearing and noninterest bearing deposit accounts. Federal funds purchased, securities sold
under agreements to repurchase, and other short-term borrowings are additional sources of liquidity
and, basically, represent the Companys incremental borrowing capacity. These sources of liquidity
are short-term in nature and are used as necessary to fund asset growth and meet short-term
liquidity needs. A strong capital position, which is vital to the continued profitability of the Company, also
promotes depositor and investor confidence and provides a solid foundation for the future growth of
the organization. The Company has satisfied its capital requirements principally through the
retention of earnings. The ratio of total shareholders equity as a percentage of total assets is one measure used to
determine capital strength. The Companys capital position remains strong, as the ratio of total
shareholders equity to total assets at March 31, 2005 was 7.23 percent compared to 7.26 percent at
December 31, 2004. Shareholders equity increased during the first three months of 2005 primarily
due to an increase in retained earnings partially offset by an
increase in accumulated other
comprehensive loss. In January and August of 2003, the Company announced that its board of directors authorized share
repurchase programs allowing for the purchase of 5.0 percent and 3.3 percent, respectively, or
approximately 6.3 million shares and 4.1 million shares, respectively, of the Companys outstanding
common stock. Through March 31, 2005, 6.1 million -28-




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##### Table of Contents



shares had been repurchased
under the January 2003 program at a cost of $228 million.
Approximately 1.1 million of the total shares repurchased had been reissued for acquisitions and
employee benefit plans. At March 31, 2005, approximately 4.3 million shares remained available for
repurchase under the programs. The timing and amount of purchases is dependent upon the
availability and alternative uses of capital, market conditions, and other factors. In addition to the capital ratios mentioned above, banking industry regulators have defined
minimum regulatory capital ratios that the Parent Company and the Subsidiary Banks are required to
maintain. These regulatory capital guidelines take into consideration risk factors, as defined by
the banking industry regulators, associated with various categories of assets, both on and off
balance sheet. Under the guidelines, capital strength is measured in two tiers that are used in
conjunction with risk-adjusted assets to determine the risk-based capital ratios. Tier I Capital is
defined as common shareholders equity, excluding the net unrealized holding gain (loss) on
available-for-sale securities (except for net unrealized losses on marketable equity securities),
the accumulated gain (loss) on cash-flow hedging instruments and disallowed credit-enhancing
interest-only strips, plus perpetual preferred stock and the Trust Preferred Securities, subject to
regulatory limitations, minus goodwill and other disallowed intangible assets. Other disallowed
intangibles represent intangible assets, other than goodwill, recorded after February 19, 1992.
Total Qualifying Capital is defined as Tier I Capital plus Tier II Capital components, which
include such items as qualifying allowance for loan losses, certain qualifying classes of preferred
stock and qualifying subordinated debt. Tier I Capital and Total Qualifying Capital as of March 31, 2005 exceeded the target ratios
for well capitalized of 6.00 percent and 10.00 percent, respectively, under current regulations.
The Tier I and Total Qualifying Capital ratios at March 31, 2005 were 9.13 percent and 12.33
percent, respectively, compared to 9.09 percent and 11.12 percent at December 31, 2004. Two other
important indicators of capital adequacy in the banking industry are the leverage ratio and the
tangible leverage ratio. The leverage ratio is defined as Tier I Capital divided by total adjusted
quarterly average assets. Average quarterly assets are adjusted by subtracting the average
unrealized gain (loss) on available-for-sale securities (except for net unrealized losses on
marketable equity securities), the accumulated gain (loss) on cash-flow hedging instruments,
disallowed credit-enhancing interest-only strips, period-end goodwill, and other disallowed
intangibles. The tangible leverage ratio is defined similarly, except, by definition, all other
intangible assets not previously excluded are removed from both the numerator and denominator. The
leverage ratio was 7.63 percent at March 31, 2005 and 7.51 percent at December 31, 2004. The
Companys tangible leverage ratio was 7.59 percent at March 31, 2005 compared to 7.48 percent at
December 31, 2004. -29-




