SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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.

The number of pages of this report is 36.

COMPASS BANCSHARES, INC. AND SUBSIDIARIES

INDEX

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PART I. FINANCIAL INFORMATION

Item 1 – Financial Statements

COMPASS BANCSHARES, INC. AND SUBSIDIARIES

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows— Continued
(In Thousands)
(Unaudited)

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES

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 (“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.

     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.

     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.

     The Company utilizes certain financing arrangements to meet its balance sheet management, funding, liquidity and market or credit risk management needs. These financing arrangements are with separate legal entities, corporations, partnerships or trusts, and are not consolidated in the Company’s balance sheet. The majority of these activities are basic term or revolving securitization vehicles. The Company evaluates whether these entities should be consolidated by

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements – Continued

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.

     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 3.31 percent and 3.10 percent; expected dividend yields of 3.94 percent and 4.78 percent; volatility factors of the expected market price of the Company’s common stock of 0.295 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 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):

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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 on 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 March 31, 2004, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding contingent payment provisions is approximately $18.0 million, primarily in the form of stock.

Divestitures

     During 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 year ended December 31, 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 Capital Securities are reflected as other borrowing in the Company’s Consolidated Balance Sheets as of March 31, 2004.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements – Continued

     The Trust Preferred Securities must be redeemed when the related Capital Securities mature, or earlier, if provided in the governing indenture. Each issue of Trust Preferred Securities carries an interest rate identical to that of the related Capital Securities. The Trust Preferred Securities qualify as Tier 1 Capital, subject to regulatory limitations, under guidelines established by the Board of Governors of the Federal Reserve System (“Federal Reserve”).

     The subsidiary business trusts have the right to redeem their Trust Preferred Securities: (i) in whole or in part, on or after January 15, 2007 (for securities issued by Compass Trust I) and March 22, 2007 (for securities issued by Compass Trust III); and (ii) in whole at any time within 90 days following the occurrence and during the continuation of a tax event or a capital treatment event (as defined in the offering circulars). If the Trust Preferred Securities issued by Compass Trust I are redeemed before they mature, the redemption price will be the principal amount, plus a premium, plus any accrued but unpaid interest. If the Trust Preferred Securities issued by Compass Trust III are redeemed before they mature, the redemption price will be the principal amount plus any accrued but unpaid interest.

     On March 19, 2004, the Company redeemed the Trust Preferred Securities issued by 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 (the “Preferred Stock”). The Preferred Stock, net of discount, was approximately $18 million at March 31, 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.

* All Capital Securities issued by the Company were redeemed on March 19, 2004.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

NOTE 4 – Earnings Per Share

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.

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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.

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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 months ended March 31, 2004 and 2003.

For the Three Months Ended March 31, 2004
(in Thousands)

For the Three Months Ended March 31, 2003
(in Thousands)

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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 March 31, 2004 and December 31, 2003.

     A summary of the activity in the allowance for loan losses for the three months ended March 31, 2004 and 2003 follows:

     Nonperforming assets at March 31, 2004 and December 31, 2003 are detailed in the following table.

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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. These transactions result in certain assets being reclassified from loans to investment securities and in improved liquidity. These assets, which the Company continues to manage and service, approximated $2.0 billion and $1.5 billion at March 31, 2004 and December 31, 2003, respectively.

     During March of 2004, the Company securitized $589 million of residential mortgage loans and retained 100 percent of the beneficial interests and retained interests. The beneficial interests are AAA/Aaa rated securities, by Standard & Poor’s and Moody’s, respectively, and the retained interests include an interest only strip. The value of the Company’s retained interests, which are subordinate to the beneficial interests, are subject to credit, prepayment, and interest rate risks on the transferred financial assets. The beneficial interests are reflected as Investment Securities Held to Maturity and the interest only strip is reflected as Investment Securities Available for Sale on the Company’s Consolidated Balance Sheet as of March 31, 2004. No gain or loss was recognized as a result of this transaction. In this securitization, the Company retained servicing responsibilities and receives annual servicing fees amounting to 25 basis points of the outstanding balance of fixed rate loans and 37.5 basis points of the outstanding balance of adjustable rate loans. The securitization trust has no recourse to the Company’s other assets for failure of debtors to pay when due.

     At March 31, 2004, key economic assumptions used in measuring the interest only strip and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows (dollars in thousands):

     * CPR – Constant Prepayment Rate

     These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent and 20 percent adverse variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor will likely result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

     Following are the expected static pool credit losses:

     Static pool losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

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 March 31, 2004 and December 31, 2003.

     The following table presents the notional value and carrying value amounts of the Company’s derivative positions held for hedging purposes at both March 31, 2004 and December 31, 2003. These derivative positions are primarily executed in the over-the-counter market. For the three months ended March 31, 2004 and March 31, 2003, there were no credit losses associated with derivative instrument contracts.

Interest-Rate Risk

     The Company uses derivative instruments to manage the risk of earnings fluctuations caused by interest rate volatility. The effect of interest rate movements on hedged assets or liabilities will generally be offset by the derivative instrument.

