Equipment Leasing Activities.We conduct equipment leasing activities through Banknorth Leasing Corp. This company engages in direct equipment leasing activities, primarily involving business and office equipment, in

~~the States of Maine,~~ New ~~Hampshire, Massachusetts, Vermont,~~England, New York ~~Connecticut, Rhode Island~~ and ~~California.~~certain other states. At December 31, ~~2003,~~2004, Banknorth Leasing Corp. had ~~$98.1~~$90.2 million of leases outstanding.

Investment Activities. Northgroup Asset Management Company ~~(formerly known as Northgroup (FM) Investment Company)~~ is a Maine corporation which was formed for purposes of effectively managing assets and investments for the benefit of Banknorth, NA. Northgroup Asset Management Company employs staff in its offices in Portland, Maine who are engaged in the management of its assets. ~~Banknorth, NA has contributed to this Company the stock of certain other subsidiaries and substantially all of the investment securities held by Banknorth, NA.~~

Other Equity Investments.We hold certain other equity investments, primarily through Banknorth, NA and Four Eighty-One Corp., a wholly-owned subsidiary of Banknorth, NA. At December 31, ~~2003,~~2004, these investments consisted of (i) ~~$59.4~~$61.3 million of interests in limited partnerships formed for the purpose of investing primarily in real estate for lower-income families in our market areas, plus commitments to invest up to an additional ~~$25.0~~$22.7 million in such partnerships, and (ii) an aggregate of ~~$20.5~~$30.2 million of interests in limited partnerships which invest primarily in small business investment companies in our market areas, plus commitments to invest up to an additional ~~$17.7~~$17.1 million in such partnerships. For additional information about these investments see Note 1817 to the Consolidated Financial Statements included in Item 8 hereof.

Competition

We are subject to vigorous competition in all aspects and areas of our business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. We also compete with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low-cost or guaranteed loans to certain borrowers. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services than us. Competition from both bank and non-bank organizations will continue.

The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Technological advances are likely to enhance competition by enabling more companies to provide financial resources. As a result, our future success will depend in part on our ability to address our customers’ needs

by using technology. We cannot assure you that we will be able to effectively develop new technology-driven products and services or be successful in marketing these products to our customers. Many of our competitors have far greater resources than we have to invest in technology.

Employees

We had approximately ~~6,700~~7,200 full-time equivalent employees as of December 31, ~~2003.~~2004. None of these employees is represented by a collective bargaining agent, and we believe that we enjoy good relations with our personnel.

Supervision and Regulation

The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to Banknorth. The regulatory framework is intended primarily for the protection of depositors and the insurance funds administered by the FDIC and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.

General.Banknorth currently is registered as a bank holding company and a financial holding company under the Bank Holding Company Act of 1956, as amended. As such, we are subject to regulation, supervision and examination by the Federal Reserve Board. We also are registered as a Maine financial institution holding company under Maine law and as such are subject to regulation and examination by the Superintendent of Financial ~~Institutions~~Institution of the State of Maine. Banknorth, NA is a national bank subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”), its chartering authority, and by the Federal Deposit Insurance Corporation (“FDIC”), which insures Banknorth, NA’s deposits to the maximum extent permitted by law.

Financial Modernization. The Bank Holding Company Act permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and which are not authorized for bank holding companies. A bank holding company may become a financial holding company if each of its subsidiary banks is “well capitalized” under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the applicable regulations thereunder, is “well managed” and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration with the Federal Reserve Board that the bank holding company seeks to become a financial holding company. Banknorth became a financial holding company effective January 25, 2002.

No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a “satisfactory” Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of “satisfactory” or better.

Bank Acquisitions. Pursuant to the Bank Holding Company Act, we are required to obtain the prior approval of the Federal Reserve Board before acquiring more than 5% of any class of voting stock of any bank that is not already majority owned by us. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company became able to acquire banks in states other than its home state beginning September 29, 1995, without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and less than 30% of such deposits in that state (or such lesser or greater amount set by state law).

The Interstate Banking and Branching Act also authorizes banks to merge across state lines, subject to certain restrictions, thereby creating interstate branches. Pursuant to the Interstate Banking and Branching Act, a bank also may open new branches in a state in which it does not already have banking operations if the state enacts a law permitting such de novo branching.

Capital and Operational Requirements. The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to U.S. banking organizations such as Banknorth and Banknorth, NA. In addition, those regulatory agencies may from time

to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. “Tier 1 capital” generally consists of common and qualifying preferred stockholders’ equity, less certain intangibles and other adjustments. “Tier 2 capital” and “Tier 3 capital” generally consist of subordinated and other qualifying debt, preferred stock that does not qualify as Tier 1 capital and the allowance for credit losses up to 1.25% of risk-weighted assets.

The sum of Tier 1, Tier 2 and Tier 3 capital, less investments in unconsolidated subsidiaries, represents qualifying “total capital,” at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 capital and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk weights, based primarily on relative credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. At December 31, ~~2003,~~2004, our Tier 1 risk-based capital and total risk-based capital ratios under these guidelines were ~~8.96%~~9.96% and ~~11.29%~~12.13%, respectively.

The “leverage ratio” requirement is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3%, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3%. At December 31, ~~2003,~~2004, our leverage ratio was ~~6.65%~~7.58%.

Federal bank regulatory agencies require banking organizations that engage in significant trading activity to calculate a capital charge for market risk. Significant trading activity means trading activity of at least 10% of total assets or $1 billion, whichever is smaller, calculated on a consolidated basis for bank holding companies. Federal bank regulators may apply the market risk measure to other banks and bank holding companies as the agency deems necessary or appropriate for safe and sound banking practices. Each agency may exclude organizations that it supervises that otherwise meet the criteria under certain circumstances. The market risk charge will be included in the calculation of an organization’s risk-based capital ratios.

FDICIA identifies five capital categories for insured depository institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and requires the respective U.S. federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding

company under any such guarantee is limited to the lesser of 5% of the bank’s assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness related generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.

The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, Banknorth, NA is considered “well capitalized.”

The Federal bank regulatory agencies also have adopted regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. That evaluation will be made as part of the institution’s regular safety and soundness examination. Banking agencies also have adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance sheet position) in the determination of a bank’s capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. The banking agencies do not intend to establish an explicit risk-based capital charge for interest rate risk but will continue to assess capital adequacy for interest rate risk under a risk assessment approach based on a combination of quantitative and qualitative factors and have provided guidance on prudent interest rate risk management practices.

Distributions. We derive funds for cash distributions to our stockholders primarily from dividends received from our banking subsidiary. Banknorth, NA is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate U.S. federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of the bank or bank/financial holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.

In addition to the foregoing, the ability of us and Banknorth, NA to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. Our right and the rights of our stockholders and creditors to participate in any distribution of the assets or earnings of our subsidiaries is further subject to the prior claims of creditors of such subsidiaries.

“Source of Strength” Policy. According to Federal Reserve Board policy, bank/financial holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank/financial holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC — either as a result of default of a banking or thrift subsidiary of a bank/financial holding company such as Banknorth or related to FDIC assistance provided to a subsidiary in danger of default — the other banking subsidiaries of such bank/financial holding company may be assessed for the FDIC’s loss, subject to certain exceptions.

Community Investment and Consumer Protection Laws. In connection with its lending activities, Banknorth, NA is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the federal Home Mortgage

Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and Community Reinvestment Act.

The Community Reinvestment Act requires insured institutions to define the communities that they serve, identify the credit needs of those communities and adopt and implement a “Community Reinvestment Act Statement” pursuant to which they offer credit products and take other actions that respond to the credit needs of the community. The responsible federal banking regulator must conduct regular Community Reinvestment Act examinations of insured financial institutions and assign to them a Community Reinvestment Act rating of “outstanding,” “satisfactory,” “needs improvement” or “unsatisfactory.” ~~In 2003, the~~The current Community Reinvestment Act rating, which is from a 2001 examination, of Banknorth, NA ~~was~~is “outstanding.”

Miscellaneous. Banknorth, NA is subject to certain restrictions on loans to Banknorth or its non-bank subsidiaries, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of Banknorth or its non-bank subsidiaries. Banknorth, NA also is subject to certain restrictions on most types of transactions with Banknorth or its non-bank subsidiaries, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms.

Regulatory Enforcement Authority. The enforcement powers available to federal banking regulators is substantial and includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Sarbanes-Oxley Act of 2002. On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. ~~Certain~~Among other things, the new legislation (i) created a public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new ~~legislation’s more significant reforms are noted below.~~

• The new legislation creates a public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review. The new board is funded by mandatory fees paid by all public companies. The new legislation also improves the Financial Accounting Standards Board, giving it full financial independence from the accounting industry.
• The new legislation strengthens auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients.
• The new legislation heightens the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies. Among other things, the new legislation provides for a strong public company audit committee that will be directly responsible for the appointment, compensation and oversight of the work of the public company auditors.
• The new legislation contains a number of provisions to deter wrongdoing. CEOs and CFOs now have to certify that company financial statements fairly present the company’s financial condition. If a misleading financial statement later results in a restatement, the CEO and CFO must forfeit and return to the company any bonus, stock or stock option compensation received in the twelve months following the misleading financial report. The new legislation also prohibits any company officer or director from attempting to mislead or coerce an auditor. Among other reforms, the new legislation empowers the SEC to bar certain persons from serving as officers or directors of a public company; prohibits insider trades during pension fund “blackout periods;” directs the SEC to adopt rules requiring attorneys to report securities law violations; and requires that civil penalties imposed by the SEC go into a disgorgement fund to benefit harmed investors.
• The new legislation imposes a range of new corporate disclosure requirements. Among other things, the new legislation requires public companies to report all off-balance-sheet transactions and conflicts, as well as to present any pro forma disclosures in a way that is not misleading and in accordance with requirements established by the SEC. The new legislation also accelerated the required reporting of insider transactions, which now generally must be reported by the end of the second business day following a covered transaction; requires that annual reports filed with the SEC include a statement by management asserting that it is responsible for creating and maintaining adequate internal controls and assessing the effectiveness of those controls; and requires companies to disclose whether or not they have adopted an ethics code for senior financial officers, and, if not, why not, and whether the audit committee includes at least one “financial expert,” a term which has been defined by the SEC in accordance with specified requirements. The new legislation also requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.

• ~~The new legislation contains provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts.~~
• Finally, the new legislation imposes a range of new criminal penalties for fraud and other wrongful acts, as well as extends the period during which certain types of lawsuits can be brought against a company or its insiders.

corporate disclosure requirements; (vi) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts, as well as extended the period during which certain types of lawsuits can be brought against a company or its insiders.

Taxation

We are subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code. Banknorth and its subsidiaries, as members of an affiliated group of corporations within the meaning of Section 1504 of the Internal Revenue Code, file a consolidated federal income tax return, which has the effect of eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income.

We also are subject to various forms of state taxation under the laws of Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut as a result of the business which we conduct in these states. We are also subject to taxation in several ~~other~~ states related to business conducted by our leasing company.

Statistical Disclosure by Bank Holding Companies

The following information, included under Items 6, 7 and 8 of this report, is incorporated by reference herein.

Table 2 — Three-Year Average Balance Sheets, which presents average balance sheet amounts, related taxable equivalent interest earned or paid and related average yields earned and rates paid and is included in Item 7;

Table 3 — Changes in Net Interest Income, which presents changes in taxable equivalent interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and is included in Item 7;

Table 1012 — Securities Available for Sale and Held to Maturity, which presents information regarding carrying values of investment securities by category of security and is included in Item 7;

Table 1113 — Maturities of Securities, which presents information regarding the maturities and weighted average yield of investment securities by category of security and is included in Item 7;

Table 1314 — Composition of Loan Portfolio, which presents the composition of loans and leases by category of loan and lease and is included in Item 7;

Table 1415 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, ~~2003,~~2004, which presents maturities and sensitivities of loans and leases to changes in interest rates and is included in Item 7;

Table 2022 — Five Year Schedule of Nonperforming Assets, which presents information concerning non-performing assets and accruing loans 90 days or more overdue and is included in Item 7;

“Credit Risk Management” and Note 1 to the Consolidated Financial Statements, which discuss our policies for placing loans on non-accrual status, as well as in the case of the former potential problem loans, which are included in Items 7 and 8, respectively;

Table 2123 — Five-Year Table of Activity in the Allowance for Loan and Lease Losses, included in Item 7;

Table 2225 — Allocation of the Allowance for Loan and Lease Losses — Five Year Schedule, included in Item 7;

Table 2123 — Net Charge-offs as a Percent of Average Loans and Leases Outstanding, included in Item 7;

Table 2 — Three-Year Average Balance Sheets, which includes average balances of deposits by category of deposit and is included in Item 7;

Table 1820 — Maturity of Certificates of Deposit of $100,000 or more at December 31, ~~2003,~~2004, included in Item 7;

“Selected Financial Data,” which presents return on assets, return on equity, dividend payout and equity to assets ratios and is included in Item 6; and

Note 1211 to the Consolidated Financial Statements, which includes information regarding short-term borrowings and is included in Item 8.

For additional information regarding our business and operations, see “Selected Financial Data” in Item 6 hereof, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 hereof and the Consolidated Financial Statements in Item 8 hereof.

Availability of Information

We make available on our web site, which is located athttp://www.banknorth.com, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on the date which we

electronically file these reports with the Securities and Exchange Commission. Investors are encouraged to access these reports and the other information about our business and operations on our web site.

~~Item 2.~~ ~~Properties~~


Item 2.	*Properties*

At December 31, ~~2003,~~2004, we conducted business from our executive offices at Two Portland Square, Portland, Maine and ~~have 359~~386 banking offices located in Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut.

The following table sets forth certain information with respect to our offices as of December 31, ~~2003.~~2004.


		Number of					Number of
State	State	Banking Offices		Deposits		State	Banking Offices		Deposits

				(Dollars in Thousands)					(Dollars in Thousands)
Maine	Maine		60	$	2,801,185	Maine		60	$	2,808,559
New Hampshire	New Hampshire		77		3,989,394	New Hampshire		76		4,190,703
Massachusetts	Massachusetts		115		5,906,579	Massachusetts		144		6,987,858
Vermont	Vermont		36		2,451,052	Vermont		36		1,672,390
New York	New York		27		1,658,404	New York		27		1,157,935
Connecticut	Connecticut		44		1,094,571	Connecticut		43		2,410,136

	Total		359	$	17,901,185	Total		386	$	19,227,581

For additional information regarding our premises and equipment and lease obligations, see Notes 7 and 1817 respectively, to the Consolidated Financial Statements included in Item 8 hereof.

~~Item 3.~~ ~~Legal Proceedings~~

~~We are involved in routine legal proceedings occurring in~~


Item 3.	*Legal Proceedings*

In the ordinary course of business, ~~which~~Banknorth and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions, including actions brought on behalf of various putitive classes of claimants. Certain of these actions assert claims for substantial monetary damages against Banknorth and its subsidiaries. Based on currently available information, advice of counsel, available insurance coverage and established reserves, management does not believe that the ~~aggregate are believed by us to be immaterial to our~~eventual outcome of pending litigation against Banknorth and its subsidiaries will have a material adverse effect on the consolidated financial ~~condition and~~position, liquidity or results of ~~operations.~~

operations of Banknorth. In view of the inherent difficulty of predicting such matters, however, there can be no assurance that the outcome of any such action will not have a material adverse effect on Banknorth’s consolidated results of operations in any future reporting period.

Item 4.

~~Item 4.~~ Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of our security holders in the fourth quarter of 2004.

PART II.


Item 5.	*Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities*

Market Information and Related Matters. Our common stock is traded on the New York Stock Exchange, Inc (“NYSE”). The following table sets forth the high and low prices of our common stock and the dividends declared per share of common stock for the periods indicated.


	Market Price
					Dividends Declared
2004	High		Low		Per Share

First Quarter	$	34.45	$	30.53	$	0.195
Second Quarter		34.75		30.25		0.195
Third Quarter		36.10		30.49		0.200
Fourth Quarter		36.71		34.49		0.200
2003


First Quarter	$	24.02	$	20.60	$	0.160
Second Quarter		26.68		21.09		0.160
Third Quarter		29.70		25.43		0.190
Fourth Quarter		33.57		27.58		0.190

As of December 31, 2004, there were 179,297,987 shares of common stock outstanding which were held by approximately 19,900 holders of record. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.

We have historically paid quarterly dividends on our common stock and currently intend to continue to do so in the foreseeable future. Our ability to pay dividends depends on a number of factors, however, including restrictions on the ability of Banknorth, NA to pay dividends under federal laws and regulations, and as a result there can be no assurance that dividends will be paid in the future.

Share Repurchases. The following table sets forth information with respect to any purchase made by or on behalf of Banknorth or any “affiliated purchaser,” as defined in §240.10b-18(a)(3) under the Exchange Act, of shares of Banknorth common stock during the indicated periods.


					Total Number of
					Shares Purchased as		Maximum Number of
	Total Number		Average		Part of Publicly		Shares that May Yet Be
	of Shares		Price Paid		Announced Plans or		Purchased Under the
Period	Purchased		per Share		Programs		Plans or Programs(1)

October 1-31, 2004		—		—		—		2,853,200
November 1-30, 2004		—		—		—		2,853,200
December 1-31, 2004		—		—		—		2,853,200
Total		—		—		—		2,853,200


(1)	An 8,000,000 share repurchase program was approved by the Board of Directors in February 2002. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments” in Item 7.


Item 6.	*Selected Consolidated Financial Data*


		2004			2003			2002			2001			2000

Condensed Income Statement
Net interest income		$	933,382		$	840,831		$	796,517		$	679,890		$	603,550
Provision for loan and lease losses			40,340			42,301			44,314			41,889			23,819

Net interest income after loan and lease loss provision			893,042			798,530			752,203			638,001			579,731
Noninterest income(1)			339,799			367,159			274,508			240,505			211,188
Noninterest expense(2)			765,101			641,270			579,392			515,317			502,392

Income before income taxes			467,740			524,419			447,319			363,189			288,527
Income tax expense			163,097			173,660			148,681			124,104			96,793
Cumulative effect of change in accounting principle, net of tax			—			—			—			(290	)		—

Net income		$	304,643		$	350,759		$	298,638		$	238,795		$	191,734

Per Common Share
Basic earnings per share		$	1.78		$	2.18		$	2.01		$	1.70		$	1.33
Diluted earnings per share			1.75			2.15			1.99			1.68			1.32
Dividends per share			0.79			0.70			0.58			0.53			0.50
Book value per share at year end			17.71			15.54			13.70			11.83			9.42
Tangible book value per share at year end			9.82			8.37			9.09			8.75			8.11
Stock price:
	High		36.71			33.57			27.22			24.39			21.13
	Low		30.25			20.60			20.44			18.13			10.38
	Close		36.60			32.53			22.60			22.52			19.94
Period end common shares outstanding			179,298			162,188			150,579			151,221			141,245
Weighted average shares outstanding — diluted			174,158			163,520			149,829			141,802			145,194

Financial Ratios
Return on average assets			1.08	%		1.37	%		1.39	%		1.29	%		1.05	%
Return on average equity			10.63			14.51			16.25			16.48			15.69
Net interest margin(3)			3.72			3.66			4.07			3.99			3.60
Net interest rate spread(3)			3.47			3.41			3.69			3.43			3.05
Average equity to average assets			10.17			9.44			8.56			7.82			6.66
Efficiency ratio(4)			60.09			53.09			54.10			55.34			61.67
Noninterest income as a percent of total income			26.69			30.39			25.63			26.13			25.92
Tier 1 leverage capital ratio			7.58			6.65			7.13			7.14			7.02
Tier 1 risk-based capital ratio			9.98			8.96			9.66			9.59			10.56
Total risk-based capital ratio			12.16			11.29			12.15			12.23			11.81
Dividend payout ratio(5)			44.36			31.90			28.76			30.27			36.91

Average Balance Sheet
Assets		$	28,173,424		$	25,616,347		$	21,460,719		$	18,545,709		$	18,343,226
Loans and leases(6)			17,734,537			15,633,207			13,236,803			11,246,007			10,485,289
Deposits			18,877,811			17,302,983			14,566,644			12,529,630			11,891,481
Shareholders’ equity			2,865,540			2,416,926			1,838,064			1,449,353			1,222,378

Year End Balance Sheet Data
Assets		$	28,687,810		$	26,453,735		$	23,418,941		$	21,076,586		$	18,233,810
Loans and leases, net(7)			18,349,842			16,113,675			13,847,735			12,525,493			10,692,112
Securities(8)			6,992,778			7,247,232			6,947,876			6,156,861			5,880,658
Goodwill and identifiable intangible assets			1,416,156			1,163,054			695,158			466,633			185,520
Deposits			19,227,581			17,901,185			15,664,601			14,221,049			12,107,256
Borrowings			5,990,705			5,882,864			5,432,581			4,602,388			4,659,390
Shareholders’ equity			3,176,114			2,520,519			2,063,485			1,789,115			1,330,857
Nonperforming assets(9)			81,103			63,103			68,953			81,227			67,132

(1)

Noninterest income included net securities losses of $17.8 million and gains of $29.2 million in the fourth quarter of ~~2003.~~

~~PART II.~~


~~Item 5.~~	*~~Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Securities~~*2004 and second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods.

~~Market Information~~

(2)

Noninterest expense included prepayment penalties on borrowings of $61.5 million and ~~Related Matters.Our common stock is traded on~~$28.5 million in the ~~New York Stock Exchange, Inc (“NYSE”). The following table sets forth the high and low prices~~fourth quarter of ~~our common stock~~2004 and the ~~dividends declared per share~~second quarter of common stock for the periods indicated. Market price information for our common stock for periods prior to November 4, 2002 represents trading on the Nasdaq Stock Market, Inc.’s National Market, and market price information for this stock on and after that date represents trading on the NYSE.
Market Price
Dividends Declared
2003 High Low Per Share
First Quarter $ 24.02 $ 20.60 $ 0.160
Second Quarter 26.68 21.09 0.160
Third Quarter 29.70 25.43 0.190
Fourth Quarter 33.57 27.58 0.190

2002
First Quarter $ 26.80 $ 22.25 $ 0.135
Second Quarter 27.45 24.96 0.145
Third Quarter 27.40 20.71 0.150
Fourth Quarter 24.58 20.68 0.150

~~As of December 31,~~ 2003, ~~there were 162,187,719 shares of common stock outstanding~~respectively, which were ~~held~~incurred as part of balance sheet deleveraging programs implemented during these periods.

(3)

Net interest margin represents net interest income divided by ~~approximately 19,750 holders of record. Such number of record holders does not reflect~~average interest-earning assets and net interest rate spread represents the ~~number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.~~

~~We have historically paid quarterly dividends on our common stock and currently intend to continue to do so in~~difference between the foreseeable future. Our ability to pay dividends depends on a number of factors, however, including restrictions on the ability of Banknorth, NA to pay dividends under federal laws and regulations, and as a result there can be no assurance that dividends will be paid in the future.

~~Share Repurchases.~~~~During the year ended December 31, 2003, we repurchased 4.5 million shares at an~~weighted average ~~price per share of $23.53.~~

The following table sets forth information with respect to any purchase made by or on behalf of Banknorth or any “affiliated purchaser,” as defined in §240.10b-18(a)(3) under the Exchange Act, of shares of Banknorth common stock during the indicated periods.

Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet Be
of Shares Price Paid Announced Plans or Purchased Under the
Period Purchased Per Share Programs Plans or Programs(1)
October 1-31, 2003 50,000 $ 28.15 50,000 2,853,200
November 1-30, 2003 — — — —
December 1-31, 2003 — — — —

~~(1)~~ ~~An 8,000,000 share repurchase program was approved by the Board of Directors in February 2002.~~


~~Item 6.~~	*~~Selected Consolidated Financial Data~~*

2003 2002 2001 2000 1999
Condensed Income Statement

Net interest income $ 840,831 $ 796,517 $ 679,890 $ 603,550 $ 614,395
Provision for loan and lease losses 42,301 44,314 41,889 23,819 23,575

Net interest income after loan and lease loss provision 798,530 752,203 638,001 579,731 590,820
Noninterest income 367,159 274,508 240,505 211,188 191,795
Noninterest expense 641,270 579,392 515,317 502,392 488,308

Income before income taxes 524,419 447,319 363,189 288,527 294,307
Income tax expense 173,660 148,681 124,104 96,793 97,349
Cumulative effect of change in accounting principle, net of tax — — (290 ) — —

Net income $ 350,759 $ 298,638 $ 238,795 $ 191,734 $ 196,958

Per Common Share

Basic earnings per share $ 2.18 $ 2.01 $ 1.70 $ 1.33 $ 1.35
Diluted earnings per share 2.15 1.99 1.68 1.32 1.34
Dividends per share 0.70 0.58 0.53 0.50 0.47
Book value per share at year end 15.54 13.70 11.83 9.42 8.22
Tangible book value per share at year end 8.37 9.09 8.75 8.11 6.95
Stock price:
High 33.57 27.22 24.39 21.13 20.25
Low 20.60 20.44 18.13 10.38 14.31
Close 32.53 22.60 22.52 19.94 15.06
Period end common shares outstanding 162,188 150,579 151,221 141,245 144,974
Weighted average shares outstanding — Diluted 163,520 149,829 141,802 145,194 147,428

Financial Ratios

Return on average assets 1.37 % 1.39 % 1.29 % 1.05 % 1.12 %
Return on average equity 14.51 16.25 16.48 15.69 16.42
Net interest margin(1) 3.66 4.07 3.99 3.60 3.80
Net interest rate spread(1) 3.41 3.69 3.43 3.05 3.33
Average equity to average assets 9.44 8.56 7.82 6.66 6.81
Efficiency ratio 53.09 54.10 55.34 61.67 60.57
Noninterest income as a percent of total income 30.39 25.63 26.13 25.92 23.79
Tier 1 leverage capital ratio 6.65 7.13 7.14 7.02 6.75
Tier 1 risk-based capital ratio 8.96 9.66 9.59 10.56 10.76
Total risk-based capital ratio 11.29 12.15 12.23 11.81 12.02
Dividend payout ratio(2) 31.90 28.76 30.27 36.91 33.19

Average Balance Sheet

Assets $ 25,616,347 $ 21,460,719 $ 18,545,709 $ 18,343,226 $ 17,607,344
Loans and leases(3) 15,633,207 13,236,803 11,246,007 10,485,289 9,908,177
Deposits 17,302,983 14,566,644 12,529,630 11,891,481 11,784,103
Shareholders’ equity 2,416,926 1,838,064 1,449,353 1,222,378 1,199,496

Year End Balance Sheet Data

Assets $ 26,453,735 $ 23,418,941 $ 21,076,586 $ 18,233,810 $ 18,508,264
Loans and leases, net(4) 16,113,675 13,847,735 12,525,493 10,692,112 9,699,608
Securities(5) 7,247,232 6,947,876 6,156,861 5,880,658 6,873,182
Goodwill and identifiable intangible assets 1,163,054 695,158 466,633 185,520 184,381
Deposits 17,901,185 15,664,601 14,221,049 12,107,256 11,710,501
Borrowings 5,882,864 5,432,581 4,602,388 4,659,390 5,466,253
Shareholders’ equity 2,520,519 2,063,485 1,789,115 1,330,857 1,192,274
Nonperforming assets(6) 63,103 68,953 81,227 67,132 69,192

~~(1)~~ ~~Net interest margin represents net interest income divided by average interest-earning assets and net interest rate spread represents the difference between the weighted average rate earned~~yield on interest-earning assets and the ~~weighted average rate paid on interest-bearing liabilities, in each case calculated on a fully-taxable equivalent basis.~~
~~(2)~~ ~~Cash dividends paid divided by net income.~~
~~(3)~~ ~~Includes loans and leases held for sale.~~
~~(4)~~ ~~Excludes loans and leases held for sale.~~
~~(5)~~ ~~Includes securities held to maturity.~~
~~(6)~~ ~~Nonperforming assets consist of nonperforming loans, other real estate owned, repossessed assets and investment securities placed on non-accrual status.~~


~~Item 7.~~	*~~Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except per share data and as noted)~~*

The discussion and analysis that follows focuses on the results of operations of Banknorth Group, Inc. during 2003, 2002 and 2001 and its financial condition at December 31, 2003 and 2002. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 2003 have been reclassified to conform to the 2003 presentation.

