##### 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 June 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 July 31, 2004Common Stock, $2 Par Value
    
    122,650,263
 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 StatementsConsolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Changes In Shareholders Equity for the Six Months Ended June 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the Six Months Ended June 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 Changes in Securities and Use of Proceeds
    
    
    33Item 4 Submission of Matters to Vote of Security Holders
    
    
    33Item 6 Exhibits and Reports on Form 8-K
    
    
    34EX-31.1 CertificationEX-31.2 CertificationEX-32.1 CertificationEX-32.2 Certification
  -2-




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1  Financial Statements COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Consolidated Balance Sheets
   June 30, 2004
    
    December 31, 2003AssetsCash and due from banks
    
    $
    685,682
    
    
    $
    726,492Federal funds sold and securities purchased
under agreements to resell
    
    
    56,018
    
    
    
    78,165Trading account assets
    
    
    55,039
    
    
    
    59,024Investment securities available for sale
    
    
    4,753,319
    
    
    
    4,375,208Investment securities held to maturity (fair value of
$3,082,658 and $2,949,023 for 2004 and 2003, respectively)
    
    
    3,103,685
    
    
    
    2,936,344Loans
    
    
    17,762,727
    
    
    
    17,365,802Allowance for loan losses
    
    
    (250,573
    )
    
    
    (244,882
    )Net loans
    
    
    17,512,154
    
    
    
    17,120,920Premises and equipment, net
    
    
    533,207
    
    
    
    527,295Bank owned life insurance
    
    
    417,271
    
    
    
    409,188Goodwill
    
    
    298,839
    
    
    
    293,839Other assets
    
    
    485,878
    
    
    
    436,638Total assets
    
    $
    27,901,092
    
    
    $
    26,963,113Liabilities and Shareholders EquityDeposits:Noninterest bearing
    
    $
    5,096,601
    
    
    $
    4,627,153Interest bearing
    
    
    11,188,220
    
    
    
    11,060,670Total deposits
    
    
    16,284,821
    
    
    
    15,687,823Federal funds purchased and securities sold under
agreements to repurchase
    
    
    4,205,149
    
    
    
    4,118,624Other short-term borrowings
    
    
    170,238
    
    
    
    263,537FHLB and other borrowings
    
    
    5,092,010
    
    
    
    4,827,814Accrued expenses and other liabilities
    
    
    233,072
    
    
    
    193,432Total liabilities
    
    
    25,985,290
    
    
    
    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  132,553,609 shares in 2004 and
131,569,085 shares in 2003
    
    
    265,107
    
    
    
    263,138Treasury stock, at cost (9,956,145 shares in 2004 and
9,482,900 shares in 2003)
    
    
    (344,312
    )
    
    
    (317,669
    )Surplus
    
    
    251,066
    
    
    
    227,404Loans to finance stock purchases
    
    
    (1,004
    )
    
    
    (809
    )Unearned restricted stock
    
    
    (10,770
    )
    
    
    (6,485
    )Accumulated other comprehensive income (loss)
    
    
    (13,107
    )
    
    
    37,306Retained earnings
    
    
    1,768,822
    
    
    
    1,668,998Total shareholders equity
    
    
    1,915,802
    
    
    
    1,871,883Total liabilities and shareholders equity
    
    $
    27,901,092
    
    
    $
    26,963,113
 See accompanying Notes to Consolidated Financial Statements -3-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Consolidated Statements of Income
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest income:Interest and fees on loans
    
    $
    223,331
    
    
    $
    248,365
    
    
    $
    455,138
    

    
    $
    507,143Interest on investment securities available for sale
    
    
    50,894
    
    
    
    64,920
    
    
    
    94,906
    
    
    
    126,472Interest on investment securities held to maturity
    
    
    38,503
    
    
    
    4,163
    
    
    
    73,071
    
    
    
    9,840Interest on federal funds sold and securities
purchased under agreements to resell
    
    
    164
    
    
    
    103
    
    
    
    316
    
    
    
    218Interest on trading account assets
    
    
    116
    
    
    
    123
    
    
    
    256
    
    
    
    247Total interest income
    
    
    313,008
    
    
    
    317,674
    
    
    
    623,687
    
    
    
    643,920Interest expense:Interest on deposits
    
    
    35,925
    
    
    
    44,022
    
    
    
    71,960
    
    
    
    92,168Interest on federal funds purchased and securities
sold under agreements to repurchase
    
    
    9,908
    
    
    
    7,012
    
    
    
    20,020
    
    
    
    11,773Interest on other short-term borrowings
    
    
    191
    
    
    
    274
    
    
    
    393
    
    
    
    511Interest on FHLB and other borrowings
    
    
    40,245
    
    
    
    43,037
    
    
    
    81,714
    
    
    
    88,894Total interest expense
    
    
    86,269
    
    
    
    94,345
    
    
    
    174,087
    
    
    
    193,346Net interest income
    
    
    226,739
    
    
    
    223,329
    
    
    
    449,600
    
    
    
    450,574Provision for loan losses
    
    
    28,178
    
    
    
    27,909
    
    
    
    52,523
    
    
    
    57,688Net interest income after provision for loan
losses
    
    
    198,561
    
    
    
    195,420
    
    
    
    397,077
    
    
    
    392,886Noninterest income:Service charges on deposit accounts
    
    
    72,994
    
    
    
    60,232
    
    
    
    137,322
    
    
    
    111,511Credit card service charges and fees
    
    
    19,016
    
    
    
    15,713
    
    
    
    35,585
    
    
    
    29,730Insurance commissions
    
    
    12,806
    
    
    
    10,051
    
    
    
    27,393
    
    
    
    20,855Retail investment sales
    
    
    8,092
    
    
    
    7,323
    
    
    
    15,650
    
    
    
    14,484Asset management fees
    
    
    5,684
    
    
    
    5,452
    
    
    
    11,419
    
    
    
    10,798Corporate and correspondent investment sales
    
    
    4,910
    
    
    
    7,057
    
    
    
    10,873
    
    
    
    15,480Bank owned life insurance
    
    
    4,031
    
    
    
    4,460
    
    
    
    8,203
    
    
    
    8,918Investment securities gains, net
    
    
    
    
    
    
    
    
    
    
    2,207
    
    
    
    Other
    
    
    22,486
    
    
    
    21,685
    
    
    
    43,278
    
    
    
    43,304Total noninterest income
    
    
    150,019
    
    
    
    131,973
    
    
    
    291,930
    
    
    
    255,080Noninterest expense:Salaries, benefits and commissions
    
    
    111,330
    
    
    
    106,948
    
    
    
    229,467
    
    
    
    214,677Equipment
    
    
    18,948
    
    
    
    18,413
    
    
    
    37,301
    
    
    
    36,199Net occupancy
    
    
    16,768
    
    
    
    15,259
    
    
    
    33,246
    
    
    
    29,819Professional services
    
    
    13,605
    
    
    
    14,515
    
    
    
    26,747
    
    
    
    27,000Marketing
    
    
    10,467
    
    
    
    6,923
    
    
    
    19,136
    
    
    
    16,150Communications
    
    
    5,838
    
    
    
    6,285
    
    
    
    11,361
    
    
    
    12,302Amortization of intangibles
    
    
    1,624
    
    
    
    1,827
    
    
    
    3,250
    
    
    
    3,626Merger and integration
    
    
    300
    
    
    
    455
    
    
    
    545
    
    
    
    921Other
    
    
    32,301
    
    
    
    24,872
    
    
    
    60,275
    
    
    
    50,936Total noninterest expense
    
    
    211,181
    
    
    
    195,497
    
    
    
    421,328
    
    
    
    391,630Net income before income tax expense
    
    
    137,399
    
    
    
    131,896
    
    
    
    267,679
    
    
    
    256,336Income tax expense
    
    
    45,654
    
    
    
    44,848
    
    
    
    89,687
    
    
    