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##### Table of Contents



Item 3  Quantitative and Qualitative Disclosures About Market Risk The Companys interest rate risk management policies and practices, along with the assumptions
used in the net interest income sensitivity analysis, are described in the annual report on Form
10-K for the period ended December 31, 2004. Net interest income sensitivities given a gradual and
sustained parallel interest rate shift over a one-year time horizon using yield curves current as
of March 31, 2005 and December 31, 2004, respectively, are shown in the table below. Principal
    
    
    PercentageAmount of Earning
    
    
    Increase/(Decrease)Assets, Interest
    
    
    in Interest Income/ExpenseBearing Liabilities
    
    
    Down 100
    
    
    Up 100and Swaps
    
    
    Basis Points
    
    
    Basis Points(In thousands)(Unaudited)March 31, 2005:Assets which reprice in: *One year or less
    
    $
    12,732,829
    
    
    
    (8.51
    )%
    
    
    8.63
    %Over one year
    
    
    13,686,154
    
    
    
    (2.62
    )
    
    
    1.88$
    26,418,983
    
    
    
    (5.59
    )
    
    
    5.29Liabilities which reprice in:One year or less
    
    $
    16,482,389
    
    
    
    (19.36
    )%
    
    
    21.47
    %Over one year
    
    
    4,237,857
    
    
    
    (0.94
    )
    
    
    0.94$
    20,720,246
    
    
    
    (12.49
    )
    
    
    13.81Total net interest income sensitivity
    
    
    
    
    
    
    (1.62
    )%
    
    
    0.38
    %December 31, 2004:Assets which reprice in: *One year or less
    
    $
    12,480,418
    
    
    
    (8.94
    )%
    
    
    9.23
    %Over one year
    
    
    13,610,460
    
    
    
    (2.81
    )
    
    
    2.40$
    26,090,878
    
    
    
    (5.83
    )
    
    
    5.77Liabilities which reprice in:One year or less
    
    $
    16,491,092
    
    
    
    (24.19
    )%
    
    
    27.69
    %Over one year
    
    
    3,920,666
    
    
    
    (1.15
    )
    
    
    1.33$
    20,411,758
    
    
    
    (15.16
    )
    
    
    17.36Total net interest income sensitivity
    
    
    
    
    
    
    (1.26
    )%
    
    
    0.10
    %
   *
     Excludes noninterest earning trading account assets As shown in the table above, the Companys balance sheet became more sensitive to both rising
and falling interest rates from December 31, 2004 to March 31, 2005. The asset side of the balance
sheet largely remained stable with its year-end position, while the liability side decreased its
sensitivity to both rising and declining interest rates. This decrease in sensitivity on the
liability side was primarily due to the extension of short-term liabilities into term deposits. -30-




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##### Table of Contents



Item 4  Controls and Procedures The management of the Company is responsible for periodically evaluating the Companys
disclosure controls and procedures, which are defined under applicable SEC regulations as controls
and other procedures of a reporting company designed to ensure that information required to be
disclosed by the reporting company in its periodic reports filed with the Commission is recorded,
processed, summarized, and reported on a timely basis. As of March 31, 2005, the Companys management, with the participation of its Chairman and
Chief Executive Officer and its Chief Financial Officer, conducted an evaluation of the
effectiveness of the design and operation of the Companys disclosure controls and procedures.
Based on that review, the Chairman and Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures, as designed and implemented, were
effective. There have been no changes in the Companys internal control over financial reporting
during the most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting. - 31 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 PART II. OTHER INFORMATION 
 
 Item 1  Legal Proceedings In the ordinary course of business, the Company is subject to legal proceedings, which involve
claims for substantial monetary relief. However, based upon the advice of legal counsel,
management is of the opinion that any legal proceedings, individually or in the aggregate, will not
have a material adverse effect on the Companys financial condition or results of operations. 
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities Total Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that May YetTotal Number of
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Be PurchasedShares Purchased (1)
    