~~General~~

Banknorth Group, Inc. is a Maine corporation and a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2003, we had consolidated assets of $26.5 billion and consolidated shareholders’ equity of $2.5 billion. Based on total assets at that date, we are one of the 35 largest commercial banking organizations in the United States.

Our principal asset is all of the capital stock of Banknorth, NA (the “Bank”), a national bank which was initially formed as a Maine-chartered savings bank in the mid-19th century. The Bank operates banking divisions in Connecticut (Banknorth Connecticut), Maine (Peoples Heritage Bank), Massachusetts (Banknorth Massachusetts) New Hampshire (Bank of New Hampshire), New York (Evergreen Bank) and Vermont (Banknorth Vermont). At December 31, 2003, Banknorth NA had 359 banking offices in these states and we served approximately 1.3 million households and commercial customers. Through the Bank and its subsidiaries, we offer a full range of banking services and products to individuals, businesses and governments throughout our market areas, including commercial banking, consumer banking, investment management, investment planning and insurance brokerage services.

~~We are subject to extensive regulation and supervision under federal and state banking laws. See “Regulation and Supervision” under Item 1.~~


	*~~Business Strategy~~*

Our primary business segment is Community Banking which represents over 90% of our consolidated income and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans and leases, commercial real estate loans, residential mortgage loans and a variety of consumer loans. In addition to keeping loans for our own portfolio, we sell residential mortgage loans into the secondary market. We also invest in mortgage-backed securities and securities issued by the United States Government and agencies thereof, as well as other securities. In addition to Community Banking, we have Insurance Brokerage, Investment Planning and Investment Management each of which represents less than 10% of our consolidated net income and consolidated assets. Our Insurance Brokerage business earns commissions on insurance brokerage activities, our Investment Planning business earns commissions from the sale of third party mutual funds, annuities, stocks and bonds and our Investment Management business reflects fees from trust and investment management operations.

Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in New England and upstate New York; developing new financial products, services and delivery channels; closely managing yields on earning assets and rates on interest-bearing liabilities; increasing noninterest income through, among other things, expanded investment management, investment planning and insurance brokerage services, and controlling the growth of noninterest expenses. It is also part of our business strategy to supplement internal growth with targeted acquisitions of other financial institutions and insurance agencies in our current or contiguous market areas. See “Acquisitions” below and under Item 1.

We strive to maintain a diversified loan and deposit mix and strong asset quality. We are focused on improving efficiencies as we integrate all of our acquisitions. We will continue to evaluate our operations and organizational structures to ensure they are closely aligned with our goal of increasing earnings per share growth.

~~Acquisitions~~

We completed four acquisitions in 2003 (including two insurance agency acquisitions) and at December 31, 2003, our proposed acquisitions of Foxborough Savings Bank and CCBT Financial Companies, Inc. were pending. The following table sets forth certain information regarding our acquisitions in 2003, 2002 and 2001. All acquisitions were accounted for as purchases and as such, were included in our results of operations from the date of acquisition.

~~Table 1 — Acquisitions 2001 – 2003~~

Transaction-Related Items
Balance at
Acquisition Date Other Total
Acquisition
Identifiable Cash Shares Purchase
Date Assets Equity Goodwill Intangibles Paid Issued Price
(Dollars and shares in millions)
First & Ocean Bancorp 12/31/2003 $ 274.4 $ 15.6 $ 33.8 $ 1.8 $ 49.7 — $ 49.7
American Financial Holdings, Inc. 2/14/2003 2,690.3 408.2 426.3 9.3 328.5 13.4 711.4
Insurance agency acquisitions 2003 1.2 0.1 2.4 0.7 3.2 — 3.2
Warren Bancorp, Inc. 12/31/2002 466.1 45.3 91.8 2.7 59.8 2.7 136.6
Bancorp Connecticut, Inc. 8/31/2002 661.7 61.4 97.0 8.7 161.2 — 161.2
Ipswich Bancshares, Inc. 7/26/2002 318.0 13.9 22.2 4.8 19.9 0.9 40.1
Insurance agency acquisitions 2002 2.5 — 5.7 2.2 — 0.2 7.4
Andover Bancorp, Inc. 10/31/2001 1,796.0 162.9 188.5 13.2 — 16.5 340.0
Metrowest Bank 10/31/2001 907.7 62.0 96.5 5.0 164.8 — 164.8

~~For additional information regarding our acquisitions in 2003, see Note 3 to the Consolidated Financial Statements.~~

~~Executive Overview~~

Our net income increased by $52.1 million in 2003 as compared to 2002, an increase of 17%. Our diluted earnings per share was $2.15 in 2003 as compared to $1.99 in 2002, an increase of $0.16 per diluted share, or 8%. The following were significant factors related to 2003 results as compared to 2002:

• Acquisitions continue to be an important part of our long-term strategy for growth. We completed the acquisition of Warren Bancorp, Inc. on December 31, 2002 and American Financial Holdings, Inc. on February 14, 2003 and completed the related systems conversions shortly thereafter. The results of these acquired companies have been included in our operations from the date of acquisition. We completed the acquisition of First & Ocean Bancorp on December 31, 2003.
• ~~The net interest margin declined by 41 basis points in 2003 versus 2002 due primarily to low interest rates which resulted in rapid prepayments of mortgage-related earning assets.~~
• In anticipation of the continuing margin compression in 2003, we implemented a balance sheet deleveraging program that benefited our net interest margin, mitigated interest rate risk and reduced the level of assets subject to prepayment risk. Under this deleveraging program, we sold $901 million of investment securities and used the proceeds to prepay $853 million of borrowings. The gain on sale of these securities totaled $29.2 million, while the prepayment charges on the borrowings totaled $28.5 million. The deleveraging program benefited our net interest margin by 0.06%.
• ~~The effects of the decline in net interest margin were offset by asset growth, increased non-interest income and good expense control.~~
• ~~As a result of the low interest rate environment, we expanded our covered call premium program. Call options were written on securities we owned which generated $10.9 million of fee income in~~

~~2003. Call options were also written on securities we had committed to buy which generated $16.9 million of fee income in 2003.~~
• During 2003, we recorded strong loan growth in commercial real estate loans, commercial business loans and leases and consumer loans and leases. During this year, commercial real estate loans increased 15%, commercial business loans and leases increased 11% and consumer loans increased 23%. Excluding the effects of acquisitions, during 2003 commercial real estate loans increased 12%, commercial business loans and leases increased 6% and consumer loans and leases increased 9%.
• ~~Asset quality remained very good. Even though total assets increased by 13% during 2003, nonperforming assets declined by 8% during this period.~~
• ~~Total deposits increased by 14% during 2003. Excluding acquisitions, core deposits (deposits excluding certificates of deposit and brokered deposits) increased by 9%.~~

~~Our financial condition and liquidity remain strong. The following are important factors in understanding our financial condition and liquidity:~~

• ~~using the definitions of banking regulators, we continue to be “well-capitalized”;~~
• ~~we issued $150 million of senior notes in 2003;~~
• ~~the Moody’s rating of our senior notes was Baa-1 at December 31, 2003;~~
• ~~we repurchased 4.5 million shares at an average price of $23.53 during 2003;~~
• ~~we increased our annual dividend by 21% in 2003 compared to 2002; and~~
• ~~all liquidity measures at December 31, 2003 met or exceeded the same measures at December 31, 2002.~~

~~Results of Operations~~


	*~~Comparison of 2003 and 2002~~*


	~~Summary~~

Our net income increased $52.1 million, or 17%, during 2003. The increase was attributable in part to acquisitions in 2003 and 2002 and were diminished by the effects of merger and consolidation costs of $8.1 million and $14.7 million in 2003 and 2002, respectively. Return on average assets and return on average equity were 1.37% and 14.51%, respectively, in 2003 compared to 1.39% and 16.25%, respectively, in 2002. The decline in the return on average equity related primarily to the intangible equity resulting from the acquisition of American in February 2003.

Net interest income and noninterest income increased 6% and 34%, respectively, during 2003. The increase in net interest income was primarily attributable to increased earning asset levels (from organic growth and acquisitions in 2003 and 2002), which more than offset the effects of a 41 basis point decline in the net interest margin. The margin declined primarily due to the effect of prepayments and repricing on loans, securities, deposits and borrowings in a declining rate environment and, to a lesser extent, the effects of acquisitions.

The provision for loan and lease losses of $42.3 million in 2003 decreased 5% compared to 2002 due mainly to lower net charge-offs and continued strong asset quality. The coverage ratio (allowance for loan and lease losses to nonperforming loans) was 389% at December 31, 2003 compared to 319% at December 31, 2002.

~~Noninterest income increased due to higher deposit services income, net securities gains and other noninterest income (primarily covered call premium income and mortgage banking services income).~~

Noninterest expense increased 11% in 2003 due primarily to higher compensation and employee benefits expense and increased occupancy expense, primarily as a result of our acquisitions, as well as prepayment penalties on borrowings.


	~~Net Interest Income~~

Net interest income is the difference between interest income on earning assets such as loans, leases and securities, and interest expense paid on liabilities such as deposits and borrowings, and continues to be our largest source of net revenue. Net interest income is affected by changes in interest rates and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities.

~~Table 2 — Three-Year Average Balance Sheets~~

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. For purposes of the table and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of our securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Information is based on average daily balances during the indicated periods.

Year Ended December 31,
2003 2002 2001
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Loans and leases(1)
Residential real estate mortgages $ 2,839,969 $ 159,215 5.61 % $ 2,635,952 $ 177,837 6.75 % $ 2,290,968 $ 169,962 7.42 %
Commercial real estate mortgages 5,162,413 312,681 6.06 % 4,293,816 298,412 6.95 % 3,216,865 265,280 8.25 %
Commercial business loans and leases 3,153,293 160,761 5.10 % 2,665,973 158,260 5.94 % 2,342,009 180,705 7.72 %
Consumer loans and leases 4,477,532 251,347 5.61 % 3,641,062 250,971 6.89 % 3,396,165 280,180 8.25 %

Total loans and leases 15,633,207 884,004 5.65 % 13,236,803 885,480 6.69 % 11,246,007 896,127 7.97 %
Investment securities 7,464,162 314,701 4.22 % 6,403,807 353,576 5.52 % 5,924,001 372,788 6.29 %
Federal funds sold and other short-term investments 11,004 160 1.46 % 60,257 1,064 1.77 % 34,620 1,168 3.37 %

Total earning assets 23,108,373 1,198,865 5.19 % 19,700,867 1,240,120 6.30 % 17,204,628 1,270,083 7.38 %

Bank-owned life insurance 465,446 359,994 311,990
Noninterest-earning assets 2,042,528 1,399,858 1,029,091

Total assets $ 25,616,347 $ 21,460,719 $ 18,545,709

Interest-bearing deposits:
Regular savings $ 2,399,179 10,994 0.46 % $ 1,743,501 15,444 0.89 % $ 1,439,551 18,921 1.31 %
Now and money market accounts 6,652,030 59,193 0.89 % 5,463,179 79,384 1.45 % 4,257,428 109,998 2.58 %
Certificates of deposit 5,027,739 118,649 2.36 % 4,693,518 149,028 3.18 % 4,512,284 226,437 5.02 %
Brokered deposits — — 0.00 % 43,311 792 1.83 % 151,980 8,618 5.67 %

Total interest-bearing deposits 14,078,948 188,836 1.34 % 11,943,509 244,648 2.05 % 10,361,243 363,974 3.51 %
Borrowed funds 5,693,420 163,302 2.87 % 4,870,795 193,952 3.98 % 4,406,017 219,925 4.99 %

Total interest-bearing liabilities 19,772,368 352,138 1.78 % 16,814,304 438,600 2.61 % 14,767,260 583,899 3.95 %

Non-interest bearing deposits 3,224,035 2,623,135 2,168,387
Other liabilities 203,018 185,216 160,709
Shareholders’ equity 2,416,926 1,838,064 1,449,353

Total liabilities and shareholders’ equity $ 25,616,347 $ 21,460,719 $ 18,545,709

Net earning assets $ 3,336,005 $ 2,886,563 $ 2,437,368

Net interest income (fully-taxable equivalent) 846,727 801,520 686,184
Less: fully-taxable equivalent adjustments (5,896 ) (5,003 ) (6,294 )

Net interest income $ 840,831 $ 796,517 $ 679,890

Net interest rate spread (fully-taxable equivalent) 3.41 % 3.69 % 3.43 %
Net interest margin (fully-taxable equivalent) 3.66 % 4.07 % 3.99 %

~~(1)~~ Loans and leases include portfolio loans and leases, loans held for sale and nonperforming loans, but unpaid interest on nonperforming loans has not been included for purposes of determining interest income.

~~Table 3 — Changes in Net Interest Income~~

The following table presents certain information on a fully-taxable equivalent basis regarding changes in our interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate) and (3) changes in rate/ volume (change in rate multiplied by change in volume).

Year Ended December 31, 2003 vs. 2002 Year Ended December 31, 2002 vs. 2001
Increase (Decrease) Due to Increase (Decrease) Due to
Rate and Total Rate and Total
Volume(1) Rate Volume(2) Change Volume(1) Rate Volume(2) Change
Interest income:
Loans and leases $ 160,319 $ (137,663 ) $ (24,132 ) $ (1,476 ) $ 158,666 $ (143,949 ) $ (25,364 ) $ (10,647 )
Investment securities 58,532 (83,249 ) (14,158 ) (38,875 ) 30,180 (45,615 ) (3,777 ) (19,212 )
Federal funds sold and other short-term investments (872 ) (187 ) 155 (904 ) 864 (554 ) (414 ) (104 )

Total interest income 217,979 (221,099 ) (38,135 ) (41,255 ) 189,710 (190,118 ) (29,555 ) (29,963 )

Interest expense:
Interest-bearing deposits
Regular savings 5,836 (7,497 ) (2,789 ) (4,450 ) 3,982 (6,046 ) (1,413 ) (3,477 )
NOW and money market accounts 17,238 (30,594 ) (6,835 ) (20,191 ) 31,108 (48,109 ) (13,613 ) (30,614 )
Certificates of deposit 10,628 (38,487 ) (2,520 ) (30,379 ) 9,098 (83,026 ) (3,481 ) (77,409 )
Brokered deposits (793 ) (793 ) 794 (792 ) (6,162 ) (5,836 ) 4,172 (7,826 )

Total interest-bearing deposits 32,909 (77,371 ) (11,350 ) (55,812 ) 38,026 (143,017 ) (14,335 ) (119,326 )
Borrowed funds 32,740 (54,066 ) (9,324 ) (30,650 ) 23,192 (44,501 ) (4,664 ) (25,973 )

Total interest expense 65,649 (131,437 ) (20,674 ) (86,462 ) 61,218 (187,518 ) (18,999 ) (145,299 )

Net interest income (fully taxable equivalent) $ 152,330 $ (89,662 ) $ (17,461 ) $ 45,207 $ 128,492 $ (2,600 ) $ (10,556 ) $ 115,336

~~(1)~~ Volume increases include the effects of the acquisitions of Andover Bancorp, Inc. and MetroWest Bank on October 31, 2001, Ipswich Bancshares, Inc. on July 26, 2002, Bancorp Connecticut, Inc. on August 31, 2002, Warren Bancorp, Inc. on December 31, 2002 and American Financial Holdings, Inc. on February 14, 2003.
~~(2)~~ ~~Includes changes in interest income and expense not due solely to volume or rate changes.~~

Net interest income on a fully taxable-equivalent basis increased by $45.2 million, or 6%, during 2003. This increase reflects the combined effects of increases in the average balances of our interest-earning assets and interest-bearing liabilities, as well as an $86.5 million, or 20%, decrease in interest expense on interest-bearing liabilities as a result of decreases in interest rates in a declining interest rate environment. The weighted average rate paid on interest-bearing liabilities, ~~decreased from 2.61% during 2002~~in each case calculated on a fully-taxable equivalent basis.

(4)

Represents noninterest expenses as a percentage of net interest income and noninterest income including net securities gains.

(5)

Cash dividends paid divided by net income.

(6)

Includes loans and leases held for sale.

(7)

Excludes loans and leases held for sale.

(8)

Includes securities held to ~~1.78%~~maturity.

(9)

Nonperforming assets consist of nonperforming loans, other real estate owned, repossessed assets and investment securities placed on non-accrual status.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except per share data and as noted)*

The discussion and analysis that follows focuses on the results of operations of Banknorth Group, Inc. during 2004, 2003, and 2002 and its financial condition at December 31, 2004 and 2003. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 2004 have been reclassified to conform to the 2004 presentation.

General

Banknorth Group, Inc. is a Maine corporation and a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2004, we had consolidated assets of $28.7 billion and consolidated shareholders’ equity of $3.2 billion. Based on total assets at that date, we are one of the 30 largest commercial banking organizations in the United States.

Our principal asset is all of the capital stock of Banknorth, NA (the “Bank”), a national bank which was initially formed as a Maine-chartered savings bank in the mid-19th century. Banknorth, NA operates under the trade name “Peoples Heritage Bank” in Maine, “Bank of New Hampshire” in New Hampshire and “Evergreen Bank” in New York. Banknorth, NA operates under its name elsewhere in our market areas. At December 31, 2004, Banknorth, NA had 386 banking offices in these states and we served approximately 1.3 million households and commercial customers. Through the Bank and its subsidiaries, we offer a full range of banking services and products to individuals, businesses and governments throughout our market areas, including commercial banking, consumer banking, investment management, investment planning and insurance agency services.

We are subject to extensive regulation and supervision under federal and state banking laws. See “Regulation and Supervision” under Item 1.


	*Business Strategy*

Our primary business segment is Community Banking, which represents over 90% of our consolidated net income and consolidated assets and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans and leases, commercial real estate loans, residential mortgage loans and a variety of consumer loans. In addition to keeping loans for our own portfolio, we sell residential mortgage loans into the secondary market. We also invest in mortgage-backed securities and securities backed by the United States Government and agencies thereof, as well as other securities. In addition to Community Banking, we have Insurance Agency, Investment Planning and Wealth Management segments, each of which represents less than 5% of our consolidated net income and consolidated assets and in the aggregate represent less than 10% of our consolidated net income and consolidated assets. Our Insurance Agency business earns commissions on insurance agency activities, our investment planning business earns fees on the sales of mutual funds and third party fixed annuities and our Wealth Management business reflects fees from wealth management operations.

Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in New England and upstate New York; developing new financial products, services and delivery channels; closely managing yields on earning assets and rates on interest-bearing liabilities; increasing noninterest income through, among other things, expanded wealth management, investment planning and insurance agency services, controlling the growth of noninterest expenses and maintaining strong asset quality. It is also part of our business strategy to supplement internal growth with targeted acquisitions of other financial institutions and insurance agencies in our current or contiguous market areas. See “Acquisitions” below and under Item 1.

and organizational structure to ensure they are closely aligned with our goal of increasing earnings per share.

Executive Overview

Our net income was $304.6 million in 2004 as compared to $350.8 million in 2003, a decrease of 13%. Our diluted earnings per share was $1.75 in 2004 as compared to $2.15 in 2003, a decrease of $0.40 per diluted share, or 18%. The decline was attributable to costs to implement our balance sheet deleveraging program in the fourth quarter of 2004 ($0.30 per diluted share) and certain merger and consolidation costs ($0.23 per diluted share), including those associated with the pending acquisition of 51% of Banknorth by The Toronto-Dominion Bank (“TD”). Return on average assets and return on average equity were 1.08% and 10.63%, respectively, in 2004 compared to 1.37% and 14.51%, respectively, in 2003. In addition to the impact of the deleveraging, the decline in the return on average equity was also impacted by the intangible equity resulting from our acquisitions. The following were significant factors related to 2004 results as compared to 2003.

•

In October 2004, we implemented a deleveraging program under which we sold approximately $1.2 billion of securities with a weighted average yield of 2.77% and prepaid a similar amount of borrowings with a weighted average rate of 4.77%, both of which had a duration of approximately 3.5 years. A $51.6 million after-tax loss was incurred in connection with this program in the fourth quarter. This program is expected to improve our annual net interest margin by approximately 28 basis points.

•

We completed the acquisitions of CCBT Financial Companies, Inc. and Foxborough Savings Bank on April 30, 2004 and an insurance agency on July 1, 2004. Acquisitions continue to be an important part of our long-term strategy for growth.

•

Net interest income increased 11% in 2004 compared to 2003, primarily due to a ~~decrease of 83~~$2.1 billion increase in average earning assets. The net interest margin increased by 6 basis points ~~or 32%. This decrease more that offset a $3.0 billion, or 18%,~~in 2004 versus 2003 primarily due to the 9% increase in ~~the average balance of interest-bearing liabilities during 2003, as compared to 2002. Average interest-bearing deposits~~earning assets.

•

Noninterest income from deposit services, insurance agency commissions, merchant and electronic banking services, wealth management services and investment planning services increased by ~~$2.1 billion, or 18%,~~$36.9 million (or 16%) in ~~2003, as compared~~the aggregate, due in part to ~~2002. Excluding acquisitions, average deposits increased by $232 million, or 1.4%, as strong growth in demand and money market accounts~~acquisitions. This aggregate increase was offset by ~~declines in higher-costing certificates of deposit. Average borrowings increased $823 million, or 17%, in 2003 compared to 2002, primarily due to acquisitions.~~

~~The~~a decrease in ~~interest expense in 2003 more than offset~~net securities gains of $50.2 million (primarily related to the balance sheet deleveraging program) and a ~~$41.3 million, or 3.3%,~~ decrease in ~~tax-equivalent interest~~other noninterest income ~~as a result~~ of a 111 basis point, or 18%, decrease in the weighted average yield on interest-earning assets in 2003 as compared to 2002, which reflected the declining interest rate environment. The decrease in the weighted average yield on interest-earning assets during 2003 offset the effects of a substantial increase in average interest-earning assets in this period. Average interest-earning assets increased $3.4 billion, or 17%, during 2003 compared to 2002, primarily as a result of an increase in

~~average loans and leases due to internal~~$14.5 million. SeeTable 6for details.

•

During 2004, we recorded strong growth and acquisitions. Average loans and leases increased $2.4 billion, or 18%, during 2003 as compared to 2002. Excluding acquisitions, average loans and leases increased $260.8 million, or 2%, in 2003 as compared to 2002. These increases were attributable to increases in commercial real estate loans, commercial business loans and leases and consumer loans and leases.

~~Interest rate spread, which represents~~ During the difference between the yield earned on our interest-earning assets and the rate paid on our interest-bearing liabilities, decreased from 3.69% to 3.41% on a fully-taxable equivalent basis during 2003 and 2002, respectively, because the 111 basis point decrease in the weighted average yield on interest-earning assets exceeded the 83 basis point decrease in the weighted average rate paid on interest-bearing liabilities, reflecting our asset sensitivity during the year. See “Asset-Liability Management” below.

The net interest margin decreased 41 basis points during 2003. The primary reasons for this margin compression were the effects of acquisitions (8 basis points, including cash paid and lower margins at acquired banks), a heavier weighting of U.S. agency securities in our investment portfolio versus mortgage-backed securities (9 basis points) and the impact of prepayments and repricing on loans, securities, deposits and borrowings in a declining rate environment (24 basis points). The margin compression was mitigated somewhat by the positive impact of the deleveraging program completed in the second quarter of 2003. The change in the investment portfolio from mortgage-backed securities to U.S. agency securities reduced the exposure to the loan prepayments inherent in mortgage-related assets.

Our net interest margin in 2003 benefited from interest rate swap agreements that synthetically converted fixed rate debt to variable rate debt. In 2003, we entered into $566.5 million of notional amount swap agreements on fixed rate debt, pursuant to which we pay a variable rate (based on LIBOR plus a margin) and receive a fixed rate. The combined effect of these interest rate swaps was to lower interest expense by $6.5 million during 2003. See “Asset-Liability Management” for more detailed discussion.

~~Provision and Allowance for Loan and Lease Losses~~

The provision for loan and lease losses is recorded to bring the allowance for loan and lease losses to a level deemed appropriate by management based on factors discussed in the “Analysis and Determination of the Allowance for Loan and Lease Losses” in the “Risk Management” section. Although we utilize judgment in providing for losses, for the reasons discussed under the “Risk Management” section, there can be no assurance that we will not have to increase the amount of our provision for loans and lease losses in future periods. We recorded a provision for loan and lease losses in 2003 of $42.3 million, as compared to a $44.3 million provision in 2002. The decline in the provision for loan and lease losses of $2.0 million was due to lower net-charge-offs, a higher coverage ratio of the allowance to non-performing loans and leases and lower delinquency ratios. As shown in Table 18, nonperforming assets amounted to $63.1 million at December 31, 2003 compared to $69.0 million at December 31, 2002. At December 31, 2003, the allowance for loan and lease losses amounted to $232.3 million, or 1.42% of total portfolio loans and leases, as compared to $208.3 million, or 1.48%, at December 31, 2002. The ratio of the allowance for loan and lease losses to nonperforming loans was 389% at December 31, 2003, as compared to 319% at December 31, 2002, due primarily to a decrease of $5.5 million in nonperforming loans.

See “Risk Management” below for further information on the provision for loan and lease losses, net charge-offs, nonperforming assets and other factors we consider in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.

~~Noninterest Income~~

~~Table 4 — Noninterest Income~~

~~The following table presents noninterest income for the periods indicated.~~

Change
Year Ended December 31, 2003-2002 2002-2001
2003 2002 2001 Amount Percent Amount Percent
Noninterest income:
Deposit services $ 97,323 $ 82,139 $ 72,634 $ 15,184 18 % $ 9,505 13 %
Insurance brokerage commissions 45,714 44,439 39,360 1,275 3 % 5,079 13 %
Merchant and electronic banking income, net 41,778 37,643 32,115 4,135 11 % 5,528 17 %
Trust and investment management services 31,956 32,453 34,060 (497 ) (2 )% (1,607 ) (5 )%
Bank-owned life insurance 22,930 20,002 18,392 2,928 15 % 1,610 9 %
Investment planning services 15,692 11,572 8,286 4,120 36 % 3,286 40 %
Net securities gains 42,460 7,282 1,329 35,178 483 % 5,953 448 %
Other noninterest income:
Covered call premiums 27,756 7,279 3,251 20,477 281 % 4,028 124 %
Loan fee income 24,831 21,893 14,501 2,938 13 % 7,392 51 %
Mortgage banking services income 10,212 8,539 11,130 1,673 20 % (2,591 ) (23 )%
Venture capital write-downs (592 ) (2,753 ) (1,514 ) 2,161 78 % (1,239 ) (82 )%
Miscellaneous income 7,099 4,020 6,961 3,079 77 % (2,941 ) (42 )%

Total other noninterest income 69,306 38,978 34,329 30,328 78 % 4,649 (14 )%

Total $ 367,159 $ 274,508 $ 240,505 $ 92,651 34 % $ 34,003 14 %

Deposit services income increased 18% in 2003, primarily as a result of increases in deposit accounts and cash management and overdraft fees. Acquisitions in 2003 and 2002 accounted for a significant portion of the increased volume.

Merchant and electronic banking income increased 11% in 2003 due to increases in the volume of transactions processed and increased market share from acquisitions. This increase was net of the impact of decreased debit card fee revenue due to the reductions in interchange rates resulting from the settlement of antitrust litigation brought against VISA and Mastercard by Wal-Mart, Sears and other retailers. Merchant and electronic banking income represents fees and interchange income generated by the use of our ATMs and debit cards issued by us, along with charges to merchants for credit card transactions processed, net of third-party costs directly attributable to handling these transactions.

