##### 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 September 30, 2004
    
    Commission File No. 0-6032
 (COMPASS BANCSHARES, INC. 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 October 31, 2004Common Stock, $2 Par Value
    
    122,873,908
 The number of pages of this report is 37.




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES INDEX  
 PagePART I. FINANCIAL INFORMATIONItem 1 Financial Statements (Unaudited)Consolidated Balance Sheet as of September 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2004
and 2003
    
    
    4Consolidated Statements of Changes In Shareholders Equity for the Nine Months Ended
September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2004 and 2003
    
    
    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
    
    
    31Item 4 Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    33Item 2 Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
    
    
    33Item 6 Exhibits
    
    
    33EX-31.1 Certification - CEOEX-31.2 Certification - CFOEX-32.1 Rule 906 - CEOEX-32.2 Rule 906 - CFO
  - 2 -




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1  Financial Statements COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Consolidated Balance Sheet
 September 30, 2004
    
    December 31, 2003AssetsCash and due from banks
    
    $
    635,533
    
    
    $
    726,492Federal funds sold and securities purchased
under agreements to resell
    
    
    42,503
    
    
    
    78,165Trading account assets
    
    
    54,965
    
    
    
    59,024Investment securities available for sale
    
    
    4,245,188
    
    
    
    4,375,208Investment securities held to maturity (fair value of
$2,937,718 and $2,949,023 for 2004 and 2003, respectively)
    
    
    2,918,380
    
    
    
    2,936,344Loans
    
    
    18,419,986
    
    
    
    17,365,802Allowance for loan losses
    
    
    (256,038
    )
    
    
    (244,882
    )Net loans
    
    
    18,163,948
    
    
    
    17,120,920Premises and equipment, net
    
    
    530,583
    
    
    
    527,295Bank owned life insurance
    
    
    419,023
    
    
    
    409,188Goodwill
    
    
    298,839
    
    
    
    293,839Other assets
    
    
    472,196
    
    
    
    436,638Total assets
    
    $
    27,781,158
    
    
    $
    26,963,113Liabilities and Shareholders EquityDeposits:Noninterest bearing
    
    $
    5,319,272
    
    
    $
    4,627,153Interest bearing
    
    
    11,172,875
    
    
    
    11,060,670Total deposits
    
    
    16,492,147
    
    
    
    15,687,823Federal funds purchased and securities sold under
agreements to repurchase
    
    
    4,716,861
    
    
    
    4,118,624Other short-term borrowings
    
    
    204,887
    
    
    
    263,537FHLB and other borrowings
    
    
    4,153,745
    
    
    
    4,827,814Accrued expenses and other liabilities
    
    
    227,780
    
    
    
    193,432Total liabilities
    
    
    25,795,420
    
    
    
    25,091,230Shareholders equity:Preferred stock (25,000,000 shares authorized; Issued  none)
    
    
    
    
    
    
    Common stock of $2 par value:Authorized  300,000,000 shares;
Issued  132,730,134 shares in 2004 and
131,569,085 shares in 2003
    
    
    265,460
    
    
    
    263,138Treasury stock, at cost (9,956,145 shares in 2004 and
9,482,900 shares in 2003)
    
    
    (344,312
    )
    
    
    (317,669
    )Surplus
    
    
    257,005
    
    
    
    227,404Loans to finance stock purchases
    
    
    (1,059
    )
    
    
    (809
    )Unearned restricted stock
    
    
    (11,077
    )
    
    
    (6,485
    )Accumulated other comprehensive income (loss)
    
    
    (4,031
    )
    
    
    37,306Retained earnings
    
    
    1,823,752
    
    
    
    1,668,998Total shareholders equity
    
    
    1,985,738
    
    
    
    1,871,883Total liabilities and shareholders equity
    
    $
    27,781,158
    
    
    $
    26,963,113
 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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest income:Interest and fees on loans
    
    $
    238,392
    
    
    $
    236,525
    
    
    $
    693,530
    
    
    $
    743,668Interest on investment securities available for sale
    
    
    42,914
    
    
    
    54,816
    
    
    
    137,820
    
    
    
    181,288Interest on investment securities held to maturity
    
    
    34,709
    
    
    
    25,292
    
    
    
    107,780
    
    
    
    35,132Interest on federal funds sold and securities
purchased under agreements to resell
    
    
    283
    
    
    
    100
    
    
    
    599
    
    
    
    318Interest on trading account assets
    
    
    111
    
    
    
    133
    
    
    
    367
    
    
    
    380Total interest income
    
    
    316,409
    
    
    
    316,866
    
    
    
    940,096
    
    
    
    960,786Interest expense:Interest on deposits
    
    
    37,861
    
    
    
    35,714
    
    
    
    109,821
    
    
    
    127,882Interest on federal funds purchased and securities
sold under agreements to repurchase
    
    
    15,438
    
    
    
    8,468
    
    
    
    35,458
    
    
    
    20,241Interest on other short-term borrowings
    
    
    395
    
    
    
    247
    
    
    
    788
    
    
    
    758Interest on FHLB and other borrowings
    
    
    36,184
    
    
    
    42,179
    
    
    
    117,898
    
    
    
    131,073Total interest expense
    
    
    89,878
    
    
    
    86,608
    
    
    
    263,965
    
    
    
    279,954Net interest income
    
    
    226,531
    
    
    
    230,258
    
    
    
    676,131
    
    
    
    680,832Provision for loan losses
    
    
    25,617
    
    
    
    30,354
    
    
    
    78,140
    
    
    
    88,042Net interest income after provision for loan
losses
    
    
    200,914
    
    
    
    199,904
    
    
    
    597,991
    
    
    
    592,790Noninterest income:Service charges on deposit accounts
    
    
    73,401
    
    
    
    63,907
    
    
    
    210,723
    
    
    
    175,418Credit card service charges and fees
    
    
    19,554
    
    
    
    15,165
    
    
    
    55,139
    
    
    
    44,895Insurance commissions
    
    
    11,787
    
    
    
    11,601
    
    
    
    39,180
    
    
    
    32,456Retail investment sales
    
    
    8,501
    
    
    
    6,736
    
    
    
    24,151
    
    
    
    21,220Asset management fees
    
    
    5,479
    
    
    
    5,475
    
    
    
    16,898
    
    
    
    16,273Corporate and correspondent investment sales
    
    
    4,347
    
    
    
    7,740
    
    
    
    15,220
    
    
    
    23,220Bank owned life insurance
    
    
    4,224
    
    
    
    4,066
    
    
    
    12,427
    
    
    
    12,984Investment securities gains, net
    
    
    25,129
    
    
    
    3
    
    
    
    27,336
    
    
    
    3Other
    
    
    19,892
    
    
    
    19,319
    
    
    
    63,170
    
    
    
    62,623Total noninterest income
    
    
    172,314
    
    
    
    134,012
    
    
    
    464,244
    
    
    
    389,092Noninterest expense:Salaries, benefits and commissions
    
    
    111,061
    
    
    
    108,580
    
    
    
    340,528
    
    
    
    323,257Equipment
    
    
    19,301
    
    
    
    17,778
    
    
    
    56,602
    
    
    
    53,977Net occupancy
    
    
    16,377
    
    
    
    15,857
    
    
    
    49,623
    
    
    
    45,676Professional services
    
    
    13,407
    
    
    
    14,260
    
    
    
    40,154
    
    
    
    41,260Marketing
    
    
    9,749
    
    
    
    8,019
    
    
    
    28,885
    
    
    
    24,169Communications
    
    
    5,246
    
    
    
    8,085
    
    
    
    16,607
    
    
    
    20,387Amortization of intangibles
    
    
    1,621
    
    
    
    1,841
    
    
    
    4,871
    
    
    
    5,467Merger and integration
    
    
    233
    
    
    
    343
    
    
    
    778
    
    
    
    1,264Loss on prepayment of FHLB advances
    
    
    25,136
    
    
    
    
    
    
    
    25,136
    
    
    
    Other
    
    
    30,370
    
    
    
    27,917
    
    
    
    90,645
    
    
    
    78,853Total noninterest expense
    
    
    232,501
    
    
    
    202,680
    
    
    
    653,829
    
    
    
    594,310Net income before income tax expense
    
    
    140,727
    
    
    
    131,236
    
    
    
    408,406
    
    
    
    387,572Income tax expense
    
    
    47,125
    
    
    
    44,679
    
    
    
    136,812
    
    
    
    131,882Net income
    
    $
    93,602
    
    
    $
    86,557
    
    
    $
    271,594
    
    
    $
    255,690Basic earnings per share
    
    $
    0.76
    
    
    $
    0.70
    
    
    $
    2.22
    
    
    $
    2.04Basic weighted average shares outstanding
    
    
    122,320
    
    
    
    124,869
    
    
    
    122,153
    
    
    
    125,538Diluted earnings per share
    
    $
    0.75
    
    
    $
    0.68
    
    
    $
    2.17
    
    
    $
    2.00Diluted weighted average shares outstanding
    
    
    125,557
    
    
    
    127,566
    
    
    
    125,218
    
    
    
    127,986Dividends per share
    
    $
    0.3125
    
    
    $
    0.2800
    
    
    $
    0.9375
    
    
    $
    0.8400
 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, 2002
    
    $
    260,824
    
    
    $
    (129,415
    )
    