    87,203Net income
    
    $
    91,745
    
    
    $
    87,048
    
    
    $
    177,992
    
    
    $
    169,133Basic earnings per share
    
    $
    0.75
    
    
    $
    0.69
    
    
    $
    1.46
    
    
    $
    1.34Basic weighted average shares outstanding
    
    
    122,074
    
    
    
    125,858
    
    
    
    122,069
    
    
    
    125,879Diluted earnings per share
    
    $
    0.73
    
    
    $
    0.68
    
    
    $
    1.42
    
    
    $
    1.32Diluted weighted average shares outstanding
    
    
    124,947
    
    
    
    128,602
    
    
    
    125,046
    
    
    
    128,288Dividends per share
    
    $
    0.3125
    
    
    $
    0.2800
    
    
    $
    0.6250
    
    
    $
    0.5600
 See accompanying Notes to Consolidated Financial Statements -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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,133
    
    
    
    
    
    
    
    
    
    
    
    169,133
    
    
    $
    169,133Change in unrealized holding gains on securities
available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,692
    )
    
    
    
    
    
    
    (12,692
    )
    
    
    (12,692
    )Change in accumulated gains on cash-flow
hedging instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,552
    )
    
    
    
    
    
    
    (18,552
    )
    
    
    (18,552
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    137,889Common dividends declared ($0.5600 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,750
    )
    
    
    
    
    
    
    
    
    
    
    (70,750
    )Exercise of stock options and other issuances
    
    
    1,104
    
    
    
    
    
    
    
    10,117
    
    
    
    (605
    )
    
    
    
    
    
    
    
    
    
    
    10,616Issuance of restricted stock, net of cancellations
    
    
    327
    
    
    
    
    
    
    
    5,302
    
    
    
    
    
    
    
    
    
    
    
    (5,629
    )
    
    
    Repayment of loans to finance stock
purchases, net of advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    347
    
    
    
    347Issuance of treasury stock for acquisitions and
employee benefit plans
    
    
    
    
    
    
    12,485
    
    
    
    227
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,712Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,338
    
    
    
    1,338Purchase of treasury stock
    
    
    
    
    
    
    (49,238
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,238
    )Balance, June 30, 2003
    
    $
    262,255
    
    
    $
    (166,168
    )
    
    $
    215,553
    
    
    $
    1,566,295
    
    
    $
    104,865
    
    
    $
    (8,384
    )
    
    $
    1,974,416Balance, December 31, 2003
    
    $
    263,138
    
    
    $
    (317,669
    )
    
    $
    227,404
    
    
    $
    1,668,998
    
    
    $
    37,306
    
    
    $
    (7,294
    )
    
    $
    1,871,883Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,992
    
    
    
    
    
    
    
    
    
    
    
    177,992
    
    
    $
    177,992Change in unrealized holding gains / losses on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,124
    )
    
    
    
    
    
    
    (45,124
    )
    
    
    (45,124
    )Change in accumulated gains / losses on cash-flow
hedging instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,289
    )
    
    
    
    
    
    
    (5,289
    )
    
    
    (5,289
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    127,579Common dividends declared ($0.6250 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,162
    )
    
    
    
    
    
    
    
    
    
    
    (77,162
    )Exercise of stock options and other issuances
    
    
    1,727
    
    
    
    
    
    
    
    17,532
    
    
    
    (1,006
    )
    
    
    
    
    
    
    
    
    
    
    18,253Issuance of restricted stock, net of cancellations
    
    
    242
    
    
    
    
    
    
    
    5,217
    
    
    
    
    
    
    
    
    
    
    
    (5,970
    )
    
    
    (511
    )Advances on loans to finance stock purchases,
net of repayments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195
    )
    
    
    (195
    )Issuance of treasury stock for acquisitions and
employee benefit plans
    
    
    
    
    
    
    6,453
    
    
    
    913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,366Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,685
    
    
    
    1,685Purchase of treasury stock
    
    
    
    
    
    
    (33,096
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,096
    )Balance, June 30, 2004
    
    $
    265,107
    
    
    $
    (344,312
    )
    
    $
    251,066
    
    
    $
    1,768,822
    
    
    $
    (13,107
    )
    
    $
    (11,774
    )
    
    $
    1,915,802
 See accompanying Notes to Consolidated Financial Statements -5-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows
   Six Months EndedJune 30,2004
    
    2003Operating Activities:Net income
    
    $
    177,992
    
    
    $
    169,133Adjustments to reconcile net income to cash provided by operations:Depreciation and amortization
    
    
    49,941
    
    
    
    58,692Accretion of discount and loan fees
    
    
    (10,886
    )
    
    
    (5,954
    )Provision for loan losses
    
    
    52,523
    
    
    
    57,688Net change in trading account assets
    
    
    3,985
    
    
    
    (11,033
    )Net gain on sale of investment securities available for sale
    
    
    (2,207
    )
    
    
    Net gain on sale of branches
    
    
    
    
    
    
    (2,128
    )Increase in other assets
    
    
    (79,269
    )
    
    
    (62,108
    )Increase (decrease) in other liabilities
    
    
    52,791
    
    
    
    (20,197
    )Net cash provided by operating activities
    
    
    244,870
    
    
    
    184,093Investing Activities:Proceeds from maturities/calls of investment securities held to
maturity
    
    
    402,288
    
    
    
    205,057Proceeds from sales of investment securities available for sale
    
    
    215,370
    
    
    
    73,890Proceeds from maturities/calls of investment securities available for
sale
    
    
    486,405
    
    
    
    1,258,411Purchases of investment securities available for sale
    
    
    (1,139,759
    )
    
    
    (2,677,824
    )Net decrease in federal funds sold and securities
purchased under agreements to resell
    
    
    22,147
    
    
    
    10,179Net increase in loan portfolio
    
    
    (1,039,435
    )
    
    
    (725,055
    )Net cash received in acquisitions
    
    
    
    
    
    
    1,371Net cash paid in sale of branches
    
    
    
    
    
    
    (26,028
    )Purchases of premises and equipment
    
    
    (35,491
    )
    
    
    (46,929
    )Proceeds from sales of other real estate owned
    
    
    14,522
    
    
    
    12,699Net cash used by investing activities
    
    
    (1,073,953
    )
    
    
    (1,914,229
    )
 See accompanying Notes to Consolidated Financial Statements -6-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows  Continued
(In Thousands)
(Unaudited) Six Months EndedJune 30,2004
    
    2003Financing Activities:Net increase in demand deposits, NOW accounts
and savings accounts
    
    
    562,909
    
    
    
    963,809Net increase (decrease) in time deposits
    
    
    38,565
    
    
    
    (889,794
    )Net increase in federal funds purchased and securities sold
under agreements to repurchase
    
    
    86,525
    
    
    
    1,938,333Net decrease in short-term borrowings
    
    
    (93,299
    )
    
    
    (141,724
    )Proceeds from FHLB advances and other borrowings
    
    
    1,025,100
    
    
    
    Repayment of FHLB advances and other borrowings
    
    
    (717,774
    )
    
    
    (80,301
    )Redemption of guaranteed preferred beneficial interests in
Companys junior subordinated deferrable interest debentures
    
    
    (23,000
    )
    
    
    (12,000
    )Common dividends paid
    
    
    (77,829
    )
    
    
    (70,390
    )Purchase of treasury stock
    
    
    (30,471
    )
    
    
    (47,851
    )Repayment of loans to finance stock purchases
    
    
    301
    
    
    
    510Proceeds from exercise of stock options
    
    
    17,246
    
    
    
    10,453Net cash provided by financing activities
    
    
    788,273
    
    
    
    1,671,045Net decrease in cash and due from banks
    
    
    (40,810
    )
    
    
    (59,091
    )Cash and due from banks at beginning of period
    
    
    726,492
    
    
    
    734,540Cash and due from banks at end of period
    
    $
    685,682
    
    
    $
    675,449Schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    $
    11,984
    
    
    $
    16,872Loans to facilitate the sale of other real estate owned
    
    
    723
    
    
    