Income from bank owned life insurance (“BOLI”) increased 15% during 2003. BOLI represents life insurance on the lives of certain employees who have consented to allowing the Bank to be the beneficiary of such policies. The increase in BOLI income in 2003 reflected BOLI purchased in 2002 and $85.6 million of BOLI acquired in the American merger in the first quarter of 2003. The cash surrender value of BOLI was $488.8 million at December 31, 2003 compared to $380.4 million at December 31, 2002. Most of our BOLI is invested in the “general account” of quality insurance companies. Standard and Poors rated all such general account carriers AA- or better at December 31, 2003. The BOLI investment provides a means to mitigate increasing employee benefit costs. The average carrying value of BOLI in 2003 was $465 million compared to $360 million in 2002.

Investment planning services income increased 36% during 2003. This increase was primarily attributable to commissions earned from increased sales of third party mutual funds and annuities, which benefited from the rise in investor confidence in the stock market as well as the impact of our acquisition of American in 2003.

Net securities gains increased $35.2 million during 2003. This increase included $29.2 million recorded as part of the deleveraging program related to the sale of $901 million in securities. Gains from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future.

Other noninterest income increased 78% during 2003. Covered call premium income included income resulting from call options written on securities we own as well as securities we had committed to buy. The $20.5 million increase in 2003 was primarily due to the increased volume of call options written as well as historically high premium rates related to high interest rate volatility. Loan fee income included $4.6 million and $897 thousand of fees to arrange for interest rate swap agreements between commercial borrowers and third parties in 2003 and 2002, respectively. See “Asset-Liability Management — Derivative Instruments” below. The commercial swap program began in the fourth quarter of 2002.

~~Noninterest Expense~~

~~Table 5 — Noninterest Expense~~

~~The following table presents noninterest expense during the periods indicated.~~

Change
Year Ended December 31, 2003-2002 2002-2001
2003 2002 2001 Amount Percent Amount Percent
Noninterest expense
Compensation and employee benefits $ 326,621 $ 311,385 $ 261,317 $ 15,236 5 % $ 50,068 19 %
Occupancy 59,200 52,422 45,921 6,778 13 % 6,501 14 %
Equipment 47,459 40,933 34,572 6,526 16 % 6,361 18 %
Data processing 40,940 40,702 38,670 238 1 % 2,032 5 %
Advertising and marketing 22,000 17,239 11,907 4,761 28 % 5,332 45 %
Amortization of goodwill — — 11,061 — — (11,061 ) (100 )%
Amortization of identifiable intangible assets 8,946 6,492 11,023 2,454 38 % (4,531 ) (41 )%
Merger and consolidation costs 8,104 14,691 7,614 (6,587 ) (45 )% 7,077 93 %
Prepayment penalties on borrowings 30,490 — 5,995 30,490 100 % (5,995 ) (100 )%
Write-off of branch automation project — 6,170 — (6,170 ) (100 )% 6,170 100 %
Other noninterest expense:
Telephone 12,858 13,396 11,574 (538 ) (4 )% 1,822 16 %
Office supplies 10,513 10,736 9,106 (223 ) (2 )% 1,630 18 %
Postage and freight 11,187 9,707 9,366 1,480 15 % 341 4 %
Miscellaneous loan costs 5,984 4,290 7,380 1,694 39 % (3,090 ) (42 )%
Deposits and other assessments 3,752 3,541 3,460 211 6 % 81 2 %
Collection and carrying costs of non-performing assets 2,694 2,713 3,511 (19 ) (1 )% (798 ) (23 )%
Miscellaneous 50,522 44,975 42,840 5,547 12 % 2,135 5 %

Total other noninterest expense 97,510 89,358 87,237 8,152 9 % 2,121 2 %

Total $ 641,270 $ 579,392 $ 515,317 $ 61,878 11 % $ 64,075 12 %

Noninterest expense increased $61.9 million, or 11%, during 2003. Included in this increase was $30.5 million of prepayment penalties on borrowings related to the aforementioned deleveraging program in the second quarter. This amount represented 49% of the total increase of $61.9 million and was offset by a related gain on the sale of securities of $29.2 million. It was recorded as net securities gains in noninterest income. The efficiency ratio improved to 53.09% during 2003 from 54.10% in 2002 primarily as a result of the efficiencies created by the integration of recent acquisitions, as well as internal operating improvements.

Compensation and employee benefits expense increased 5% during 2003 primarily due to the effects of additional employees from acquisitions and higher benefits expense, which were partially offset by lower incentive compensation. The total number of full-time equivalent employees approximated 6,700 at December 31, 2003 compared to 6,600 at December 31, 2002. Pension expense (which is included in compensation and employee benefits expense) was $12.9 million and $5.3 million for the years ended December 31, 2003 and 2002, respectively. It increased primarily due to a lower discount rate, a lower expected rate of return on plan assets and additional employees from purchase acquisitions. The fair value of plan assets as of December 31, 2003 was $237.5 million as compared to $154.9 million at December 31, 2002.

Occupancy expense in 2003 increased 13%. The $6.8 million increase was primarily due to the cost of additional facilities from acquisitions and a new back-office facility in West Falmouth, Maine. Equipment expense increased $6.5 million or 16% in 2003 compared to 2002 primarily due to depreciation expense on new technology equipment and software (e.g., check imaging and e-commerce) and additional depreciation and maintenance of equipment obtained through acquisitions.

Advertising and marketing expense increased 28% in 2003. The $4.8 million increase was primarily attributable to new advertising promotions and corporate sponsorships (such as for the Boston Bruins and “Win a day with Ray” promotions) and additional expenses incurred in connection with the introduction of our products in new market areas.

Amortization of identifiable intangible assets increased 38% during 2003 due to core deposit intangibles and other amortizing intangible assets recorded in connection with our 2003 and 2002 acquisitions.

Merger and consolidation costs decreased $6.6 million, or 45%, during 2003. Merger and consolidation costs include expenses related to acquisitions, charter consolidation costs, branch closing costs and certain asset write-downs. The decrease in 2003 was due to lower acquisition expenses and the completion of our charter consolidation in 2002. For a tabular analysis of our merger and consolidation costs, see Note 10 to the Consolidated Financial Statements.

During 2002, we wrote off $6.2 million in connection with a branch automation project. These were costs incurred during the early phases of a multi-phase project to update all teller and platform workstations and software in our branch network. These costs included direct vendor fees, capitalized salaries, hardware and project specific software. Design concerns and cost overruns prompted a thorough review of the long-term viability of the project in its current form. We determined it was not prudent to continue development and decided to abandon the project. A total of $9.1 million had been capitalized on this project. The impairment charge was determined based on a review of all costs incurred. Management concluded that $6.2 million should be written-off related to the abandonment of that project and that $2.9 million of hardware and off-the-shelf software programs were of on-going value and could be redeployed throughout the Bank.

~~Other noninterest expense, which is comprised primarily of general and administrative expenses, increased $8.2 million, or 9%, in 2003.~~

~~The increase in miscellaneous expenses during 2003 was largely due to increased insurance and consulting expenses.~~

~~Taxes~~

~~Our effective tax rate was 33% in 2003 and 2002. We expect the effective tax rate to be approximately 33% during 2004.~~

~~Comprehensive Income~~

Our comprehensive income amounted to $241.8 million and $373.0 million during 2003 and 2002, respectively. Comprehensive income differed from our net income in 2003 because of a $110.1 million net unrealized loss on securities, a $1.6 million net unrealized gain on cash flow hedges and a $446 thousand unrealized loss on a minimum pension liability. For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the Consolidated Financial Statements.

Our available for sale investment portfolio had net unrealized gains of $11.8 million, $181.3 million and $62.0 million ($7.7 million, $117.5 million and $40.3 million net of applicable income tax effects, respectively) at December 31, 2003, 2002 and 2001, respectively. The changes from year, to year are due mainly to changes in prevailing interest rates and, to a lesser degree, the size of the available for sale investment portfolio. For additional information, see Note 4 to the Consolidated Financial Statements. The change in fair value of our interest-bearing liabilities, which would tend to offset the change in fair value of available for sale securities, is not included in other comprehensive income.

~~Segment Reporting~~

Our primary business segment is Community Banking. During 2003 and 2002, the Community Banking segment represented over 90% of the combined revenues and income of the consolidated group and, thus, this is the only reporting segment as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Insurance Brokerage, Investment Planning and Investment Management each represented less than 10% of our combined revenues in 2003 and 2002 and consolidated assets at December 31, 2003 and 2002. Insurance Brokerage reflects commissions on insurance brokerage activities, Investment Planning reflects commissions from the sale of third party mutual funds, annuities, stocks and bonds and Investment Management reflects fees from trust and investment management operations.

~~Table 6 — Business Segment Information~~

~~The following tables set forth selected operating data for our business segments in 2003 and 2002, which are included for information purposes only.~~

Year Ended December 31, 2003
Community Insurance Investment Investment
Banking Brokerage Planning Management Total
Net interest income (expense) $ 842,058 $ (367 ) $ 10 $ (870 ) $ 840,831
Provision for loan and lease losses 42,301 — — — 42,301

Net interest income (expense) after provision for loan and lease losses 799,757 (367 ) 10 (870 ) 798,530

Noninterest income 271,975 46,687 15,692 32,805 367,159

Noninterest expense:
Salaries and benefits 271,395 29,506 10,305 15,415 326,621
Occupancy and equipment 100,632 3,755 684 1,588 106,659
Data processing 34,960 473 1,301 4,206 40,940
Advertising and marketing 21,262 448 95 195 22,000
Amortization of intangibles 8,642 304 — — 8,946
Merger and consolidation costs 8,104 — — 8,104
Other 118,638 5,316 1,173 2,873 128,000

Total non-interest expense 563,633 39,802 13,558 24,277 641,270

Pre-tax income $ 508,099 $ 6,518 $ 2,144 $ 7,658 $ 524,419

Total assets $ 26,352,435 $ 69,664 $ 4,622 $ 27,013 $ 26,453,734

Net interest income and noninterest income as a percent of total income 92.3 % 3.8 % 1.3 % 2.6 % 100.0 %
Percent of pre-tax income to total pre-tax income 96.9 % 1.2 % 0.4 % 1.5 % 100.0 %
Percent of assets to total consolidated assets 99.6 % 0.3 % 0.0 % 0.1 % 100.0 %

Year Ended December 31, 2002
Community Insurance Investment Investment
Banking Brokerage Planning Management Total
Net interest income (expense) $ 796,859 $ (341 ) $ (12 ) $ 11 $ 796,517
Provision for loan and lease losses 44,314 — — — 44,314

Net interest income (expense) after provision for loan and lease losses 752,545 (341 ) (12 ) 11 752,203

Noninterest income 184,802 44,840 11,571 33,295 274,508

Noninterest expense:
Salaries and benefits 260,948 27,285 8,021 15,131 311,385
Occupancy and equipment 87,727 3,587 494 1,547 93,355
Data processing 35,039 635 742 4,286 40,702
Advertising and marketing 16,436 287 200 316 17,239
Amortization of intangibles 6,360 132 — — 6,492
Merger and consolidation costs 14,691 — — — 14,691
Other 87,158 4,861 917 2,592 95,528

Total non-interest expense 508,359 36,787 10,374 23,872 579,392

Pre-tax income $ 428,988 $ 7,712 $ 1,185 $ 9,434 $ 447,319

Total assets $ 23,327,921 $ 69,385 $ 2,411 $ 19,224 $ 23,418,941

Net interest income and noninterest income as a percent of total income 91.6 % 4.2 % 1.1 % 3.1 % 100.0 %
Percent of pre-tax income to total pre-tax income 95.9 % 1.7 % 0.3 % 2.1 % 100.0 %
Percent of assets to total consolidated assets 99.6 % 0.3 % 0.0 % 0.1 % 100.0 %

~~Fourth Quarter Summary~~

~~The following table presents operating results for the quarters ended December 31, 2003 and 2002.~~

~~Table 7 — Fourth Quarter Summary~~

Three Months Ended
December 31, Change
2003 2002 Amount Percent
Condensed Income Statement

Net interest income $ 213,288 $ 199,563 $ 13,725 6.88 %
Provision for loan and lease losses 10,400 10,829 (429 ) (3.96 )%

Net interest income after loan and lease losses provision 202,888 188,734 14,154 7.50 %
Noninterest income 84,435 84,441 (6 ) (0.01 )%
Noninterest expense 155,676 158,126 (2,450 ) (1.55 )%

Income before income taxes 131,647 115,049 16,598 14.43 %
Income tax expense 40,085 37,911 2,174 5.73 %

Net income $ 91,562 $ 77,138 $ 14,424 18.70 %

Per Common Share

Basic earnings per share $ 0.56 $ 0.52 $ 0.04 8.51 %
Diluted earnings per share $ 0.55 $ 0.52 $ 0.03 6.52 %
Financial Ratios

Return on average assets(1) 1.39 % 1.35 % 0.04 bp
Return on average equity(1) 14.72 % 15.75 % (1.03 )bp
Net interest margin (fully-taxable equivalent)(1) 3.65 % 3.86 % (0.21 )bp
Noninterest income as a percent of total income 28.36 % 29.73 % (1.37 )bp
Efficiency ratio(2) 52.29 % 55.68 % (3.39 )bp

~~bp — denotes basis points; 100 bp = 1%~~

~~(1)~~ ~~Annualized.~~
~~(2)~~ ~~Represents noninterest expenses as a percentage of net interest income and noninterest income.~~

Results for the fourth quarter of 2003 improved over the fourth quarter of 2002 due primarily to increased net interest income, which increased by 7% as a result of acquisitions and, to a lesser extent, internal growth. The net interest margin for the quarter ended December 31, 2003 was 3.65%, a decrease of 21 basis points from the fourth quarter last year. The primary reasons for this decrease were the effects of acquisitions (9 basis points, including cash paid and lower margins at acquired banks), a heavier weighting of U.S. agency securities in our investment portfolio versus mortgage-backed securities (8 basis points) and the impact of prepayments and repricing on loans, securities, deposits and borrowings in a declining rate environment (14 basis points). These factors were partially offset by the positive impact of the deleveraging program of approximately 10 basis points.

Noninterest income totaled $84.4 million for the fourth quarters ended December 31, 2003 and 2002, respectively, which included $2.7 million and $6.7 million of net securities gains, respectively. Increases in 2003 in deposit services and investment planning services income were partially offset by lower other noninterest income. Included in other noninterest income was $6.4 million and $2.2 million of covered call premium income for the fourth quarters ended December 31, 2003 and 2002, respectively. Noninterest expense decreased by 2% in the fourth quarter of 2003, as compared to the fourth quarter of 2002, due primarily to lower merger and consolidation costs (which include merger-related costs, branch consolidation costs and branch closings) and the write-down of a branch automation project which was abandoned in December 2002. The efficiency ratio was 52.29% in the fourth quarter of 2003 compared to

~~55.68% in the comparable period last year. See Note 24 in the Consolidated Financial Statements for selected quarterly data for the years ended December 31, 2003 and 2002.~~

~~The effective tax rate was 30% in the fourth quarter of 2003 compared to 33% in the fourth quarter of 2002. The lower effective tax rate resulted primarily from the results of an IRS audit.~~

Annualized return on average equity and return on average assets were 14.72% and 1.39%, respectively, for the quarter ended December 31, 2003 and were 15.75% and 1.35%, respectively, for the comparable quarter last year. The decline in return on average equity related primarily to the intangible equity created in the acquisition of American in February 2003.

~~Comparison of 2002 and 2001~~

Our consolidated total assets increased by $2.3 billion, or 11%, from $21.1 billion at December 31, 2001 to $23.4 billion at December 31, 2002. This increase was primarily attributable to three banking acquisitions and one insurance agency acquisition in 2002. Shareholders’ equity totaled $2.1 billion and $1.8 billion at December 31, 2002 and 2001, respectively. The increase was primarily attributable to net income in 2003 and the issuance of stock for acquisitions in 2002.

We reported net income of $298.6 million for 2002, or $1.99 per diluted share, compared with net income of $238.8 million, or $1.68 per diluted share, for 2001. Return on average assets and return on average equity were 1.39% and 16.25%, respectively, for 2002 and 1.29% and 16.48%, respectively, for 2001.

Net interest income on a fully taxable-equivalent basis totaled $801.5 million during 2002, as compared with $686.2 million in 2001. The $115.3 million, or 17%, increase in 2002 was primarily attributable to the combined effects of increases in the average balances of our interest-earning assets and interest-bearing liabilities. In 2002, the net interest margin increased 8 basis points to 4.07%, compared to 3.99% in 2001.

The provision for loan and lease losses amounted to $44.3 million in 2002 compared to $41.9 million in 2001. Net charge-offs were $38.7 million in 2002 compared to $36.9 million in 2001. The ratio of the allowance to nonperforming loans at December 31, 2002 was 319% compared to 252% at December 31, 2001. The allowance for loan and lease losses represented 1.48% of total loans at December 31, 2002 compared to 1.49% at December 31, 2001. Nonperforming assets decreased $12.3 million from $81.2 million, or 0.39% of total assets, at December 31, 2001 to $68.9 million, or 0.29% of total assets, at December 31, 2002. This decrease was primarily due to a $7.6 million decrease in nonperforming commercial business loans and leases and a $2.5 million decrease in nonperforming residential real estate loans.

Noninterest income amounted to $274.5 million and $240.5 million in 2002 and 2001, respectively. The increase was primarily due to increases of $9.5 million in deposit services income, $5.9 million in net securities gains and $5.7 million in merchant and electronic banking income. Deposit services income of $82.1 million reflected 8% growth from 2001. The increases were due in part to acquisitions.

Noninterest expense amounted to $579.4 million in 2002 compared with $515.3 million for 2001. The $64.1 million increase included an increase of $7.1 million in merger and consolidation costs and a $6.2 million write-off of a branch automation project, which were partially offset by the cessation of the amortization of goodwill in 2002 (which had amounted to $11.1 million in 2001.) The increase in noninterest expense in 2002 was primarily due to increases in compensation and employee benefits expense, equipment expense and occupancy expense. The efficiency ratio improved to 54.10% during 2002 from 55.34% in 2001 primarily as a result of the integration of recent acquisitions, as well as internal operating improvements.

Our comprehensive income amounted to $373.0 million and $313.9 million during 2002 and 2001, respectively. Comprehensive income differed from our net income in 2002 primarily because of a $77.3 million net unrealized gain on securities, a $2.1 million net unrealized loss on cash flow hedges and

~~an $825 thousand unrealized loss on a minimum pension liability. For additional information, see the Consolidated Statements of Shareholders’ Equity in the Consolidated Financial Statements.~~

~~Financial Condition~~

Our consolidated total assets increased by $3.0 billion, or 13%, from $23.4 billion at December 31, 2002 to $26.5 billion at December 31, 2003. Total average assets were $25.6 billion and $21.5 billion in 2003 and 2002, respectively. These increases were primarily due to acquisitions and internal growth in 2003 and 2002. See the acquisitions table under “General — Acquisitions.” Total liabilities increased by $2.6 billion in 2003, primarily due to a growth in total deposits. Shareholders’ equity totaled $2.5 billion and $2.1 billion at December 31, 2003 and 2002, respectively.


	*~~Investment Securities~~*

The securities portfolio is utilized for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, generates interest and dividend income from the investment of excess funds, provides liquidity to meet liquidity requirements and is used as collateral for public deposits and wholesale funding sources.

The average balance of the securities portfolio, which consists of securities available for sale and securities held to maturity, was $7.5 billion in 2003 and $6.4 billion in 2002, an increase of $1.1 billion. This increase was primarily due to acquisitions. The securities portfolio consists primarily of mortgage-backed securities and U.S. Government and agency securities. Other securities in the portfolio are collateralized mortgage obligations, which include securitized residential real estate loans held in REMICS, and asset-backed securities. The majority of securities available for sale are rated AAA or equivalently rated. In 2003, we invested more heavily in U.S. Government and federal agency securities to reduce exposure to the loan prepayment risk inherent in mortgage-related assets. Mortgage-backed securities and collateralized mortgage obligations comprised 58% of the securities portfolio at December 31, 2003 compared to 65% at December 31, 2002. The average yield on securities was 4.22% during 2003, compared to 5.52% during 2002, which reflects declines in interest rates during 2003 and 2002.

~~Table 8 — Investment Securities~~

~~The following table sets forth our investment securities at the dates indicated.~~

December 31,
2003 2002 2001
% of % of % of
Amount Total Amount Total Amount Total
Securities available for sale:
U.S. Government and federal agencies $ 2,359,347 33.18 % $ 1,539,447 23.50 % $ 531,256 9.23 %
Tax-exempt bonds and notes 138,280 1.94 % 95,332 1.46 % 112,845 1.96 %
Other bonds and notes 365,109 5.13 % 356,551 5.44 % 560,090 9.73 %
Mortgage-backed securities 3,834,958 53.93 % 3,659,334 55.86 % 3,577,405 62.16 %
Collateralized mortgage obligations 264,545 3.72 % 581,357 8.88 % 681,366 11.84 %

Total debt securities 6,962,239 97.90 % 6,232,021 95.14 % 5,462,962 94.92 %

Federal Home Loan Bank stock 104,397 1.47 % 275,768 4.21 % 264,943 4.61 %
Federal Reserve Bank stock 37,666 0.53 % 35,250 0.54 % 23,159 0.40 %
Other equity securities 6,868 0.10 % 7,177 0.11 % 4,183 0.07 %

Total equity securities 148,931 2.10 % 318,195 4.86 % 292,285 5.08 %

December 31,
2003 2002 2001
% of % of % of
Amount Total Amount Total Amount Total
Total securities available for sale 7,111,170 100.00 % 6,550,216 100.00 % 5,755,247 100.00 %
Net unrealized gain 11,822 181,251 61,991

Fair value of securities available for sale $ 7,122,992 $ 6,731,467 $ 5,817,238

Securities held to maturity:
Collateralized mortgage obligations $ 124,240 $ 216,409 $ 339,623

Amortized cost of securities held to maturity $ 124,240 $ 216,409 $ 339,623

Fair value of securities held to maturity $ 124,344 $ 221,571 $ 340,737

Excess of fair value over recorded value $ 104 $ 5,162 $ 1,114

Fair value as a % of amortized cost 100.1 % 102.4 % 100.3 %

~~Table 9 — Maturities of Debt Securities~~

The following table sets forth the contractual maturities and fully-taxable equivalent weighted average yields of our debt securities at December 31, 2003. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized Cost Maturing in
Less Than More than 5 to More than
1 Year 1 to 5 Years 10 Years 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Available for Sale:
U.S. Government and federal agencies $ 18,508 3.66 % $ 1,966,576 2.95 % $ 374,263 3.13 % $ — 0.00 % $ 2,359,347 2.98 %
Tax-exempt bonds and notes 67,921 3.04 % 7,810 4.32 % 4,384 4.67 % 58,165 4.41 % 138,280 3.74 %
Other bonds and notes 29,925 4.43 % 113,464 5.59 % 22,356 6.38 % 199,364 6.15 % 365,109 5.85 %
Mortgage-backed securities 3,369 6.26 % 27,192 5.49 % 423,179 5.36 % 3,381,218 4.71 % 3,834,958 4.79 %
Collateralized mortgage obligations — 0.00 % 6,313 6.49 % 50,310 4.45 % 207,922 4.55 % 264,545 4.57 %

Total $ 119,723 3.57 % $ 2,121,355 3.13 % $ 874,492 4.37 % $ 3,846,669 4.77 % $ 6,962,239 4.20 %

Held to Maturity:
Collateralized mortgage obligations — — — — — — $ 124,240 5.96 % $ 124,240 5.96 %

Securities available for sale are carried at fair value and had net unrealized gains of $11.8 million and $181.3 million at December 31, 2003 and 2002, respectively. See Note 4 to the Consolidated Financial Statements. These unrealized gains do not impact net income or regulatory capital but are recorded as adjustments to shareholders’ equity, net of related deferred income taxes. Unrealized gains, net of related

~~deferred income taxes, are a component of our “Comprehensive Income” contained in the Consolidated Statement of Changes in Shareholders’ Equity.~~


	*~~Loans~~*

Total loans and leases (including loans held for sale) averaged $15.6 billion during 2003 compared to $13.2 billion during 2002, an increase of $2.4 billion, or 18%. Excluding acquisitions, total loans and leases increased $260.8 million. Average loans as a percent of average earning assets amounted to 68% and 67% in 2003 and 2002, respectively.

~~Table 10 — Average Loans and Leases~~

~~The following table presents average loans and leases during the periods indicated.~~

Year Ended December 31, Change
2003 2002 Amount Percent
Residential real estate mortgages $ 2,839,969 $ 2,635,952 $ 204,017 7.74 %
Commercial real estate mortgages 5,162,413 4,293,816 868,597 20.23 %
Commercial business loans and leases 3,153,293 2,665,973 487,320 18.28 %
Consumer loans and leases 4,477,532 3,641,062 836,470 22.97 %

Total average loans and leases $ 15,633,207 $ 13,236,803 $ 2,396,404 18.10 %

~~Table 11 — Composition of Loan and Lease Portfolio~~

~~The following table presents the composition of our loan and lease portfolio at the dates indicated.~~

December 31,
2003 2002 2001 2000 1999
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Residential real estate loans $ 2,710,483 16.58 % $ 2,382,197 16.95 % $ 2,627,125 20.66 % $ 2,248,714 20.73 % $ 2,270,417 23.04 %
Commercial real estate loans:
Permanent first mortgage loans 4,696,428 28.73 % 4,151,674 29.54 % 3,509,311 27.60 % 2,663,775 24.56 % 2,493,492 25.30 %
Construction and development loans 832,434 5.09 % 640,375 4.55 % 584,728 4.60 % 291,388 2.69 % 202,825 2.06 %

Total 5,528,862 33.82 % 4,792,049 34.09 % 4,094,039 32.20 % 2,955,163 27.25 % 2,696,317 27.36 %

Commercial business loans and leases 3,287,094 20.11 % 2,968,474 21.12 % 2,462,653 19.37 % 2,308,904 21.29 % 1,924,201 19.53 %
Consumer loans and leases 4,819,523 29.49 % 3,913,288 27.84 % 3,531,513 27.77 % 3,332,881 30.73 % 2,963,721 30.07 %

Total loans receivable $ 16,345,962 100.00 % $ 14,056,008 100.00 % $ 12,715,330 100.00 % $ 10,845,662 100.00 % $ 9,854,656 100.00 %

~~Table 12 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, 2003~~

The following table sets forth the scheduled contractual amortization of our construction and development loans and commercial business loans and leases at December 31, 2003, as well as the amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates.

Commercial
Real Estate
Construction Commercial
and Development Business Loans
Loans and Leases Total
Amounts due:
Within one year $ 299,079 $ 1,634,808 $ 1,933,887
After one year through five years 328,165 1,179,902 1,508,067
Beyond five years 205,190 472,384 677,574

Total $ 832,434 $ 3,287,094 $ 4,119,528

Interest rate terms on amounts due after one year:
Fixed $ 71,033 $ 747,399 $ 818,432
Adjustable 462,322 904,887 1,367,209

Residential real estate loans (including loans held for sale) averaged $2.8 billion and $2.6 billion in 2003 and 2002, respectively. Excluding acquisitions, average residential loans decreased approximately $896 million, or 24%, as a result of increased refinancing activity and prepayments in a low interest rate environment. Residential mortgage loans held for sale amounted to $41.7 million and $128.6 million at December 31, 2003 and 2002, respectively. This decrease was due primarily to lower origination volumes in the fourth quarter of 2003. We are currently selling substantially all 30-year conforming fixed-rate loans that we originate.

Commercial real estate loans averaged $5.2 billion in 2003 and $4.3 billion in 2002, a 20% increase. Excluding acquisitions, average commercial real estate loans increased $532 million, or 11%, in 2003. Although most of our markets reflected increases, the largest increases were in Massachusetts and Connecticut. The average yield on commercial real estate loans during 2003 was 6.06%, as compared to 6.95% in 2002, a decrease of 89 basis points. The lower yield reflects the effect of the downward repricing of variable-rate loans, the refinancing of fixed-rate loans at lower rates and the origination of new loans at the lower prevailing rates.