    $
    199,907
    
    
    $
    1,468,517
    
    
    $
    136,109
    
    
    $
    (4,440
    )
    
    $
    1,931,502Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255,690
    
    
    
    
    
    
    
    
    
    
    
    255,690
    
    
    $
    255,690Change in unrealized holding gains on securities
available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,877
    )
    
    
    
    
    
    
    (59,877
    )
    
    
    (59,877
    )Change in accumulated gains on cash-flow
hedging instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,617
    )
    
    
    
    
    
    
    (23,617

    )
    
    
    (23,617
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    172,196Common dividends declared ($0.8400 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,713
    )
    
    
    
    
    
    
    
    
    
    
    (105,713
    )Exercise of stock options and other issuances
    
    
    1,636
    
    
    
    
    
    
    
    15,495
    
    
    
    (878
    )
    
    
    
    
    
    
    
    
    
    
    16,253Issuance of restricted stock, net of cancellations
    
    
    337
    
    
    
    
    
    
    
    5,464
    
    
    
    
    
    
    
    
    
    
    
    (5,801
    )
    
    
    Repayment of loans to finance stock
purchases, net of advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    728Issuance of treasury stock for acquisitions and
employee benefit plans
    
    
    
    
    
    
    15,073
    
    
    
    620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,693Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,039
    
    
    
    2,039Purchase of treasury stock
    
    
    
    
    
    
    (119,358
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119,358
    )Balance, September 30, 2003
    
    $
    262,797
    
    
    $
    (233,700
    )
    
    $
    221,486
    
    
    $
    1,617,616
    
    
    $
    52,615
    
    
    $
    (7,474
    )
    
    $
    1,913,340Balance, December 31, 2003
    
    $
    263,138
    
    
    $
    (317,669
    )
    
    $
    227,404
    
    
    $
    1,668,998
    
    
    $
    37,306
    
    
    $
    (7,294
    )
    
    $
    1,871,883Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271,594
    
    
    
    
    
    
    
    
    
    
    
    271,594
    
    
    $
    271,594Change in unrealized holding gains / losses on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,056
    )
    
    
    
    
    
    
    (37,056
    )
    
    
    (37,056
    )Change in accumulated gains / losses on cash-flow
hedging instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,281
    )
    
    
    
    
    

    
    (4,281
    )
    
    
    (4,281
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    230,257Common dividends declared ($0.9375 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115,528
    )
    
    
    
    
    
    
    
    
    
    
    (115,528
    )Exercise of stock options and other issuances
    
    
    2,060
    
    
    
    
    
    
    
    21,968
    
    
    
    (1,312
    )
    
    
    
    
    
    
    
    
    
    
    22,716Issuance of restricted stock, net of cancellations
    
    
    262
    
    
    
    
    
    
    
    6,720
    
    
    
    
    
    
    
    
    
    
    
    (7,651
    )
    
    
    (669
    )Advances on loans to finance stock purchases,
net of repayments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    (250
    )Issuance of treasury stock for acquisitions and
employee benefit plans
    
    
    
    
    
    
    7,100
    
    
    
    913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,013Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,059
    
    
    
    3,059Purchase of treasury stock
    
    
    
    
    
    
    (33,743
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,743
    )Balance, September 30, 2004
    
    $
    265,460
    
    
    $
    (344,312
    )
    
    $
    257,005
    
    
    $
    1,823,752
    
    
    $
    (4,031
    )
    
    $
    (12,136
    )
    
    $
    1,985,738
 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
 Nine Months EndedSeptember 30,2004
    
    2003Operating Activities:Net income
    
    $
    271,594
    
    
    $
    255,690Adjustments to reconcile net income to cash provided by operations:Depreciation and amortization
    
    
    79,440
    
    
    
    85,334Accretion of discount and loan fees
    
    
    (13,827
    )
    
    
    (11,471
    )Provision for loan losses
    
    
    78,140
    
    
    
    88,042Net change in trading account assets
    
    
    4,059
    
    
    
    (8,542
    )Net gain on sale of investment securities available for sale
    
    
    (27,336
    )
    
    
    (3
    )Net loss on prepayment of FHLB advances
    
    
    25,136
    
    
    
    Net gain on sale of branches
    
    
    
    
    
    
    (2,128
    )Increase in other assets
    
    
    (75,162
    )
    
    
    (75,705
    )Increase (decrease) in other liabilities
    
    
    58,750
    
    
    
    (6,340
    )Net cash provided by operating activities
    
    
    400,794
    
    
    
    324,877Investing Activities:Proceeds from maturities/calls of investment securities held to
maturity
    
    
    585,879
    
    
    
    489,570Proceeds from sales of investment securities available for sale
    
    
    812,248
    
    
    
    225,184Proceeds from maturities/calls of investment securities available for
sale
    
    
    684,966
    
    
    
    1,904,307Purchases of investment securities available for sale
    
    
    (1,392,921
    )
    
    
    (3,583,840
    )Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell
    
    
    35,662
    
    
    
    (7,820
    )Net increase in loan portfolio
    
    
    (1,724,255
    )
    
    
    (1,452,408
    )Net cash received in acquisitions
    
    
    
    
    
    
    1,669Net cash paid in sale of branches
    
    
    
    
    
    
    (26,051
    )Purchases of premises and equipment
    
    
    (46,910
    )
    
    
    (69,598
    )Proceeds from sales of other real estate owned
    
    
    23,958
    
    
    
    18,138Net cash used by investing activities
    
    
    (1,021,373
    )
    
    
    (2,500,849
    )
 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
 Nine Months EndedSeptember 30,2004
    
    2003Financing Activities:Net increase in demand deposits, NOW accounts
and savings accounts
    
    
    579,824
    
    
    
    983,454Net increase (decrease) in time deposits
    
    
    225,700
    
    
    
    (928,107
    )Net increase in federal funds purchased and securities sold
under agreements to repurchase
    
    
    598,237
    
    
    
    2,530,112Net decrease in short-term borrowings
    
    
    (58,650
    )
    
    
    (164,975
    )Proceeds from FHLB advances and other borrowings
    
    
    1,025,101
    
    
    
    800,000Repayment of FHLB advances and other borrowings
    
    
    (1,693,004
    )
    
    
    (780,386
    )Redemption of guaranteed preferred beneficial interests in
Companys junior subordinated deferrable interest debentures
    
    
    (23,000
    )
    
    
    (12,000
    )Common dividends paid
    
    
    (115,914
    )
    
    
    (105,399
    )Cash paid for the purchase of treasury stock
    
    
    (30,471
    )
    
    
    (119,358
    )Repayment of loans to finance stock purchases
    
    
    357
    
    
    
    971Proceeds from exercise of stock options
    
    
    21,440
    
    
    
    16,010Net cash provided by financing activities
    
    
    529,620
    
    
    
    2,220,322Net increase (decrease) in cash and due from banks
    
    
    (90,959
    )
    
    
    44,350Cash and due from banks at beginning of period
    
    
    726,492
    
    
    
    734,540Cash and due from banks at end of period
    
    $
    635,533
    
    
    $
    778,890Schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    $
    20,093
    
    
    $
    23,451Loans to facilitate the sale of other real estate owned
    
    
    1,006
    
    
    
    324Transfers of investment securities available for sale to
securities held to maturity
    
    
    
    
    
    
    2,797,765Assets retained in loan securitizations
    
    
    589,912
    
    
    
    767,510Loans to finance stock purchases
    
    
    607
    
    
    
    243Change in unrealized gain on available for sale investment
securities
    
    
    (50,175
    )
    
    
    (99,902
    )Issuance of restricted stock, net of cancellations
    
    
    7,651
    
    
    
    5,801Treasury stock exchanged for stock options and acquisition
earnouts
    
    
    7,802
    
    
    
    Business combinations and divestitures:Assets acquired
    
    
    
    
    
    
    20,876Liabilities assumed
    
    
    
    
    
    
    6,824Treasury stock issued
    
    
    
    
    
    
    15,721Assets sold
    
    
    
    
    
    
    41,853Liabilities sold
    
    
    
    
    
    
    70,032
 See accompanying Notes to Consolidated Financial Statements (Unaudited) - 7 -




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##### Table of Contents



COMPASS BANCSHARES, INC.
AND SUBSIDIARIES 
 Notes to the 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 (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 to
present fairly the financial position and the results of operations for the
interim periods have been made. All such adjustments are of a normal recurring
nature. The results of operations 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,
2003, as filed with the Securities and Exchange Commission on March 12, 2004. Certain reclassifications of prior years amounts have been made to
conform to 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
Sheet 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 judgments: historical loss
experience derived from analytical models, current trends and 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. 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 8, 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 - 8 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) consolidated in the Companys balance sheet. The Company evaluates
whether these entities should be 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 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 long-term incentive stock option plans and an 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
stock-based employee compensation cost is reflected in net income of the
Company for these plans. 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 2004 and 2003, respectively: risk-free
interest rates of 3.64 percent and 3.10 percent; expected dividend yields of
4.13 percent and 4.78 percent; volatility factors of the expected market price
of the Companys common stock of 0.275 and 0.309; 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 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 Companys options
granted in 2003 vest 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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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) The Companys actual and pro forma information follows (in thousands
except per share data): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income:As reported
    