    
    Paid Per Share
    
    
    Announced Program (2)
    
    
    Under the Program (2)January 1, 2005 
January 31, 2005
    
    
    28,204
    
    
    $
    46.42
    
    
    
    
    
    
    
    4,338,600February 1, 2005 
February 28, 2005
    
    
    7,032
    
    
    
    46.48
    
    
    
    
    
    
    
    4,338,600March 1, 2005 
March 31, 2005
    
    
    1,155
    
    
    
    46.55
    
    
    
    
    
    
    
    4,338,600Total
    
    
    36,391
    
    
    $
    46.43
    
    
    
    
   (1)
    
    This column includes (a) purchases of equity instruments under the Companys publicly announced share repurchase
programs described in (2) below and (b) the surrender to the Company by plan participants of shares of common
stock to satisfy the exercise price related to the exercise of employee stock options during the period
indicated.(2)
    
    On January 16, 2003, the Company announced that its Board of Directors had authorized management to purchase 6.3
million shares of the Companys outstanding common stock from time to time through open market transactions
either directly or through brokers or agents, and has no expiration date. Additionally, on August 16, 2003, the
Company announced that its Board of Directors had authorized management to purchase an additional 4.1 million
shares of the Companys outstanding common stock from time to time through open market transactions either
directly or through brokers or agents, and has no expiration date. 
 Item 5  Other
Information On February 21, 2005 the Compensation Committee (the Committee) of the Board of Directors of
Compass Bancshares, Inc. (the Company) approved the performance criteria for determination of
bonus awards for the 2005 fiscal year under the Compass Bancshares, Inc. 2002 Incentive Compensation Plan
(the Plan). The performance criteria applicable to all
bonus awards under the Plan for 2005 are
earnings per share and return on common equity. The actual bonus awards payable for the fiscal year
ending December 31, 2005, if any, will vary depending on the extent to which actual performance
meets, exceeds or falls short of the performance criteria approved by the Committee.
The maximum bonus opportunities established by the Committee for
executive officers range from 100 percent to 200 percent of base
salary. On February 21, 2005, the Board of Directors approved the following fee schedule for
non-employee directors: (1) a monthly retainer of $2,687.50 ($3020.83 for committee chairs), (2)
$1,750 for each board meeting attended, (3) $1,300 for each committee meeting attended, (4) an
annual stock option grant for 2,000 shares of Compass Bancshares, Inc. common stock, and (5)
reimbursement of reasonable out-of-pocket expenses incurred for attendance at Board and Board
committee meetings. Monthly retainers and fees are paid into an account for the purchase of
Compass common stock under Compass Director & Executive Stock Purchase Plan, which includes
provisions for an additional matching contribution from Compass of 45% and a gross-up to
reimburse the directors for all federal income tax obligations attributable to these retainer, fees
and matching contributions. The form of stock option agreement for non-employee directors is listed
as Exhibit 10(cc) to this report. 
 Item 6  Exhibits (3) Articles of Incorporation and By-Laws of Compass Bancshares, Inc. (a)
    
    Restated Certificate of Incorporation of Compass Bancshares, Inc., as
amended, dated May 17, 1982 (incorporated by reference to Exhibit 3(a) to
Compass Bancshares, Inc.s December 31, 1997 Form 10-K, file number 000-06032,
filed March 23, 1998, with the Commission)(b)
    
    Certificate of Amendment, dated May 20, 1986, to Restated Certificate
of Incorporation of Compass Bancshares, Inc. (incorporated by reference to
Exhibit 3.2 to Compass Bancshares, Inc.s Registration Statement on Form S-4,
Registration No. 33-46086 filed with the Commission)(c)
    