~~Commercial business loans and leases averaged $3.2 billion in 2003 and $2.7 billion in 2002, an increase of 18%. Excluding acquisitions, average~~ commercial business loans and leases increased ~~$291~~20%, commercial real estate loans increased 13% and consumer loans increased 11%. Excluding the effects of acquisitions, total average loans and leases increased 8%.

•

Asset quality remained strong despite an increase in nonperforming assets of $18 million ~~or 10%,~~at December 31, 2004 as compared to December 31, 2003, which was attributable to increases in ~~2003. Massachusetts reflected the greatest amount of growth. The yield on~~commercial real estate and commercial business loans and leases.

•

Total deposits increased by 7% during 2004. Excluding acquisitions, total average deposits increased $554 million, or 3%, as average checking deposits increased 16% and savings and money market deposits increased 6%, while certificates of deposit declined 11%.

Our financial condition and liquidity rating remain strong. The following are important factors in understanding our financial condition and liquidity:


	•	using the definitions of banking regulators, we continue to be “well-capitalized”;

	•	the Moody’s rating of our senior notes was “A3” at December 31, 2004;


	•	we increased our annual dividend by 13% in 2004 compared to 2003; and

	•	our liquidity measures at December 31, 2004 continue to meet our policy guidelines.

Recent Developments

Our board of directors has authorized us to repurchase in the coming months up to 15.3 million shares of Banknorth common stock, or 8% of the outstanding shares (which amount is inclusive of prior authorizations). Approximately 8 million of the repurchased shares will cover shares issued to our employees in the last six months upon the exercise of stock options. Repurchases are authorized to be made by Banknorth from time to time in open-market or privately-negotiated transactions as, in the opinion of management, market and business conditions warrant following completion of the acquisition of a majority interest in us by The Toronto-Dominion Bank. The repurchased shares will be held as treasury stock and may be reserved for issuance pursuant to our stock benefit plans. Shares will be purchased with cash obtained from internal resources.

Our board of directors also has authorized us to take certain actions to reduce our interest rate risk and more effectively use our capital. In this regard, our board has authorized an additional deleveraging program in the first quarter of 2005, pursuant to which we have sold or intend to sell certain medium to long-term assets and prepay certain short-term borrowings with the proceeds from such sales. Specifically, we have sold or intend to sell an aggregate of approximately $3.0 billion of assets, consisting of approximately $500 million of single-family residential loans, approximately $2.0 billion of mortgage-backed securities and approximately $500 million of fixed-rate securities of U.S. federal agencies. We will use the proceeds from the sale of these assets to prepay approximately $3.0 billion of short-term borrowings, consisting of repurchase agreements and FHLB advances.

In addition, in order to hedge the future cash flow of certain variable rate loans with interest rates tied to a designated prime rate or LIBOR, Banknorth, NA intends to enter into interest rate swap agreements which have an aggregate notional amount of $2.2 billion. We will pay a variable rate and receive a fixed rate pursuant to these agreements, which synthetically will convert variable rate assets to fixed-rate assets.

The foregoing actions will reduce the sensitivity of our operations to changes in interest rates because the assets to be sold have primarily fixed-rates and a weighted average duration of approximately 3.8 years and the borrowings to be prepaid have floating rates and are short-term. As a result, the maturities and interest rate sensitivity of our interest-earning assets and interest-bearing liabilities will be better matched. Moreover, we will sell over $2.5 billion of assets which are subject to prepayment risk.

The excess capital from the reduced asset levels resulting from the deleveraging program can be used by us to repurchase shares of Banknorth common stock or to support future growth, both internally and through acquisitions, which could result in a reduction in the capital available for repurchases. Investment securities as a percentage of our assets is expected to be approximately 19% in the first quarter as a result of purchases in the quarter to date, securities acquired in connection with the acquisition of Boston Fed Bancorp, Inc. and normal balance sheet growth.

We will incur a one-time loss of approximately $38 million after tax, or $0.21 per diluted share, in connection with the new deleveraging program, which will be included in our operations for the first quarter of 2005. Because the weighted average yield on the assets to be sold currently is approximately 4.03% and the weighted average rate on the borrowings to be prepaid currently is approximately LIBOR plus 23 basis points, the deleveraging program also will adversely affect our net income in future periods.

We estimate that the net effect of these actions on our diluted earnings per share for 2005 and future periods on an operating basis, exclusive of the one-time loss from the new deleveraging program, will not be significant.

We will remain a “well capitalized” institution for regulatory purposes upon completion of the new deleveraging program and the repurchase of shares pursuant to the new share repurchase program.


	*Acquisitions*

We completed three acquisitions in 2004 and on January 21, 2005, we completed the acquisition of BostonFed Bancorp, Inc. The following table sets forth certain information regarding our bank acquisitions in 2004, 2003 and 2002. All acquisitions were accounted for as purchases and as such, were included in our results of operations from the date of acquisition.

Table 1 — Acquisitions 2002 – 2004


							Transaction-Related Items
			Balance at
			Acquisition Date						Other						Total
	Acquisition								Identifiable		Cash		Shares		Purchase
	Date		Assets		Equity		Goodwill		Intangibles		Paid		Issued		Price

	(Dollars and shares in millions)
CCBT Financial Companies, Inc.		4/30/2004	$	1,292.9	$	108.5	$	178.2	$	19.4	$	—		9.2	$	298.1
Foxbrough Savings Bank		4/30/2004		241.8		22.8		62.2		2.2		88.9		—		88.9
First & Ocean Bancorp		12/31/2003		274.4		15.6		35.1		1.8		49.7		—		49.7
American Financial Holdings, Inc.		2/14/2003		2,690.3		408.2		422.2		9.3		328.5		13.4		711.4
Warren Bancorp, Inc.		12/31/2002		466.1		45.3		90.5		2.7		59.8		2.7		136.6
Bancorp Connecticut, Inc.		8/31/2002		661.7		61.4		96.9		8.7		161.2		—		161.2
Ipswich Bancshares, Inc.		7/26/2002		318.0		13.9		22.0		4.8		19.9		0.9		40.1

In addition to the bank acquisitions in the above table, we acquired four insurance agencies from 2002 to 2004. The total purchase price for these agencies was $16.8 million. For additional information regarding our bank acquisitions, see Note 3 to the Consolidated Financial Statements.


	Results of Operations


	*Comparison of 2004 and 2003*


	Net Interest Income

Net interest income is the difference between interest income on earning assets such as loans, leases and securities and interest expense paid on liabilities such as deposits and borrowings, and continues to be our largest source of net revenue. Net interest income is affected by changes in interest rates and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities.

Table 2 — Three-Year Average Balance Sheets

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; (v) net interest margin. For purposes of the table and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax exempt interest received on loans to qualifying borrowers and on certain securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Information is based on average daily balances during the indicated periods.


	Year Ended December 31,

	2004							2003							2002

	Average					Yield/		Average					Yield/		Average					Yield/
	Balance		Interest			Rate		Balance		Interest			Rate		Balance		Interest			Rate

Loans and leases(1):
Residential real estate mortgages	$	2,997,572	$	150,245			5.01%	$	2,839,969	$	159,215			5.61%	$	2,635,952	$	177,837			6.75%
Commercial real estate mortgages		5,959,510		345,147			5.79%		5,162,413		312,681			6.06%		4,293,816		298,412			6.95%
Commercial business loans and leases		3,686,919		181,437			4.92%		3,153,293		160,761			5.10%		2,665,973		158,260			5.94%
Consumer loans and leases		5,090,536		261,358			5.13%		4,477,532		251,347			5.61%		3,641,062		250,971			6.89%

Total loans and leases		17,734,537		938,187			5.29%		15,633,207		884,004			5.65%		13,236,803		885,480			6.69%
Investment securities		7,501,956		325,199			4.33%		7,464,162		314,701			4.22%		6,403,807		353,576			5.52%
Securities purchased under agreements to resell		419		7			1.75%		—		—			0.00%		—		—			0.00%
Federal funds sold and other short-term investments		9,567		83			0.86%		11,004		160			1.46%		60,257		1,064			1.77%

Total earning assets		25,246,479		1,263,476			5.00%		23,108,373		1,198,865			5.19%		19,700,867		1,240,120			6.30%

Bank-owned life insurance		503,957							465,446							359,994
Noninterest-earning assets		2,422,988							2,042,528							1,399,858

Total assets	$	28,173,424						$	25,616,347						$	21,460,719

Interest-bearing deposits:
Regular savings	$	2,563,838		7,513			0.29%	$	2,399,179		10,994			0.46%	$	1,743,501		15,444			0.89%
Now and money market accounts		7,678,644		62,336			0.81%		6,652,030		59,193			0.89%		5,463,179		79,384			1.45%
Certificates of deposit		4,647,746		91,149			1.96%		5,027,739		118,649			2.36%		4,693,518		149,028			3.18%
Brokered deposits		272		6			2.03%		—		—			0.00%		43,311		792			1.83%

Total interest-bearing deposits		14,890,500		161,004			1.08%		14,078,948		188,836			1.34%		11,943,509		244,648			2.05%
Borrowed funds		6,245,995		162,619			2.60%		5,693,420		163,302			2.87%		4,870,795		193,952			3.98%

Total interest-bearing liabilities		21,136,495		323,623			1.53%		19,772,368		352,138			1.78%		16,814,304		438,600			2.61%

Non-interest bearing deposits		3,987,311							3,224,035							2,623,135
Other liabilities		184,078							203,018							185,216
Shareholders’ equity		2,865,540							2,416,926							1,838,064

Total liabilities and shareholders’ equity	$	28,173,424						$	25,616,347						$	21,460,719

Net earning assets	$	4,109,984						$	3,336,005						$	2,886,563

Net interest income (fully-taxable equivalent)				939,853							846,727							801,520
Less: fully-taxable equivalent adjustments				(6,471	)						(5,896	)						(5,003	)

Net interest income			$	933,382						$	840,831						$	796,517

Net interest rate spread (fully-taxable equivalent)							3.47%							3.41%							3.69%
Net interest margin (fully-taxable equivalent)							3.72%							3.66%							4.07%

(1)

Loans and leases ~~decreased to 5.10% in 2003 from 5.94% in 2002. The decrease in the yield was primarily due to lower rates on new loans and the repricing of variable-rate loans.~~

~~Table 13 — Commercial Loans by State~~

~~The following table presents commercial loans by geographical area at the dates indicated.~~

Commercial Real Estate Loans Commercial Business Loans and Leases
December 31, Change December 31, Change
2003 2002 Amount Percent 2003 2002 Amount Percent
Massachusetts $ 2,565,064 $ 2,174,534 $ 390,530 17.96 % $ 1,173,803 $ 982,078 $ 191,725 19.52 %
Maine 885,791 868,091 17,700 2.04 % 658,902 640,258 18,644 2.91 %
New Hampshire 732,249 703,743 28,506 4.05 % 494,811 461,079 33,732 7.32 %
Vermont 645,608 594,849 50,759 8.53 % 438,483 419,291 19,192 4.58 %
Connecticut 504,624 286,658 217,966 76.04 % 332,749 265,503 67,246 25.33 %
New York 195,526 164,174 31,352 19.10 % 188,346 200,265 (11,919 ) (5.95 %)

Total $ 5,528,862 $ 4,792,049 $ 736,813 15.38 % $ 3,287,094 $ 2,968,474 $ 318,620 10.73 %

~~Consumer~~include portfolio loans and leases ~~averaged $4.5 billion in 2003~~ and ~~$3.6 billion in 2002, an increase of 23%. Acquisitions accounted~~loans held for ~~approximately $502 million~~sale.

Table 3 — Changes in Net Interest Income

The following table presents certain information on a fully-taxable equivalent basis regarding changes in our interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate) and (3) changes in rate/volume (change in rate multiplied by change in volume).


		Year Ended December 31, 2004 vs. 2003												Year Ended December 31, 2003 vs. 2002
		Increase (Decrease) Due to												Increase (Decrease) Due to

								Rate and			Total									Rate and			Total
		Volume(1)			Rate			Volume(2)			Change			Volume(1)			Rate			Volume(2)			Change

Interest income:
Loans and leases		$	118,725		$	(56,280	)	$	(8,262	)	$	54,183		$	160,319		$	(137,663	)	$	(24,132	)	$	(1,476	)
Investment securities			1,595			8,211			692			10,498			58,532			(83,249	)		(14,158	)		(38,875	)
Securities purchased under agreements to resell			—			—			7			7			—			—			—			—
Federal funds and other short-term investments			(21	)		(66	)		10			(77	)		(872	)		(187	)		155			(904	)

Total interest income			120,299			(48,135	)		(7,553	)		64,611			217,979			(221,099	)		(38,135	)		(41,255	)

Interest expense:
Interest-bearing deposits
	Regular savings		757			(4,079	)		(159	)		(3,481	)		5,836			(7,497	)		(2,789	)		(4,450	)
	NOW and money market accounts		9,137			(5,322	)		(672	)		3,143			17,238			(30,594	)		(6,835	)		(20,191	)
	Certificates of deposit		(8,968	)		(20,111	)		1,579			(27,500	)		10,628			(38,487	)		(2,520	)		(30,379	)
	Brokered deposits		—			—			6			6			(793	)		(793	)		794			(792	)

Total interest-bearing deposits			926			(29,512	)		754			(27,832	)		32,909			(77,371	)		(11,350	)		(55,812	)
Borrowed funds			15,859			(15,372	)		(1,170	)		(683	)		32,740			(54,066	)		(9,324	)		(30,650	)

Total interest expense			16,785			(44,884	)		(416	)		(28,515	)		65,649			(131,437	)		(20,674	)		(86,462	)

Net interest income (fully taxable equivalent)		$	103,514		$	(3,251	)	$	(7,137	)	$	93,126		$	152,330		$	(89,662	)	$	(17,461	)	$	45,207

(1)

Volume increases include the effects of the ~~$836 million increase. The growth in consumer loans was primarily in home equity loans~~acquisitions of American Financial Holdings, Inc. on February 14, 2003, First and ~~indirect automobile loans. The average yield~~Ocean Bancorp on ~~consumer loans and leases decreased to 5.61% in 2003 from 6.89% in 2002.~~

~~Table 14 — Composition of Consumer Loans and Leases~~

~~The following table presents the composition of consumer loans and leases at the dates indicated.~~

December 31, 2003 December 31, 2002
% of % of
Amount Total Amount Total
Home equity $ 2,274,793 47.20 % $ 1,572,816 40.19 %
Automobile 1,596,504 33.13 % 1,478,228 37.77 %
Mobile home 141,407 2.93 % 171,715 4.39 %
Vision, dental, and orthodontia fee plan 120,694 2.50 % 172,861 4.42 %
Education 234,226 4.86 % 135,386 3.46 %
Other 451,899 9.38 % 382,282 9.77 %

Total $ 4,819,523 100.00 % $ 3,913,288 100.00 %

~~Deposits~~

Total deposits averaged $17.3 billion during 2003 compared to $14.6 billion during 2002, an increase of 19%. Acquisitions accounted for approximately $2.5 billion of the $2.7 billion increase. Excluding acquisitions, average core deposits (deposits excluding certificates of deposit and brokered deposits) increased $1.0 billion as compared to last year, or 9%. Excluding acquisitions, the average balances of certificates of deposit and brokered deposits decreased $790 million from 2002, or 14%.

~~Table 15 — Change in Average Deposit Balances by Category of Deposit~~

~~The following table presents the changes in the average balances of deposits during the periods indicated.~~

Year Ended December 31, Change
2003 2002 Amount Percent
Noninterest-bearing deposits $ 3,224,035 $ 2,623,135 $ 600,900 22.91 %
Interest-bearing deposits:
Money market access/ NOW accounts 6,652,030 5,463,179 1,188,851 21.76 %
Savings accounts 2,399,179 1,743,501 655,678 37.61 %
Certificates of deposit 5,027,739 4,693,518 334,221 7.12 %
Brokered deposits — 43,311 (43,311 ) (100.00 %)

Total interest-bearing deposits 14,078,948 11,943,509 2,135,439 17.88 %

Total average deposits $ 17,302,983 $ 14,566,644 $ 2,736,339 18.78 %

Average noninterest-bearing deposits increased 23% in 2003 to $3.2 billion from $2.6 billion in 2002. Acquisitions accounted for approximately $194 million of the $601 million increase. The remainder of the increase reflected strong growth in commercial, government and personal accounts.

Average interest-bearing deposits increased $2.1 billion during 2003 to $14.1 billion. Excluding acquisitions, average money market and NOW deposits increased $458 million and average regular savings deposits increased $157 million, while average certificates of deposit and brokered deposits declined $790 million in the aggregate. The decline in certificates of deposits resulted from our decision to allow deposits priced above alternate funding costs to run off. The average rates paid on NOW and money market accounts decreased 56 basis points from 1.45% in 2002 to 0.89% in 2003 due largely to lower prevailing interest rates. The average rates paid on all interest-bearing deposits decreased by 71 basis points from 2.05% in 2002 to 1.34% in 2003, reflecting the decline in prevailing interest rates.

~~Table 16 — Maturity of Certificates of Deposits of $100,000 or more~~

~~The following table presents the scheduled maturities of certificates of deposits of $100,000 or more at the date indicated.~~

December 31, 2003
Balance Percent
3 months or less $ 222,759 22 %
Over 3 to 6 months 196,982 20 %
Over 6 to 12 months 223,822 22 %
More than 12 months 354,983 36 %

$ 998,546 100 %

Included within the deposit categories are government banking deposits, which averaged $1.2 billion in 2003 and $1.1 billion in 2002. Government banking deposits include deposits received from state and local governments, school districts, public colleges/ universities, utility districts, public housing authorities and court systems in our market area. Many of these deposits exceed the FDIC insurance coverage amounts and require us to pledge specific collateral or maintain private insurance.


	*~~Other Funding Sources~~*

We use both short-term and long-term borrowings to balance earning asset growth. Short-term borrowings, which include federal funds purchased, retail securities sold under agreements to repurchase and other short-term borrowings, amounted to $1.5 billion at December 31, 2003, up $246 million, or 19%, from $1.3 billion at December 31, 2002. See Note 11 to the Consolidated Financial Statements.

At December 31, 2003, we also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. We did not draw on this line during 2003 and we continue to meet the financial covenants required for the line of credit.

Long-term debt includes FHLB advances, senior notes, subordinated notes, capital trust securities, wholesale securities sold under agreements to repurchase, capital lease obligation and other debt with original terms greater than one year. Long-term debt amounted to $4.4 billion at December 31, 2003, up from $4.2 billion at December 31, 2002. The increase in long-term debt was primarily due to borrowings assumed in acquisitions.

At December 31, 2003, and ~~2002, FHLB borrowings amounted~~CCBT Financial Companies, Inc. and Foxborough Savings Bank on April 30, 2004.

(2)

Includes changes in interest income and expense not due solely to $1.5 billion and $2.5 billion, respectively. FHLB collateral consists primarily of first mortgage loans secured by single-family properties, certain unencumbered securities and other qualified assets. These borrowings had an average cost of 4.36% during 2003 as compared to 4.50% during 2002. Our additional borrowing capacity with the FHLB at December 31, 2003 was approximately $2.5 billion. See Note 12 to the Consolidated Financial Statements.

~~In April 2003, we issued $150 million of 5-year senior notes carrying a fixed~~volume or rate ~~of 3.75%. These securities were rated Baa-1 by Moody’s at December 31, 2003.~~

~~Subordinated notes consisted of $200 million of 7.625% subordinated notes due 2011 issued by our banking subsidiary in 2001. The notes qualify as Tier 2 capital for regulatory purposes.~~

At December 31, 2003 and 2002, wholesale securities sold under repurchase agreements amounted to $2.2 billion and $1.2 billion, respectively, and were collateralized by mortgage-backed securities and U.S. Government obligations. See Note 12 to the Consolidated Financial Statements.

~~At December 31, 2003, through subsidiary trusts, we had outstanding $295.3 million of capital securities which currently qualify as Tier 1 capital for regulatory purposes. See “Capital” below.~~

~~Contractual Obligations and Commitments~~

~~Table 17 — Contractual Obligations and Commitments~~

~~The following table summarizes our contractual cash obligations and other commitments at December 31, 2003.~~

Payments Due By Period
Less than After
Contractual Obligations(1) Total 1 Year 1-3 Years 4-5 Years 5 Years
Long-term debt $ 2,139,882 $ 38,677 $ 801,607 $ 178,313 $ 1,121,285
Capital lease obligations 6,035 57 197 875 4,906
Repurchase agreements — wholesale 2,214,650 914,650 1,200,000 100,000 —

Total long-term debt 4,360,567 953,384 2,001,804 279,188 1,126,191
Operating lease obligations 160,740 24,658 43,026 31,043 62,013
Pension plan contribution 20,000 20,000 — — —
Other benefit plan payments 35,022 3,130 6,196 5,955 19,741
Other vendor obligations 35,431 10,123 20,246 5,062 —

Total contractual obligations $ 4,611,760 $ 1,011,295 $ 2,071,272 $ 321,248 $ 1,207,945

changes.

Table 4 — Analysis of Net Interest Income


		Year Ended December 31,									Change

		2004			2003			2002			2004-2003			2003-2002

Components of net interest income
	Income on earning assets (fully-taxable equivalent)	$	1,263,476		$	1,198,865		$	1,240,120		$	64,611		$	(41,255	)
	Expenses on interest-bearing liabilities		323,623			352,138			438,600			(28,515	)		(86,462	)

	Net interest income (fully-taxable equivalent)		939,853			846,727			801,520			93,126			45,207
	Less: fully-taxable equivalent adjustments		(6,471	)		(5,896	)		(5,003	)		575			893

	Net interest income, as reported	$	933,382		$	840,831		$	796,517		$	92,551		$	44,314

Average yields and rates paid
	Earning assets yield (fully-taxable equivalent)		5.00	%		5.19	%		6.30	%		(0.19	)%		(1.11	)%
	Rate paid on interest-bearing liabilities		1.53	%		1.78	%		2.61	%		(0.25	)%		(0.83	)%

	Net interest rate spread (fully-taxable equivalent)		3.47	%		3.41	%		3.69	%		0.06	%		(0.28	)%

Net interest margin (fully-taxable equivalent)			3.72	%		3.66	%		4.07	%		0.06	%		(0.41	)%

Average balances
	Loans	$	17,734,537		$	15,633,207		$	13,236,803		$	2,101,330		$	2,396,404
	Investment securities		7,501,956			7,464,162			6,403,807			37,794			1,060,355
	Securities purchased under agreements to resell		419			—			—			419			—
	Fed funds sold and other short term investments		9,567			11,004			60,257			(1,437	)		(49,253	)

	Total earning assets		25,246,479			23,108,373			19,700,867			2,138,106			3,407,506
	Total interest-bearing liabilities		21,136,495			19,772,368			16,814,304			1,364,127			2,958,064

	Net earning assets	$	4,109,984		$	3,336,005		$	2,886,563		$	773,979		$	449,442

Fully-taxable equivalent net interest income for 2004 increased $93.1 million, or 11%, compared to 2003. This increase was primarily attributable to an increase in net earning assets and, to a lesser extent, a decrease in the weighted average rate paid on interest-bearing liabilities. The decrease in funding costs was attributable in part to noninterest-bearing deposits comprising a larger share of the funding base, which allows us to be less reliant on higher-costing certificates of deposit. Together, these factors more than offset the effects of lower prevailing interest rates.

Fully-taxable equivalent interest income increased by $64.6 million in 2004, as compared to 2003, as a result of a $2.1 billion increase in total earning assets. This increase was offset in part by a decrease in the weighted average yield on earning assets from 5.19% in 2003 to 5.00% in 2004, respectively, a decline of 4%. The increases in earning assets, primarily average balances of commercial real estate loans, consumer loans and leases and commercial business loans and leases, resulted from acquisitions and, to a lesser extent, internal growth.

Interest expense decreased by $28.5 million during 2004, as compared to 2003, as a result of a decrease in the weighted average rate paid on interest-bearing liabilities from 1.78% to 1.53% during 2003 and 2004, respectively, a decline of 14%. Year over year, the weighted average cost of deposits declined by 26 basis points and the weighted average cost of borrowings declined by 27 basis points. However, during the last half of 2004, funding costs began to rise. The favorable effect of lower funding costs was offset in part by a $1.4 billion, or 7%, increase in the average balance of interest-bearing liabilities during 2004, as compared to 2003, resulting from acquisitions and, to a lesser extent, internal growth. Average deposits increased by $1.6 billion, of which approximately $1.0 billion came from acquisitions. Excluding acquisitions, average deposits increased by $554 million, or 3%, as growth in demand and money market accounts more than offset a decline in higher-costing certificates of deposit. Average borrowings increased $553 million, or 10%, in 2004 compared to 2003 due, in part, to acquisitions.

Interest rate spread, which represents the difference between the yield earned on our interest-earning assets and the rate on our interest-bearing liabilities, increased to 3.47% from 3.41% on a fully-taxable equivalent basis during 2004 and 2003, respectively, because the 25 basis point decrease in the weighted average rate paid on interest-bearing liabilities was more than the 19 basis point decrease in the weighted average yield on interest-earning assets, reflecting our liability sensitivity during the year. See “Asset-Liability Management” below.

The net interest margin increased six basis points during 2004, of which approximately 2 basis points related to the deleveraging program in the fourth quarter of 2004.

Our net interest margin in 2004 benefited from interest rate swap agreements that synthetically convert fixed rate debt to variable rate debt. At December 31, 2004 and 2003, we had entered into $566.5 million and $216.5 million, respectively, notional amount of interest rate swap agreements on fixed-rate debt, pursuant to which we pay a variable rate (based on LIBOR plus a margin) and receive a fixed rate. The combined effect of these interest rate swap agreements was to lower interest expense by $8.4 million and $6.5 million during 2004 and 2003, respectively. See “Asset-Liability Management” for more detailed discussion.

Provision and Allowance for Loan and Lease Losses

Table 5 — Provision for Loan and Lease Losses


							Change

	Year Ended December 31,						2004-2003						2003-2002

	2004		2003		2002		Amount			Percent			Amount			Percent

Provision for loan and lease losses	$	40,340	$	42,301	$	44,314	$	(1,961	)		(5	)%	$	(2,013	)		(5	)%

The provision for loan and lease losses is recorded to bring the allowance for loan and lease losses to a level deemed appropriate by management based on factors discussed in the “Analysis and Determination of the Allowance for Loan and Lease Losses” in the “Risk Management” section. Although we use judgment in providing for losses, for the reasons discussed under the “Risk Management” section, there can be no assurance that we will not have to increase the amount of our provision for loan and lease losses in future periods. Since 2001, management has implemented numerous procedures to analyze the loan and lease portfolio, including the use of a corporate risk rating migration analysis and a charge-off history analysis, an industry analysis and a stress-testing analysis. As a result, our loan and lease portfolio has performed better with lower classified and criticized asset ratios. The provision in 2004 exceeded net charge-offs of $36.5 million. The provision for loan and lease losses declined slightly from the prior year as charge-offs were lower, asset quality trends remain good and the allowance was trending towards the upper end of the range. The coverage ratio (ratio of the allowance for credit losses to nonperforming loans) was 322% at December 31, 2004 compared to 389% at December 31, 2003. At December 31, 2004 the allowance for credit losses amounted to $249.8 million, or 1.34% of total portfolio loans and leases, as compared to $232.3 million, or 1.42% at December 31, 2003. As shown in Table 22, nonperforming assets amounted to $81.1 million at December 31, 2004 compared to $63.1 million at December 31, 2003.

Noninterest Income

Table 6 — Noninterest Income

The following table presents noninterest income for the periods indicated.