    $
    93,602
    
    
    $
    86,557
    
    
    $
    271,594
    
    
    $
    255,690Deduct: Total stock-based employee
compensation
expense determined under fair value based
method for all awards, net of tax
    
    
    2,234
    
    
    
    2,776
    
    
    
    7,163
    
    
    
    8,020Pro forma net income
    
    $
    91,368
    
    
    $
    83,781
    
    
    $
    264,431
    
    
    $
    247,670Basic earnings per share:As reported
    
    $
    0.76
    
    
    $
    0.70
    
    
    $
    2.22
    
    
    $
    2.04Pro forma
    
    $
    0.74
    
    
    $
    0.67
    
    
    $
    2.16
    
    
    $
    1.97Diluted earnings per share:As reported
    
    $
    0.75
    
    
    $
    0.68
    
    
    $
    2.17
    
    
    $
    2.00Pro forma
    
    $
    0.73
    
    
    $
    0.66
    
    
    $
    2.11
    
    
    $
    1.94
 Website Availability of Reports Filed with the Securities and Exchange
Commission 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 Securities and Exchange
Commission, 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 Securities and Exchange
Commission. To access these reports directly, 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 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. On July 2, 2003, the Company completed the acquisition of Apogee Holdings,
Inc. (Apogee); a Houston, Texas based compensation and benefits consulting
company, which specializes in providing health and welfare plans, qualified
retirement plan services, executive benefits and compensation consulting to
corporate clients, as well as personal wealth transfer planning to high net
worth individuals. On March 10, 2003, the Company completed the acquisition of
Maxson-Mahoney-Turner, Inc. (MM&T); a Dallas, Texas based full-line general
insurance brokerage firm, which services commercial and retail customers in the
Dallas/Ft. Worth metroplex and the southwestern United States. MM&T
specializes in providing property and casualty insurance, personal insurance,
employee benefit plans and surety products. On March 3, 2003, the Company completed the acquisition of Mueller &
Associates, Inc. (Mueller); a Tucson, Arizona based full-line general
insurance brokerage firm, which services commercial and retail customers in
Tucson and throughout the state of Arizona. Mueller 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 September 30, 2004,
the maximum potential amount of future undiscounted payments the Company could
be required to make under outstanding contingent payment provisions is
approximately $18 million, primarily in the form of the Companys common stock. - 10 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) Divestitures In June 2003, the Company completed the sale of two non-strategic banking
centers in Nebraska. A gain of $2.1 million was realized on the sale and is
included in other income on the Consolidated Statements of Income for the
nine-month period ended September 30, 2003. 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
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 securities 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. 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 Companys Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003. 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 securities issued by Compass Trust I) and March 22, 2007 (for securities
issued 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. On March 19, 2004, the Company redeemed the Capital Securities issued in
connection with FW Capital I, a subsidiary business trust. Class B Preferred Stock In December 2000, a subsidiary of the Company issued $21 million of Class
B Preferred Stock (Preferred Stock). The Preferred Stock, net of discount,
was approximately $18 million at both September 30, 2004 and December 31, 2003.
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 (as defined in the offering circular). 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. - 11 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) The Companys Capital Securities and Preferred Stock are summarized below. Maturity
    
    September 30,
    
    December 31,Dates
    
    2004
    
    2003(in Thousands)Capital Securities:8.23% debentures payable to Compass Trust I
    
    
    2027
    
    
    $
    103,093
    
    
    $
    103,0939.38% debentures payable to FW Capital I *
    
    
    2029
    
    
    
    
    
    
    
    23,7117.35% debentures payable to Compass Trust III
    
    
    2032
    
    
    
    309,279
    
    
    
    309,279Fair value of hedged Capital Securities
    
    
    
    
    
    
    24,742
    
    
    
    27,760Class B Preferred Stock
    
    
    N/A
    
    
    
    17,993
    
    
    
    17,955Total Capital Securities and Preferred Stock
    
    
    
    
    
    $
    455,107
    
    
    $
    481,798
 * Redeemed on March 19, 2004. NOTE 4  Earnings Per Share Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(In Thousands Except Per Share Data)BASIC EARNINGS PER SHARE:Net income
    
    $
    93,602
    
    
    $
    86,557
    
    
    $
    271,594
    
    
    $
    255,690Weighted average shares outstanding
    
    
    122,320
    
    
    
    124,869
    
    
    
    122,153
    
    
    
    125,538Basic earnings per share
    
    $
    0.76
    
    
    $
    0.70
    
    
    $
    2.22
    
    
    $
    2.04DILUTED EARNINGS PER SHARE:Net income
    
    $
    93,602
    
    
    $
    86,557
    
    
    $
    271,594
    
    
    $
    255,690Weighted average shares outstanding
    
    
    122,320
    
    
    
    124,869
    
    
    
    122,153
    
    
    
    125,538Net effect of nonvested restricted stock and
the assumed exercise of stock options  based
on the treasury stock method using the
average
market price for the period
    
    
    3,237
    
    
    
    2,697
    
    
    
    3,065
    
    
    
    2,448Weighted average diluted shares outstanding
    
    
    125,557
    
    
    
    127,566
    
    
    
    125,218
    
    
    
    127,986Diluted earnings per share
    
    $
    0.75
    
    
    $
    0.68
    
    
    $
    2.17
    
    
    $
    2.00
 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, through 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 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 376 banking centers and through the use of alternative delivery channels
such as personal computer, internet, and telephone banking. The Retail - 12 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) Banking
segment provides individuals with comprehensive products and services,
including home mortgages, credit cards, deposit accounts, mutual funds, and
brokerage. In addition, Retail Banking serves the Companys small business
customers, and includes 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
Wealth Management segment is also the discretionary investment manager of
Expedition Funds®, the Companys family of proprietary mutual funds. The Treasury segments primary function is to manage the investment
securities portfolio, the interest rate sensitivity of the Companys balance
sheet, 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. 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 2003 has been revised to conform to the
2004 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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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) The following table presents information for the Companys segments as of
and for the three and nine months ended September 30, 2004 and 2003. For the Three Months Ended September 30, 2004(in Thousands)CorporateCorporate
    
    Retail
    
    Wealth
    
    
    
    
    
    Support andBanking
    
    Banking
    
    Management
    
    Treasury
    
    Other
    
    ConsolidatedIncome StatementNet interest income
    
    $
    87,630
    
    
    $
    90,280
    
    
    $
    12,465
    
    
    $
    17,820
    
    
    $
    18,336
    
    
    $
    226,531Noninterest income (expense)
    
    
    31,459
    
    
    
    104,098
    
    
    
    7,174
    
    
    
    31,987
    
    
    
    (2,404
    )
    
    
    172,314Noninterest expense
    
    
    47,915
    
    
    
    99,941
    
    
    
    9,216
    
    
    
    28,951
    
    
    
    46,478
    
    
    
    232,501Segment income (loss)
    
    $
    71,174
    
    
    $
    94,437
    
    
    $
    10,423
    
    
    $
    20,856
    
    
    $
    (30,546
    )
    
    
    166,344Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,617Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,727Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,125Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    93,602Balance SheetAverage assets
    
    $
    9,950,238
    
    
    $
    6,805,509
    
    
    $
    1,235,366
    
    
    $
    7,671,708
    
    
    $
    2,063,225
    
    
    $
    27,726,046Average loans
    
    
    9,815,068
    
    
    
    6,545,662
    
    
    
    1,226,708
    
    
    
    
    
    
    
    486,251
    
    
    
    18,073,689Average deposits
    
    
    4,697,484
    
    
    
    9,297,687
    
    
    
    1,226,798
    
    
    
    1,274,815
    
    
    
    (7,325
    )
    
    
    16,489,459Period-end assets
    
    $
    10,121,535
    
    
    $
    6,922,967
    
    
    $
    1,271,920
    
    
    $
    7,595,306
    
    
    $
    1,869,430
    
    
    $
    27,781,158Period-end loans
    
    
    9,985,392
    
    
    
    6,649,454
    
    
    
    1,263,732
    
    
    
    
    
    
    
    521,408
    
    
    
    18,419,986Period-end deposits
    
    
    4,811,143
    
    
    
    9,363,248
    
    
    
    1,216,904
    
    
    
    1,111,115
    
    
    
    (10,263
    )
    
    
    16,492,147
 For the Three Months Ended September 30, 2003(in Thousands)CorporateCorporate
    
    Retail
    
    Wealth
    
    
    
    
    
    Support andBanking
    
    Banking
    
    Management
    
    Treasury
    
    Other
    
    ConsolidatedIncome StatementNet interest income
    
    $
    78,945
    
    
    $
    72,258
    
    
    $
    9,746
    
    
    $
    17,113
    
    
    $
    52,196
    
    
    $
    230,258Noninterest income (expense)
    
    
    33,949
    
    
    
    93,503
    
    
    
    7,104
    
    
    
    5,842
    
    
    
    (6,386
    )
    
    
    134,012Noninterest expense
    
    
    46,955
    
    
    
    94,113
    
    
    
    9,785
    
    
    
    2,617
    
    
    