    97Assets retained in loan securitizations
    
    
    589,912
    
    
    
    767,510Loans to finance stock purchases
    
    
    496
    
    
    
    163Change in unrealized gain on available for sale investment
securities
    
    
    (65,206
    )
    
    
    (20,364
    )Issuance of restricted stock, net of cancellations
    
    
    5,970
    
    
    
    5,156Treasury stock exchanged for stock options and acquisition
earnouts
    
    
    7,155
    
    
    
    1,415Business combinations and divestitures:Assets acquired
    
    
    
    
    
    
    16,095Liabilities assumed
    
    
    
    
    
    
    6,141Treasury stock issued
    
    
    
    
    
    
    11,325Assets sold
    
    
    
    
    
    
    41,876Liabilities sold
    
    
    
    
    
    
    70,032
 See accompanying Notes to Consolidated Financial Statements -7-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 Notes to the Consolidated Financial Statements
 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
Sheets and Consolidated Statements of Income and (4) the calculation of income
taxes. 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 three 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 of Variable Interest Entities: The Company utilizes certain
financing arrangements to meet its balance sheet management, funding, liquidity
and market or credit risk management needs. The majority of these activities
are basic term or revolving securitization vehicles. Because these financing
arrangements are made with separate legal entities, they are not consolidated
in the Companys balance sheet. The Company evaluates whether these entities
should -8-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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. Calculation of 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. 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
4.14 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. The Companys actual and pro forma information follows (in thousands
except per share data): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income:As reported
    
    $
    91,745
    
    
    $
    87,048
    
    
    $
    177,992
    
    
    $
    169,133Deduct: Total stock-based employee
compensation
expense determined under fair value based
method for all awards, net of tax
    
    
    2,318
    
    
    
    2,834
    
    
    
    4,929
    
    
    
    5,244Pro forma net income
    
    $
    89,427
    
    
    $
    84,214
    
    
    $
    173,063
    
    
    $
    163,889Basic earnings per share:As reported
    
    $
    0.75
    
    
    $
    0.69
    
    
    $
    1.46
    
    
    $
    1.34Pro forma
    
    $
    0.73
    
    
    $
    0.67
    
    
    $
    1.42
    
    
    $
    1.30Diluted earnings per share:As reported
    
    $
    0.73
    
    
    $
    0.68
    
    
    $
    1.42
    
    
    $
    1.32Pro forma
    
    $
    0.71
    
    
    $
    0.66
    
    
    $
    1.38
    
    
    $
    1.28
 -9-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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 nor should be considered part of this
filing. NOTE 2  Business Combinations and Divestitures Business Combinations On July 2, 2003, the Company completed the acquisition of Apogee Holdings,
Inc. (Apogee); a Houston, Texas based compensation and benefits consulting
company. Apogee 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. The transaction was accounted for under the purchase method
of accounting. 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. MM&T had annual revenues of approximately $5 million
and 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. The transaction was accounted for under the purchase method of
accounting. On March 3, 2003, the Company completed the acquisition of Mueller &
Associates, Inc. (Mueller); a Tucson, Arizona based full-line general
insurance brokerage firm. Mueller had annual revenues of approximately $4
million and 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. The
transaction was accounted for under the purchase method of accounting. 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 June 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. 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 three
and six-month periods ended June 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 stock of each of the two
trusts. The trusts used the proceeds from the issuance of their Trust
Preferred Securities and common stock 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 June 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 -10-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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 June 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. The Companys Capital Securities and Preferred Stock are summarized below. Maturity
    
    June 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
    
    
    
    
    
    
    19,137
    
    
    
    27,760Class B Preferred Stock
    
    
    N/A
    
    
    
    17,983
    
    
    
    17,955Total Capital Securities and Preferred Stock
    
    
    
    
    
    $
    449,492
    
    
    $
    481,798
  *
    
    All FW Capital I securities were redeemed on March 19, 2004. -11-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued NOTE 4  Earnings Per Share Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In Thousands Except Per Share Data)(Unaudited)BASIC EARNINGS PER SHARE:Net income
    
    $
    91,745
    
    
    $
    87,048
    
    
    $
    177,992
    
    
    $
    169,133Weighted average shares outstanding
    
    
    122,074
    
    
    
    125,858
    
    
    
    122,069
    
    
    
    125,879Basic earnings per share
    
    $
    0.75
    
    
    $
    0.69
    
    
    $
    1.46
    
    
    $
    1.34DILUTED EARNINGS PER SHARE:Net income
    
    $
    91,745
    
    
    $
    87,048
    
    
    $
    177,992
    
    
    $
    169,133Weighted average shares outstanding
    
    
    122,074
    
    
    
    125,858
    
    
    
    122,069
    
    
    
    125,879Net 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
    
    
    2,873
    
    
    
    2,744
    
    
    
    2,977
    
    
    
    2,409Weighted average diluted shares outstanding
    
    
    124,947
    
    
    
    128,602
    
    
    
    125,046
    
    
    
    128,288Diluted earnings per share
    
    $
    0.73
    
    
    $
    0.68
    
    
    $
    1.42
    
    
    $
    1.32
 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 banking, the internet, and telephone banking. The
Retail Banking segment provides individuals with comprehensive products and
services, including home mortgages, credit cards, deposit accounts, mutual
funds, and brokerage. In addition, Retail Banking serves the Companys small
business customers, and is responsible for the 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. Corporate Support and Other includes activities that are not directly
attributable to the reportable segments. Included in this category are the
activities of the Parent Company and support functions, including accounting,
loan review and the elimination of intercompany transactions. -12-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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  Continued The following table presents information for the Companys segments as of
and for the three and six months ended June 30, 2004 and 2003. For the Three Months Ended June 30, 2004
(in Thousands) CorporateCorporate
    
    Retail
    
    Wealth
    
    
    
    
    
    Support andBanking
    
    Banking
    
    Management
    
    Treasury
    
    Other
    
    ConsolidatedIncome StatementNet interest income
    
    $
    84,616
    
    
    $
    81,916
    
    
    $
    11,246
    
    
    $
    24,745
    
    
    $
    24,216
    
    
    $
    226,739Noninterest income
    
    
    34,886
    
    
    
    104,364
    
    
    
    7,491
    
    
    
    6,436
    
    
    
    (3,158
    )
    
    
    150,019Noninterest expense
    
    
    48,307
    
    
    
    99,461
    
    
    
    9,253
    
    
    
    2,798
    
    
    
    51,362
    
    
    
    211,181Segment income (loss)
    
    $
    71,195
    
    
    $
    86,819
    
    
    $
    9,484
    
    
    $
    28,383
    
    
    $
    (30,304
    )
    
    
    165,577Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,178Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,399Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,654Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    91,745Balance SheetAverage assets
    
    $
    9,856,131
    
    
    $
    6,635,220
    
    
    $
    1,205,295
    
    
    $
    7,776,566
    
    
    $
    2,312,334
    
    
    $
    27,785,546Average loans
    
    
    9,712,934
    
    
    
    6,385,491
    
    
    
    1,196,758
    
    
    
    
    
    
    
    332,861
    
    
    
    17,628,044Average deposits
    
    
    4,569,886
    
    
    
    9,250,251
    
    
    
    1,246,753
    
    
    
    1,886,839
    
    
    
    (549,954
    )
    
    
    16,403,775Period-end assets
    
    $
    9,858,028
    
    
    $
    6,712,003
    
    
    $
    1,214,806
    
    
    $
    7,769,649
    
    
    $
    2,346,606
    
    
    $
    27,901,092Period-end loans
    
    
    9,709,814
    
    
    
    6,449,110
    
    
    
    1,206,840
    
    
    
    
    
    
    
    396,963
    
    
    
    17,762,727Period-end deposits
    
    
    4,773,811
    
    
    
    9,242,833
    
    
    
    1,220,119
    
    
    
    1,561,399
    
    
    
    (513,341
    )
    