														Change

					Year Ended December 31,									2004-2003						2003-2002

					2004			2003			2002			Amount			Percent			Amount			Percent

Noninterest income:
	Deposit services				$	109,321		$	97,323		$	82,139		$	11,998			12	%	$	15,184			18	%
	Insurance brokerage commissions					50,311			45,714			44,439			4,597			10	%		1,275			3	%
	Merchant and electronic banking income, net					50,564			41,778			37,643			8,786			21	%		4,135			11	%
	Wealth management services					39,788			31,956			32,453			7,832			25	%		(497	)		(2	)%
	Bank-owned life insurance					23,282			22,930			20,002			352			2	%		2,928			15	%
	Investment planning services					19,418			15,692			11,572			3,726			24	%		4,120			36	%
	Net securities (losses) gains					(7,701	)		42,460			7,282			(50,161	)		(118	)%		35,178			483	%
	Other noninterest income:
		Covered call option premiums				18,024			27,756			7,279			(9,732	)		(35	)%		20,477			281	%
		Loan fee income				26,453			24,831			21,893			1,622			7	%		2,938			13	%
		Mortgage banking services income				6,562			10,212			8,539			(3,650	)		(36	)%		1,673			20	%
		Venture capital write-downs				(2,880	)		(592	)		(2,753	)		(2,288	)		(386	)%		2,161			78	%
		Miscellaneous income				6,657			7,099			4,020			(442	)		(6	)%		3,079			77	%

			Total other noninterest income			54,816			69,306			38,978			(14,490	)		(21	)%		30,328			78	%

				Total	$	339,799		$	367,159		$	274,508		$	(27,360	)		(7	)%	$	92,651			34	%

Deposit services income increased 12% in 2004, primarily as a result of volume and fee increases in deposit accounts and an increase in the volume of overdraft fees. This increase was partially offset by a decline in service charge income on business accounts resulting from the introduction of “Free Business Checking” in 2004. Acquisitions in 2004 and 2003 accounted for a significant portion of the increased volume.

Insurance agency commissions increased 10% in 2004, primarily as a result of increases in renewals and new business in 2004 as well as from agency acquisitions.

Merchant and electronic banking income represents fees and intercharge income generated by the use of our ATMs and debit cards issued by us, along with charges to merchants for credit card transactions processed, net of third-party costs directly attributable to handling these transactions. Merchant and electronic banking income increased 21% in 2004 due to increases in the volume of transactions processed and increased market share from acquisitions.

Wealth management services income increased 25% in 2004. This increase was primarily due to an increase in assets under management, which increased to $10.3 billion at December 31, 2004 from $8.9 billion at December 31, 2003, an increase of $1.4 billion. Improvement in the stock market performance and the acquisition of CCBT accounted for the increase in assets under management in 2004. The acquisition of CCBT in April 2004 accounted for approximately $4.5 million of the $7.8 million increase in revenue.

Income from bank owned life insurance (“BOLI”) increased $352 thousand during 2004. BOLI represents life insurance on the lives of certain employees who have consented to allowing Banknorth, NA to be the beneficiary of such policies. The cash surrender value of BOLI was $523.1 million at December 31, 2004 compared to $488.8 million at December 31, 2003. The $34.3 million increase was primarily comprised of amounts from acquisitions and increases in the cash surrender value of policies, which were partially offset by death claims. Most of our BOLI is invested in the “general account” of quality insurance companies. Standard and Poors rated all such general account carriers AA- or better at December 31, 2004. The average carrying value of BOLI in 2004 was $504 million, compared to $465 million in 2003.

Investment planning services income increased 24% during 2004. This increase was primarily attributable to commissions earned from increased sales of mutual funds and third party fixed annuities.

Net securities losses amounted to $7.7 million during 2004 and included a $17.8 million loss recorded as part of the deleveraging program related to the sale of $1.2 billion in securities. Net securities gains in 2003 included a $29.2 million gain as part of a deleveraging program related to the sale of $901 million of securities. Gains and losses from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future.

Other noninterest income decreased 21% during 2004. This decrease was primarily due to lower income from covered call option premiums, mortgage banking services income and venture capital investments. Premiums received on covered call options declined by $9.7 million during 2004. The covered call option program is managed in conjunction with the fixed income securities portfolio to provide revenue opportunities in addition to the interest income earned on the securities. Covered call activity will vary from year to year as interest rates, levels of market volatility and our strategic objectives for the fixed income securities portfolio change. Reduced market volatility in 2004 compared to the same period last year reduced the income opportunities related to covered call options. Mortgage banking services income declines were due largely to reduced volumes of residential loan originations and loan sales to the secondary market. Venture capital write-downs increased primarily due to lower earnings of a publicly traded bio-science company included in the portfolio of one of our venture capital funds.

Noninterest Expense

Table 7 — Noninterest Expense

The following table presents noninterest expense during the periods indicated.


											Change

					Year Ended December 31,						2004-2003						2003-2002

					2004		2003		2002		Amount			Percent			Amount			Percent

Noninterest expense Compensation and employee benefits					$	356,611	$	326,621	$	311,385	$	29,990			9	%	$	15,236			5	%
	Occupancy					63,892		59,200		52,422		4,692			8	%		6,778			13	%
	Equipment					48,480		47,459		40,933		1,021			2	%		6,526			16	%
	Data processing					43,141		40,940		40,702		2,201			5	%		238			1	%
	Advertising and marketing					25,550		22,000		17,239		3,550			16	%		4,761			28	%
	Amortization of identifiable intangible assets					8,627		8,946		6,492		(319	)		(4	)%		2,454			38	%
	Merger and consolidation costs					49,635		8,104		14,691		41,531			512	%		(6,587	)		(45	)%
	Prepayment penalties on borrowings					61,546		30,490		—		31,056			102	%		30,490			100	%
	Write-off of branch automation project					—		—		6,170		—			—			(6,170	)		(100	)%
	Other noninterest expense:
		Telephone				14,717		12,858		13,396		1,859			14	%		(538	)		(4	)%
		Office supplies				10,638		10,513		10,736		125			1	%		(223	)		(2	)%
		Postage and freight				10,657		11,187		9,707		(530	)		(5	)%		1,480			15	%
		Miscellaneous loan costs				4,930		5,984		4,290		(1,054	)		(18	)%		1,694			39	%
		Deposits and other assessments				3,756		3,752		3,541		4			0	%		211			6	%
		Collection and carrying costs of non-performing assets				2,717		2,694		2,713		23			1	%		(19	)		(1	)%
		Miscellaneous				60,204		50,522		44,975		9,682			19	%		5,547			12	%

			Total other noninterest expense			107,619		97,510		89,358		10,109			10	%		8,152			9	%

				Total	$	765,101	$	641,270	$	579,392	$	123,831			19	%	$	61,878			11	%

Compensation and employee benefits expense increased 9% during 2004 due primarily to merit increases and the effects of additional employees from acquisitions. The total number of full-time equivalent employees approximated 7,200 at December 31, 2004 compared to 6,700 at December 31, 2003. These increases were slightly offset by reduced expense associated with our self-funded medical plan resulting from a $3.2 million benefit related to favorable claims experience covering the period July 2002 (plan inception) through June 30, 2004. Pension expense (which is included in compensation and employee benefits expense) was $11.4 million and $12.9 million for the years ended December 31, 2004 and 2003, respectively. The decline was primarily due to the increased return on plan assets. The fair value of plan assets as of December 31, 2004 was $263.9 million compared to $237.5 million at December 31, 2003. The increase in plan assets was primarily due to a $47 million contribution in December 2003.

Occupancy expense in 2004 increased 8%. The $4.7 million increase was due primarily to the cost of additional facilities from acquisitions. Equipment expense increased $1.0 million, or 2%, in 2004 primarily due to additional maintenance cost of equipment (including ATMs) and increased security expenses.

Advertising and marketing expense increased 16% in 2004. The $3.6 million increase was primarily attributable to expenses incurred to identify and attract customers who were looking for new banking opportunities following Bank of America Corporation’s acquisition of FleetBoston Financial Corporation. The increases in this expense included additional media campaigns (television and radio), new advertising promotions and corporate sponsorships (such as for the Boston Bruins, “Win a day with Ray” promotions and Tobin Bridge sponsorships), as well as expense associated with the development of a new comprehensive product catalogue for use in all of our branches.

Merger and consolidation costs increased $41.5 million during 2004 primarily due to costs incurred in connection with our proposed transaction with TD and, to a lesser extent, our acquisitions of CCBT and Foxborough in April 2004 and our pending acquisition of BostonFed Bancorp, Inc. Merger and consolidation costs relating to the transaction with TD amounted to $38.9 million in 2004, which was principally comprised of $33.2 million of long-term incentive payments pursuant to the change-in-control provision of our Executive Incentive Plan. These non-refundable payments were paid in December 2004 in advance of completion of this transaction, which constitutes a change-in-control for purposes of the Executive Incentive Plan. For a tabular analysis of our merger and consolidation costs, see Note 10 to the Consolidated Financial Statements.

Other noninterest expense increased $10.1 million, or 10%, in 2004. This increase was largely due to a $3.4 million increase in professional (audit and legal) fees, due in part to additional expense incurred for compliance with Sarbanes-Oxley requirements, a $2.7 million increase in consulting fees and a $2.3 million increase in travel and entertainment expenses.

Taxes

Table 8 — Income Tax Expense


							Change

	Year Ended December 31,						2004-2003						2003-2002

	2004		2003		2002		Amount			Percent			Amount		Percent

Income tax expense	$	163,097	$	173,660	$	148,681	$	(10,563	)		(6	)%	$	24,979		17	%

Our effective tax rate was 35% in 2004 and 33% in 2003. The increase in the effective tax rate to 35% was primarily due to nondeductible compensation and transaction expenses relating to the merger with TD. We expect the effective tax rate to be approximately 35% in 2005.

We are subject to examinations by various federal and state governmental tax authorities from time to time regarding tax returns we have filed. Currently, certain state income tax returns filed by us in recent years are under examination. In June 2004, the Vermont Department of Taxes assessed three Vermont-based banks, previously acquired by us, for taxes, interest and penalties for the years 2000 and 2001 on the basis that subsidiary investment companies established by these banks pursuant to Vermont law should be considered part of our banking subsidiary for purposes of calculating taxes due the State of Vermont. We believe that we have substantial defenses to this assessment and are in the process of appealing it in accordance with administrative procedures. Although not considered reasonably probable, there can be no assurance that Vermont will not ultimately prevail on this matter. Our estimate of the range of reasonably possible exposure above established reserves on this matter is from $0 to $2.0 million, after federal tax benefits.

Comprehensive Income

Table 9 — Comprehensive Income


										Change

	Year Ended December 31,									2004-2003						2003-2002

	2004			2003			2002			Amount			Percent			Amount			Percent

Net income	$	304,643		$	350,759		$	298,638		$	(46,116	)		(13	)%	$	52,121			17	%
Unrealized gains (losses) on securities, net of reclassification adjustment and taxes		(7,231	)		(110,068	)		77,257			102,837			93	%		(187,325	)		(242	)%
Unrealized gains (losses) on cash flow hedges, net net of reclassification adjustment and taxes		146			1,575			(2,054	)		(1,429	)		(91	)%		3,629			177	%
Minimum pension liability, net of tax		(1,079	)		(446	)		(825	)		(633	)		(142	)%		379			46	%

Comprehensive income	$	296,479		$	241,820		$	373,016		$	54,659			23	%	$	(131,196	)		(35	)%

Our available for sale investment portfolio had net unrealized gains of $669 thousand, $11.8 million and $181.3 million ($435 thousand, $7.7 million and $117.5 million net of applicable income tax effects, respectively) at December 31, 2004, 2003 and 2002, respectively. The changes from year to year reflect changes in prevailing interest rates and, to a lesser degree, the size of the available for sale investment portfolio. For additional information, see Note 4 to the Consolidated Financial Statements. The change in fair value of our interest-bearing liabilities, which would tend to offset the change in fair value of available for sale securities, is not included in other comprehensive income.

For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the Consolidated Financial Statements.

Segment Reporting

Our primary business segment is Community Banking. During 2004 and 2003, the Community Banking segment represented over 90% of the combined revenues and income of the consolidated group and, thus, this is the only reporting segment as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Insurance Agency, Investment Planning and Wealth Management each represented less than 5% of our combined revenues in 2004 and 2003 and consolidated assets at December 31, 2004 and 2003. Insurance Agency reflects commissions on insurance agency activities, Investment Planning reflects commissions from the sale of third party mutual funds, annuities, stocks and bonds and Wealth Management reflects fees from wealth management operations.

Table 10 — Business Segment Information

The following tables set forth selected operating data for our business segments in 2004 and 2003.


		Year Ended December 31, 2004

		Community			Insurance			Investment			Wealth
		Banking			Agency			Planning			Management			Total

Net interest income (expense)		$	934,244		$	(574	)	$	55		$	(343	)	$	933,382
Provision for loan and lease losses			40,340			—			—			—			40,340

Net interest income (expense) after provision for loan and lease losses			893,904			(574	)		55			(343	)		893,042

Noninterest income			227,787			51,389			19,418			41,205			339,799

Noninterest expense:
Compensation and employee benefits			290,970			32,624			13,269			19,748			356,611
Occupancy and equipment			105,966			4,695			765			946			112,372
Data processing			35,721			492			1,758			5,170			43,141
Advertising and marketing			24,878			275			45			352			25,550
Amortization of intangibles			8,263			364			—			—			8,627
Merger and consolidation costs			49,635			—			—			—			49,635
Other			159,170			5,026			1,601			3,368			169,165

	Total non-interest expense		674,603			43,476			17,438			29,584			765,101

Pre-tax income		$	447,088		$	7,339		$	2,035		$	11,278		$	467,740

Total assets		$	28,536,436		$	77,179		$	7,110		$	67,085		$	28,687,810

Net interest income and noninterest income as a percent of total income			91.3	%		4.0	%		1.5	%		3.2	%		100.0	%
Percent of pre-tax income to total pre-tax income			95.6	%		1.6	%		0.4	%		2.4	%		100.0	%
Percent of assets to total consolidated assets			99.5	%		0.3	%		0.0	%		0.2	%		100.0	%


		Year Ended December 31, 2003

		Community			Insurance			Investment			Wealth
		Banking			Agency			Planning			Management			Total

Net interest income (expense)		$	842,058		$	(367	)	$	10		$	(870	)	$	840,831
Provision for loan and lease losses			42,301			—			—			—			42,301

Net interest income (expense) after provision for loan and lease losses			799,757			(367	)		10			(870	)		798,530

Noninterest income			271,975			46,687			15,692			32,805			367,159

Noninterest expense:
Compensation and employee benefits			271,395			29,506			10,305			15,415			326,621
Occupancy and equipment			100,632			3,755			684			1,588			106,659
Data processing			34,960			473			1,301			4,206			40,940
Advertising and marketing			21,262			448			95			195			22,000
Amortization of intangibles			8,642			304			—			—			8,946
Merger and consolidation costs			8,104			—			—			—			8,104
Other			118,638			5,316			1,173			2,873			128,000

	Total non-interest expense		563,633			39,802			13,558			24,277			641,270

Pre-tax income		$	508,099		$	6,518		$	2,144		$	7,658		$	524,419

Total assets		$	26,352,435		$	69,664		$	4,622		$	27,013		$	26,453,734

Net interest income and noninterest income as a percent of total income			92.3	%		3.8	%		1.3	%		2.6	%		100.0	%
Percent of pre-tax income to total pre-tax income			96.9	%		1.2	%		0.4	%		1.5	%		100.0	%
Percent of assets to total consolidated assets			99.6	%		0.3	%		0.0	%		0.1	%		100.0	%

Fourth Quarter Summary

The following table presents operating results for the quarters ended December 31, 2004 and 2003.

Table 11 — Fourth Quarter Summary


	Three Months Ended
	December 31,						Change

	2004			2003			Amount			Percent

Condensed Income Statement
Net interest income	$	246,063		$	213,288		$	32,775			15	%
Provision for loan and lease losses		10,670			10,400			270			3	%

Net interest income after loan and lease losses provision		235,393			202,888			32,505			16	%
Noninterest income(1)		70,591			84,435			(13,844	)		(16	)%
Noninterest expense(2)		267,359			155,676			111,683			72	%

Income before income taxes		38,625			131,647			(93,022	)		(71	)%
Income tax expense		17,927			40,085			(22,158	)		(55	)%

Net income	$	20,698		$	91,562		$	(70,864	)		(77	)%

Per Common Share
Basic earnings per share	$	0.12		$	0.56		$	(0.45	)		(79	)%
Diluted earnings per share	$	0.12		$	0.55		$	(0.43	)		(78	)%
Financial Ratios
Return on average assets(3)		0.29	%		1.39	%		(1.11	)bp
Return on average equity(3)		2.66	%		14.72	%		(12.06	)bp
Net interest margin (fully-taxable equivalent)(3)		3.87	%		3.65	%		0.22	bp
Noninterest income as a percent of total income		22.29	%		28.36	%		(6.07	)bp
Efficiency ratio(4)		84.43	%		52.29	%		32.14	bp

bp — denotes basis points; 100 bp = 1%


(1)	Noninterest income included net securities losses of $17.8 million in the fourth quarter of 2004 incurred as part of the deleveraging program.

(2)	Noninterest expense included prepayment penalties on borrowings of $61.5 million in the fourth quarter of 2004 incurred as part of the deleveraging program.

(3)	Annualized.

(4)	Represents noninterest expense as a percentage of net interest income and noninterest income.

Results for the fourth quarter of 2004 were impacted by our balance sheet deleveraging program ($0.29 per diluted share) and certain merger and consolidation costs ($0.17 per diluted share) including those associated with the pending acquisition of 51% of Banknorth by TD. The deleveraging included the sale of approximately $1.2 billion of securities with a weighted average yield of 2.77% and prepayment of a similar amount of borrowings with a weighted average rate of 4.77%, both of which had a duration of approximately 3.5 years. As a result, a $51.6 million after-tax loss was incurred. Net interest income increased 15% as a result of acquisitions and, to a lesser extent, internal growth. The net interest margin for the quarter ended December 31, 2004 was 3.87%, an increase of 22 basis points from the fourth quarter last year. This increase was primarily attributable to an increase in net earning assets of $1.0 billion along with an increase of 17 basis points in the interest rate spread.

Noninterest income totaled $70.6 million and $84.4 million for the fourth quarters ended December 31, 2004 and 2003, respectively, which included a loss of $17.8 million and a gain of $2.7 million of net securities gains (losses), respectively. The net securities losses in the fourth quarter of

2004 was part of a deleveraging program mentioned above. Increases in 2004 in deposit services income, merchant and electronic banking income and wealth management services income were partially offset by lower other noninterest income. Included in other noninterest income was $4.0 million and $6.4 million of covered call option premium income and $6.9 million and $5.4 million of loan fee income for the fourth quarters ended December 31, 2004 and 2003, respectively.

Noninterest expense increased by $111.7 million in the fourth quarter of 2004, as compared to the fourth quarter of 2003, due primarily to prepayment penalties on borrowings of $61.5 million and an increase in merger and consolidation costs of $37.0 million. The prepayment penalties were incurred as part of a deleveraging program implemented in the fourth quarter of 2004, and the increase in merger and consolidation costs was attributable to costs incurred in connection with the pending transaction with TD, in each case as discussed above. The efficiency ratio was 84.43% in the fourth quarter of 2004 compared to 52.32% in the comparable period last year. See Note 24 in the Consolidated Financial Statements for selected quarterly data for the years ended December 31, 2004 and 2003.

The effective tax rate was 46% in the fourth quarter of 2004 compared to 30% in the fourth quarter of 2003. The increase in 2004 in the tax rate was primarily attributable to nondeductible compensation and transaction expenses relating to the transaction with TD. The 30% effective tax rate in the fourth quarter of 2003 was lower than the annual effective tax rate of 33% due primarily to a favorable IRS audit settlement occurring in the fourth quarter. We expect the tax rate to be approximately 35% in 2005.

Annualized return on average equity and return on average assets were 2.66% and .029%, respectively, for the quarter ended December 31, 2004 and were 14.72% and 1.39%, respectively, for the comparable quarter last year. The declines in the ratios were attributable to the lower net income resulting from the balance sheet deleveraging and additional merger and consolidation costs mentioned above.

Comparison of 2003 and 2002

Our consolidated total assets increased by $3.0 billion, or 13%, from $23.4 billion at December 31, 2002 to $26.5 billion at December 31, 2003. This increase was primarily attributable to two banking acquisitions and two insurance agency acquisitions in 2003. Shareholders’ equity totaled $2.5 billion and $2.1 billion at December 31, 2003 and 2002, respectively. The increase was primarily attributable to net income and the issuance of our stock for acquisitions in 2003.

We reported net income of $350.8 million during 2003, or $2.15 per diluted share, compared with net income of $298.6 million, or $1.99 per diluted share, for 2002. Return on average assets and return on average equity were 1.37% and 14.51%, respectively, for 2003 and 1.39% and 16.25%, respectively, for 2002.

Net interest income on a fully taxable-equivalent basis totaled $846.7 million during 2003, as compared with $801.5 million in 2002. The $45.2 million, or 6%, increase in 2003 was primarily attributable to the combined effects of increases in the average balances of our interest-earning assets and interest-bearing liabilities as well as an $86.5 million, or 20%, decrease in interest expense on interest-bearing liabilities as a result of decreases in interest rates in a declining interest rate environment. In 2003, the net interest margin decreased 41 basis points to 3.66% from to 4.07% in 2002.

The provision for loan and lease losses amounted to $42.3 million in 2003 compared to $44.3 million in 2002. The decline in the provision for loan and lease losses of $2.0 million was due to lower net charge-offs, a higher coverage ratio of the allowance to nonperforming loans and leases and lower delinquency ratios. Nonperforming assets decreased $5.9 million from $69.0 million at December 31, 2002 to $63.1 million at December 31, 2003. The ratio of the allowance to nonperforming loans at December 31, 2003 was 389% compared to 319% at December 31, 2002. The allowance for loan and lease losses represented 1.42% of total loans at December 31, 2003 compared to 1.48% at December 31, 2002.

Noninterest income amounted to $367.2 million and $274.5 million in 2003 and 2002, respectively. The $92.7 million increase was primarily due to increases of $15.2 million in deposit services income, $35.2 million in net securities gains and $20.5 million in covered call option premium income. Deposit

services income of $97.3 million reflected 18% growth from 2002 as a result of increased volume, due in part to acquisitions. Net securities gains included $29.2 million recorded as part of a deleveraging program implemented in the second quarter of 2003, which included the sale of $901 million in securities. The increase in covered call option premium income was primarily due to the increased volume of call options written, as well as historically high premium rates related to high interest rate volatility.

Noninterest expense amounted to $641.3 million in 2003 compared with $579.4 million in 2002. The $61.9 million increase included $30.5 million of prepayment penalties on borrowings incurred as part of the deleveraging program in 2003 and was offset by a related gain on the sale of securities of $29.2 million recorded in noninterest income. The remaining $31.4 million increase in noninterest expense in 2003 was primarily due to increases in compensation and employee benefits expense, occupancy expense and equipment expense. The efficiency ratio improved to 53.09% during 2003 from 54.10% in 2002 primarily as a result of the integration of recent acquisitions, as well as internal operating improvements.

Our comprehensive income amounted to $241.8 million and $373.0 million during 2003 and 2002, respectively. Comprehensive income differed from our net income in 2003 primarily because of a $110.1 million net unrealized loss on securities, a $1.6 million net unrealized loss on cash flow hedges and an $446 thousand unrealized loss on a minimum pension liability. For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the Consolidated Financial Statements.

Financial Condition

Our consolidated total assets increased by $2.2 billion, or 8%, from $26.5 billion at December 31, 2003 to $28.7 billion at December 31, 2004. Total average assets were $28.2 billion and $25.6 billion in 2004 and 2003, respectively. These increases were primarily due to acquisitions in 2004 and 2003. See “General — Acquisitions” above and Note 3 to the Consolidated Financial Statements. Total liabilities increased by $1.6 billion in 2004, primarily due to acquisitions. The increases in assets and liabilities were offset in part by the deleveraging program in 2004, under which $1.2 billion of securities were sold and a similar amount of borrowings were prepaid. Shareholders’ equity totaled $3.2 billion and $2.5 billion at December 31, 2004 and 2003, respectively.


	*Investment Securities*

The average balance of the securities portfolio, which consists of securities available for sale and securities held to maturity, was $7.5 billion in 2004 and 2003. The securities portfolio consists primarily of mortgage-backed securities and collateralized mortgage obligations which include securitized residential real estate loans held in a REMIC. Other securities in the portfolio are U.S. Government and agency securities and other bonds and notes. Included in U.S. Government and federal agency securities at December 31, 2004 were $475.1 million of Federal National Mortgage Association and Federal Home Loan Mortgage Corp. securities. The majority of securities available for sale are rated AAA or equivalently rated. Mortgage-backed securities and collateralized mortgage obligations comprised 83% of the securities available for sale at December 31, 2004 compared to 58% at December 31, 2003. The average yield on securities was 4.33% during 2004, compared 4.22% during 2003.

Table 12 — Investment Securities

The following table sets forth our investment securities at the dates indicated.


		December 31,

		2004						2003						2002

					% of						% of						% of
		Amount			Total			Amount			Total			Amount			Total

Securities available for sale:
U.S. Government and federal agencies		$	528,973			7.66	%	$	2,359,347			33.18	%	$	1,539,447			23.50	%
Tax-exempt bonds and notes			166,901			2.42	%		138,280			1.94	%		95,332			1.46	%
Other bonds and notes			285,742			4.14	%		365,109			5.13	%		356,551			5.44	%
Mortgage-backed securities			5,130,478			74.30	%		3,834,958			53.93	%		3,659,334			55.86	%
Collateralized mortgage obligations			599,304			8.68	%		264,545			3.72	%		581,357			8.88	%

	Total debt securities		6,711,398			97.20	%		6,962,239			97.90	%		6,232,021			95.14	%

Federal Home Loan Bank stock			116,904			1.69	%		104,397			1.47	%		275,768			4.21	%
Federal Reserve Bank stock			60,338			0.87	%		37,666			0.53	%		35,250			0.54	%
Other equity securities			16,456			0.24	%		6,868			0.10	%		7,177			0.11	%

	Total equity securities		193,698			2.80	%		148,931			2.10	%		318,195			4.86	%

Total securities available for sale			6,905,096			100.00	%		7,111,170			100.00	%		6,550,216			100.00	%
Net unrealized gain			669						11,822						181,251

Fair value of securities available for sale		$	6,905,765					$	7,122,992					$	6,731,467

Securities held to maturity:
Collateralized mortgage obligations		$	87,013					$	124,240					$	216,409

Amortized cost of securities held to maturity		$	87,013					$	124,240					$	216,409

Fair value of securities held to maturity		$	87,507					$	124,344					$	221,571

Excess of fair value over recorded value		$	494					$	104					$	5,162

Fair value as a % of amortized cost			100.6	%					100.1	%					102.4	%

Table 13 — Maturities of Debt Securities

The following table sets forth the contractual maturities and fully-taxable equivalent weighted average yields on our debt securities at December 31, 2004. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized Cost Maturing in

	Less Than								More than 5 to				More than
	1 Year				1 to 5 Years				10 Years				10 Years				Total

	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield

Available for Sale:
U.S. Government and federal agencies	$	15,157		5.03%	$	463,816		3.08%	$	50,000		3.40%	$	—		0.00%	$	528,973		3.16%
Tax-exempt bonds and notes		89,036		1.89%		8,386		4.24%		11,538		4.44%		57,941		4.42%		166,901		3.06%
Other bonds and notes		49,195		5.54%		45,315		4.91%		8,382		6.18%		182,850		5.97%		285,742		5.74%
Mortgage-backed securities		38		5.86%		35,589		5.63%		306,335		5.76%		4,788,516		4.60%		5,130,478		4.68%
Collateralized mortgage obligations		—		0.00%		3,773		6.35%		13,994		4.06%		581,537		4.27%		599,304		4.28%

Total	$	153,426		3.37%	$	556,879		3.43%	$	390,249		5.37%	$	5,610,844		4.61%	$	6,711,398		4.53%

Held to Maturity:
Collateralized mortgage obligations	$	118		7.23%	$	5,315		6.53%	$	26,703		6.22%	$	54,877		5.98%	$	87,013		6.09%

Securities available for sale are carried at fair value and had net unrealized gains of $669 thousand at December 31, 2004 and $11.8 million at December 31, 2003. See Note 4 to the Consolidated Financial Statements. These unrealized gains and losses do not impact net income or regulatory capital but are recorded as adjustments to shareholders’ equity, net of deferred income taxes. Unrealized gains and losses, net of related deferred income taxes, are a component of our Comprehensive Income. See the Consolidated Statement of Changes in Shareholders’ Equity in the Consolidated Financial Statements.