    49,210
    
    
    
    202,680Segment income (loss)
    
    $
    65,939
    
    
    $
    71,648
    
    
    $
    7,065
    
    
    $
    20,338
    
    
    $
    (3,400
    )
    
    
    161,590Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,354Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131,236Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,679Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    86,557Balance SheetAverage assets
    
    $
    9,196,879
    
    
    $
    6,060,588
    
    
    $
    1,039,661
    
    
    $
    6,936,352
    
    
    $
    2,367,791
    
    
    $
    25,601,271Average loans
    
    
    9,028,543
    
    
    
    5,833,512
    
    
    
    1,030,840
    
    
    
    
    
    
    
    764,604
    
    
    
    16,657,499Average deposits
    
    
    4,074,240
    
    
    
    8,912,261
    
    
    
    1,245,040
    
    
    
    624,820
    
    
    
    28,059
    
    
    
    14,884,420Period-end assets
    
    $
    9,211,549
    
    
    $
    6,260,345
    
    
    $
    1,037,331
    
    
    $
    7,089,422
    
    
    $
    2,597,997
    
    
    $
    26,196,644Period-end loans
    
    
    9,053,746
    
    
    
    6,019,910
    
    
    
    1,029,273
    
    
    
    
    
    
    
    924,596
    
    
    
    17,027,525Period-end deposits
    
    
    4,213,721
    
    
    
    8,907,925
    
    
    
    1,287,265
    
    
    
    683,973
    
    
    
    22,461
    
    
    
    15,115,345
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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) For the Nine Months Ended September 30, 2004(in Thousands)CorporateCorporate
    
    Retail
    
    Wealth
    
    
    
    
    
    Support andBanking
    
    Banking
    
    Management
    
    Treasury
    
    Other
    
    ConsolidatedIncome StatementNet interest income
    
    $
    253,395
    
    
    $
    247,168
    
    
    $
    34,044
    
    
    $
    59,924
    
    
    $
    81,600
    
    
    $
    676,131Noninterest income (expense)
    
    
    102,981
    
    
    
    297,873
    
    
    
    21,971
    
    
    
    48,264
    
    
    
    (6,845
    )
    
    
    464,244Noninterest expense
    
    
    146,510
    
    
    
    296,195
    
    
    
    28,903
    
    
    
    36,149
    
    
    
    146,072
    
    
    
    653,829Segment income (loss)
    
    $
    209,866
    
    
    $
    248,846
    
    
    $
    27,112
    
    
    $
    72,039
    
    
    $
    (71,317
    )
    
    
    486,546Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,140Net income before income
tax expense
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    408,406Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,812Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    271,594Balance SheetAverage assets
    
    $
    9,823,825
    
    
    $
    6,631,198
    
    
    $
    1,189,135
    
    
    $
    7,647,690
    
    
    $
    2,198,948
    
    
    $
    27,490,796Average loans
    
    
    9,678,865
    
    
    
    6,378,131
    
    
    
    1,180,505
    
    
    
    
    
    
    
    525,579
    
    
    
    17,763,080Average deposits
    
    
    4,558,995
    
    
    
    9,213,120
    
    
    
    1,244,210
    
    
    
    1,180,149
    
    
    
    (6,248
    )
    
    
    16,190,226Period-end assets
    
    $
    10,121,535
    
    
    $
    6,922,967
    
    
    $
    1,271,920
    
    
    $
    7,595,306
    
    
    $
    1,869,430
    
    
    $
    27,781,158Period-end loans
    
    
    9,985,392
    
    
    
    6,649,454
    
    
    
    1,263,732
    
    
    
    
    
    
    
    521,408
    
    
    
    18,419,986Period-end deposits
    
    
    4,811,143
    
    
    
    9,363,248
    
    
    
    1,216,904
    
    
    
    1,111,115
    
    
    
    (10,263
    )
    
    
    16,492,147
 For the Nine Months Ended September 30, 2003(in Thousands)CorporateCorporate
    
    Retail
    
    Wealth
    
    
    
    
    
    Support andBanking
    
    Banking
    
    Management
    
    Treasury
    
    Other
    
    ConsolidatedIncome StatementNet interest income
    
    $
    231,380
    
    
    $
    202,256
    
    
    $
    27,277
    
    
    $
    50,658
    
    
    $
    169,261
    
    
    $
    680,832Noninterest income (expense)
    
    
    96,262
    
    
    
    258,083
    
    
    
    21,042
    
    
    
    20,068
    
    
    
    (6,363
    )
    
    
    389,092Noninterest expense
    
    
    136,486
    
    
    
    271,732
    
    
    
    28,975
    
    
    
    8,481
    
    
    
    148,636
    
    
    
    594,310Segment income
    
    $
    191,156
    
    
    $
    188,607
    
    
    $
    19,344
    
    
    $
    62,245
    
    
    $
    14,262
    
    
    
    475,614Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,042Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387,572Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131,882Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    255,690Balance SheetAverage assets
    
    $
    9,152,917
    
    
    $
    5,835,527
    
    
    $
    1,009,863
    
    
    $
    6,481,972
    
    
    $
    2,198,142
    
    
    $
    24,678,421Average loans
    
    
    8,994,565
    
    
    
    5,602,071
    
    
    
    1,001,128
    
    
    
    
    
    
    
    1,013,394
    
    
    
    16,611,158Average deposits
    
    
    3,917,256
    
    
    
    8,939,174
    
    
    
    1,209,744
    
    
    
    756,112
    
    
    
    52,280
    
    
    
    14,874,566Period-end assets
    
    $
    9,211,549
    
    
    $
    6,260,345
    
    
    $
    1,037,331
    
    
    $
    7,089,422
    
    
    $
    2,597,997
    
    
    $
    26,196,644Period-end loans
    
    
    9,053,746
    
    
    
    6,019,910
    
    
    
    1,029,273
    
    
    
    
    
    
    
    924,596
    
    
    
    17,027,525Period-end deposits
    
    
    4,213,721
    
    
    
    8,907,925
    
    
    
    1,287,265
    
    
    
    683,973
    
    
    
    22,461
    
    
    
    15,115,345
 - 15 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) NOTE 6  Loans and Allowance for Loan Losses The following presents the composition of the loan portfolio at September
30, 2004 and December 31, 2003. September 30,
    
    December 31,2004
    
    2003(in Thousands)Commercial loans:Commercial, financial and agricultural
    
    $
    3,658,392
    
    
    $
    3,576,115Real estate  construction
    
    
    2,945,522
    
    
    
    2,481,281Commercial real estate  mortgage
    
    
    4,040,591
    
    
    
    3,933,773Total commercial loans
    
    
    10,644,505
    
    
    
    9,991,169Consumer loans:Residential real estate  mortgage
    
    
    1,448,596
    
    
    
    1,653,805Equity lines of credit
    
    
    1,323,416
    
    
    
    1,122,725Equity loans
    
    
    1,068,603
    
    
    
    1,046,881Credit card
    
    
    491,134
    
    
    
    485,487Consumer installment  direct
    
    
    459,235
    
    
    
    435,326Consumer installment  indirect
    
    
    2,984,497
    
    
    
    2,630,409Total consumer loans
    
    
    7,775,481
    
    
    
    7,374,633Total
    
    $
    18,419,986
    
    
    $
    17,365,802
 A summary of the activity in the allowance for loan losses for the three
and nine months ended September 30, 2004 and 2003 follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in Thousands)Balance at beginning of period
    
    $
    250,573
    
    
    $
    234,158
    
    
    $
    244,882
    
    
    $
    232,830Add: Provision charged to income
    
    
    25,617
    
    
    
    30,354
    
    
    
    78,140
    
    
    
    88,042Deduct: Allowance for loans securitized/sold
    
    
    
    
    
    
    
    
    
    
    591
    
    
    
    2,942Net charge-offs:Commercial, financial and
agricultural
    
    
    612
    
    
    
    3,240
    
    
    
    6,588
    
    
    
    11,738Commercial real estate  mortgage
    
    
    328
    
    
    
    856
    
    
    
    2,969
    
    
    
    2,620Real estate  construction
    
    
    3
    
    
    
    20
    
    
    
    115
    
    
    
    688Residential real estate  mortgage
    
    
    489
    
    
    
    183
    
    
    
    1,004
    
    
    
    1,004Equity lines of credit
    
    
    812
    
    
    
    869
    
    
    
    1,889
    
    
    
    2,441Equity loans
    
    
    142
    
    
    
    928
    
    
    
    1,604
    
    
    
    4,373Credit card
    
    
    7,266
    
    
    
    9,296
    
    
    
    25,710
    
    
    
    27,879Consumer installment  direct
    
    
    2,992
    
    
    
    2,415
    
    
    
    6,115
    
    
    
    5,925Consumer installment  indirect
    
    
    7,508
    
    
    
    6,734
    
    
    
    20,399
    
    
    
    21,291Total net charge-offs
    
    
    20,152
    
    
    
    24,541
    
    
    
    66,393
    
    
    
    77,959Balance at end of period
    
    $
    256,038
    
    
    $
    239,971
    
    
    $
    256,038
    
    
    $
    239,971
 Nonperforming assets at September 30, 2004 and December 31, 2003 are
detailed in the following table. September 30,
    