    
    16,284,821
 For the Three Months Ended June 30, 2003
(in Thousands) CorporateCorporate
    
    Retail
    
    Wealth
    
    
    
    
    
    Support andBanking
    
    Banking
    
    Management
    
    Treasury
    
    Other
    
    ConsolidatedIncome StatementNet interest income
    
    $
    75,776
    
    
    $
    65,518
    
    
    $
    8,798
    
    
    $
    14,953
    
    
    $
    58,284
    
    
    $
    223,329Noninterest income
    
    
    29,465
    
    
    
    87,831
    
    
    
    7,216
    
    
    
    7,532
    
    
    
    (71
    )
    
    
    131,973Noninterest expense
    
    
    42,503
    
    
    
    89,416
    
    
    
    9,304
    
    
    
    2,650
    
    
    
    51,624
    
    
    
    195,497Segment income
    
    $
    62,738
    
    
    $
    63,933
    
    
    $
    6,710
    
    
    $
    19,835
    
    
    $
    6,589
    
    
    
    159,805Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,909Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131,896Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,848Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    87,048Balance SheetAverage assets
    
    $
    9,136,993
    
    
    $
    5,793,751
    
    
    $
    1,015,187
    
    
    $
    6,532,463
    
    
    $
    2,129,481
    
    
    $
    24,607,875Average loans
    
    
    8,979,555
    
    
    
    5,563,166
    
    
    
    1,006,553
    
    
    
    5
    
    
    
    1,020,044
    
    
    
    16,569,323Average deposits
    
    
    3,930,585
    
    
    
    9,004,213
    
    
    
    1,215,242
    
    
    
    711,954
    
    
    
    65,894
    
    
    
    14,927,888Period-end assets
    
    $
    9,179,241
    
    
    $
    5,899,588
    
    
    $
    1,038,645
    
    
    $
    7,240,169
    
    
    $
    2,316,060
    
    
    $
    25,673,703Period-end loans
    
    
    9,008,980
    
    
    
    5,683,961
    
    
    
    1,030,264
    
    
    
    8
    
    
    
    606,146
    
    
    
    16,329,359Period-end deposits
    
    
    4,279,285
    
    
    
    9,002,171
    
    
    
    1,230,601
    
    
    
    603,360
    
    
    
    21,416
    
    
    
    15,136,833
 -14-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued For the Six Months Ended June 30, 2004
(in Thousands) CorporateCorporate
    
    Retail
    
    Wealth
    
    
    
    
    
    Support andBanking
    
    Banking
    
    Management
    
    Treasury
    
    Other
    
    ConsolidatedIncome StatementNet interest income
    
    $
    165,765
    
    
    $
    156,897
    
    
    $
    21,579
    
    
    $
    48,425
    
    
    $
    56,934
    
    
    $
    449,600Noninterest income
    
    
    71,540
    
    
    
    193,790
    
    
    
    14,771
    
    
    
    14,688
    
    
    
    (2,859
    )
    
    
    291,930Noninterest expense
    
    
    98,551
    
    
    
    196,314
    
    
    
    19,681
    
    
    
    5,608
    
    
    
    101,174
    
    
    
    421,328Segment income (loss)
    
    $
    138,754
    
    
    $
    154,373
    
    
    $
    16,669
    
    
    $
    57,505
    
    
    $
    (47,099
    )
    
    
    320,202Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,523Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267,679Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,687Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    177,992Balance SheetAverage assets
    
    $
    9,759,885
    
    
    $
    6,543,084
    
    
    $
    1,165,766
    
    
    $
    7,635,549
    
    
    $
    2,267,594
    
    
    $
    27,371,878Average loans
    
    
    9,610,014
    
    
    
    6,293,445
    
    
    
    1,157,150
    
    
    
    
    
    
    
    545,460
    
    
    
    17,606,069Average deposits
    
    
    4,488,990
    
    
    
    9,170,371
    
    
    
    1,253,012
    
    
    
    1,681,902
    
    
    
    (555,310
    )
    
    
    16,038,965Period-end assets
    
    $
    9,858,028
    
    
    $
    6,712,003
    
    
    $
    1,214,806
    
    
    $
    7,769,649
    
    
    $
    2,346,606
    
    
    $
    27,901,092Period-end loans
    
    
    9,709,814
    
    
    
    6,449,110
    
    
    
    1,206,840
    
    
    
    
    
    
    
    396,963
    
    
    
    17,762,727Period-end deposits
    
    
    4,773,811
    
    
    
    9,242,833
    
    
    
    1,220,119
    
    
    
    1,561,399
    
    
    
    (513,341
    )
    
    
    16,284,821
 For the Six Months Ended June 30, 2003
(in Thousands) CorporateCorporate
    
    Retail
    
    Wealth
    
    
    
    
    
    Support andBanking
    
    Banking
    
    Management
    
    Treasury
    
    Other
    
    ConsolidatedIncome StatementNet interest income
    
    $
    152,400
    
    
    $
    129,998
    
    
    $
    17,531
    
    
    $
    33,545
    
    
    $
    117,100
    
    
    $
    450,574Noninterest income
    
    
    62,313
    
    
    
    164,580
    
    
    
    14,079
    
    
    
    14,086
    
    
    
    22
    
    
    
    255,080Noninterest expense
    
    
    88,780
    
    
    
    177,698
    
    
    
    19,197
    
    
    
    5,725
    
    
    
    100,230
    
    
    
    391,630Segment income
    
    $
    125,933
    
    
    $
    116,880
    
    
    $
    12,413
    
    
    $
    41,906
    
    
    $
    16,892
    
    
    
    314,024Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,688Net income before income
tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    256,336Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,203Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    169,133Balance SheetAverage assets
    
    $
    9,130,572
    
    
    $
    5,721,131
    
    
    $
    994,720
    
    
    $
    6,251,016
    
    
    $
    2,111,910
    
    
    $
    24,209,349Average loans
    
    
    8,977,294
    
    
    
    5,484,433
    
    
    
    986,026
    
    
    
    3
    
    
    
    1,139,848
    
    
    
    16,587,604Average deposits
    
    
    3,837,463
    
    
    
    8,952,853
    
    
    
    1,191,804
    
    
    
    822,846
    
    
    
    64,591
    
    
    
    14,869,557Period-end assets
    
    $
    9,179,241
    
    
    $
    5,899,588
    
    
    $
    1,038,645
    
    
    $
    7,240,169
    
    
    $
    2,316,060
    
    
    $
    25,673,703Period-end loans
    
    
    9,008,980
    
    
    
    5,683,961
    
    
    
    1,030,264
    
    
    
    8
    
    
    
    606,146
    
    
    
    16,329,359Period-end deposits
    
    
    4,279,285
    
    
    
    9,002,171
    
    
    
    1,230,601
    
    
    
    603,360
    
    
    
    21,416
    
    
    
    15,136,833
 -15-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued NOTE 6  Loans and Allowance for Loan Losses The following presents the composition of the loan portfolio at June 30,
2004 and December 31, 2003. June 30,
    
    December 31,2004
    
    2003(in Thousands)Commercial loans:Commercial, financial and agricultural
    
    $
    3,525,770
    
    
    $
    3,576,115Real estate  construction
    
    
    2,781,534
    
    
    
    2,481,281Commercial real estate  mortgage
    
    
    4,014,151
    
    
    
    3,933,773Total commercial loans
    
    
    10,321,455
    
    
    
    9,991,169Consumer loans:Residential real estate  mortgage
    
    
    1,367,895
    
    
    
    1,653,805Equity lines of credit
    
    
    1,253,853
    
    
    
    1,122,725Equity loans
    
    
    1,068,753
    
    
    
    1,046,881Credit card
    
    
    490,245
    
    
    
    485,487Consumer installment  direct
    
    
    439,652
    
    
    
    435,326Consumer installment  indirect
    
    
    2,820,874
    
    
    
    2,630,409Total consumer loans
    
    
    7,441,272
    
    
    