	*Loans*

Total loans and leases (including loans held for sale) averaged $17.7 billion during 2004 compared to $15.6 billion during 2003, an increase of $2.1 billion, or 13%. Excluding acquisitions, total loans and leases increased $1.3 billion. Average loans as a percent of average earning assets amounted to 70% and 68% in 2004 and 2003, respectively.

Table 14 — Composition of Loan and Lease Portfolio

The following table presents the composition of our loan and lease portfolio at the dates indicated.


		December 31,

		2004					2003					2002					2001					2000

				% of					% of					% of					% of					% of
		Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans

Residential real estate loans		$	3,081,217		16.57	%	$	2,710,483		16.58	%	$	2,382,197		16.95	%	$	2,627,125		20.66	%	$	2,248,714		20.73	%
Commercial real estate loans:
	Permanent first mortgage loans		5,297,812		28.49	%		4,696,428		28.73	%		4,151,674		29.54	%		3,509,311		27.60	%		2,663,775		24.56	%
	Construction and development loans		951,701		5.12	%		832,434		5.09	%		640,375		4.55	%		584,728		4.60	%		291,388		2.69	%

	Total		6,249,513		33.61	%		5,528,862		33.82	%		4,792,049		34.09	%		4,094,039		32.20	%		2,955,163		27.25	%

Commercial business loans and leases
	Commercial business loans		3,838,366		20.64	%		3,188,504		19.51	%		2,865,617		20.39	%		2,353,933		18.51	%		2,244,648		20.70	%
	Commercial business leases		90,228		0.49	%		98,590		0.60	%		102,857		0.73	%		108,720		0.86	%		64,256		0.59	%

	Total		3,928,594		21.13	%		3,287,094		20.11	%		2,968,474		21.12	%		2,462,653		19.37	%		2,308,904		21.29	%

Consumer loans and leases
	Consumer loans		5,333,448		28.69	%		4,816,217		29.47	%		3,898,638		27.74	%		3,494,979		27.48	%		3,251,268		29.98	%
	Consumer leases		222		0.00	%		3,306		0.02	%		14,650		0.10	%		36,534		0.29	%		81,613		0.75	%

	Total		5,333,670		28.69	%		4,819,523		29.49	%		3,913,288		27.84	%		3,531,513		27.77	%		3,332,881		30.73	%

Total loans receivable		$	18,592,994		100.00	%	$	16,345,962		100.00	%	$	14,056,008		100.00	%	$	12,715,330		100.00	%	$	10,845,662		100.00	%

Table 15 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, 2004

The following table sets forth the scheduled contractual amortization of our construction and development loans and commercial business loans and leases at December 31, 2004, as well as the amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates.


		Commercial
		Real Estate
		Construction		Commercial
		and Development		Business Loans
		Loans		and Leases		Total

Amounts due:
	Within one year	$	370,026	$	2,046,306	$	2,416,332
	After one year through five years		345,650		1,393,134		1,738,784
	Beyond five years		236,025		489,154		725,179

	Total	$	951,701	$	3,928,594	$	4,880,295

Interest rate terms on amounts due after one year:
	Fixed	$	55,808	$	691,938	$	747,746
	Adjustable		525,867		1,190,350		1,716,217

Table 16 — Average Loans and Leases

The following table presents average loans and leases during the periods indicated.


		Year Ended December 31,				Change

		2004		2003		Amount		Percent

Residential real estate mortgages		$	2,997,572	$	2,839,969	$	157,603		6	%
Commercial real estate mortgages			5,959,510		5,162,413		797,097		15	%
Commercial business loans and leases			3,686,919		3,153,293		533,626		17	%
Consumer loans and leases			5,090,536		4,477,532		613,004		14	%

	Total average loans and leases	$	17,734,537	$	15,633,207	$	2,101,330		13	%

Residential real estate loans (including loans held for sale) averaged $3.0 billion and $2.8 billion in 2004 and 2003, respectively. Excluding acquisitions, average residential loans decreased approximately $138 million, or 4%, as a result of continued refinancing activity and prepayments in a low interest rate environment. The weighted average yield on residential real estate loans decreased from 5.61% in 2003 to 5.01% in 2004, primarily due to the repricing of adjustable-rate loans, the refinancing of fixed-rate loans at lower rates and prepayments.

Residential mortgage loans held for sale amounted to $51.7 million and $41.7 million at December 31, 2004 and 2003, respectively. We are currently selling substantially all 30-year conforming fixed-rate loans that we originate.

Commercial real estate loans averaged $6.0 billion in 2004 and $5.2 billion in 2003, a 15% increase. Excluding acquisitions, average commercial real estate loans increased $461 million, or 8%, in 2004. Most of our markets reflected increases, with the largest increases in Massachusetts and Connecticut. The average yield on commercial real estate loans during 2004 was 5.79%, as compared to 6.06% in 2003, a decrease of 27 basis points. The lower yield reflects the effect of the competitive pricing for variable-rate loans, the refinancing of fixed-rate loans at lower rates and the origination of new loans at the lower prevailing rates.

Commercial business loans and leases averaged $3.7 billion in 2004 and $3.2 billion in 2003, an increase of 17%. Excluding acquisitions, average commercial business loans and leases increased $447 million, or 14%, in 2004. Massachusetts reflected the strongest growth. The yield on commercial business loans and leases decreased to 4.92% in 2004 from 5.10% in 2003. The decrease in the yield was primarily due to lower rates on new loans and the repricing of variable-rate loans.

Table 17 — Commercial Loans by State

The following table presents commercial loans by geographical area at the dates indicated.


		Commercial Real Estate Loans									Commercial Business Loans and Leases

		December 31,				Change					December 31,				Change

		2004		2003		Amount		Percent			2004		2003		Amount			Percent

Massachusetts		$	3,085,278	$	2,565,064	$	520,214		20	%	$	1,569,911	$	1,173,803	$	396,108			34	%
Maine			933,677		885,791		47,886		5	%		787,822		658,902		128,920			20	%
New Hampshire			767,590		732,249		35,341		5	%		564,604		494,811		69,793			14	%
Vermont			664,063		645,608		18,455		3	%		433,055		438,483		(5,428	)		(1	)%
Connecticut			583,907		504,624		79,283		16	%		412,601		332,749		79,852			24	%
New York			214,998		195,526		19,472		10	%		160,601		188,346		(27,745	)		(15	)%

	Total	$	6,249,513	$	5,528,862	$	720,651		13	%	$	3,928,594	$	3,287,094	$	641,500			20	%

Consumer loans and leases averaged $5.1 billion in 2004 and $4.5 billion in 2003, an increase of 14%. Acquisitions accounted for approximately $110 million, or 18%, of the $613 million increase. The growth in consumer loans was primarily in home equity loans and indirect automobile loans. The average yield on

consumer loans and leases decreased to 5.13% in 2004 from 5.61% in 2003 due to lower rates on new loans and the repricing of adjustable rate loans.

Table 18 — Composition of Consumer Loans and Leases

The following table presents the composition of consumer loans and leases at the dates indicated.


		December 31,										Change

		2004					2003					2004-2003

				% of					% of
		Amount		Total			Amount		Total			Amount			Percent

Home equity		$	3,123,525		58.55	%	$	2,472,471		51.31	%	$	651,054			26.33	%
Automobile			1,678,817		31.48	%		1,596,504		33.13	%		82,313			5.16	%
Mobile home			111,874		2.10	%		141,407		2.93	%		(29,533	)		(20.89	)%
Vision, dental, and orthodontia fee plan			49,934		0.94	%		120,694		2.50	%		(70,760	)		(58.63	)%
Education			159,314		2.99	%		234,226		4.86	%		(74,912	)		(31.98	)%
Other			210,206		3.94	%		254,221		5.27	%		(44,015	)		(17.31	)%

	Total	$	5,333,670		100.00	%	$	4,819,523		100.00	%	$	514,147			10.67	%


	*Deposits*

Total deposits averaged $18.9 billion during 2004 compared to $17.3 billion during 2003, an increase of 9%. Acquisitions accounted for approximately $1.0 billion of the $1.6 billion increase. Money market and NOW accounts and noninterest-bearing accounts showed the largest increases. The ratio of loans to deposits was 97% and 91% at December 31, 2004 and 2003, respectively.

Included within the deposit categories are government banking deposits, which averaged $1.7 billion in 2004 and $1.2 billion in 2003. Government banking deposits include deposits received from state and local governments, school districts, public colleges/universities, utility districts, public housing authorities and court systems in our market area. Many of these deposits exceed the FDIC insurance coverage amounts and require us to pledge specific collateral or maintain private insurance.

Table 19 — Change in Average Deposit Balances by Category of Deposit

The following table presents the changes in the average balances of deposits during the periods indicated.


			Year Ended December 31,				Change

			2004		2003		Amount			Percent

Noninterest-bearing deposits			$	3,987,311	$	3,224,035	$	763,276			24	%
Interest-bearing deposits:
	Money market/ NOW accounts			7,678,644		6,652,030		1,026,614			15	%
	Savings accounts			2,563,838		2,399,179		164,659			7	%
	Certificates of deposit			4,647,746		5,027,739		(379,993	)		(8	)%
	Brokered deposits			272		—		272			100	%

		Total interest-bearing deposits		14,890,500		14,078,948		811,552			6	%

		Total average deposits	$	18,877,811	$	17,302,983	$	1,574,828			9	%

Average noninterest-bearing deposits increased 24% in 2004 to $4.0 billion from $3.2 billion in 2003. Acquisitions accounted for approximately $203 million, or 27%, of the $763 million increase.

Average interest-bearing deposits increased $812 million during 2004 to $14.9 billion. Excluding acquisitions, average savings, money market and NOW deposits increased $593 million, while average certificates of deposit and brokered deposits declined $599 million in the aggregate. The decline in certificates of deposits resulted from our decision to allow deposits priced above alternate funding costs to run off. The average rates paid on total interest-bearing deposits decreased by 26 basis points from 1.34% in 2003 to 1.08% in 2004, reflecting the decline in prevailing interest rates and run-off of higher-costing certificates of deposit.

Table 20 — Maturity of Certificates of Deposits of $100,000 or more

The following table presents the scheduled maturities of certificates of deposits of $100,000 or more at the date indicated.


	December 31, 2004

	Balance		Percent

3 months or less	$	320,776		28	%
Over 3 to 6 months		236,327		21	%
Over 6 to 12 months		236,136		21	%
More than 12 months		336,121		30	%

	$	1,129,360		100	%


	*Other Funding Sources*

We use both short-term and long-term borrowings to balance earning asset growth vis-à-vis deposit growth.

Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and borrowings from the U.S. Treasury and the Federal Home Loan Bank (“FHLB”), amounted to $3.8 billion at December 31, 2004, up $1.5 billion, or 63% from $2.3 billion at December 31, 2003. See Note 11 to the Consolidated Financial Statements.

At December 31, 2004, we also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. We did not draw on this line during 2004, and in January 2005, we replaced this line of credit with a line of credit from TD with similar terms. We also have additional borrowing capacity as more fully described under “Liquidity” below.

Long-term debt includes FHLB advances, senior notes, subordinated notes, junior subordinated debentures, wholesale securities sold under agreements to repurchase, capital lease obligations and other debt obligations, each with original terms greater than one year. Long-term debt amounted to $2.2 billion at December 31, 2004, down from $3.5 billion at December 31, 2003. The decrease in long-term debt was due in part to the prepayment of approximately $1.2 billion in debt as part of the deleveraging program in 2004. See Note 12 to the Consolidated Financial Statements.

At December 31, 2004 and 2003, FHLB borrowings amounted to $429 million and $1.5 billion, respectively. FHLB collateral consists primarily of first mortgage loans secured by single-family properties, certain unencumbered securities and other qualified assets. These borrowings had an average cost of 4.04% during 2004 as compared to 4.36% during 2003.

At December 31, 2004 and 2003, we had $150 million of 5-year senior notes carrying a fixed rate of 3.75%. These securities, which were issued in April 2003 for general corporate purposes, including share repurchases, were rated A3 by Moody’s at December 31, 2004.

At December 31, 2004 and 2003, subordinated notes consisted of $200 million of 7.625% subordinated notes due 2011 issued by our banking subsidiary in 2001. The notes qualify as Tier 2 capital for regulatory purposes.

At December 31, 2004 and 2003, long-term wholesale securities sold under repurchase agreements amounted to $1.1 billion and $1.4 billion, respectively, and were collateralized by mortgage-backed securities and U.S. Government obligations. See Note 12 to the Consolidated Financial Statements.

At December 31, 2004 and 2003, we had outstanding $310.7 million and $305.6 million, respectively, of junior subordinated debentures issued by us to affiliated trusts. See “Capital” below.

Off-Balance Sheet Arrangements

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, commitments to invest in real estate limited partnerships, standby letters of credit, recourse arrangements on serviced loans, forward commitments to sell loans, foreign currency forward contracts and interest rate swaps. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. For forward commitments to sell loans, the contract or notional amounts do not represent exposure to credit loss. We control the credit risk of our forward commitments to sell loans through credit approvals, limits and monitoring procedures. See Note 17 to the Consolidated Financial Statements for more information regarding the nature, business purpose and the importance of off-balance sheet arrangements.

Table 21 — Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations, other commitments and derivative financial instruments at December 31, 2004.


				Payments Due By Period

				Less than						After
Contractual Obligations(1)		Total		1 Year		1-3 Years		4-5 Years		5 Years

Long-term debt		$	1,086,162	$	278,516	$	32,600	$	158,819	$	616,227
Capital lease obligations			6,720		62		471		1,281		4,906
Repurchase agreements — wholesale			1,100,000		350,000		750,000		—		—

	Total long-term debt		2,192,882		628,578		783,071		160,100		621,133
Operating lease obligations			123,862		24,396		38,531		26,702		34,233
Pension plan contribution(2)			20,000		20,000		—		—		—
Other benefit plan payments — estimated			46,875		4,318		9,055		12,602		20,900
Other vendor obligations			25,683		10,290		10,290		5,103		—

	Total contractual obligations	$	2,409,302	$	687,582	$	840,947	$	204,507	$	676,266


(1)	Other liabilities are short term in nature, except for liabilities related to employee benefit plans.

Amount of Commitment Expiration — Per Period
Total
Amounts Less than After
Other Commitments Committed 1 Year 1-3 Years 4-5 Years 5 Years
Unused portions on lines of credit $ 4,268,079 $ 314,512 $ 235,120 $ 31,428 $ 3,687,019
Standby letters of credit 407,395 95,268 78,812 93,179 140,136
Commitments to originate loans 1,569,612 1,063,842 247,390 37,942 220,438
Other commitments 48,203 18,218 4,818 1,935 23,232

Total commitments $ 6,293,289 $ 1,491,840 $ 566,140 $ 164,484 $ 4,070,825

Amount of Commitment Expiration — Per Period
Total
Amounts Less than After
Derivative Financial Instruments Committed 1 Year 1-3 Years 4-5 Years 5 Years
Interest rate swaps (notional amount):
Commercial loan swap program:
Interest rate swaps with commercial borrowers(1) $ 325,023 $ 23,225 $ — $ 54,609 $ 247,189
Interest rate swaps with dealers(2) 325,023 23,225 — 54,609 247,189
Interest rate swaps on borrowings(3) 566,500 — 216,500 150,000 200,000
Forward commitments to sell loans 61,000 61,000 — — —
Foreign currency forward contracts(4)
Forward contracts with customers 23,438 15,213 8,225 — —
Forward contracts with dealers 23,438 15,213 8,225 — —
Rate-locked loan commitments 30,779 30,779 — — —
(2) Funding requirements for pension benefits after 2005 are excluded due to the significant variability in the assumptions required to project the timing of future cash contributions.


				Amount of Commitment Expiration — Per Period
		Total
		Amounts		Less than						After
Other Commitments		Committed		1 Year		1-3 Years		4-5 Years		5 Years

Unused portions on lines of credit		$	4,857,077	$	1,334,860	$	304,656	$	57,889	$	3,159,672
Standby letters of credit			464,299		115,737		89,087		82,479		176,996
Commercial letters of credit			23,094		18,378		1,656		304		2,756
Commitments to originate loans			1,924,832		1,180,640		391,645		37,071		315,476
Other commitments			263,199		12,378		7,668		2,684		240,469

	Total commitments	$	7,532,501	$	2,661,993	$	794,712	$	180,427	$	3,895,369


					Amount of Commitment Expiration — Per Period
			Total
			Amounts		Less than						After
Derivative Financial Instruments			Committed		1 Year		1-3 Years		4-5 Years		5 Years

Interest rate swaps (notional amount):
	Commercial loan swap program:
		Interest rate swaps with commercial borrowers(1)	$	690,856	$	2,000	$	28,858	$	141,350	$	518,648
		Interest rate swaps with dealers(2)		690,856		2,000		28,858		141,350		518,648
	Interest rate swaps on borrowings(3)			566,500		216,500		—		150,000		200,000
Forward commitments to sell loans				83,016		83,016		—		—		—
Foreign currency rate contracts(4):
		Forward contracts with customers		33,575		26,760		6,815		—		—
		Forward contracts with dealers		33,747		26,913		6,834		—		—
		Foreign exchange options to purchase		35,713		25,716		9,997		—		—
		Foreign exchange options to sell		35,713		25,716		9,997		—		—
Rate-locked loan commitments				35,961		35,961		—		—		—


(1)	Swaps with commercial loan customers (Banknorth receives fixed, pays variable).

(2)	Offsetting swaps with dealers (Banknorth pays fixed, receives variable), which offset the ~~interest rate swaps with commercial borrowers.~~

~~(3)~~	~~Swaps on borrowings (Banknorth pays variable, receives fixed).~~

~~(4)~~	~~Forward contracts for customer accommodations.~~

~~See Note 17 to the Consolidated Financial Statements for more information regarding the nature and business purpose and the importance of off-balance sheet arrangements.~~

~~Risk Management~~

The primary goal of our risk management program is to determine how certain existing or emerging issues in the financial services industry affect the nature and extent of the risks faced by us. Based on a periodic self-evaluation, we determine key issues and develop plans and/or objectives to address risk. Our board of directors and management believe that there are seven applicable “risk categories,” consisting of credit, interest rate ~~liquidity, transaction, compliance, strategic and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled~~swaps with a quality of risk management perspective. In addition, an aggregate level of risk is assigned as a whole as well as the direction of risk (stable, increasing or decreasing). Each risk category and the overall risk level is compared to regulatory viewscommercial borrowers.(3) Swaps on a regular basis and then reported to the board with an accompanying explanation as to the existence of any differences. The risk program includes risk identification, measurement, control and monitoring.

~~Our board of directors has established the overall strategic direction~~borrowings (Banknorth pays variable, receives fixed).(4) Forward contracts for Banknorth. It approves our overall risk policies and oversees our overall risk management process. The board has established two board committees, consisting of Audit and Board Risk Management, and has charged each committee with overseeing key risks. In addition, there is a management Operational Risk Committee, which is

comprised of senior officers in key business lines, which identifies and monitors key operational risks. The Operational Risk Committee reports to the Board Risk Management Committee on a regular basis.

~~Credit Risk Management~~

customer accommodations.

Risk Management

The primary goal of our risk management program is to determine how certain existing or emerging issues in the financial services industry affect the nature and extent of the risks faced by us. Based on a periodic self-evaluation, we determine key issues and develop plans and/or objectives to address risk. Our board of directors and management believe that there are seven applicable “risk categories,” consisting of credit, interest rate, liquidity, transaction, compliance, strategic and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled with a quality of risk management perspective. In addition, an aggregate level of risk is assigned as a whole as well as the direction of risk (stable, increasing or decreasing). Each risk category and the overall risk level is compared to regulatory views on a regular basis and then reported to the board with an accompanying explanation as to the existence of any differences. The risk program includes risk identification, measurement, control and monitoring.

Our board of directors has established the overall strategic direction for Banknorth. It approves our overall risk policies and oversees our overall risk management process. The board has established two board committees, consisting of Audit and Board Risk Management, and has charged each committee with overseeing key risks. In addition, there is a management Operational Risk Committee, which is

comprised of senior officers in key business lines, which identifies and monitors key operational risks. The Operational Risk Committee reports on a regular basis to the Board Risk Management Committee.

Credit Risk Management

~~General~~

The Board Risk Management Committee monitors our credit risk management. Our strategy for credit risk management includes centralized policies and uniform underwriting criteria for all loans. The strategy also includes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management review of large loans and loans with a deterioration of credit quality. We maintain an internal rating system that provides a mechanism to regularly monitor the credit quality of our loan portfolio. The rating system is intended to identify and measure the credit quality of lending relationships. For consumer loans, we utilize standard credit scoring systems to access consumer credit risks and to price consumer products accordingly. We strive to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels. See “Analysis and Determination of the Allowance for Loan and Lease Losses” below and Note 1 to the Consolidated Financial Statements. SeeTable 15 for information about the scheduled contractual amortization of certain parts of our loan portfolio at December 31, 2004.

Our residential loan portfolio accounted for 16% and 17% of the total loan portfolio at December 31, 2004 and 2003, respectively. Our residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless the excess is protected by mortgage insurance. At December 31, 2004, 0.25% of our residential loans was nonperforming, as compared to 0.26% at December 31, 2003. Nonperforming residential real estate loans increased by $689 thousand in 2004, while the total residential loan portfolio increased by $370.7 million.

Our commercial real estate loan portfolio accounted for 34% of the total loan portfolio at December 31, 2004 and 2003. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate. These loans generally are secured by properties located in the New England states and upstate New York. Generally, the investment-based real estate mortgages are diversified among various property types with somewhat higher concentration in multi-family, office and retail properties. At December 31, 2004, 0.48% of our commercial real estate loans was nonperforming, as compared to 0.36% at December 31, 2003.

Our commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at December 31, 2004 compared to 20% at December 31, 2003. Commercial business loans and leases are generally made to small to medium size businesses located within our market areas. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England and upstate New York. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to businesses in the form of lines of credit. Through a subsidiary, we also offer direct equipment leases, which amounted to $90.2 million at December 31, 2004. From time to time we purchase participations in syndicated commercial loans. At December 31, 2004, we had $428 million of outstanding participations in syndicated commercial loans and had an additional $337 million of unfunded commitments related to these participations. At December 31, 2004, 0.83% of our commercial business loans and leases were nonperforming, as compared to 0.74% at December 31, 2003. SeeTable 17for the geographic distribution of our commercial loans and leases at December 31, 2004 and 2003.

Consumer loans and leases accounted for 29% of our total loan portfolio at December 31, 2004 and December 31, 2003. In the fourth quarter of 2003, we ceased originating vision, dental and orthodontia fee plan loans and mobile home loans. The decrease in these loan types during 2004 reflect the run-off of these loans. At December 31, 2004, 0.14% of our consumer loans was nonperforming, as compared to

0.18% at December 31, 2003. SeeTable 18for a breakdown of our consumer loan and lease portfolio by type of loan and lease at December 31, 2004 and 2003.


	*Nonperforming Assets*

Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue), other real estate owned, repossessed assets and certain securities available for sale. Total nonperforming assets as a percentage of total assets amounted to 0.28% at December 31, 2004 and 0.24% at December 31, 2003. Total nonperforming assets as a percentage of total loans and other nonperforming assets amounted to 0.44% and 0.39% at December 31, 2004 and 2003, respectively. The increase from December 31, 2003 was due to a $10 million increase in nonperforming commercial real estate loans, as well as an $8 million increase in nonperforming commercial business loans and leases. The $18 million increase was due to two credit relationships.

Table 22 — Five-Year Schedule of Nonperforming Assets

The following table presents a summary of nonperforming assets at the dates indicated.


			December 31,

			2004			2003			2002			2001			2000

Nonaccrual loans
	Residential real estate loans		$	7,846		$	7,157		$	5,781		$	8,311		$	9,894
	Commercial real estate loans			29,948			19,700			17,649			17,124			12,155
	Commercial business loans and leases			32,421			24,412			32,693			40,341			32,583
	Consumer loans and leases			7,344			8,493			9,194			9,470			6,329

		Total nonaccrual loans		77,559			59,762			65,317			75,246			60,961
	Troubled debt restructurings			—			—			—			—			673

		Total nonperforming loans		77,559			59,762			65,317			75,246			61,634

Other nonperforming assets:
	Other real estate owned, net of related reserves			1,878			529			100			1,861			4,074
	Repossessions, net of related reserves			1,666			2,812			3,536			2,016			1,424
	Securities available for sale			—			—			—			2,104			—

		Total		3,544			3,341			3,636			5,981			5,498

Total nonperforming assets			$	81,103		$	63,103		$	68,953		$	81,227		$	67,132

Accruing loans 90 days or more overdue			$	5,254		$	4,915		$	3,373		$	6,227		$	5,973

Total nonperforming loans as a percentage of total loans				0.42	%		0.37	%		0.46	%		0.59	%		0.57	%
Total nonperforming assets as a percentage of total assets				0.28	%		0.24	%		0.29	%		0.39	%		0.37	%
Total nonperforming assets as a percentage of total loans and other nonperforming assets				0.44	%		0.39	%		0.49	%		0.64	%		0.62	%

We continue to focus on asset quality issues and to allocate significant resources to the key asset quality control functions of credit policy and administration and loan review. The collection, workout and asset management functions focus on the reduction of nonperforming assets. Despite the ongoing focus on asset quality and relatively low levels of nonperforming assets, there can be no assurance that adverse changes in the real estate markets and economic conditions in our primary market areas will not result in higher nonperforming asset levels in the future and negatively impact our operations through higher provisions for loan losses, net charge-offs, decreased accrual of interest income and increased noninterest expenses as a result of the allocation of resources to the collection and workout of nonperforming assets.

Residential real estate loans are generally placed on nonaccrual when they become 120 days past due or are in the process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity lines of credit in the process of foreclosure are placed on nonaccrual status. Consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. We generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due, unless secured by sufficient cash or other assets immediately convertible to cash, on nonaccrual status. At December 31, 2004, we had $5.3 million of accruing loans which were 90 days or more delinquent, as compared to $4.9 million of such loans at December 31, 2003. We also may place loans on nonaccrual and, therefore, nonperforming status which are currently less than 90 days past due or performing in accordance with their terms but which in our judgment are likely to present future principal and/or interest repayment problems and which thus ultimately would be classified as nonperforming.


	*Net Charge-offs*

Net charge-offs amounted to $36.5 million in 2004, as compared to $37.3 million in 2003. Net charge-offs represented 0.21% and 0.24% of average loans and leases outstanding in 2004 and 2003, respectively.

Table 23 — Five-Year Table of Activity in the Allowance for Loan and Lease Losses

The following table presents net charge-offs by loan type and the activity in the allowance for loan and lease losses during the periods indicated.