    December 31,2004
    
    2003(in Thousands)Nonaccrual loans
    
    $
    47,774
    
    
    $
    65,870Renegotiated loans
    
    
    724
    
    
    
    218Total nonperforming loans
    
    
    48,498
    
    
    
    66,088Other real estate
    
    
    25,778
    
    
    
    29,014Total nonperforming assets
    
    $
    74,276
    
    
    $
    95,102
 - 16 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the 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 $1.7
billion and $1.5 billion at September 30, 2004 and December 31, 2003,
respectively. Included in securitized assets are $10 million and $9 million in
nonaccrual and past due loans greater than 90 days at September 30, 2004 and
December 31, 2004, respectively. Also included in securitized assets were $4
million in foreclosed assets at both September 30, 2004 and December 31, 2003,
respectively. NOTE 8  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 September 30, 2004 and December 31,
2003. September 30,
    
    December 31,2004
    
    2003Other
    
    
    
    
    
    OtherThan
    
    
    
    
    
    ThanTrading
    
    Trading
    
    Trading
    
    Trading(in Thousands)Forward and futures contracts
    
    $
    333,757
    
    
    $
    22,740
    
    
    $
    771,993
    
    
    $
    Interest rate swap agreements:Pay fixed versus receive float
    
    
    1,322,240
    
    
    
    
    
    
    
    1,491,175
    
    
    
    Receive fixed versus pay float
    
    
    1,419,679
    
    
    
    1,828,836
    
    
    
    1,514,564
    
    
    
    1,805,200Written options
    
    
    56,364
    
    
    
    27,129
    (1)
    
    
    32,850
    
    
    
    Purchased options
    
    
    102,385
    
    
    
    
    
    
    
    78,551
    
    
    
    
  (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 September 30, 2004 and 2003, there were no
credit losses associated with derivative instruments. For the nine months
ended September 30, 2004, there were no credit losses associated with
derivative instruments. For the nine months ended September 30, 2003, credit
losses associated with derivative instruments were $1.7 million. The following table presents the notional value and carrying value amounts
of the Companys derivative positions held for hedging purposes at both
September 30, 2004 and December 31, 2003. These derivative positions are
primarily executed in the over-the-counter market. September 30, 2004
    
    December 31, 2003Notional
    
    Carrying
    
    Notional
    
    CarryingValue
    
    Value
    
    Value
    
    Value(in Thousands)Cash Flow Hedges:Interest rate swap agreements
    
    $
    1,000,000
    
    
    $
    (659
    )
    
    $
    1,000,000
    
    
    $
    589Fair Value Hedges:Interest rate swap agreements
    
    
    828,836
    
    
    
    62,860
    
    
    
    805,200
    
    
    
    73,238Forward contracts (1)
    
    
    22,740
    
    
    
    (127
    )
    
    
    
    
    
    
    
  (1)
    
    Derivatives related to the Companys mortgage banking activities - 17 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) 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 or nine months ended September 30, 2004 and 2003. The
Company recognized a decrease in interest expense of $10.2 million and $11.2
million for the three months ended September 30, 2004 and 2003, respectively,
and $32.3 million and $34.5 million for the nine months ended September 30,
2004 and 2003, respectively, related to interest rate swaps accounted for as
fair value hedges. At September 30, 2004, the fair value hedges had a carrying
value of $829 million and a weighted average remaining term of 3.2 years. Additionally, in 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 hedged gains or losses were immaterial for the three and nine
months ended September 30, 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. 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 recognized for either the three
or nine-month periods ended September 30, 2004 and 2003, resulting from hedge
ineffectiveness. As of September 30, 2004, 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
additional interest income of $1.8 million and $10.7 million related to
interest rate swaps and floors accounted for as cash flow hedges for the three
months ended September 30, 2004 and 2003, respectively, and $11.3 million and
$42.6 million for the nine months ended September 30, 2004 and 2003,
respectively. Deferred net losses of $1.1 million on derivative instruments
not terminated are recorded in other comprehensive income at September 30,
2004. Based on the current interest rate environment these losses are expected
to be reclassified to interest income over the next twelve 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 September 30, 2004, all securities held by Sunbelt were AAA/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 September 30,
2004 were variable rate. Sunbelts total assets, which approximated market
value, were $1.6 billion at September 30, 2004 and $904 million at December 31,
2003, respectively. The Company realized fee income of $1.2 million and $1.7
million for the three months ended September 30, 2004 and 2003, respectively,
and $4.4 million and $6.3 million for the nine months ended September 30, 2004
and 2003, respectively, from Sunbelt for providing various services including
serving as liquidity provider, investment advisor and administrative agent. At
September 30, 2004 receivables from Sunbelt were $2 million and at December 31,
2003 were $3 million. There were no outstanding payables to Sunbelt at either
September 30, 2004 or December 31, 2003. The Company, under agreements with
Sunbelt, may be required to purchase assets or provide - 18 -




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) 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 September 30, 2004. 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 September 30, 2004, 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 13  Recently Issued Accounting Standards. NOTE 9  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 September 30, 2004, 6.1 million shares had been repurchased under the
January 2003 program at a cost of $229 million. Approximately 475,000 of the
total shares repurchased had been reissued for acquisitions and employee
benefit plans. At September 30, 2004, 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 2004, the Company increased its quarterly dividend 12 percent
to $0.3125 per common share, from $0.2800 per common share in 2003. At September 30, 2004, accumulated other comprehensive income included an
unrealized loss of $411,000 from the effective portion of cash flow hedges and
$3.6 million of net unrealized losses on investment securities available for
sale. At December 31, 2003, accumulated other comprehensive income reflected an
unrealized gain of $3.9 million associated with the effective portion of cash
flow hedges and $33.4 million of net unrealized gains on investment securities
available for sale. NOTE 10  Goodwill and Other Acquired Intangible Assets As of September 30, 2004, the Company had four reporting units with
goodwill, including Corporate Banking with $136 million, Retail Banking with
$96 million, Insurance with $60 million and Wealth Management with $7 million.
During the nine months ended September 30, 2004, goodwill increased $4 million,
$468,000, and $240,000 within the Insurance reporting unit, the Corporate
Banking reporting unit and the Wealth Management reporting unit, respectively.
These amounts increased primarily due to the payment of contingent
consideration payments in the current year from prior acquisitions. Each reporting unit was tested for impairment during the third quarter of
2004. The fair value of each of the reporting units was estimated using the
expected present value of future cash flows. The Companys impairment test
indicated no impairment charge was required as of the test date. Acquired intangible assets as of September 30, 2004 are detailed in the
following table. As of September 30, 2004Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    Value(in Thousands)Nonamortizing goodwill
    
    $
    352,572
    
    
    $
    (53,733
    )
    
    $
    298,839Amortizing intangible assets:Core deposit intangibles
    
    $
    63,890
    
    
    $
    (52,076
    )
    
    $
    11,814Other customer intangibles
    
    
    38,173
    
    
    
    (10,191
    )
    
    
    27,982Total amortizing intangible assets
    
    $
    102,063
    
    
    $
    (62,267
    )
    
    $
    39,796
 The Company recognized $1.6 million and $1.8 million in amortization
expense on acquired intangible assets for the three months ended September 30,
2004 and 2003, respectively, and $4.9 million and $5.5 million for the nine
months ended September 30, 2004 and 2003, respectively. Aggregate amortization
expense for the years ending December 31, - 19 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) 2004 through December 31, 2008 are estimated to be $6.5 million, $5.8
million, $4.5 million, $3.8 million, and $3.5 million, respectively. NOTE 11  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 September 30,
2004, the recorded amount of these deferred fees was $4 million. The Company
holds various assets as collateral supporting those commitments for which
collateral is deemed necessary. At September 30, 2004, the maximum potential
amount of future undiscounted payments the Company could be required to make
under outstanding standby and commercial letters of credit was $615 million. The following represents the Companys commitments to extend credit and
standby and commercial letters of credit as of September 30, 2004, and December
31, 2003: September 30,
    
    December 31,2004
    
    2003(in Thousands)Commitments to extend credit
    
    $
    10,983,176
    
    
    $
    9,993,691Standby and commercial letters of credit
    
    
    615,816
    
    
    
    451,868
 At September 30, 2004, 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 September 30, 2004, the maximum potential
amount of future undiscounted payments the Company could be required to make
under outstanding contingent payment provisions is approximately $18 million,
primarily in the form of the Companys common stock. In the ordinary course of business, the Company has entered into
indemnification agreements covering claims and potential legal proceedings
against its directors and officers and the Company has entered into similar but
time limited agreements with respect to the directors and officers of acquired
entities. The Company also makes standard representations and warranties in
underwriting agreements, merger and acquisition agreements, brokerage
activities, and other similar arrangements. The counterparties to many of these
indemnifications provide similar indemnifications to the Company. 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 - 20 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) 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 recently enacted 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 money penalties, imposition of cease
and desist orders or other written directives, removal of management and in
certain circumstances criminal penalties. NOTE 12  Defined Benefit Pension Plan The following table provides certain information with respect to the
Companys defined benefit pension plan for the three and nine-month periods
ending September 30, 2004 and 2003. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(In Thousands)Service cost
    