    7,374,633Total
    
    $
    17,762,727
    
    
    $
    17,365,802
 A summary of the activity in the allowance for loan losses for the three
and six months ended June 30, 2004 and 2003 follows: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(in Thousands)Balance at beginning of period
    
    $
    244,655
    
    
    $
    237,100
    
    
    $
    244,882
    
    
    $
    232,830Add: Provision charged to income
    
    
    28,178
    
    
    
    27,909
    
    
    
    52,523
    
    
    
    57,688Deduct: Allowance for loans securitized/sold
    
    
    
    
    
    
    2,942
    
    
    
    591
    
    
    
    2,942Net charge-offs (recoveries):Commercial, financial and
agricultural
    
    
    2,374
    
    
    
    5,388
    
    
    
    5,976
    
    
    
    8,498Commercial real estate  mortgage
    
    
    2,534
    
    
    
    1,044
    
    
    
    2,641
    
    
    
    1,764Real estate  construction
    
    
    (33
    )
    
    
    671
    
    
    
    112
    
    
    
    668Residential real estate  mortgage
    
    
    159
    
    
    
    251
    
    
    
    515
    
    
    
    821Equity lines of credit
    
    
    351
    
    
    
    597
    
    
    
    1,077
    
    
    
    1,572Equity loans
    
    
    889
    
    
    
    1,763
    
    
    
    1,462
    
    
    
    3,445Credit card
    
    
    8,865
    
    
    
    9,396
    
    
    
    18,444
    
    
    
    18,583Consumer installment  direct
    
    
    1,500
    
    
    
    1,746
    
    
    
    3,123
    
    
    
    3,510Consumer installment  indirect
    
    
    5,621
    
    
    
    7,053
    
    
    
    12,891
    
    
    
    14,557Total net charge-offs
    
    
    22,260
    
    
    
    27,909
    
    
    
    46,241
    
    
    
    53,418Balance at end of period
    
    $
    250,573
    
    
    $
    234,158
    
    
    $
    250,573
    
    
    $
    234,158
 Nonperforming assets at June 30, 2004 and December 31, 2003 are detailed
in the following table. June 30,
    
    December 31,2004
    
    2003(in Thousands)Nonaccrual loans
    
    $
    62,536
    
    
    $
    65,870Renegotiated loans
    
    
    41
    
    
    
    218Total nonperforming loans
    
    
    62,577
    
    
    
    66,088Other real estate
    
    
    27,070
    
    
    
    29,014Total nonperforming assets
    
    $
    89,647
    
    
    $
    95,102
 -16-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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 $1.8
billion and $1.5 billion at June 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 June 30, 2004 and December 31, 2003. June 30,
    
    December 31,2004
    
    2003Other
    
    
    
    
    
    OtherThan
    
    
    
    
    
    ThanTrading
    
    Trading
    
    Trading
    
    Trading(in Thousands)Forward and futures contracts
    
    $
    1,254,152
    
    
    $
    35,077
    
    
    
    771,993
    
    
    
    Interest rate swap agreements:Pay fixed versus receive float
    
    
    1,299,582
    
    
    
    
    
    
    
    1,491,175
    
    
    
    Receive fixed versus pay float
    
    
    1,394,587
    
    
    
    1,915,200
    
    
    
    1,514,564
    
    
    
    1,805,200Written options
    
    
    56,284
    
    
    
    45,252
    
    
    
    32,850
    
    
    
    Purchased options
    
    
    102,199
    
    
    
    
    
    
    
    78,551
    
    
    
    
 For the three months ended June 30, 2004, there were no credit losses
associated with derivative instrument contracts. For the three months ended
June 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 June
30, 2004 and December 31, 2003. These derivative positions are primarily
executed in the over-the-counter market. June 30, 2004
    
    December 31, 2003Notional
    
    Carrying
    
    Notional
    
    CarryingValue
    
    Value
    
    Value
    
    Value(in Thousands)Cash Flow Hedges:Interest rate swap agreements
    
    $
    1,000,000
    
    
    $
    (2,275
    )
    
    $
    1,000,000
    
    
    $
    589Written options (1)
    
    
    45,252
    
    
    
    122
    
    
    
    
    
    
    
    Fair Value Hedges:Interest rate swap agreements
    
    
    915,200
    
    
    
    48,644
    
    
    
    805,200
    
    
    
    73,238Forward contracts (1)
    
    
    35,077
    
    
    
    (220
    )
    
    
    
    
    
    
    
  (1)
    
    Derivatives relate to the Companys mortgage banking activities Interest-Rate Risk The Company uses derivative instruments to manage the risk of earnings
fluctuations caused by interest rate volatility. The effect of interest rate
movements on hedged assets or liabilities will generally be offset by the
derivative instrument. -17-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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 six months ended June 30, 2004 and 2003. The
Company recognized a decrease to interest expense of $11.1 million and $11.9
million for the three months ended June 30, 2004 and 2003, respectively, and
$22.1 million and $23.3 million for the six months ended June 30, 2004 and
2003, respectively, related to interest rate swaps accounted for as fair value
hedges. At June 30, 2004, the fair value hedges had a carrying value of $48.6
million and a weighted average remaining term of 3.1 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 six
months ended June 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 six-month periods ended June 30, 2004 and 2003, resulting from hedge
ineffectiveness. As of June 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 $2.9 million and $14.2 million related to interest rate swaps and
floors accounted for as cash flow hedges for the three months ended June 30,
2004 and 2003, respectively, and $9.5 million and $31.8 million for the six
months ended June 30, 2004 and 2003, respectively. Deferred net losses of
$3.8 million on derivative instruments not terminated are recorded in other
comprehensive income at June 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 June 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 June 30, 2004
were variable rate. Sunbelts total assets, which approximated market value,
were $1.4 billion at June 30, 2004 and $904 million at December 31, 2003,
respectively. The Company realized fee income of $1.7 million and $2.9 million
for the three months ended June 30, 2004 and 2003, respectively, and $3.2
million and $4.7 million for the six months ended June 30, 2004 and 2003,
respectively, from Sunbelt for providing various services including serving as
liquidity provider, investment advisor and administrative agent. At June 30,
2004 and December 31, 2003, receivables from Sunbelt were $3 million. There
were no outstanding payables to Sunbelt at either June 30, 2004 or December 31,
2003. The Company, under agreements with Sunbelt, may be required to purchase
assets or provide alternative funding to the conduit in certain limited
circumstances, including the conduits inability to place commercial paper or a
downgrade in the Companys short-term debt rating. Management believes if such
an event occurs, the Company has the ability to provide funding without any
material -18-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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 June 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 June 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 June 30, 2004, 6.1 million shares had been repurchased under the
January 2003 plan at a cost of $229 million. Approximately 475,000 of the
total shares repurchased had been reissued for acquisitions and employee
benefit plans. At June 30, 2004, approximately 4.3 million shares remained
available for repurchase under both 2003 plans. 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 June 30, 2004, accumulated other comprehensive income included negative
$1.4 million from the effective portion of cash flow hedges and $11.7 million
of net unrealized losses on investment securities available for sale. At
December 31, 2003, accumulated other comprehensive income reflected a positive
$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 June 30, 2004, the Company had four reporting units with goodwill,
which include Corporate Banking with $136 million, Retail Banking with $96
million, Insurance with $60 million and Wealth Management with $7 million.
During the six months ended June 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 prior acquisition contingent
consideration payments in the current year. Each reporting unit was tested for impairment in the third quarter of
2003. The fair value of the reporting units were estimated using the expected
present value of future cash flows. This cash flow approach indicated no
impairment charge was required at the test date. No events have occurred
subsequent to the test date that would indicate a need to perform a revised
assessment. Acquired intangible assets as of June 30, 2004 are detailed in the
following table. As of June 30, 2004Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    Value(in Thousands)Nonamortizing goodwill
    
    $
    352,572
    
    
    $
    (53,733
    )
    