			Year Ended December 31,

			2004			2003		2002			2001		2000

Allowance at the beginning of period			$	232,287		$	208,273	$	189,837		$	153,550	$	155,048
Additions due to acquisitions				13,665			19,008		12,794			31,277		—
Charge-offs:
	Residential real estate mortgages			613			197		(138	)		626		1,828
	Commercial real estate mortgages			17			577		1,290			2,267		3,566
	Commercial business loans and leases			20,159			16,272		24,455			20,899		7,790
	Consumer loans and leases			29,898			32,563		26,395			21,860		21,508

		Total loans and leases charged off		50,687			49,609		52,002			45,652		34,692

Recoveries:
	Residential real estate mortgages			2,741			64		122			241		107
	Commercial real estate mortgages			54			1,761		117			222		2,371
	Commercial business loans and leases			6,452			6,367		8,972			4,800		2,334
	Consumer loans and leases			4,900			4,122		4,119			3,510		4,563

		Total loans and leases recovered		14,147			12,314		13,330			8,773		9,375

		Net charge-offs		36,540			37,295		38,672			36,879		25,317
Transfer for off-balance sheet loan commitments				(6,600	)		—		—			—		—
Provision for loan and lease losses				40,340			42,301		44,314			41,889		23,819

Allowance at the end of the period			$	243,152		$	232,287	$	208,273		$	189,837	$	153,550

Total allowances for credit losses:
	Allowance for loan and lease losses		$	243,152
	Liability for unfunded credit commitments			6,600

	Total allowances for credit losses		$	249,752


		Year Ended December 31,

		2004			2003			2002			2001			2000

Ratio of net charge-offs to average loans and leases outstanding			0.21	%		0.24	%		0.29	%		0.33	%		0.24	%
Ratio of allowance for credit losses to total portfolio loans and leases at end of period			1.34	%		1.42	%		1.48	%		1.49	%		1.42	%
Ratio of allowance for credit losses to nonperforming loans and leases at end of period			322.02	%		388.69	%		318.86	%		252.29	%		249.13	%
Ratio of net chargeoffs (recoveries) as a percent of outstanding average loans and leases(1)
	Residential real estate mortgages		(0.07	)%		0.00	%		(0.01	)%		0.02	%		0.08	%
	Commercial real estate mortgages		0.00	%		(0.02	)%		0.03	%		0.06	%		0.04	%
	Commercial business loans and leases		0.37	%		0.31	%		0.58	%		0.69	%		0.26	%
	Consumer loans and leases		0.49	%		0.64	%		0.61	%		0.54	%		0.54	%
Total portfolio loans and leases at end of period		$	18,592,994		$	16,345,962		$	14,056,008		$	12,715,330		$	10,845,662
Total nonperforming loans and leases at end of period			77,559			59,762			65,317			75,246			61,634
Average loans and leases outstanding (excluding loans held for sale)			17,697,737			15,574,078			13,182,785			11,173,723			10,449,753


(1)	Excludes residential real estate loans held for sale

Table 24 — Foregone Interest

The following table presents the amount of foregone interest on nonperforming loans for the periods indicated.


	Year Ended
	December 31,

	2004			2003

Interest income that would have been recognized at original contractual terms	$	7,424		$	4,748
Amount recognized as interest income on a cash basis		(3,291	)		(2,746	)

Foregone interest	$	4,133		$	2,002


	*Potential Problem Loans*

In addition to the nonperforming loans discussed under “Credit Risk Management” above, we also have loans that are 30 to 89 days delinquent and still accruing. These loans amounted to $138 million and $142 million at December 31, 2004 and 2003, respectively. These loans and delinquency trends, along with accruing loans which are 90 days or more past due and performing loans which are less than 90 day past due or performing in accordance on their terms which we have placed on nonaccrual status, are considered in the evaluation of the allowance for loan and lease losses and the related determination of the provision for loans and lease losses.


	*Analysis and Determination of the Allowance for Loan and Lease ~~Losses” below~~Losses*

The allowance for loan and lease losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to income and by recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment and is determined based on management’s ongoing evaluation. As discussed under “Critical Accounting

Policies,” we believe that the methods used by us in determining the allowance for loan and lease losses constitute a critical accounting policy. Although we utilize judgment in providing for losses, for the reasons discussed under “Critical Accounting Policies” and “Credit Risk Management — Nonperforming Assets,” there can be no assurance that we will not have to increase the amount of our provision for loan and lease losses in future periods. Management determined that the allowance for loan and lease losses was adequate at December 31, 2004.

The allowance for loan and lease losses amounted to $243.2 million at December 31, 2004, as compared to $232.3 million at December 31, 2003. The $10.9 million increase was net of a transfer of $6.6 million to other liabilities related to reserves for off-balance sheet loan commitments. The increase was also impacted by $13.7 million from acquired banks and the effect of the provision for loan and lease losses exceeding net charge-offs during 2004. The ratio of the allowance for credit losses to total portfolio loans and leases at December 31, 2004 and 2003 was 1.34% and 1.42%, respectively. The ratio of the allowance for credit losses to nonperforming loans was 322% at December 31, 2004 and 389% at December 31, 2003. Nonperforming assets amounted to $81.1 million, or 0.28% of total assets, at December 31, 2004 as compared to $63.1 million, or 0.24% of total assets at December 31, 2003. The $18 million increase in nonperforming assets from December 31, 2003 to December 31, 2004 was primarily attributable to an increase in nonperforming commercial real estate loans and commercial business loans and leases. Accruing loans 90 days or more past due amounted to $5.3 million at December 31, 2004, as compared to $4.9 million at December 31, 2003, an increase of $339 thousand.

Table 25 — Allocation of the Allowance for Loan and Lease Losses — Five-Year Schedule

The following table sets forth the allocation of the allowance for loan and lease losses at the dates indicated.


	December 31,

	2004					2003					2002					2001					2000

			Percent of					Percent of					Percent of					Percent of					Percent of
			Loans in Each					Loans in Each					Loans in Each					Loans in Each					Loans in Each
			Category to					Category to					Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans

Residential real estate loans	$	6,705		16.57	%	$	6,850		16.58	%	$	5,800		16.95	%	$	5,000		20.66	%	$	7,600		20.73	%
Commercial real estate loans		103,530		33.61	%		115,333		33.82	%		102,294		34.09	%		98,271		32.20	%		73,423		27.25	%
Commercial business loans and leases		87,483		21.13	%		70,383		20.11	%		63,940		21.12	%		58,090		19.37	%		50,486		21.29	%
Consumer loans and leases		45,434		28.69	%		39,721		29.49	%		36,239		27.84	%		28,476		27.77	%		22,038		30.73	%

	$	243,152		100.00	%	$	232,287		100.00	%	$	208,273		100.00	%	$	189,837		100.00	%	$	153,547		100.00	%

For purposes of determining our allowance for loan and lease losses, we specifically evaluate commercial business and commercial real estate loans rated substandard and are in excess of $300 thousand. We evaluate all other loans by loan type on a pooled basis.

Table 26 — Composition of Allowance for Loan and Lease Losses

The following table presents the amount for allowance for loan and lease losses which is attributable to specifically evaluated loans and all other loans by loan type on a pooled basis.


	December 31,

	2004		2003		2002

Residential real estate loans	$	6,705	$	6,850	$	5,800
Specifically evaluated commercial loans		44,671		41,800		27,000
Other commercial loans		146,342		143,916		139,234
Consumer loans and leases		45,434		39,721		36,239

	$	243,152	$	232,287	$	208,273

Asset-Liability Management

The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-liability management is governed by policies, goals and objectives that are adopted and reviewed by our board of directors and monitored periodically by the Board Risk Management Committee. The board delegates responsibility for asset-liability management strategies to achieve these goals and objectives to the Asset Liability Management Committee (“ALCO”), which is comprised of members of senior management. Senior management determines the strategic directives that guide the day-to-day management of our activities and interest rate risk exposure. The ALCO also reviews and approves all major risk, liquidity and capital management programs, except for product pricing. Product pricing is reviewed and approved by the Pricing Committee, which is comprised of a subset of ALCO members and the state presidents of our banking subsidiary.


	*Interest Rate Risk*

Interest rate risk is the risk of loss to future earnings or long-term value resulting from changes in interest rates and is by far the most significant non-credit risk to which we are exposed. This risk arises directly from our core lending and deposit gathering activities and is predominantly concentrated in our mortgage-related assets, as well as in our non-maturity deposits. Mortgage-related assets typically give borrowers the option to prepay at any time without penalty. Principal cash flows that come from these assets are highly interest rate sensitive. As interest rates fall, borrowers are more likely to pay off their existing mortgages, which results in higher cash flows that we must in turn reinvest. Replacing these higher-rate mortgage assets with lower-rate mortgage assets has the potential to reduce our net interest income unless we can also reduce either our wholesale or retail funding costs. In the low interest rate environment, bank deposits can increase, especially if the market risk premium is not sufficient to adequately compensate investors. Consequently, under such circumstances, we can have even more cash to reinvest in low yielding assets. Conversely, rising rates tend to have the opposite effect on both mortgage assets and non-maturity deposits. Higher rates make borrowers less likely to refinance existing debt, resulting in lower cash flows for us to reinvest. And if the market risk premium is sufficiently high, depositors could be enticed to take additional investment risk and move deposits from banks into riskier assets, such as equity securities. This in turn could result in less cash to invest or even require us to use wholesale funding market sources more actively. In the case of higher interest rates, our funding sources could reprice faster than our assets and at higher rates, thereby reducing our interest rate spread and net interest margin. The degree to which future earnings or long-term value is subject to interest rate risk depends on how closely the characteristics of our interest-earning assets match those of our interest-bearing liabilities.

servicing rights, deferred fees and purchase accounting adjustments, (vi) the fair value of our saleable assets, the amount of unrealized gains and losses on securities available for sale per SFAS No. 115, and the resultant ability to realize gains on the sale of such securities and (vii) per SFAS Nos. 133 and 138, the fair value of derivatives carried on our balance sheet, derivative hedge effectiveness testing and the amount of ineffectiveness recognized in earnings.


	*Assessment and ~~Note~~Measurement*

The overall objective of interest rate risk management is to deliver consistent net interest income growth and returns on equity over a wide range of possible interest rate environments. To that end, management focuses on (i) key interest rate risk metrics and assessment of Banknorth’s exposure to this risk, (ii) a careful review and consideration of modeling assumptions and (iii) asset and liability management strategies that help attain the corporate goals and objectives adopted by our board of directors.

The primary objective of interest rate risk management is to control our estimated exposure to interest rate risk within limits and guidelines established by the ALCO and approved by our Board. These limits and guidelines reflect our tolerance for interest rate risk over a wide range of both short-term and long-term measurements. In addition, we evaluate interest rate risk based on ongoing business risk measures, liquidation or run-off measures of assets and liabilities on our balance sheet and stress test measures. Ongoing measurements and runoff analysis provide management with information concerning day-to-day operations. Stress testing shows the impact of very extreme but lower probability events. The combination of these measures gives management a comprehensive view of possible risks to future earnings and long-term equity value. We attempt to control interest rate risk by identifying, quantifying and, where appropriate, hedging our exposure to these risks.


	*Net Interest Income Sensitivity*

Net interest income is our largest source of revenue. Net interest income sensitivity is our primary short-term measurement used to assess the interest rate risk of our ongoing business. Management believes that net interest income sensitivity gives us the best perspective on how day-to-day decisions affect our interest rate risk profile. We subject estimated net interest income over a 12-month period to various rate movements using a simulation model for various specified interest rate scenarios. Simulations are run monthly and include scenarios where market rates are “shocked” up and down, scenarios where market rates gradually change or “ramp” up and down and scenarios where the slope of the market yield curve changes. Our base simulation assumes that rates do not change for the next 12 months. The sensitivity measurement is calculated as the percentage variance of the net interest income simulations to the base simulation results. Results for the gradual “ramps” are compared to policy guidelines and are disclosed in the interest rate risk results below.

As indicated intable 27, assuming a gradual 100 and 200 basis point increase in interest rates starting on December 31, 2004, we estimate that our net interest income in the following 12 months would decrease by 0.68% and 2.13%, respectively. This is because in the event of an upward shift in rates, the simulated increase in interest income would be less than the simulated increase in interest expense because total adjustable rate interest-earning assets generally will reprice less quickly than will total interest-bearing liabilities. Also as indicated inTable 27, assuming a gradual 100 and 200 basis point decrease in interest rates starting on the same date, we estimate that our net interest income in the following 12 months would increase by 0.20% and decrease by 1.51%. These results are dependent on material assumptions such as interest rate movements, product pricing and customer behavior.

Table 27 — Sensitivity of Net Interest Income

The following table sets forth the estimated sensitivity of our net interest income for the 12 months following the dates indicated.


	200 Basis Point			100 Basis Point			100 Basis Point			200 Basis Point
	Rate Increase			Rate Increase			Rate Decrease			Rate Decrease

December 31, 2004		(2.13	)%		(0.68	)%		0.20	%		(1.51	)%

December 31, 2003		(0.26	)%		0.24	%		(0.71	)%		N/M

NM Not meaningful.

Our asset-liability management policy on interest rate risk simulation specifies that if market interest rates were to shift gradually up or down 200 basis points, estimated net interest income for the subsequent 12 months should decline by less than 5%. All interest rate risk measures were within compliance guidelines at December 31, 2004 and 2003.

For additional information regarding our interest rate sensitivity, see “Recent Developments” above.

Derivative Instruments


	*Purpose and Benefits*

Derivative financial instruments are important tools that we use to manage interest rate risk. When appropriate, we use derivatives such as interest-rate swaps, interest rate floors, interest rate caps, interest rate corridor agreements and forward security sales, among other instruments.

Certain derivatives are used to hedge certain wholesale funding activities and the mortgage origination pipeline. These instruments are designated as hedges at inception in accordance with SFAS No. 133. At December 31, 2004, our designated hedging activities consisted of $83 million forward commitments related to hedging our mortgage banking operations, a $150 million notional amount interest rate swap at 3-month LIBOR plus 0.41% that hedged $150 million of 3.75% fixed-rate senior notes maturing on May 1, 2008, a $200 million notional amount interest rate swap at 3-month LIBOR plus 3.47% that hedged $200 million of 7.625% fixed-rate subordinated debt issued by Banknorth, NA which matures on June 15, 2011, and five interest rate swaps with an aggregate notional amount of $216.5 million and a weighted average rate of 1-month LIBOR plus 3.82%, which hedge $216.5 million of FHLB advances with a weighted average cost of 5.47% that mature throughout 2005.

We manage the interest rate risk inherent in our mortgage banking operations by entering into forward sales contracts and, to a lesser extent, by purchasing mortgage-backed security options. An increase in market interest rates between the time we commit to terms on a loan and the time we ultimately sell the loan in the secondary market generally will have the effect of reducing the gain (or increasing the loss) we record on the sale. We attempt to mitigate this risk by entering into forward sales commitments in amounts sufficient to cover 70% to 90% of 30-year fixed-rate loans which are currently closed or are anticipated to close.

For the year ended December 31, 2004, higher mortgage rates contributed to a decline in residential mortgage loan originations.

Table 28 — Mortgage Loans Held for Sale and Related Hedges

The following table summarizes the average balances of residential mortgage loans held for sale and related hedge positions during the periods indicated.


	Year Ended
	December 31,

	2004		2003

Residential mortgage loans held for sale	$	48,567	$	79,878
Rate-locked loan commitments		50,710		88,492
Forward sales contracts		86,149		155,698

Interest rate derivatives, primarily interest rate swaps, offered to commercial borrowers through our hedging program are designated as speculative under SFAS 133. However, we believe that our exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an identical dealer transaction. The commercial customer hedging program allows us to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. For the year ended December 31, 2004, we recorded a total notional amount of $408.8 million of new interest rate swaps with commercial borrowers and an equal notional amount of dealer transactions. It is anticipated that over time, customer interest rate derivatives will reduce the interest rate risk inherent in our longer-term, fixed-rate commercial business and real estate loans. The customer-related positions summarized in the table below include both the customer and offsetting dealer transactions.


	*Foreign Exchange or Market Risk*

Our earnings are not directly and materially impacted by movements in foreign currency rates or commodity prices. Virtually all transactions are denominated in the U.S. dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related businesses.

Foreign currency forward and option contracts are contracts that we enter into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these credit-worthy customers, we set aside a percentage of the customer’s available line of credit until the foreign currency contract is settled. Foreign exchange and trade services are provided under a private label arrangement with a correspondent bank. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting our exposure to the replacement value of the contracts rather than the notional principal or contract amounts.

Table 29 — Derivative Positions

The following table summarizes our derivative positions at December 31, 2004.

Asset-Liability Management Positions


		Notional Amount Maturing
														Fair
December 31, 2004		2005		2006		2007		2008		Thereafter		Total		Value

Interest rate contracts
	Pay variable, receive fixed	$	216,500	$	—	$	—	$	150,000	$	200,000	$	566,500	$	(4,420	)
Forward commitments to sell loans			83,016		—		—		—		—		83,016		(149	)

Customer-related Positions


		Notional Amount Maturing

December 31, 2004		2005		2006		2007		2008		Thereafter		Total		Fair Value

Interest rate contracts
	Receive fixed, pay variable	$	2,000	$	13,250	$	15,608	$	49,489	$	610,510	$	690,857	$	17,836
	Pay fixed, receive variable		2,000		13,250		15,608		49,489		610,510		690,857		(17,836	)
Foreign currency rate contracts
	Forward contracts with customers		26,760		6,815		—		—		—		33,575		3,307
	Forward contracts with dealers		26,913		6,834		—		—		—		33,747		(3,056	)
	Foreign exchange options to purchase		25,716		9,997		—		—		—		35,713		1,727
	Foreign exchange options to sell		25,716		9,997		—		—		—		35,713		(1,727	)
Rate-locked loan commitments(1)			35,961		—		—		—		—		35,961		147

(1)

No value has been assigned to ~~the Consolidated Financial Statements. See~~~~Table 10~~ ~~for information about the composition of our loan portfolio for the last five years and~~~~Table 12~~ ~~for information about the scheduled contractual amortization of certain parts of our loan portfolio at December 31, 2003.~~

Our residential loan portfolio accounted for 17% of the total loan portfolio at December 31, 2003 and 2002. Our residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless the excess is protected bypotential mortgage insurance. At December 31, 2003, 0.26% of our residential loans were nonperforming, as compared to 0.24% at December 31, 2002. Nonperforming residential real estate loans increased by $1.4 million in 2003, while the total residential loan portfolio increased by $328.3 million. These increases were primarily due to acquisitions.

Our commercial real estate loan portfolio accounted for 34% of the total loan portfolio at December 31, 2003 and 2002. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate. These loans generally are secured by properties located in the New England states and upstate New York. At December 31, 2003, 0.36% of our commercial real estate loans were nonperforming, as compared to 0.37% at December 31, 2002.

Our commercial business loan and lease portfolio accounted for 20% of the total loan portfolio at December 31, 2003 compared to 21% at December 31, 2002. Commercial business loans and leases are generally made to small to medium size businesses located within our market areas. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England and upstate New York. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to businesses in the form of lines of credit. Through a subsidiary, we also offer direct equipment leases, which amounted to $98.1 million at December 31, 2003. We do not emphasize the purchase of participations in syndicated commercial loans. At December 31, 2003, we had $373 million of outstanding participations in syndicated commercial loans and had an additional $343 million of unfunded commitmentsservicing rights related to ~~these participations. At December 31, 2003, 0.74% of our commercial business loans and leases were nonperforming, as compared to 1.10% at December 31, 2002. See~~~~Table 13~~ ~~for the geographic distribution of our commercial loans and leases at December 31, 2003 and 2002.~~

~~Consumer loans and leases accounted for 29% of our total~~rate-locked loan ~~portfolio at December 31, 2003 compared to 28% at December 31, 2002. At December 31, 2003, 0.18% of our consumer loans were nonperforming, as compared to 0.23% at December 31, 2002.~~

36commitments.


	*2004 Asset Liability Management Actions*

The most significant factors affecting market risk exposure of net interest income during the year ended December 31, 2004 were (i) changes in the shape of the U.S. Government securities and interest rate swap yield curves, (ii) changes in the prepayment speeds of mortgage assets, (iii) the reduction in deposit interest expense and (iv) the above-described $1.2 billion investment portfolio and wholesale borrowing deleveraging program in 2004.

The targeted federal funds rate ended 2004 at 2.25%, which was 0.50% higher than at September 30, 2004 and 1.25% higher than at December 31, 2003. Long-term interest rates at December 31, 2004 were relatively unchanged, with 10-year U.S. Treasury yields up approximately 10 basis points for the quarter ended December 31, 2004, as compared to the quarter ended September 30, 2004, and down less than 4 basis points as compared to December 31, 2003. Mortgage rates remained level in the fourth quarter, with our 30-year conforming single-family residential mortgage rate below 6%. As a result, the yield curve used to measure interest income sensitivity has flattened considerably.Table 27 incorporates the estimated net impact of these changes, as well as planned 2005 activity, the deleveraging program in the fourth quarter of 2004 and the acquisition of BostonFed on January 21, 2005, on our net interest income assuming various changes in interest rates.

For additional information regarding our interest rate sensitivity, see “Recent Developments” above.

Liquidity

Our Board Risk Management Committee establishes policies and analyzes and manages liquidity to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. Liquidity management is viewed from a long-term and a short-term perspective, as well as from an asset and liability perspective. We monitor liquidity through a regular review of loan and deposit maturities, yield and rate scenarios and loan and deposit forecasts to minimize funding risk. Other factors affecting our ability to meet liquidity needs include variations in the markets served and general economic conditions. We have various funding sources available to us on a parent-only basis as well as through our banking subsidiary, as outlined below.

On a parent-only basis, our commitments and debt service requirements at December 31, 2004 consisted primarily of $310.7 million of junior subordinated debentures and $150 million of 3.75% senior notes due May 1, 2008. See “Capital” and Notes 13 and 22 to the Consolidated Financial Statements. The principal sources of funds for us to meet parent-only obligations are dividends from our banking subsidiary, which are subject to regulatory limitations, income from investment securities and borrowings from public and private sources, including draws on our $110 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. At December 31, 2004 our subsidiary bank had $736.8 million available for dividends that could be paid without prior regulatory approval. In addition, the parent company had $250 million in cash or cash equivalents at December 31, 2004. See also “Financial Condition — Other Funding Sources” above. For information on restrictions on the payment of dividends by our banking subsidiary, see Note 14 to the Consolidated Financial Statements.

For a discussion of a contribution of capital we made in 2003 to our banking subsidiary to enhance its liquidity and capital for regulatory purposes, see “Capital”.


	*Banking Subsidiary*

For the Bank, liquidity represents the ability to fund asset growth, accommodate deposit withdrawals and meet other contractual obligations and commercial commitments. See “Table 17 — Contractual Obligations and Commitments” above. Liquidity is measured by the ability to raise cash when needed at a reasonable cost. Many factors affect a bank’s ability to meet its liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions.

In addition to traditional retail deposits, the Bank has various other liquidity sources, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and borrowed funds such as FHLB advances, reverse repurchase agreements and brokered deposits.

We continually monitor and forecast our liquidity position. There are several interdependent methods used by us for this purpose, including daily review of fed funds positions, monthly review of balance sheet changes, and monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans.

At December 31, 2004, the Bank had in the aggregate $4.4 billion of “immediately accessible liquidity,” defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represented 22% of deposits, as compared to a policy minimum of 10% of deposits.

Also at December 31, 2004, the Bank had in the aggregate “potentially volatile funds” of $3.1 billion. These are funds that might flow out of the Bank over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources.

At December 31, 2004, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 139%, compared to a policy minimum of 100%.

In addition to the liquidity sources discussed above, we believe that our residential and consumer loan portfolios provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales or securitizations. We believe we also have significant untapped access to the national brokered deposit market. These sources are contemplated as secondary liquidity in our contingent funding plan. We believe that the level of liquidity is sufficient to meet current and future funding requirements. For additional information regarding off-balance sheet risks and commitments, see Note 17 to the Consolidated Financial Statements.

We have a shelf registration on file with the Securities and Exchange Commission which allows us to sell up to $1.0 billion of debt securities, preferred stock, depository shares, common stock and warrants and which allows affiliated trusts to sell capital securities. We had $650 million of remaining authority under this shelf registration statement as of December 31, 2004.

In addition, at December 31, 2004, we also had an $110 million unsecured line of credit available to us. This line was replaced in January 2005 with a line of credit from TD with similar terms and conditions.

Capital

We are committed to managing capital for shareholder benefit and maintaining protection for depositors and creditors. At December 31, 2004 and 2003, our shareholders’ equity totaled $3.2 billion and $2.5 billion, respectively, or 11.07% and 9.53% of total assets, respectively.

The increase in shareholders’ equity in 2004 was attributable to our $304.6 million net income in 2004 and our issuance of our common stock with an aggregate value of $304.3 million in connection with acquisitions in 2004. These increases were partially offset by $135.1 million in dividends to shareholders and a $7.2 million net change in unrealized loss on securities available for sale.

In February 2002, our board authorized 8 million shares to be repurchased in the open market. We did not repurchase any shares in 2004. During the year ended December 31, 2003, we repurchased 4.5 million shares at an average price of $23.53. At December 31, 2004, a total of 2.9 million shares were available for repurchase under the existing Board authorization.

Capital guidelines issued by the Federal Reserve Board require us to maintain certain ratios. We maintain capital ratios to exceed “well capitalized” capital levels in accordance with capital guidelines approved by our board of directors. Our Tier 1 Capital, as defined by the Federal Reserve Board, was $2.1 billion or 7.58% of average assets at December 31, 2004, compared to $1.7 billion or 6.65% of average assets at December 31, 2003. We also are required to maintain capital ratios based on the level or our assets, as adjusted to reflect their perceived level of risk. Our regulatory capital ratios currently exceed all applicable requirements. See Note 13 to Consolidated Financial Statements.

The Bank is also subject to federal regulatory capital requirements. At December 31, 2004, the Bank was deemed to be “well capitalized” under the regulations of the Office of the Comptroller of Currency of the United States and in compliance with applicable capital requirements. See Note 13 to the Consolidated Financial Statements.

In 2003, we contributed $70 million to our banking subsidiary in advance of the acquisition of American Financial Holdings, Inc. (“American”), which closed on February 14, 2003 and was financed with 50% stock and 50% cash. The $70 million capital contribution from us to our subsidiary bank was required to maintain our subsidiary bank’s capital ratios above “well-capitalized” levels after the acquisition of American. When evaluating the issuance of long-term debt at the holding company level versus receiving dividends from its subsidiaries, management first considers the regulatory capital ratios of the banking subsidiary and the proforma impact of potential acquisitions on these capital ratios. Company policy is to maintain capital ratios at the bank and holding company at levels in excess of “well-

capitalized” levels — specifically a Tier 1 leverage capital ratio between 5.50% and 6.00% (compared to 5.00% needed to be considered “well-capitalized”) and total risk-based capital ratio of 10.50% (compared to 10.00% needed to be considered “well-capitalized”). Although the bank has considerable capital that it can dividend to the holding company without prior regulatory approval, its policy is to maintain capital in excess of the “well-capitalized” thresholds to support changes in the composition of its assets and growth, including by acquisition.

At December 31, 2004, we operated five affiliated trusts for the purpose of issuing to unaffiliated parties capital securities and investing the proceeds from the sale thereof in junior subordinated debentures issued by us. All of the proceeds from the issuance of the capital securities and the common securities issued by the trusts are invested in our junior subordinated debentures, which represent the sole assets of the trusts. The capital securities pay cumulative cash distributions quarterly at the same rate as the junior subordinated debentures held by the trusts. We own all of the outstanding common securities of the trusts and effectively are the guarantor of the obligations of the trusts.

Table 30 — Capital Securities

The following table provides information on each of our affiliated trusts and the outstanding capital securities of such trusts and the related junior subordinated debentures issued by us at December 31, 2004.


							Junior
	Issuance		Capital		Common		Subordinated		Stated		Maturity
Name	Date		Securities		Securities		Debentures(1)		Rate		Date

Peoples Heritage Capital Trust I		1/31/1997	$	61,775	$	3,093	$	64,868		9.06%		2/1/2027
Banknorth Capital Trust I		5/1/1997		30,000		928		30,928		10.52%		5/1/2027
Ipswich Statutory Trust I		2/22/2001		3,500		109		3,609		10.20%		2/22/2031
CCBT Statutory Trust I		7/31/2001		5,000		155		5,155		5.74%		7/31/2031
Banknorth Capital Trust II		2/22/2002		200,000		6,186		206,186		8.00%		4/1/2032

			$	300,275	$	10,471	$	310,746


(1)	Amounts include junior subordinated debentures acquired by affiliated trusts from us with the capital contributed by us in exchange for the common securities of such trusts. Junior subordinated debentures are equal to capital securities plus common securities.