    Certificate of Amendment, dated May 15, 1987, to Restated Certificate
of Incorporation of Compass Bancshares, Inc. (incorporated by reference to
Exhibit 3.1.2 to Compass Bancshares, Inc.s Post-Effective Amendment No. 1 to
Registration Statement on Form S-4, Registration No. 33-10797 filed with the
Commission)(d)
    
    Certificate of Amendment, dated September 16, 1994, to Restated
Certificate of Incorporation of Compass Bancshares, Inc. (incorporated by
reference to Exhibit 3.5(1) to Compass Bancshares, Inc.s Registration
Statement on Form S-4, Registration No. 33-55899, filed with the Commission)
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##### Table of Contents



(a) Exhibits (continued) (e)
    
    Certificate of Amendment, dated November 3, 1993, to Restated
Certificate of Incorporation of Compass Bancshares, Inc. (incorporated by
reference to Exhibit 3(d) to Compass Bancshares, Inc.s Registration Statement
on Form S-4, Registration No. 33-51919, filed with the Commission)(f)
    
    Certificate of Amendment, dated May 15, 1998, to Restated Certificate
of Incorporation of Compass Bancshares, Inc. (filed as exhibit 4.6 to Compass
Bancshares, Inc.s Registration Statement on Form S-3, Registration Statement
No. 333-60725, filed with the Commission)(g)
    
    Certificate of Amendment, dated May 1, 2002, to Restated Certificate of
Incorporation of Compass Bancshares, Inc. (incorporated by reference to Exhibit
4.7 to Compass Bancshares, Inc.s Registration Statement on Form S-8,
Registration No. 333-90806, filed June 19, 2002 with the Commission)(h)
    
    Bylaws of Compass Bancshares, Inc. (Amended and Restated as of March
15, 1982) (incorporated by reference to Exhibit 3(f) to Compass Bancshares,
Inc.s December 31, 1997 Form 10-K, file number 000-06032, filed March 23,
1998, with the Commission)
 (4) Instruments Defining the Rights of Security Holders, Including Indentures (a)
    
    Form of Indenture between Compass Bancshares, Inc. (formerly Central
Bancshares of the South, Inc.) and JPMorgan Chase Bank (formerly Chemical
Bank), as Senior Trustee (incorporated by reference to Exhibit 4(g) to Compass
Bancshares, Inc.s Registration Statement on Form S-3, Registration No.
33-61018, filed with the Commission)(b)
    
    Form of Indenture between Compass Bancshares, Inc. (formerly Central
Bancshares of the South, Inc.) and JPMorgan Chase Bank (formerly Chemical
Bank), as Subordinated Trustee (incorporated by reference to Exhibit 4(f) to
Compass Bancshares, Inc.s Registration Statement on Form S-3, Registration No.
33-61018, filed with the Commission)
 (10) Material Contracts (a)
    
    Compass Bancshares, Inc., 1996 Long Term Incentive Plan (incorporated
by reference to Exhibit 4(g) to Compass Bancshares, Inc.s Registration
Statement on Form S-8, Registration No. 333-15117, filed October 30, 1996, with
the Commission)(b)
    
    Compass Bancshares, Inc., 1999 Omnibus Incentive Compensation Plan
(incorporated by reference to Exhibit 10(a) to Compass Bancshares, Inc.s
Registration Statement on Form S-8, Registration No. 333-86455, filed September
2, 1999, with the Commission)(c)
    
    Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and D. Paul Jones, Jr. (incorporated by reference to Exhibit
10(e) to Compass Bancshares, Inc.s March 31, 2000 Form 10-Q, file number
000-06032, filed May 15, 2000, with the Commission)(d)
    
    Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Garrett R. Hegel (incorporated by reference to Exhibit
10(g) to Compass Bancshares, Inc.s March 31, 2000 Form 10-Q, file number
000-06032, filed May 15, 2000, with the Commission)(e)
    