    $
    1,770
    
    
    $
    1,575
    
    
    $
    5,185
    
    
    $
    4,665Interest cost
    
    
    2,191
    
    
    
    1,988
    
    
    
    6,415
    
    
    
    5,888Expected return on plan assets
    
    
    (3,016
    )
    
    
    (2,831
    )
    
    
    (8,329
    )
    
    
    (7,339
    )Amortization of prior service cost
    
    
    9
    
    
    
    9
    
    
    
    26
    
    
    
    25Amortization of net loss
    
    
    424
    
    
    
    259
    
    
    
    1,241
    
    
    
    761Net periodic benefit cost
    
    $
    1,378
    
    
    $
    1,000
    
    
    $
    4,538
    
    
    $
    4,000
 In June 2004, the Company contributed $13.2 million to the defined benefit
pension plan. For the remainder of 2004, the Company does not anticipate
making any further contributions to the defined benefit pension plan. In the
future, the Company anticipates contributing amounts to the defined benefit
pension plan sufficient to satisfy minimum funding requirements of the Employee
Retirement Income Security Act of 1974. NOTE 13  Recently Issued Accounting Standards Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity On May 30, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The provisions of SFAS No. 150 were effective for financial
instruments entered into or modified after May 31, 2003, and otherwise were
effective for fiscal periods beginning after June 15, 2003. However, on
November 7, 2003, FASB issued FASB Staff Position (FSP) FAS 150-3, which
deferred the effective date for portions of SFAS 150 indefinitely. Management
does not believe the provisions of this standard currently in effect or the
deferred provision will have a material impact on the results of future
operations. 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 - 21 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) 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s securitization structure, as of September 30, 2004, met
QSPE standards, and therefore, will not be 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 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. Prior to the adoption of FIN 46R the Company classified its subsidiary
business trusts Trust Preferred Securities as Capital Securities on the
Consolidated Balance Sheets. The adoption of FIN 46R required the Company to
deconsolidate the subsidiary business trusts Trust Preferred Securities. The
Companys Capital Securities are classified as FHLB and other borrowings on the
Consolidated Balance Sheet. Accounting for Certain Loans or Debt Securities 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 (loans) 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. Management does not believe the provision of this standard will have
a material impact on the results of future operations. Application of Accounting Principles to Loan Commitments On March 9, 2004, the Securities and Exchange Commission (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 initial adoption of this standard did not have an impact
on the financial condition or the results of operations of the Company.
Management does not believe the provisions of this standard will have a
material impact on the results of future operations. The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments In November 2003, the Emerging Issues Task Force (EITF) issued issue
summary 03-1 (EITF 03-1), The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments.EITF 03-01 addressed an entitys
treatment of the impairment of securities when such impairment is considered
other than temporary. The preliminary summary required disclosures only
related to other than temporary impairment. In March 2004, the EITF continued
its discussion and reached a consensus on the procedures for recognizing an
impairment of securities considered other than temporarily impaired. The
guidance in EITF 03-1 was intended to be effective for reporting periods
beginning after June 15, 2004. However, in September 2004, the FASB issued FSP
EITF 03-1-1, which deferred the effective date for the measurement and
recognition provisions of EITF 03-1 until further implementation guidance could
be established. Management does not believe the provision of this standard, as
currently written, will have a material impact on the results of future
operations. - 22 -




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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 Securities and Exchange Commission
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 $93.6 million for the third quarter of 2004,
an eight percent increase over the $86.6 million earned during the third
quarter of 2003. For the same time period, diluted earnings per share increased
10 percent to $0.75 from $0.68 earned in the prior year. For the first nine months of 2004, net income increased six percent to
$271.6 million compared to $255.7 million for the same period last year.
Diluted earnings per share for the first nine months of 2004 increased nine
percent to $2.17 from $2.00 in the first nine months of 2003. In August of 2004, the Company modestly repositioned its balance sheet by
prepaying approximately $900 million of FHLB advances resulting in a loss of
$25.1 million and sold approximately $500 million investment securities
available for sale resulting in a gain of $25.1 million. The Company believes
the prepayment of FHLB advances will provide a modest improvement in net
interest margin and better position the balance sheet going forward. The Company operates 376 full-service banking centers including 137 in
Texas, 89 in Alabama, 71 in Arizona, 41 in Florida, 28 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 September 30, 2004, decreased to
$227.4 million from $231.2 million for the three months ended September 30,
2003, as interest income decreased $483,000 and interest expense increased $3.3
million. The decrease in interest income was due to a 44 basis point decrease
in the average yield on earning assets from 5.38 percent to 4.94 percent,
partially offset by an increase in average earning assets of $2.2 billion, - 23 -




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##### Table of Contents



or nine percent. The increase in average earning assets from the third quarter
of 2003 was primarily the result of a $1.4 billion increase in average loans
and an increase of $697 million in investment securities, including both
investment securities available for sale and investment securities held to
maturity. The increase in the average loans was due to continued strong loan
demand through all of the Companys major markets. The increase in investment
securities was primarily due to the securitization and retention of loans as
investment securities in the fourth quarter of 2003 and the first quarter of
2004. The four percent increase in interest expense over the third quarter of
2003 was primarily the result of a $1.5 billion increase in average
interest-bearing liabilities, partially offset by a 7 basis point decrease in
the rate paid on interest bearing liabilities. The increase in total
interest-bearing liabilities was driven by an increase of $889 million in
average interest bearing deposits and an $841 million increase in fed funds
purchased, partially offset by a decrease of $253 million in FHLB and other
borrowings. For the first nine months of 2004, net interest income decreased $4.9
million over the first nine months of 2003 to $678.8 million, with interest
income decreasing $20.9 million and interest expense decreasing $16.0 million.
The decrease in interest income was due to a 75 basis point decrease in the
average yield from earning assets from 5.73 percent to 4.98 percent, partially
offset by an increase in average earning assets of $2.8 billion, or 13 percent.
The increase in average earning assets over the first nine months of 2003 was
primarily the result of a $1.6 billion increase in investment securities,
including both investment securities available for sale and investment
securities held to maturity, and a $1.2 billion increase in loans. The increase
in investment securities was primarily due to the securitization and retention
of loans as investment securities during the last quarter of 2003 and the first
quarter of 2004. The six percent decrease in interest expense over the first
nine months of the prior year was the result of a 33 basis point decrease in
the rate paid on interest bearing liabilities partially offset by a $2.2
billion increase in average interest bearing liabilities. The increase in
average interest-bearing liabilities was primarily the result of a $1.6 billion
increase in fed funds purchased and a $539 million increase in total interest
bearing deposits. 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 decreased to 3.54 percent for the
third quarter of 2004, compared to 3.92 percent for the third quarter of 2003.
For the nine months ended September 30, 2004, net interest margin decreased
from 4.07 percent in the prior year to 3.58 percent. These decreases resulted
from the changes in rates and volumes of earning assets and the corresponding
funding sources noted previously. During the third quarter of 2004, the
Companys net interest margin was impacted by the Companys use of interest
rate contracts, increasing taxable equivalent net interest margin by 19 basis
points as compared to a 37 basis point positive impact for the third quarter of
2003. For the nine months ended September 30, 2004, the Companys use of
interest rate contract increased the Companys net interest margin by 23 basis
points as compared to a 46 basis point positive impact for the first nine
months of 2003. - 24 -




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##### Table of Contents



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 2003 and 2004, 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 September 30, 2004, levels. For the Quarter EndingMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2003
    
    2003
    
    2003
    
    2003Actual
    
    Actual
    
    Actual
    
    Actual
    
    Total(in Thousands)Hedging derivatives positive
impact to net interest margin
    
    $
    29,148
    
    
    $
    26,034
    
    
    $
    21,918
    
    
    $
    21,755
    
    
    $
    98,855
 For the Quarter EndingMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2004
    
    2004
    
    2004
    
    2004
    
    TotalActual
    
    Actual
    
    Actual
    
    Projected*
    
    Projected*(in Thousands)Hedging derivatives positive
impact to net interest margin
    
    $
    17,668
    
    
    $
    13,931
    
    
    $
    12,012
    
    
    $
    11,055
    
    
    $
    54,666
  *
    
    Projected impact based on September 30, 2004 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 September 30, 2004, 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 8  Off-Balance Sheet Activities, Derivatives and Hedging for further
information about the Companys use of derivatives and the fair value of those
instruments. October 1, 2004throughDecember 31,
    
    For the Year Ended December 31,2004
    
    2005
    
    2006
    
    Thereafter($ in Thousands)Non-trading interest rate contractsCash Flow HedgesNotional maturity
    
    $
    300,000
    
    
    $
    500,000
    
    
    $
    200,000
    
    
    $
    Weighted average coupon received
on maturities
    
    
    2.08
    %
    
    
    2.60
    %
    
    
    2.13
    %
    
    
    
    %Weighted average time to
maturity (months)
    
    
    3
    
    
    
    10
    
    
    
    19
    
    
    
    Fair Value HedgesNotional maturity
    
    $
    60,000
    
    
    $
    70,000
    
    
    $
    
    
    
    $
    698,836Weighted average coupon received
on maturities
    
    
    5.40
    %
    
    
    4.65
    %
    
    
    