    $
    298,839Amortizing intangible assets:Core deposit intangibles
    
    $
    69,756
    
    
    $
    (56,765
    )
    
    $
    12,991Other customer intangibles
    
    
    38,173
    
    
    
    (9,746
    )
    
    
    28,427Total amortizing intangible assets
    
    $
    107,929
    
    
    $
    (66,511
    )
    
    $
    41,418
 The Company recognized $1.6 million and $1.8 million in amortization
expense on acquired intangible assets for the three months ended June 30, 2004
and 2003, respectively, and $3.3 million and $3.6 million for the six months
ended June 30, 2004 and 2003, respectively. Aggregate amortization expense for
the years ending December 31, 2004 through December 31, 2008 are estimated to
be $6.4 million, $5.4 million, $4.1 million, $3.3 million, and $3.0 million,
respectively. -19-




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##### Table of Contents



COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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 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 June 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 June 30, 2004,
the maximum potential amount of future undiscounted payments the Company could
be required to make under outstanding standby letters of credit was $594
million. The following represents the Companys commitments to extend credit and
standby letters of credit as of June 30, 2004, and December 31, 2003: June 30,
    
    December 31,2004
    
    2003(in Thousands)Commitments to extend credit
    
    $
    10,609,545
    
    
    $
    9,993,691Standby and commercial letters of credit
    
    
    593,909
    
    
    
    451,868
 At June 30, 2004, the Company has potential recourse related to FNMA
securitizations of approximately $22 million. Certain acquisition agreements, related to the insurance agencies and the
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 June 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. -20-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued NOTE 12  Defined Benefit Pension Plan The following table provides certain information with respect to the
Companys defined benefit pension plan for the periods ending June 30, 2004 and
2003. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In Thousands)Service cost
    
    $
    1,695
    
    
    $
    1,545
    
    
    $
    3,415
    
    
    $
    3,090Interest cost
    
    
    2,116
    
    
    
    1,950
    
    
    
    4,224
    
    
    
    3,900Expected return on plan assets
    
    
    (2,731
    )
    
    
    (2,254
    )
    
    
    (5,313
    )
    
    
    (4,508
    )Amortization of prior service cost
    
    
    9
    
    
    
    8
    
    
    
    17
    
    
    
    16Amortization of net loss
    
    
    262
    
    
    
    251
    
    
    
    817
    
    
    
    502Net periodic benefit cost
    
    $
    1,351
    
    
    $
    1,500
    
    
    $
    3,160
    
    
    $
    3,000
 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 and Reporting for Derivative Instruments On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities.SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities.The provisions of SFAS No. 149 were effective for
fiscal quarters beginning after June 15, 2003. The Company adopted SFAS No.
149 on July 1, 2003. The adoption of this standard did not have a material
impact on operations. 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 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 -21-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements  Continued 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. Compass securitization structure, as of June 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 now classified as FHLB and other borrowings on
the Consolidated Balance Sheets. 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. 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 is effective for reporting periods beginning after June
15, 2004. Management does not believe the provision of this standard 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. The Companys actual
results may differ materially from those included in the forward-looking
statements. 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. These forward-looking
statements involve risks and uncertainties including, but not limited to:
regional and local economic conditions; regulatory actions; capital markets
volatility; the level of interest rates and effects of such interest rates on
derivatives contracts; changes in laws and regulations relating to financial
services and significant changes in accounting, tax or regulatory practices or
requirements; the growth and credit performance of the loan portfolios;
competition for our customers from other financial service providers; the
dividend capabilities of subsidiaries; and the resolution of legal proceedings
and related matters. Investors are cautioned not to place undue reliance on
any forward-looking statements. The Company disclaims any obligation to update
any such forward-looking statements. Overview The Company had net income of $91.7 million for the second quarter of
2004, a five percent increase over the $87.0 million earned during the second
quarter of 2003. For the same time period, diluted earnings per share increased
seven percent to $0.73 from $0.68 in the prior year. For the first six months of 2004, net income increased five percent to
$178.0 million compared to $169.1 million for the same period last year.
Diluted earnings per share for the first six months of 2004 increased eight
percent to $1.42 from $1.32 in the first six months of 2003. The Company operates 376 full-service banking centers including 136 in
Texas, 89 in Alabama, 71 in Arizona, 42 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 June 30, 2004, increased to
$227.6 million from $224.3 million for the three months ended June 30, 2003, as
interest income decreased $4.7 million and interest expense decreased $8.1
million. The decrease in interest income was due to a 78 basis point decrease
in the average yield on earning assets from 5.71 percent to 4.93 percent,
partially offset by an increase in average earning assets of $3.2 billion, or
14 percent. The increase in average earning assets from the second quarter of
2004 was primarily the result of a $2.1 billion increase in average investment
securities, including both investment securities available for sale and
investment securities held to maturity, and an increase of $1.1 billion in
average loans. The increase in the investment securities was primarily due to
the securitization and retention of loans as investment securities throughout
the last two quarters of 2003 and into 2004. During the second quarter of
2004, loans increased due to continued loan demand through all of the Companys
markets. The nine percent decrease in interest expense over the second quarter
of 2003 was primarily the result of a 41 basis point decrease in the rate paid
on interest bearing liabilities, offset partially by a $2.5 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, a $663 million increase in total interest bearing deposits and an
increase of $276 million in FHLB and other borrowings. For the first six months of 2004, net interest income decreased $1.1
million over the first six months of 2003 to $451.4 million, with interest
income decreasing $20.4 million and interest expense decreasing $19.3 million.
The decrease in interest income was due to a 92 basis point decrease in the
average yield from earning assets from 5.92 percent to 5.00 percent, offset
partially by an increase in average earning assets of $3.2 billion, or 14
percent. The increase in average earning assets over the first six months of
2003 was primarily the result of a $2.1 billion increase in -23-




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##### Table of Contents



investment securities, including both investment securities available for
sale and investment securities held to maturity, and a $1.0 billion increase in
loans. The increase in the investment securities was primarily due to the
securitization and retention of loans as investment securities throughout the
last two quarters of 2003 and into 2004. The 10 percent decrease in interest
expense over the first six months of the prior year was the result of a 46
basis point decrease in the rate paid on interest bearing liabilities offset
partially by a $2.5 billion increase in average interest bearing liabilities.
The increase in average interest-bearing liabilities was primarily the result
of a $2.1 billion increase in fed funds purchased and a $362 million increase
in total interest bearing deposits. Net interest margin, stated as a percentage, is the yield obtained by
dividing the difference between the overall 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 3.58 percent for the
second quarter of 2004, compared to 4.02 percent for the second quarter of
2003. For the six months ended June 30, 2004, net interest margin decreased
from 4.15 percent in the prior year to 3.61 percent. These decreases resulted
from the changes in rates and volumes of earning assets and the corresponding
funding sources noted previously. During the second 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 22 basis
points as compared to a 47 basis point positive impact for the second quarter
of 2003. For the six months ended June 30, 2004, the Companys use of interest
rate contracts increased the Companys net interest margin by 26 basis points
as compared to a 51 basis point positive impact for the first six months of
2003. 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 June 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
    
    Projected*
    
    Projected*
    
    Projected*(in Thousands)Hedging derivatives positive
impact to net interest margin
    
    $
    17,668
    
    
    $
    13,931
    
    
    $
    12,029
    
    
    $
    11,055
    
    
    $
    54,683
  *
    
    Projected impact based on June 30, 2004 interest rates. -24-




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Derivative instruments are subject to market risk. While the Company does
have 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 June 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. July 1, 2004through
    
    For the Year Ended December 31,December 31,2004
    
    2005
    
    2006
    
    Thereafter($ in Thousands)Non-trading interest rate contractsCash Flow HedgesNotional maturity
    
    $
    300,000
    
    
    $
    500,000
    (1)
    
    $
    200,000
    
    
    $
    Weighted average coupon received
on maturities
    
    
    2.08
    %
    
    
    2.60
    %
    
    
    2.13
    %
    
    
    