Fair-Value Hedges

     The Company enters into interest rate swaps to convert its fixed rate long-term debt to floating rate debt. The critical terms of the interest rate swaps match the terms of the corresponding fixed rate long-term debt. All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness, unless otherwise noted. There were no fair-value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the three months ended March 31, 2004 and 2003. The Company recognized a decrease to interest expense of $11.1 million and $11.4 million for the three months ended March 31, 2004 and 2003, respectively, related to interest rate swaps accounted for as fair value hedges. At March 31, 2004, the fair value hedges had a carrying value of $83.3 million and a weighted average remaining term of 3.4 years.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

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 the three-month periods ended March 31, 2004 and 2003, resulting from hedge ineffectiveness. During the fourth quarter of 2002, the Company terminated interest rate swaps that were hedging floating rate commercial loans. At March 31, 2004, a deferred gain from this termination of $771,000 remained in accumulated other comprehensive income and will be amortized into income over the next two months as the related loan interest income is recognized. As of March 31, 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 $6.6 million and $17.7 million related to interest rate swaps and floors accounted for as cash flow hedges for the three months ended March 31, 2004 and 2003, respectively. Deferred net gains of $7.3 million on derivative instruments not terminated are recorded in other comprehensive income at March 31, 2004. Based on the current interest rate environment these gains 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 March 31, 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 March 31, 2004 were variable rate. Sunbelt’s total assets, which approximated market value, were $1.1 billion at March 31, 2004 and $904 million at December 31, 2003, respectively. The Company realized fee income of $1.5 million and $1.8 million for the three months ended March 31, 2004 and 2003, respectively, from Sunbelt for providing various services including serving as liquidity provider, investment advisor and administrative agent. At March 31, 2004 and December 31, 2003, receivables from Sunbelt were $3 million. There were no outstanding payables to Sunbelt at either March 31, 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 adverse effect. The underlying assets are eligible investments for Compass Bank. The commitments, which are renewable annually at the Company’s option, are for amounts up to $2 billion. No funding or purchase of assets had occurred as of March 31, 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 would not have a significant impact on the Company’s regulatory capital ratios, as they would continue to exceed 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 March 31, 2004, 6.1 million shares had been repurchased under the January 2003 plan at a cost of $221 million. Approximately 475,000 of the total shares repurchased had been reissued for acquisitions and employee benefit plans. At March 31, 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.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

     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 March 31, 2004, accumulated other comprehensive income included $5.0 million from the effective portion of cash flow hedges and $47.0 million of net unrealized gains on investment securities available for sale. At December 31, 2003, accumulated other comprehensive income reflected $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 March 31, 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 three months ended March 31, 2004, goodwill increased $4 million, $477,000, and $242,000 within the Insurance reporting unit, the Corporate Banking reporting unit and the Wealth Management reporting unit, respectively. These amounts increased primarily from contingent consideration payments related to prior acquisition activity.

     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.

     Acquired intangible assets as of March 31, 2004 are detailed in the following table.

     The Company recognized $1.6 million and $1.8 million in amortization expense on acquired intangible assets for the three months ended March 31, 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.

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 March 31, 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 March 31, 2004, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit was $531 million.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

     The following represent the Company’s commitments to extend credit and standby letters of credit as of March 31, 2004, and December 31, 2003:

     At March 31, 2004, the Company has potential recourse related to FNMA securitizations of approximately $18 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 March 31, 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 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.

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 March 31, 2004 and 2003.

     For the three months ended March 31, 2004, the Company has not made any contributions to the defined benefit pension plan due to the defined benefit pension plan being fully funded. For the remainder of 2004, the Company does not anticipate making any contributions to the defined benefit pension plan. In the future, the Company anticipates contributing amounts to the defined benefit pension plan sufficient to satisfy funding requirements of the Employee Retirement Income Security Act.

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.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

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, neither the effective nor deferred provisions, will have a material impact on the results of future operations.

Guarantor’s Accounting and Disclosure Requirements for Guarantees

     On November 25, 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the Interpretation were effective for financial statements that end after December 15, 2002. However, the provisions for initial recognition and measurement were effective on a prospective basis for guarantees that were issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. The initial adoption of this standard did not have an impact on the financial condition or results of operations of the Company. Management does not believe the provisions of this standard will have a material impact on 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 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 March 31, 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 Other Borrowings on the Consolidated Balance Sheets.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

Staff Accounting Bulletin No. 105, 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.

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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 $86.2 million for the first quarter of 2004, a five percent increase over the $82.1 million earned during the first quarter of 2003. For the same time period, diluted earnings per share increased eight percent to $0.69 from $0.64 in the prior year.

     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 March 31, 2004, decreased to $223.7 million from $228.2 million, for the three months ended March 31, 2003, as interest income decreased $15.7 million and interest expense decreased $11.2 million. The decrease in interest income was due to a 108 basis point decrease in the average yield on earning assets from 6.15 percent to 5.07 percent, partially offset by an increase in average earning assets of $3.1 billion, or 15 percent. The increase in average earning assets from the first quarter of 2003 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 $978 million 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 three quarters of 2003 and into 2004, including $589 million in residential real estate loans during the first quarter of 2004. Loans increased due to continued loan demand through all of the Company’s markets. The 11 percent decrease in interest expense over the prior year quarter was primarily the result of a 53 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 $2.5 billion increase in fed funds purchased and a $60 million increase in total interest bearing deposits, offset partially by a $48 million decrease in FHLB and other borrowings.

     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 3.64 percent for the first quarter of 2004, compared to 4.29 percent for the first quarter of 2003. This decrease resulted from the changes in rates and volumes of earning assets and the corresponding funding sources noted previously. During the first 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 29 basis points as compared to a 55 basis point positive impact for the first quarter of 2003.