    %
    
    
    6.76
    %Weighted average time to maturity
(months)
    
    
    2
    
    
    
    6
    
    
    
    
    
    
    
    44
 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. - 25 -




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##### Table of Contents



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 and nine month periods ended
September 30, 2004, as compared to the same period in 2003 (in thousands): Three Months EndedSeptember 30, 2004Change2003To
    
    Attributed to2004
    
    Volume
    
    Rate
    
    MixInterest income:Federal funds sold and securities
purchased
under agreements to resell
    
    $
    183
    
    
    $
    136
    
    
    $
    20
    
    
    $
    27Trading account assets
    
    
    (20
    )
    
    
    (25
    )
    
    
    6
    
    
    
    (1
    )Investment securities available for sale
    
    
    (12,076
    )
    
    
    (3,626
    )
    
    
    (9,046
    )
    
    
    596Investment securities held to maturity
    
    
    9,474
    
    
    
    12,920
    
    
    
    (2,298
    )
    
    
    (1,148
    )Loans
    
    
    1,956
    
    
    
    20,119
    
    
    
    (16,740
    )
    
    
    (1,423
    )Increase (decrease) in interest income
    
    $
    (483
    )
    
    $
    29,524
    
    
    $
    (28,058
    )
    
    $
    (1,949
    )Interest expense:Deposits
    
    $
    2,147
    
    
    $
    3,848
    
    
    $
    (1,493
    )
    
    $
    (208
    )Federal funds purchased and securities
sold under agreements to repurchase
    
    
    6,970
    
    
    
    2,042
    
    
    
    3,971
    
    
    
    957Other short-term borrowings
    
    
    148
    
    
    
    42
    
    
    
    91
    
    
    
    15FHLB and other borrowings*
    
    
    (5,995
    )
    
    
    (2,240
    )
    
    
    (3,965
    )
    
    
    210Increase (decrease) in interest expense
    
    $
    3,270
    
    
    $
    3,692
    
    
    $
    (1,396
    )
    
    $
    974
 Nine Months EndedSeptember 30, 2004Change2003To
    
    Attributed to2004
    
    Volume
    
    Rate
    
    MixInterest income:Federal funds sold and securities
purchased
under agreements to resell
    
    $
    281
    
    
    $
    295
    
    
    $
    (7
    )
    
    $
    (7
    )Trading account assets
    
    
    (3
    )
    
    
    (17
    )
    
    
    15
    
    
    
    (1
    )Investment securities available for sale
    
    
    (44,573
    )
    
    
    (17,368
    )
    
    
    (30,066
    )
    
    
    2,861Investment securities held to maturity
    
    
    73,425
    
    
    
    82,360
    
    
    
    (2,734
    )
    
    
    (6,201
    )Loans
    
    
    (49,987
    )
    
    
    51,598
    
    
    
    (94,997
    )
    
    
    (6,588
    )Increase (decrease) in interest income
    
    $
    (20,857
    )
    
    $
    116,868
    
    
    $
    (127,789
    )
    
    $
    (9,936
    )Interest expense:Deposits
    
    $
    (18,061
    )
    
    $
    4,025
    
    
    $
    (21,040
    )
    
    $
    (1,046
    )Federal funds purchased and securities
sold under agreements to repurchase
    
    
    15,217
    
    
    
    13,139
    
    
    
    1,260
    
    
    
    818Other short-term borrowings
    
    
    30
    
    
    
    8
    
    
    
    22
    
    
    
    FHLB and other borrowings*
    
    
    (13,175
    )
    
    
    (252
    )
    
    
    (12,948
    )
    
    
    25Increase (decrease) in interest expense
    
    $
    (15,989
    )
    
    $
    16,920
    
    
    $
    (32,706
    )
    
    $
    (203
    )
  *
    
    Includes Capital Securities and Preferred Stock. Noninterest Income and Noninterest Expense During the third quarter of 2004, noninterest income increased $38.3 million,
or 29 percent, to $172.3 million, from $134.0 million for the third quarter
2003. For the quarter, excluding gains on the sale of securities of $25.1
million, noninterest income increased $13.2 million, or 10 percent, to $147.2
million, as compared to the third quarter of 2003. The increase in noninterest
income is directly attributable to increases in most of the fee-based
businesses of the Company, including a $9.5 million increase in service charges
on deposit accounts, a $4.4 million increase in credit card service charges and
fees, and a $1.8 million increase in retail investment sales, partially offset
by a decrease of $3.4 million in corporate and correspondent investment sales.
Noninterest income for the first nine months of 2004 compared to the same
period in 2003 increased $75.2 million, or 19 percent, to $464.2 million. For
the nine months ended - 26 -




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##### Table of Contents



September 30, 2004, excluding gains on the sale of securities of $27.3 million,
noninterest income increased $47.8 million, or 12 percent, to $436.9 million,
as compared to the previous year period. The increase in noninterest income is
primarily the result of a $35.3 million increase in service charges on deposit
accounts, a $10.2 million increase in credit card service charges and fees, a
$6.7 million increase in insurance commissions and a $2.9 million increase in
retail investment sales, partially offset by a decrease of $8.0 million in
corporate and correspondent investment sales. The increase in service charges
on deposit accounts was primarily due to increases in noninterest bearing
demand deposit accounts, while the increase in credit card service charges and
fees was due to increased volume of activity in credit card and debit card
business. The increase in insurance commissions is due to continued expansion
of the property and casualty business throughout the Companys franchise
through internal growth and acquisitions. 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 September 30, 2004, increased
$29.8 million, or 15 percent, compared to the third quarter of 2003. Excluding
losses from the prepayment of FHLB advances of $25.1 million, noninterest
expense increased $4.7 million, or two percent, to $207.4 for the quarter ended
September 30, 2004. This increase was due primarily the result of an increase
of $2.5 million in salaries and benefits, a $2.5 million increase in other
expense, a $1.5 million increase in equipment expense, partially offset by a
decrease of $2.8 million in communications expense. For the first nine months
of 2004, noninterest expense increased $59.5 million, or 10 percent, to $653.8
million. For the first nine months ended September 30, 2004, excluding losses
from the prepayment of FHLB advances of $25.1 million, noninterest expense
increased $34.4 million, or six percent, to $628.7 million. This increase is
primarily the result of an increase in salaries and benefits of $17.3 million,
an increase of $11.8 million in other expense, an increase of $4.7 million in
marketing expense and an increase of $3.9 million in net occupancy expense,
partially offset by a decrease of $3.8 million in communications expense. Income Taxes Income tax expense totaled $47.1 million for the quarter and $136.8
million for the nine months ended September 30, 2004. Income tax expense
totaled $44.7 million and $131.9 million, respectively for the same periods in
2003. The effective tax rate for the quarter ended September 30, 2004 was
33.5% compared to 34.0% in 2003. The effective tax rate for the nine months
ended September 30, 2004 was 33.5% compared to 34.0% in 2003. Provision and Allowance for Loan Losses The provision for loan losses for the three and nine-month periods ended
September 30, 2004 decreased $4.7 million and $9.9 million respectively, from
the same periods in 2003. 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.
The allowance for loan losses at September 30, 2004, was $256 million and at
December 31, 2003, was $245 million. The ratio of the allowance for loan losses
to loans outstanding was 1.39 percent at September 30, 2004 and 1.41 percent at
December 31, 2003. The decrease in this ratio is the result of improving
credit quality. Management believes that the allowance for loan losses at
September 30, 2004 is adequate. Nonperforming Assets and Past Due Loans Stated as a percentage of total loans and other real estate owned,
nonperforming assets at September 30, 2004, were 0.40 percent, compared to 0.55
percent at December 31, 2003. At September 30, 2004, the allowance for loan
losses as a percentage of nonperforming loans was 528 percent, compared to 371
percent at December 31, 2003. The allowance for loan losses as a percentage of
nonperforming assets was 345 percent at September 30, 2004, compared to 257
percent at December 31, 2003. Nonperforming assets, comprised of nonaccrual loans, renegotiated loans,
and other real estate, totaled $74 million at September 30, 2004, compared to
$95 million at December 31, 2003. Loans past due ninety days or more but still
accruing interest were $16 million at September 30, 2004, compared to $26
million at December 31, 2003. 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. - 27 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Allowance for Loan Losses/Nonperforming Assets
(In Thousands)
(Unaudited) Nine Months EndedSeptember 30,2004
    
    2003Allowance for Loan LossesBalance at beginning of period
    
    $
    244,882
    
    
    $
    232,830Add: Provision charged to income
    
    
    78,140
    
    
    
    88,042Deduct: Allowance for loans sold / securitized
    
    
    591
    
    
    
    2,942Loans charged off
    
    
    86,161
    
    
    
    92,477Loan recoveries
    
    
    (19,768
    )
    
    
    (14,518
    )Net charge-offs
    
    
    66,393
    
    
    
    77,959Balance at end of period
    
    $
    256,038
    
    
    $
    239,971Net charge-offs as a percentage of
average loans (annualized)
    
    
    0.50
    %
    
    
    0.63
    %
 September 30, 2004
    
    December 31, 2003Nonperforming AssetsNonaccrual loans
    
    $
    47,774
    
    
    $
    65,870Renegotiated loans
    
    
    724
    
    
    