    %Weighted average time to maturity (months)
    
    
    6
    
    
    
    13
    
    
    
    22
    
    
    
    Fair Value HedgesNotional maturity
    
    $
    165,000
    
    
    $
    40,000
    
    
    $
    
    
    
    $
    710,200Weighted average coupon received
on maturities
    
    
    5.58
    %
    
    
    4.86
    %
    
    
    
    %
    
    
    6.70
    %Weighted average time to maturity (months)
    
    
    2
    
    
    
    11
    
    
    
    
    
    
    
    48
  (1)
    
    Represents $300 million of notional swaps that became effective in February 2004 and $200 million of notional forward starting swaps that will be
effective in August 2004. 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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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 six month periods ended June
30, 2004, as compared to the same period in 2003 (in thousands): Three Months EndedJune 30, 2004Change2003
    
    Attributed toTo2004
    
    Volume
    
    Rate
    
    MixInterest income:Federal funds sold and securities
purchased
under agreements to resell
    
    $
    61
    
    
    $
    107
    
    
    $
    (22
    )
    
    $
    (24
    )Trading account assets
    
    
    (4
    )
    
    
    (11
    )
    
    
    8
    
    
    
    (1
    )Investment securities available for sale
    
    
    (14,492
    )
    
    
    (9,529
    )
    
    
    (5,810
    )
    
    
    847Investment securities held to maturity
    
    
    34,702
    
    
    
    39,655
    
    
    
    (501
    )
    
    
    (4,452
    )Loans
    
    
    (24,980
    )
    
    
    15,878
    
    
    
    (38,404
    )
    
    
    (2,454
    )Increase (decrease) in interest income
    
    $
    (4,713
    )
    
    $
    46,100
    
    
    $
    (44,729
    )
    
    $
    (6,084
    )Interest expense:Deposits
    
    $
    (8,097
    )
    
    $
    1,811
    
    
    $
    (9,220
    )
    
    $
    (688
    )Federal funds purchased and securities
sold under agreements to repurchase
    
    
    2,896
    
    
    
    4,717
    
    
    
    (1,089
    )
    
    
    (732
    )Other short-term borrowings
    
    
    (83
    )
    
    
    (59
    )
    
    
    (31
    )
    
    
    7FHLB and other borrowings*
    
    
    (2,792
    )
    
    
    2,510
    
    
    
    (5,010
    )
    
    
    (292
    )Increase (decrease) in interest expense
    
    $
    (8,076
    )
    
    $
    8,979
    
    
    $
    (15,350
    )
    
    $
    (1,705
    )
 Six Months EndedJune 30, 2004Change2003
    
    Attributed toTo2004
    
    Volume
    
    Rate
    
    MixInterest income:Federal funds sold and securities
purchased
under agreements to resell
    
    $
    98
    
    
    $
    152
    
    
    $
    (32
    )
    
    $
    (22
    )Trading account assets
    
    
    17
    
    
    
    6
    
    
    
    11
    
    
    
    Investment securities available for sale
    
    
    (32,497
    )
    
    
    (13,921
    )
    
    
    (20,853
    )
    
    
    2,277Investment securities held to maturity
    
    
    63,951
    
    
    
    73,458
    
    
    
    (1,185
    )
    
    
    (8,322
    )Loans
    
    
    (51,943
    )
    
    
    31,154
    
    
    
    (78,290
    )
    
    
    (4,807
    )Increase (decrease) in interest income
    
    $
    (20,374
    )
    
    $
    90,849
    
    
    $
    (100,349
    )
    
    $
    (10,874
    )Interest expense:Deposits
    
    $
    (20,208
    )
    
    $
    62
    
    
    $
    (19,592
    )
    
    $
    (678
    )Federal funds purchased and securities
sold under agreements to repurchase
    
    
    8,247
    
    
    
    11,790
    
    
    
    (1,770
    )
    
    
    (1,773
    )Other short-term borrowings
    
    
    (118
    )
    
    
    (34
    )
    
    
    (90
    )
    
    
    6FHLB and other borrowings*
    
    
    (7,180
    )
    
    
    2,128
    
    
    
    (9,090
    )
    
    
    (218
    )Increase (decrease) in interest expense
    
    $
    (19,259
    )
    
    $
    13,946
    
    
    $
    (30,542
    )
    
    $
    (2,663
    )
  *
    
    Includes Capital Securities and Preferred Stock. Noninterest Income and Noninterest Expense During the second quarter of 2004, noninterest income increased $18.0
million, or 14 percent, to $150.0 million, from $132.0 for the second quarter
2003. The increase in noninterest income is directly attributable to increases
in most of the fee-based businesses of the Company, including a $12.8 million
increase in service charges on deposit accounts, a $3.3 million increase in
credit card service charges and fees, a $2.8 increase in insurance commissions,
offset partially by a decrease of $2.1 million in corporate and correspondent
investment sales. Noninterest income for the first six months of 2004 compared
to the same period in 2003 increased $36.9 million, or 14 percent, to $291.9
million due to a $25.8 million increase in service charges on deposit accounts,
a $6.5 million increase in insurance commissions, a $5.9 million -26-




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increase in credit card service charges and fees, offset partially by a
decrease of $4.6 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 derivative interest rate contracts. Noninterest expense, for the quarter ended June 30, 2004, increased $15.7
million, or eight percent, compared to the second quarter of 2003 due to a $4.4
million increase in salaries and benefits and a $3.5 million increase in
marketing expenses. For the first six months of 2004, noninterest expense
increased $29.7 million, or eight percent, to $421.3 million due to a $14.8
million increase in salaries and benefits, a $3.4 million increase in net
occupancy expenses and a $3.0 million increase in marketing expenses. Income Taxes The increase in income tax expense for the three and six-month periods
ended June 30, 2004, as compared to the same periods in 2003, is directly
attributable to the increase in pretax income. Provision and Allowance for Loan Losses The provision for loan losses for the three and six month periods ended
June 30, 2004 increased $269,000 and decreased $5.2 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 June 30, 2004, was $251 million and at
December 31, 2003, was $245 million. The ratio of the allowance for loan losses
to loans outstanding was 1.41 percent at June 30, 2004 and December 31, 2003.
Management believes that the allowance for loan losses at June 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 June 30, 2004, were 0.50 percent, compared to 0.55
percent at December 31, 2003. At June 30, 2004, the allowance for loan losses
as a percentage of nonperforming loans was 400 percent, compared to 371 percent
at December 31, 2003. The allowance for loan losses as a percentage of
nonperforming assets was 257 percent at December 31, 2003, compared to 280
percent at June 30, 2004. Nonperforming assets, comprised of nonaccrual loans, renegotiated loans,
and other real estate, totaled $90 million at June 30, 2004, compared to $95
million at December 31, 2003. Loans past due ninety days or more but still
accruing interest were $14 million at June 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
   Six Months EndedJune 30,2004
    
    2003Allowance for Loan LossesBalance at beginning of period
    
    $
    244,882
    
    
    $
    232,830Add: Provision charged to income
    
    
    52,523
    
    
    
    57,688Deduct: Allowance for loans sold / securitized
    
    
    591
    
    
    
    2,942Loans charged off
    
    
    58,742
    
    
    
    62,435Loan recoveries
    
    
    (12,501
    )
    
    
    (9,017
    )Net charge-offs
    
    
    46,241
    
    
    
    53,418Balance at end of period
    
    $
    250,573
    
    
    $
    234,158Net charge-offs as a percentage of
average loans (annualized)
    
    
    0.53
    %
    
    
    0.65
    %
 June 30, 2004
    
    December 31, 2003Nonperforming AssetsNonaccrual loans
    
    $
    62,536
    
    
    $
    65,870Renegotiated loans
    
    
    41
    
    
    
    218Total nonperforming loans
    
    
    62,577
    
    
    
    66,088Other real estate
    
    
    27,070
    
    
    