    Employment Agreement, dated November 24, 1997, between Compass
Bancshares, Inc. and James D. Barri (incorporated by reference to Exhibit 10(j)
to Compass Bancshares, Inc.s March 31, 2000 Form 10-Q, file number 000-06032,
filed May 15, 2000, with the Commission)(f)
    
    Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and G. Ray Stone (incorporated by reference to Exhibit 10(i)
to Compass Bancshares, Inc. Registration Statement on Form S-4, Registration
No. 333-15373, filed November 1, 1996, with the Commission)(g)
    
    Employment Agreement, dated March 1, 1998, between Compass Bancshares,
Inc. and Clayton D. Pledger (incorporated by reference to Exhibit 10(g) to
Compass Bancshares, Inc. December 31, 2001 Form 10-K, file number 000-06032,
filed March 11, 2002, with the Commission)
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(a) Exhibits (continued) (h)
    
    First Amendment to Employment Agreement, dated March 31, 1997, between
Compass Bancshares, Inc. and D. Paul Jones, Jr. (incorporated by reference to
Exhibit 10(h) to Compass Bancshares, Inc.s December 31, 2004 Form 10-K, file
number 001-31272, filed February 28, 2005, with the Commission)(i)
    
    First Amendment to Employment
Agreement, dated April 14, 1997, between
Compass Bancshares, Inc. and Garrett R. Hegel (incorporated by reference to
Exhibit 10(i) to Compass Bancshares, Inc.s December 31, 2004 Form 10-K, file
number 001-31272, filed February 28, 2005, with the Commission)(j)
    
    First Amendment to Employment
Agreement, dated April 18, 1997, between
Compass Bancshares, Inc. and G. Ray Stone (incorporated by reference to Exhibit
10(j) to Compass Bancshares, Inc.s December 31, 2004 Form 10-K, file number
001-31272, filed February 28, 2005, with the Commission)(k)
    
    Amendment to Employment Agreement, dated October 12, 2001, between
Compass Bancshares, Inc. and D. Paul Jones, Jr. (incorporated by reference to
Exhibit 10(i) to Compass Bancshares, Inc.s December 31, 2001 Form 10-K, file
number 000-06032, filed March 11, 2002, with the Commission)(l)
    
    Amendment to Employment Agreement, dated October 12, 2001, between
Compass Bancshares, Inc. and Garrett R. Hegel (incorporated by reference to
Exhibit 10(j) to Compass Bancshares, Inc.s December 31, 2001 Form 10-K, file
number 000-06032, filed March 11, 2002, with the Commission)(m)
    
    Amendment to Employment Agreement, dated October 12, 2001, between
Compass Bancshares, Inc. and James D. Barri (incorporated by reference to
Exhibit 10(l) to Compass Bancshares, Inc.s December 31, 2001 Form 10-K, file
number 000-06032, filed March 11, 2002, with the Commission)(n)
    
    Amendment to Employment Agreement, dated October 12, 2001, between
Compass Bancshares, Inc. and Clayton D. Pledger (incorporated by reference to
Exhibit 10(h) to Compass Bancshares, Inc.s December 31, 2001 Form 10-K, file
number 000-06032, filed March 11, 2002, with the Commission)(o)
    
    Amendment to Employment Agreement, dated October 12, 2001, between
Compass Bancshares, Inc. and G. Ray Stone (incorporated by reference to Exhibit
10(o) to Compass Bancshares, Inc.s December 31, 2004 Form 10-K, file number
001-31272, filed February 28, 2005, with the Commission)(p)
    
    Compass Bancshares, Inc., Employee Stock Ownership Benefit Restoration
Plan, dated as of May 1, 1997 (incorporated by reference to Exhibit 10(j) to
Compass Bancshares, Inc.s December 31, 1999 Form 10-K, file number 000-06032,
filed March 23, 2000, with the Commission)(q)
    