    218Total nonperforming loans
    
    
    48,498
    
    
    
    66,088Other real estate
    
    
    25,778
    
    
    
    29,014Total nonperforming assets
    
    $
    74,276
    
    
    $
    95,102Accruing loans ninety days or more past due
    
    $
    15,595
    
    
    $
    26,159Other repossessed assets
    
    
    1,559
    
    
    
    427Allowance as a percentage of loans
    
    
    1.39
    %
    
    
    1.41
    %Total nonperforming loans as a percentage
of loans
    
    
    0.26
    
    
    
    0.38Total nonperforming assets as a percentage
of loans and ORE
    
    
    0.40
    
    
    
    0.55Accruing loans ninety days or more past due as a
percentage of loans
    
    
    0.08
    
    
    
    0.15Allowance for loan losses as a percentage of
nonperforming loans
    
    
    527.94
    
    
    
    370.54Allowance for loan losses as a percentage of
nonperforming assets
    
    
    344.71
    
    
    
    257.49
 - 28 -




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Financial Condition Overview Total assets at September 30, 2004 were $27.8 billion, up from $27.0
billion at December 31, 2003. The increase in assets was due primarily to
internal loan growth. Assets and Funding At September 30, 2004, earning assets totaled $25.6 billion, an increase
of approximately $875 million from the $24.8 billion in earning assets at
December 31, 2003. The mix of earning assets changed slightly with total
investment securities and loans comprising 28 percent and 72 percent,
respectively, of total earning assets at September 30, 2004, while at December
31, 2003 total investment securities and loans were 30 percent and 70 percent,
respectively, of earning assets. The asset mix shifted primarily due to the
modest balance sheet repositioning and internal loan growth as loans increased
$1.1 billion. This loan growth was funded primarily through an $804 million
increase in total deposits, a $598 million increase in fed funds purchased, a
decrease of $148 million of investment securities, including both investment
securities available for sale and investment securities held to maturity,
partially offset by a $674 million decrease in FHLB and other borrowings. 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 September 30, 2004, the Companys
Subsidiary Banks could have paid additional dividends to the Parent Company of
approximately $202 million while continuing to meet the capital requirements
for well-capitalized banks. Also, the Company has access to various capital
markets. 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
September 30, 2004 was 7.15 percent compared to 6.94 percent at December 31,
2003. Shareholders equity increased during the first nine months of 2004
primarily due to an increase in retained earnings, partially offset by a
decrease in accumulated other comprehensive income and an increase in treasury
stock due to the Companys utilization of its share repurchase authorization
during 2004. 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 - 29 -




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4.1 million shares, respectively, of the Companys outstanding common stock.
Through September 30, 2004, 6.1 million shares had been repurchased under the
January 2003 program at a cost of $229 million. Approximately 475,000 of the
total shares repurchased had been reissued for acquisitions and employee
benefit plans. At September 30, 2004, 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 September 30, 2004
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 September 30, 2004 were 8.99 percent and 11.06
percent, respectively, compared to 9.09 percent and 11.52 percent at December
31, 2003. 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 7.35 percent at September 30, 2004 and
7.25 percent at December 31, 2003. The Companys tangible leverage ratio was
7.32 percent at September 30, 2004 compared to 7.20 percent at December 31,
2003. - 30 -




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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,
2003. Net interest income sensitivities given an immediate and sustained
parallel interest rate shift over a one-year time horizon using current yield curves as of September 30,
2004 and December 31, 2003, respectively, are shown in the table below. Given the low interest rate environment at September 30, 2004, the
calculations below are based upon a decrease of 50 basis points in the yield
curve rather than the 100 basis point decrease that has been used historically. PercentagePrincipal
    
    Increase/(Decrease)Amount of EarningAssets, Interest
    
    in Interest Income/ExpenseBearing Liabilities
    
    Down 50
    
    Up 100and Swaps
    
    Basis Points
    
    Basis Points(In thousands)(Unaudited)September 30, 2004:Assets which reprice in:*One year or less
    
    $
    12,204,241
    
    
    
    (7.18
    )%
    
    
    15.77
    %Over one year
    
    
    13,435,162
    
    
    
    (2.12
    )
    
    
    3.67$
    25,639,403
    
    
    
    (4.49
    )
    
    
    9.33Liabilities which reprice in:One year or less
    
    $
    16,367,522
    
    
    
    (27.32
    )
    
    
    59.24Over one year
    
    
    3,880,846
    
    
    
    (1.01
    )
    
    
    2.10$
    20,248,368
    
    
    
    (15.27
    )
    
    
    33.06Total net interest income sensitivity
    
    
    
    
    
    
    0.11
    %
    
    
    (0.80
    )%December 31, 2003:Assets which reprice in: *One year or less
    
    $
    11,538,030
    
    
    
    (5.88
    )%
    
    
    14.73
    %Over one year
    
    
    13,226,089
    
    
    
    (2.72
    )
    
    
    4.55$
    24,764,119
    
    
    
    (4.07
    )
    
    
    8.92Liabilities which reprice in:One year or less
    
    $
    16,252,098
    
    
    
    (30.31
    )
    
    
    76.28Over one year
    
    
    4,018,547
    
    
    
    (0.76
    )
    
    
    1.58$
    20,270,645
    
    
    
    (13.85
    )
    
    
    34.68Total net interest income sensitivity
    
    
    
    
    
    
    (0.11
    )%
    
    
    (1.51
    )%
  *
    
     Excludes noninterest earning trading account assets As shown in the table above, the Companys balance sheet became less
sensitive to rising rates from December 31, 2003 to September 30, 2004 in the
100 basis point increase scenario. On the asset side, an increase in the
proportion of variable rate loans and an increase in projected investment
portfolio cash flows in the 100 basis point increase scenario, resulted in
decreased sensitivity to rising rates. On the liability side, the decrease in
net interest income sensitivity is due primarily to a change in deposit pricing
assumptions. Due to the current low rate environment, the relationship of
deposit pricing to their relative indices is tighter than normal causing less
price sensitivity in the 100 basis point increase scenario. In the 50 basis
point decrease scenario, net interest income sensitivity changed from slightly
negative to slightly positive primarily due to increases in wholesale funding. - 31 -




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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 Securities and Exchange Commission 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 September 30, 2004, 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. - 32 -




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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, Use of Proceeds, and Issuer Purchases of Equity Securities 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)July 1, 2004 
July 31, 2004
    
    
    225
    
    
    $
    43.07
    
    
    
    
    
    
    
    4,338,600August 1,
2004  August 31, 2004
    
    
    14,057
    
    
    $
    45.32
    
    
    
    
    
    
    
    4,338,600September 1, 2004 
September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,338,600Total
    
    
    14,282
    
    
    $
    45.29
    
    
    
    
  (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 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 filed 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) - 33 -




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Unaudited) (a) Exhibits (continued)  (d)
    
    Certificate of Amendment, dated September 19, 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)(e)
    
    Certificate of Amendment, dated November 8, 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 June 2, 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 filed 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 filed 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 filed with
the Commission)(e)
    
    Employment Agreement, dated December 14, 1994,
between Compass Bancshares, Inc. and Charles E. McMahen
(incorporated by reference to Exhibit 10(h) to Compass
Bancshares, Inc.s March 31, 2000 Form 10-Q filed with
the Commission) - 34 -




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##### Table of Contents



(a) Exhibits (continued)  (f)
    
    Employment Agreement, dated April 15, 1997, between
Compass Bancshares, Inc. and George M. Boltwood
(incorporated by reference to Exhibit 10(f) to Compass
Bancshares, Inc.s March 31, 2003 Form 10-Q filed with
the Commission)(g)
    
    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 filed with
the Commission)(h)
    
    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
filed with the Commission)(i)
    
    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
filed with the Commission)(j)
    
    Amendment to Employment Agreement, dated October
12, 2001, between Compass Bancshares, Inc. and Charles E.
McMahen (incorporated by reference to Exhibit 10(k) to
Compass Bancshares, Inc.s December 31, 2001 Form 10-K
filed with the Commission)(k)
    
    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
filed with the Commission)(l)
    
    Amendment to Employment Agreement, dated October
23, 2001, between Compass Bancshares, Inc. and George M.
Boltwood (incorporated by reference to Exhibit 10(l) to
Compass Bancshares, Inc.s March 31, 2003 Form 10-Q filed
with the Commission)(m)
    
    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 filed
with the Commission)(n)
    
    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 filed with the Commission)(o)
    
    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 filed with the Commission)(p)
    
    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 filed with the Commission)(q)
    
    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
filed with the Commission)(r)
    
    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 filed with the Commission)(s)
    
    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) - 35 -




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##### Table of Contents



(a) Exhibits (continued)  (t)
    
    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)  (31.1)
    
    Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by D. Paul Jones, Jr., Chief
Executive Officer(31.2)
    
    Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Garrett. R. Hegel, Chief
Financial Officer(32.1)
    
    Certification Pursuant 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(32.2)
    
    Certification Pursuant 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 not applicable. - 36 -




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##### Table of Contents



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. November 4, 2004
    
    By:
    
    /s/ Garrett R. HegelDate
    
    
    
    Garrett R. HegelChief Financial Officer
 - 37 -