    29,014Total nonperforming assets
    
    $
    89,647
    
    
    $
    95,102Accruing loans ninety days or more past due
    
    $
    14,343
    
    
    $
    26,159Other repossessed assets
    
    
    1,520
    
    
    
    427Allowance as a percentage of loans
    
    
    1.41
    %
    
    
    1.41
    %Total nonperforming loans as a percentage
of loans
    
    
    0.35
    
    
    
    0.38Total nonperforming assets as a percentage
of loans and ORE
    
    
    0.50
    
    
    
    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
    
    
    400.42
    
    
    
    370.54Allowance for loan losses as a percentage of
nonperforming assets
    
    
    279.51
    
    
    
    257.49
 -28-




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##### Table of Contents



Financial Condition Overview Total assets at June 30, 2004 were $27.9 billion, up from $27.0 billion at
December 31, 2003. The increase in assets was due primarily to internal loan
growth. However, the growth in loans was offset due to the securitization of
these loans and the subsequent reclassification of these loans to investment
securities. Assets and Funding At June 30, 2004, earning assets totaled $25.7 billion, an increase of
approximately $925 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 31 percent and 69 percent, respectively, of
total earning assets at June 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 a residential real
estate securitization the Company completed in the first quarter of 2004, which
transferred approximately $600 million from loans to investment securities.
The $545 million growth in investment securities, including investment
securities held to maturity and investment securities available for sale, and
the $397 million growth in loans was primarily funded by a $597 million
increase in deposits and a $264 million increase 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 June 30, 2004, the Companys Subsidiary
Banks could have paid additional dividends to the Parent Company of
approximately $195 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
June 30, 2004 was 6.87 percent compared to 6.94 percent at December 31, 2003.
The decrease in this ratio was due to the assets growing at a quicker pace than
shareholders equity. Shareholders equity increased during the first six
months of 2004 primarily due to an increase in retained earnings, partially
offset by decreases in accumulated other comprehensive income and treasury
stock due to the Companys utilization of its share repurchase authorization
during 2004. -29-




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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 June 30, 2004, 6.1 million shares had been repurchased under the
January 2003 plan at a cost of $229 million. Approximately 475,000 of the
total shares repurchased had been reissued for acquisitions and employee
benefit plans. At June 30, 2004, approximately 4.3 million shares remained
available for repurchase under both 2003 plans. 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 June 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 June 30, 2004 were 8.96 percent and 11.22 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 7.12 percent at June 30, 2004 and 7.25 percent at
December 31, 2003. The Companys tangible leverage ratio was 7.08 percent at
June 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 as of June 30, 2004
and December 31, 2003 are shown below. Principal
    
    PercentageIncrease/(Decrease)Amount of Earning
    
    in Interest Income/ExpenseAssets, InterestBearing Liabilities
    
    Down 50
    
    Up 100and Swaps
    
    Basis Points
    
    Basis Points(In thousands)(Unaudited)June 30, 2004:Assets which reprice in: *One year or less
    
    $
    11,744,635
    
    
    
    (6.54
    )%
    
    
    15.85
    %Over one year
    
    
    13,944,612
    
    
    
    (2.32
    )
    
    
    3.51$
    25,689,247
    
    
    
    (4.12
    )
    
    
    8.79Liabilities which reprice in:One year or less
    
    $
    16,533,452
    
    
    
    (27.52
    )
    
    
    61.91Over one year
    
    
    4,122,165
    
    
    
    (0.89
    )
    
    
    1.90$
    20,655,617
    
    
    
    (14.13
    )
    
    
    31.73Total net interest income sensitivity
    
    
    
    
    
    
    0.29
    %
    
    
    (1.32
    )%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 slightly
less sensitive to rising rates from December 31, 2003 to June 30, 2004 in the
100 basis point increase scenario. On the asset side of the balance sheet, the
increase in the proportion of variable rate loans decreased sensitivity to
rising rates. This decrease in sensitivity to rising rates was offset by a
decrease in investment securities cash flows from a current rate scenario to
the 100 basis point increase scenario due to the steepness of the yield curve.
On the liability side, the decrease in 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 inverted causing
less price sensitivity in the 100 basis point increase scenario. In the 50
basis point decrease scenario, the sensitivity remained relatively neutral. Given the low interest rate environment at June 30, 2004, the calculations
above 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. -31-




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##### Table of Contents



Item 4  Controls and Procedures The management of the Company is responsible for periodically evaluating
the Companys disclosure controls and procedures, which are defined under
applicable 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 June 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  Changes in 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)April 1, 2004 
April 30, 2004
    
    
    4,574
    
    
    $
    40.4879
    
    
    
    
    
    
    
    4,338,600May 1, 2004 
May 31, 2004
    
    
    5,085
    
    
    
    40.9995
    
    
    
    
    
    
    
    4,338,600June 1, 2004 
June 30, 2004
    
    
    2,063
    
    
    
    43.1800
    
    
    
    
    
    
    
    4,338,600Total
    
    
    11,722
    
    
    $
    41.1836
    
    
    
    
  (1)
    
    This column includes (a) purchases of equity instruments under the Companys publicly announced share repurchased 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.  (3)
    
    During the three months ended June 30, 2004, the Company repurchased 11,722 shares of common stock in connection with various exercises of
stock options. 
 Item 4  Submission of Matters to Vote of Security Holders The Companys Annual Meeting was held April 19, 2004 at which the shareholders of the Company voted upon (I) the election of three directors, (II) a monthly investment plan for
the Companys employees, and (III) the ratification of the selection of PricewaterhouseCoopers LLP as the Companys independent auditor for 2004.  I.
    
    Election of Directors: Carl J. Gessler, Jr., D. Paul Jones, Jr., and J. Terry Strange were elected upon
receipt of the following votes for / withheld, respectively, 102,458,607 / 2,036,204, 102,592,295 /
1,902,518, and 102,322,635 / 2,172,176.II.
    
    Approval of a Monthly Investment Plan for Compass Employees: The Compensation Committee of the Companys
Board of Directors adopted and recommended for shareholder approval, the Compass Bancshares, Inc. Monthly
Investment Plan (MIP). The MIP will replace the existing Share Accumulation Plan, which is an employee
stock purchase plan under Internal Revenue Code -33-




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##### Table of Contents



Section 423, and will permit eligible employees to purchase shares of Compass Bancshares, Inc. common stock
through payroll contribution in an amount up to 10% of salary. Compass would make matching contributions up
to 25% of employee contributions. The MIP will become effective January 1, 2005. Shareholders approved the
MIP upon the following votes: FOR-69,199,106; AGAINST-2,035,238; ABSTAIN-499,508; NOT VOTED-32,761,032.III.
    
    Ratification of PricewaterhouseCoopers LLP as Independent Auditor: The Companys Audit Committee appointed
PricewaterhouseCoopers LLP to serve as the Companys independent auditors for 2004. Shareholders ratified
the appointment of PricewaterhouseCoopers LLP as independent auditor upon the following votes:
FOR-102,331,298; AGAINST-1,855,187; ABSTAIN-308,324. 
 Item 6  Exhibits and Reports on Form 8-K  (a)
    
    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)(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) -34-




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##### Table of Contents



(a)
    
    Exhibits (continued)  (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)(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) -35-




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##### Table of Contents



(a)
    
    Exhibits (continued)  (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)(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. (a) Reports on Form 8-K On April 16, 2004, the Company filed a Form 8-K in which it furnished a
press release announcing its financial results for the three month period
ended March 31, 2004. A copy of this press release, dated April 16, 2004, was
attached as an exhibit to the Form 8-K. On July 15, 2004, the Company filed a Form 8-K in which it furnished a
press release announcing its financial results for the three and six-month
periods ended June 30, 2004. A copy of this press release, dated July 15,
2004, was attached as an exhibit to the Form 8-K. -36-




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COMPASS BANCSHARES, INC. AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized. August 6, 2004
    By:
    /s/  Garrett R. HegelGarrett R. HegelDate
    
    Chief Financial Officer -37-