    Compass Bancshares, Inc., Supplemental Retirement Plan, dated as of May
1, 1997 (incorporated by reference to Exhibit 10(k) to Compass Bancshares,
Inc.s December 31, 1999 Form 10-K, file number 000-06032, filed March 23,
2000, with the Commission)(r)
    
    Deferred Compensation Plan for Compass Bancshares, Inc., dated as of
February 1, 1996. (Amended and Restated as of May 1, 1998) (incorporated by
reference to Exhibit 10(l) to Compass Bancshares, Inc.s December 31, 1999 Form
10-K, file number 000-06032, filed March 23, 2000, with the Commission)(s)
    
    Compass Bancshares, Inc. Special Supplemental Retirement Plan, dated as
of May 1, 1997. (Amended and Restated as of February 27, 2000) (incorporated
by reference to Exhibit 10(n) to Compass Bancshares, Inc.s March 31, 2000 Form
10-Q, file number 000-06032, filed May 15, 2000, with the Commission)
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(a) Exhibits (continued) (t)
    
    Amendment Number One to the Compass Bancshares, Inc., Special
Supplemental Retirement Plan, dated April 26, 2000 (incorporated by reference
to Exhibit 10(q) to Compass Bancshares, Inc.s December 31, 2001 Form 10-K,
file 000-06032, filed March 11, 2002, with the Commission)(u)
    
    Amendment Number Two to the Compass Bancshares, Inc., Special
Supplemental Retirement Plan, dated as of February 9, 2001(incorporated by
reference to Exhibit 10(r) to Compass Bancshares, Inc.s December 31, 2001 Form
10-K, file number 000-06032, filed March 11, 2002, with the Commission)(v)
    
    Compass Bancshares, Inc., Director & Executive Stock Purchase Plan
(formerly known as Monthly Investment Plan), as Amended and Restated, effective
as of September 1, 2001 (incorporated by reference to Exhibit 4.8 to Compass
Bancshares, Inc.s Registration Statement on Form S-8, Registration No.
333-26884, filed July 31, 2001 with the Commission)(w)
    
    Compass Bancshares, Inc. 2002 Incentive Compensation Plan (incorporated by
reference to Exhibit 4.9 to Compass Bancshares, Inc.s Registration Statement
on Form S-8, Registration No. 333-90806, filed June 19, 2002 with the
Commission)(x)
    
    Form of Performance Contingent
Restricted Stock Agreement filed as Exhibit 10.1 to Compass
Bancshares, Inc.s Current Report on Form 8-K dated February 18,
2005 and incorporated herein by reference.(y)
    


    Executive Officer Compensation Arrangements.(z)
    


    Form of Incentive Stock Option Agreement filed as Exhibit 10.2 to Compass Bancshares, Inc.s
Current Report on Form 8-K dated February 18, 2005 and incorporated herein by reference.(aa)
    


    Form of Incentive Stock Option Agreement filed as Exhibit 10.3 to Compass Bancshares, Inc.s
Current Report on Form 8-K dated February 18, 2005 and incorporated herein by reference.(bb)
    


    Form of Incentive Stock Option Agreement filed as Exhibit 10.4 to Compass Bancshares, Inc.s
Current Report on Form 8-K dated February 18, 2005 and incorporated herein by reference.(cc)
    


    Form of Stock Option Agreement for Non-Employee Directors(31)(a)
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by D.
Paul Jones, Jr., Chief Executive Officer(31)(b)
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by
Garrett. R. Hegel, Chief Financial Officer(32)(a)
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 by D. Paul Jones, Jr., Chief Executive
Officer(32)(b)
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 by Garrett R. Hegel, Chief Financial Officer
 Certain financial statement schedules and exhibits have been omitted because they are either not
required or the information is otherwise included in the Notes to Consolidated Financial
Statements. - 35 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES 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. May 5, 2005
    
    
    
    By:
    
    /s/ Garrett R. HegelDate
    
    
    
    
    
    Garrett R. HegelChief Financial Officer
 - 36 -