At December 31, 2004, trust capital securities amounted to 14.6% of Banknorth’s Tier 1 capital. Although pursuant to FIN 46(R), the trusts which issued capital securities are no longer consolidated with Banknorth and these securities therefore are no longer considered a minority interest in consolidated subsidiary for accounting purposes, pursuant to a supervisory letter sent by the Federal Reserve Board to all bank holding companies in July 2003, Banknorth has continued to include trust preferred securities in its Tier 1 capital. On May 6, 2004, the Federal Reserve Board issued a proposed regulation which proposed to permit bank holding companies to continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative and qualitative standards. Under the proposed regulation, commencing on March 31, 2007, the aggregate amount of restricted core capital elements (which include qualifying trust preferred securities, as well as qualifying cumulative perpetual preferred stock and Class B and Class C minority interests in consolidated subsidiaries, as defined) may not exceed 25% (15% for internationally active bank holding companies) of a bank holding company’s core capital elements (which consist of qualifying common stockholders’ equity, qualifying non-cumulative preferred stock and Class A minority interest in subsidiaries, as defined), net of goodwill. This test is more restrictive than the current limit for trust preferred securities, which does not deduct goodwill prior to calculating the 25% limit or explicitly include minority interests in consolidated subsidiaries, and is likely to reduce the ability of some bank holding companies, particularly those that have completed significant purchase acquisitions, to include trust preferred securities in Tier 1 capital. In addition, the proposed rule would limit the amount of qualifying trust preferred securities and Class C minority interests in excess of the restricted core capital

limit that can be included in Tier 2 capital by providing that the amount of such elements, together with subordinated debt and limited life preferred stock, that may be included in Tier 2 capital would be limited to 50% of Tier 1 capital. The proposed rule also would provide that during the last five years prior to maturity of the underlying subordinated note or debentures, trust preferred securities must be treated as limited-life preferred stock, excluding it from Tier 1 capital and amortizing it out of Tier 2 capital at the rate of 20% per year. If the proposed capital regulation were adopted as proposed, we believe that we would continue to qualify as “well capitalized” under Federal Reserve Board regulations. There can be no assurance that the proposed capital regulation will be adopted as proposed or at all.

At December 31, 2004 and 2003, we also had $200 million of 7.625% subordinated notes due in 2011 issued by our banking subsidiary, which qualify as Tier 2 capital for regulatory purposes.

Banking regulators have also established guidelines as to the level of investments in BOLI. These guidelines are expressed in terms of a percentage of Tier 1 capital plus loan loss reserves. Our guideline (which is consistent with regulatory guidelines) is that BOLI should not exceed 25% of our Tier 1 capital plus loan loss reserves, which we monitor monthly. The ratio of BOLI to Tier 1 capital plus loan loss reserves was 22.6% at December 31, 2004 and 25.9% at December 31, 2003. We currently do not anticipate any additional purchases or sales of BOLI.

Critical Accounting Policies

We consider the following to be our critical accounting policies due to the potential impact on our results of operations and the carrying value of certain of our assets based on any changes in judgments and assumptions required to be made by us in the application of these policies.


	*~~Nonperforming Assets~~*

~~Table 18 — Five-Year Schedule of Nonperforming Assets~~

~~The following table presents a summary of nonperforming assets at the dates indicated.~~

December 31,
2003 2002 2001 2000 1999
Nonaccrual loans
Residential real estate loans $ 7,157 $ 5,781 $ 8,311 $ 9,894 $ 17,283
Commercial real estate loans 19,700 17,649 17,124 12,155 16,754
Commercial business loans and leases 24,412 32,693 40,341 32,583 17,027
Consumer loans and leases 8,493 9,194 9,470 6,329 5,951

Total nonaccrual loans 59,762 65,317 75,246 60,961 57,015
Troubled debt restructurings — — — 673 1,112

Total nonperforming loans 59,762 65,317 75,246 61,634 58,127

Other nonperforming assets:
Other real estate owned, net of related reserves 529 100 1,861 4,074 8,154
Repossessions, net of related reserves 2,812 3,536 2,016 1,424 2,911
Securities available for sale — — 2,104 — —

Total 3,341 3,636 5,981 5,498 11,065

Total nonperforming assets $ 63,103 $ 68,953 $ 81,227 $ 67,132 $ 69,192

Accruing loans 90 days or more overdue $ 4,915 $ 3,373 $ 6,227 $ 5,973 $ 12,131

Total nonperforming loans as a percentage of total loans 0.37 % 0.46 % 0.59 % 0.57 % 0.59 %
Total nonperforming assets as a percentage of total assets 0.24 % 0.29 % 0.39 % 0.37 % 0.37 %
Total nonperforming assets as a percentage of total loans and other nonperforming assets 0.39 % 0.49 % 0.64 % 0.62 % 0.70 %

We continue to focus on asset quality issues and to allocate significant resources to the key asset quality control functions of credit policy and administration and loan review. The collection, workout and asset management functions focus on the reduction of nonperforming assets. Despite the ongoing focus on asset quality and reductions of nonperforming asset levels, there can be no assurance that adverse changes in the real estate markets and economic conditions in our primary market areas will not result in higher nonperforming asset levels in the future and negatively impact our operations through higher provisions for loan losses, net loan charge-offs, decreased accrual of interest income and increased noninterest expenses as a result of the allocation of resources to the collection and workout of nonperforming assets.

due, unless secured by sufficient cash or other assets immediately convertible to cash, on nonaccrual status. At December 31, 2003, we had $4.9 million of accruing loans which were 90 days or more delinquent, as compared to $3.4 million of such loans at December 31, 2002. The $1.5 million increase was primarily due to acquisitions.

We also may place loans on nonaccrual and, therefore, nonperforming status which are currently less than 90 days past due or performing in accordance with their terms but which in our judgment are likely to present future principal and/or interest repayment problems and which thus ultimately would be classified as nonperforming.


	*~~Net Charge-offs~~*

Net charge-offs amounted to $37.3 million in 2003, as compared to $38.7 million in 2002. Net charge-offs represented 0.24% and 0.29% of average loans and leases outstanding in 2003 and 2002, respectively.

~~Table 19 — Five-Year Table of Activity in the~~ Allowance for Loan and Lease Losses

~~The following table presents net charge-offs by loan type and the activity in the allowance for loan and lease losses during the periods indicated.~~

Year Ended December 31,
2003 2002 2001 2000 1999
Allowance at the beginning of period $ 208,273 $ 189,837 $ 153,550 $ 155,048 $ 155,098
Additions due to acquisitions 19,008 12,794 31,277 — —
Charge-offs:
Residential real estate mortgages 197 (138 ) 626 1,828 3,622
Commercial real estate mortgages 577 1,290 2,267 3,566 5,076
Commercial business loans and leases 16,272 24,455 20,899 7,790 5,125
Consumer loans and leases 32,563 26,395 21,860 21,508 22,211

Total loans and leases charged off 49,609 52,002 45,652 34,692 36,034

Recoveries:
Residential real estate mortgages 64 122 241 107 626
Commercial real estate mortgages 1,761 117 222 2,371 2,527
Commercial business loans and leases 6,367 8,972 4,800 2,334 3,188
Consumer loans and leases 4,122 4,119 3,510 4,563 6,068

Total loans and leases recovered 12,314 13,330 8,773 9,375 12,409

Net charge-offs 37,295 38,672 36,879 25,317 23,625
Provision for loan and lease losses 42,301 44,314 41,889 23,819 23,575

Allowance at the end of the period $ 232,287 $ 208,273 $ 189,837 $ 153,550 $ 155,048

Year Ended December 31,
2003 2002 2001 2000 1999
Ratio of net charge-offs to average loans and leases outstanding 0.24 % 0.29 % 0.33 % 0.24 % 0.25 %
Ratio of allowance to total portfolio loans and leases at end of period 1.42 % 1.48 % 1.49 % 1.42 % 1.57 %
Ratio of allowance to nonperforming loans and leases at end of period 388.69 % 318.86 % 252.29 % 249.13 % 266.74 %
Ratio of net chargeoffs (recoveries) as a percent of outstanding average loans and leases(1)
Residential real estate mortgages 0.00 % (0.01 )% 0.02 % 0.08 % 0.12 %
Commercial real estate mortgages (0.02 )% 0.03 % 0.06 % 0.04 % 0.10 %
Commercial business loans and leases 0.31 % 0.58 % 0.69 % 0.26 % 0.11 %
Consumer loans and leases 0.64 % 0.61 % 0.54 % 0.54 % 0.58 %
Total portfolio loans and leases at end of period $ 16,345,962 $ 14,056,008 $ 12,715,330 $ 10,845,662 $ 9,854,656
Total nonperforming loans and leases at end of period 59,762 65,317 75,246 61,634 58,127
Average loans and leases outstanding (excluding loans held for sale) 15,574,078 13,182,785 11,173,723 10,449,753 9,616,914

We maintain an allowance for loan and lease losses at a level which we believe is sufficient to cover potential charge-offs on loans and leases deemed to be uncollectible based on continuous review of a variety of factors. These factors consist of the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors. The primary means of adjusting the level of this allowance is through provisions for loan and lease losses, which are established and charged to income on a quarterly basis. Although we use available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because our estimates of the potential losses in our loan and lease portfolio are susceptible to change as a result of changes in the factors noted above. Any such increases would adversely affect our results of operations. At December 31, 2004, our allowance for loan and lease losses amounted to $243.2 million, and during 2004, 2003, and 2002 our provisions for loan and lease losses amounted to $40.3 million, $42.3 million, and $44.3 million, respectively. See also “Credit Risk Management” above.

For the commercial business loans and leases and the commercial real estate loans portfolios, we formally evaluate specific commercial and commercial real estate loans rated “substandard” or worse in excess of $300 thousand. On an ongoing basis, an independent loan review department reviews classified loans to ensure the accuracy of the loan classifications. Estimated reserves for each of these credits are determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. In addition, the appraisal function reviews the reasonableness of the third party appraisals related to these loans. Provisions for losses on the remaining commercial loans are based on pools of similar loans using a combination of historical loss experience and migration analysis, which considers the probability of a loan moving from one risk rating category to another over the passage of time and qualitative adjustments.

For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months.

Using the determined mid-point of the range, management uses various quantitative and qualitative factors to determine the appropriate point above or below the range mid-point. This process is supported by objective factors including:


~~(1)~~	~~Excludes residential real estate loans held for sale~~


	*~~Potential Problem Loans~~*
	•	historical loss experience;

~~In addition to the~~• trends in delinquency and nonperforming loans discussed under “Credit Risk Management” above, we also have loans that are 30 to 89 days delinquent and still accruing. These loans amounted to $142 million and $139 million at December 31, 2003 and 2002, respectively. These loans and delinquency trends are consideredloans;• changes in ~~the evaluation of the allowance for~~product offerings or loan ~~and lease losses and the related determination of the provision for loan and lease losses.~~


	*~~Analysis and Determination of the Allowance for Loan and Lease Losses~~*terms;

The allowance for loan and lease losses amounted to $232.3 million at December 31, 2003, as compared to $208.3 million at December 31, 2002. The $24.0 million increase was due to acquisitions and the provision for loan and lease losses exceeding net charge-offs during 2003. The ratio of the allowance to total portfolio loans and leases at December 31, 2003 and 2002 was 1.42% and 1.48%, respectively. The ratio of the allowance for loan and lease losses to nonperforming loans was 389% at December 31, 2003 and 319% at December 31, 2002. Nonperforming assets amounted to $63.1 million, • changes in underwriting and/or ~~0.24% of total assets, at December 31, 2003 as compared to $69.0 million, or 0.29% of total assets, at December 31, 2002. The $5.9 million decrease~~collections policies;• changes in nonperforming assets from December 31, 2002 to December 31, 2003 was primarily attributable to a decrease in nonperforming commercial business loans and leases. Accruing loans 90 days or more past due amounted to $4.9 million at December 31, 2003, as compared to $3.4 million at December 31, 2002, an increase of $1.5 million. This increase was due primarily to acquisitions.


~~Table 20 —~~	~~Allocation of the Allowance for Loan and Lease Losses — Five-Year Schedule~~

~~The following table sets forth the allocation of the allowance for loan and lease losses at the dates indicated.~~

December 31,
2003 2002 2001 2000 1999
Percent of Percent of Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
Real estate loans $ 122,183 50.41 % $ 108,094 51.04 % $ 103,271 52.86 % $ 81,026 47.98 % $ 79,147 50.40 %
Commercial business loans and leases 70,383 20.11 % 63,940 21.12 % 58,090 19.37 % 50,486 21.29 % 49,316 19.53 %
Consumer loans and leases 39,721 29.48 % 36,239 27.84 % 28,476 27.77 % 22,038 30.73 % 26,585 30.07 %

$ 232,287 100.00 % $ 208,273 100.00 % $ 189,837 100.00 % $ 153,550 100.00 % $ 155,048 100.00 %

The allowance for loan and leases losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to income and by recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment and is determined based on management’s ongoing evaluation. As discussed under “Critical Accounting Policies,” we believe that the methods used by us in determining the allowance for loan and lease losses constitute a critical accounting policy. Although we utilize judgment in providing for losses, for the reasons discussed under “Critical Accounting Policies” and “Credit Risk Management — Nonperforming Assets,” there can be no assurance that we will not have to increase the amount of our provision for loan and lease losses in future periods. Management determined that the allowance for loan and lease losses was adequate at December 31, 2003.

~~For information about the activity and the allocation of our allowance for loan and lease losses, see~~~~Tables 19 and 20~~.

~~Asset-Liability Management~~

The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-liability management is governed by policies, goals, and objectives that are adopted and reviewed by our board of directors and monitored periodically by the Board Risk Management Committee. The board delegates responsibility for asset-liability management strategies to achieve these goals and objectives to the Asset Liability Management Committee (“ALCO”), which is comprised of members of senior management. Senior management determines the strategic directives that guide the day-to-day management of ~~our activities~~underwriting and ~~interest rate risk exposure. The ALCO also reviews~~collection departments; and ~~approves all major risk, liquidity~~• regional and capital management programs, except for product pricing. Product pricing is reviewed and approved by the Pricing Committee, which is comprised of a subset of ALCO members and the state presidents of our banking subsidiary.


	*~~Interest Rate Risk~~*

environment, bank deposits can increase, especially if the market risk premium is not sufficient to adequately compensate investors. Consequently, under such circumstances, we can have even more cash to reinvest in low yielding assets. Conversely, rising rates tend to have the opposite effect on both mortgage assets and non-maturity deposits. Higher rates make borrowers less likely to refinance existing debt, resulting in lower cash flows for us to reinvest. And if the market risk premium is sufficiently high, depositors could be enticed to take additional investment risk and move deposits from banks into riskier assets, such as equities. This in turn could result in less cash to invest or even require us to use wholesale funding market sources more actively. In the case of higher interest rates, our funding sources could reprice faster than our assets and at higher rates, thereby reducing our interest rate spread and net interest margin. The degree to which future earnings or long-term value is subject to interest rate risk depends on how closely the characteristics of our interest-earning assets match those of our interest-bearing liabilities.

In addition to directly impacting mortgage asset and deposit cash flows, interest rate changes could affect (i) the amount of loans originated and sold by us, (ii) the level and composition of deposits (iii) the ability of borrowers to repay adjustable or variable rate loans, (iv) the average maturity of loans and investments, (v) the rate of amortization of premiums paid on securities, capitalized mortgage servicing rights, deferred fees and purchase accounting adjustments (vi) the fair value of our saleable assets, the amount of unrealized gains and losses on securities available for sale per SFAS No. 115, and the resultant ability to realize gains and (vii) per SFAS Nos. 133 and 138, the fair value of derivatives carried on our balance sheet, derivative hedge effectiveness testing and the amount of ineffectiveness recognized in earnings.


	*~~Assessment and Measurement~~*

The overall objective of interest rate risk management is to deliver consistent net interest income growth and returns on equity over a wide range of possible interest rate environments. To that end, management focuses on 1) key interest rate risk metrics and assessment of Banknorth’s exposure to this risk 2) a careful review and consideration of modeling assumptions and 3) asset and liability management strategies that help attain the corporate goals and objectives adopted by our board of directors.

The primary objective of interest rate risk management is to control our measured exposure to interest rate risk both within limits and guidelines established by the ALCO and approved by our board. These limits and guidelines reflect our tolerance for interest rate risk over a wide range of both short-term and long-term measurements. In addition, we evaluate interest rate risk based on ongoing business risk measures, liquidation or run-off measures of the existing balance sheet and stress test measures. Ongoing measurements and runoff analysis provide management with information concerning day-to-day operations. Stress testing shows the impact of very extreme but lower probability events. The combination of these measures gives management a comprehensive view of possible risks to future earnings and long-term equity value. We attempt to control interest rate risk by identifying, quantifying and, where appropriate, hedging our exposure.


	*~~Net Interest Income Sensitivity~~*

Net interest income is our largest source of revenue. Net interest income sensitivity is our primary short-term measurement used to assess risk to our ongoing business. Management believes that net interest income sensitivity gives us the best perspective of how day-to-day decisions affect our interest rate risk profile. We subject 12-month net interest income to various rate movements using a simulation model for various specified interest rate scenarios. Simulations are run monthly and include scenarios where market rates are “shocked” up and down, scenarios where market rates gradually change or “ramp” up and down and scenarios where the slope of the market yield curve changes. Our base simulation assumes that rates do not change for the next 12 months. The sensitivity measurement is calculated as the percentage variance of the net interest income simulations to the base simulation results. Results for the gradual “ramps” are compared to policy guidelines and are disclosed in the interest rate risk results below.


	*~~Economic Value of Equity~~*

Economic value of equity is a theoretical long-term liquidation measure of interest rate risk. It is a useful measure because it attempts to capture all cash flow optionality on the balance sheet at a particular point in time. Using this analysis, we can compute additional interest rate measures, such as effective duration and convexity, for internal asset or liability classifications. While these measurements are an integral part of our risk management process, they are not based on on-going measurements of interest rate risk because they do not consider the effects of future business activity. For this reason, management believes that net interest income sensitivity is a more appropriate measurement when making day-to-day interest rate risk management decisions. To calculate the theoretical economic value of equity, we subtract the calculated value of liabilities from the calculated value of assets at a particular point in time, usually month end. Where observable market prices are available, market values are used. For financial assets or liabilities with no or few observable market prices, we compute a net present value of cash flows using an assigned risk premium. However, in the case of certain assets or liabilities, cash flows or risk premiums may not be known with certainty. This requires us to use material modeling assumptions.


	*~~Review of Modeling Assumptions~~*

Key assumptions related to the above measurements include interest rate movements, product pricing and customer behavior. In the case of mortgage asset cash flows, the majority of our assumptions are derived from a vendor supported prepayment model that is periodically tested using actual loan portfolio behavior. Both ALCO and the Pricing Committee carefully monitor deposit retention, pricing and product behavior.


	*~~Interest Rates~~*

The net interest income simulation and economic value of equity model use the same parallel interest rate “shocks” of 1%. We consider these scenarios to be stress tests that measure the impact of sudden and severe market rate movements on our short and long term interest rate risk measures. Another stress test periodically performed is asymmetric interest rate behavior that measures the impact of yield curve slope changes on interest rate risk measures.

Not all interest rates are modeled to move with the market. Because we control the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built into the model. Many of these non-maturity interest-bearing deposit products (e.g. interest checking, savings and money market deposits) are modeled to have only a limited sensitivity to market rate movements based on historical experience. These product rates change with only a small fraction of market rate movements and are assumed to have pricing floors. Other accounts, such as home equity lines of credit, price off the prime rate applied on a lagged basis. New commercial business and commercial real estate loans generally price off average spreads to LIBOR and the swap curve. Most new fixed rate commercial loans have standard yield maintenance language, which reduces the likelihood of prepayments in portfolios that typically have higher turnover rates due to business activity. More and more large commercial customers are opting to hedge LIBOR and prime loan rates using interest rate derivatives, including interest rate swaps, which allows us to reduce our interest rate risk. In turn, this affects the mix of new loans as more of the commercial portfolio becomes variable.


	*~~Borrower Cash Flows~~*

One of the most material assumptions relates to varying cash flows and prepayment risk. Assets that have prepayment risk include mortgage and home equity loans and lines of credit, mortgage-backed securities, collateralized mortgage obligations and mortgage servicing rights. The likelihood for a borrower to prepay usually increases when interest rates fall. Since the future prepayment behavior of borrowers is uncertain, the resulting loan cash flows cannot be determined exactly. Complicating our efforts to measure interest rate risk is the uncertainty of the maturity, repricing and/or runoff of some of our assets and liabilities.


	*~~Future Business Activity~~*

Future business activity is projected in the net interest income sensitivity analysis and includes new loan originations, deposit growth, planned investment transactions, funding actions, and non-interest income and expense projections. The basis for future business activity combines budget projections, current balance sheet and income statement run rates, as well as business forecasts to simulate balance sheet and income statement growth over the next 12 months. Because future business activity forecasts are uncertain, assumptions are more likely to impact the net interest income results. Therefore, the net interest income simulation is thought to contain more assumption risk than the economic value of equity liquidation analysis.


	*~~Asset Liability Management and Strategies~~*

We manage the interest rate risk inherent in our core banking operations using both cash based investments and wholesale funding sources, as well as interest rate derivatives. For example, the types of investments available for sale or wholesale borrowings can have widely varying interest rate risk characteristics. Either of these instruments might also contain embedded options, such as calls, caps, floors and collars. Depending on our overall risk position, these investment or funding transactions can be used to further change our overall interest rate risk profile.

Our asset-liability management policy on interest rate risk simulation specifies that if market interest rates were to shift gradually up or down 2%, estimated net interest income for the subsequent 12 months should decline by less than 5%. As indicated in the table below, the gradual 2% falling rate scenario was slightly outside policy guidelines at December 31, 2002. The ALCO voted to approve the December 31, 2002 guidelines exception because a gradual 2% decreasing rate scenario was deemed unlikely based on the level of interest rates at the time. All interest rate risk measures were within compliance guidelines at December 31, 2003. The ALCO currently is more focused on strategies that prove beneficial to income should rates rise and the yield curve flattens, as well as on the gradual decreasing 1% rate scenario.

The table below sets forth information regarding estimated changes in net interest income for the 12 months following the indicated dates, assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, because most deposit accounts have implied interest rate floors, it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest income would be more than the simulated increase in interest expense because total adjustable interest-earning assets will reprice more quickly than will total adjustable interest-bearing liabilities. These results are dependent on material assumptions such as those discussed above.

200 Basis Point 100 Basis Point 100 Basis Point
Rate Increase Rate Increase Rate Decrease
December 31, 2003 (0.26 )% 0.24 % (0.71 )%

December 31, 2002 3.40 % 2.15 % (2.64 )%

~~Derivative Instruments~~


	*~~Purpose and Benefits~~*

Derivative financial instruments are important tools that we use to manage interest rate risk. When appropriate, we use derivatives such as interest-rate swaps, interest rate floors, interest rate caps and interest rate corridor agreements and forward security sales, among other instruments.

hedged $150 million of 3.75% fixed-rate senior notes maturing on May 1, 2008, a $200 million interest rate swap at 3-month LIBOR plus 3.47% that hedged $200 million of 7.625% fixed-rate subordinated debt issued by the Bank which matures on June 15, 2011, and five interest rate swaps totaling $216.5 million with a weighted average of 1-month LIBOR plus 3.82%, which hedge $216.5 million of FHLB advances with a weighted average cost of 5.47% and which mature throughout 2005.

During 2003, higher mortgage rates and record levels of residential mortgage loan originations contributed to a reduction in residential mortgages held for sale. The following table summarizes the average balances of residential mortgage loans held for sale and related hedge positions during the periods indicated.

Year Ended December 31,
2003 2002
Residential mortgage loans held for sale $ 79,878 $ 85,337
Rate-locked loan commitments 88,492 94,397
Forward sales contracts 155,698 158,092
Purchased mortgage-backed security options 1,667 13,333

Interest rate derivatives, primarily interest rate swaps, offered to commercial borrowers through our hedging program are designated as speculative under SFAS 133. However, we believe that our exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an identical dealer transaction. The commercial customer hedging program allows us to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. In 2003, we recorded a total notional amount of $273 million of interest rate swaps with commercial borrowers and an equal notional amount of dealer transactions. It is anticipated that over time, customer interest rate derivatives will reduce the interest rate risk inherent in our longer-term, fixed-rate commercial business and real estate loans. The customer-related positions summarized in the table below includes both the customer and offsetting dealer transactions.


	*~~Foreign Exchange or Market Risk~~*

Foreign currency forward contracts are contracts that we enter into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these customers, we set aside a percentage of the customer’s available line of credit until the foreign currency contract is settled. Foreign exchange and trade services are provided under a private label arrangement with a correspondent bank. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting our exposure to the replacement value of the contracts rather than the notional principal or contract amounts.

~~Table 21 — Derivative Positions~~

~~The following table summarizes our derivative positions at December 31, 2003.~~

~~Asset-Liability Management Positions~~

Notional Amount Maturing
Fair
December 31, 2003 2004 2005 2006 2007 Thereafter Total Value
Interest rate contracts
Pay variable, receive fixed $ — $ 216,500 $ — $ — $ 350,000 $ 566,500 $ (1,896 )
Forward commitments to sell loans 61,000 — — — — 61,000 (425 )

~~Customer-related Positions~~

Notional Amount Maturing
Fair
December 31, 2003 2004 2005 2006 2007 Thereafter Total Value
Interest rate contracts
Receive fixed, pay variable $ 23,225 $ — $ — $ 13,454 $ 288,344 $ 325,023 $ 7,357
Pay fixed, receive variable 23,225 — — 13,454 288,344 325,023 (7,357 )
Foreign currency forward contracts
Forward contracts with customers 15,213 8,225 — — — 23,438 3,132
Forward contracts with dealers 15,213 8,225 — — — 23,438 (3,132 )
Rate-locked loan commitments 30,779 — — — — 30,779 188


	*~~2003 Asset Liability Management Actions~~*

The most significant factors affecting market risk exposure of net interest income during 2003 were (i) changes in the shape of the U.S. Government securities and interest rate swap yield curves, (ii) changes in the composition of the investment portfolio, including a “deleveraging strategy” completed in the second quarter whereby approximately $901 million in investments yielding about 5.05% were sold, (iii) changes in the composition of mortgage assets and prepayment speeds of mortgage assets, (iv) reduction of deposit interest expenses and (v) changes in the wholesale funding structure, including $853 million of borrowings costing about 4.49% related to the “deleveraging strategy”.

Interest rates in the fourth quarter of 2003 fluctuated, with 10-year Treasury yields rising over 50 basis points and ending the fourth quarter approximately 32 basis points higher. Mortgage rate changes during 2003 resulted in significant mortgage loan activity for 2003. With higher rates in the fourth quarter, projected mortgage loan prepayments are forecasted to slow considerably in 2004. Because of historically low rates in early to mid 2003 and increased loan cash inflows, effective duration estimates for loans and mortgage-backed securities were lower than normal, thus increasing asset sensitivity during the first half of 2003. Further rises in interest rates since mid-2003 reduced simulated asset sensitivity. Asset and liability management actions implemented during 2003 were done to further reduce simulated asset sensitivity. These actions included the purchase of securities less susceptible to prepayments, replacing approximately $700 million of existing borrowings, some of which were callable, hedging $200 million of fixed rate subordinated debt, $150 million of fixed rate senior notes and $216.5 million of FHLB fixed borrowings with interest rate swaps, and the deleveraging strategy discussed above. The above net interest income table reflects the net impact of these changes. We remain asset sensitive, albeit to a lesser degree than mid-2003. Without further actions, net interest income is projected to increase modestly if short and long interest rates move symmetrically higher.

~~Liquidity~~

cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. Liquidity management is viewed from a long-term and a short-term perspective, as well as from an asset and liability perspective. We monitor liquidity through a regular review of loan and deposit maturities, yield and rate scenarios and loan and deposit forecasts to minimize funding risk. Other factors affecting our ability to meet liquidity needs include variations in the markets served and general economic conditions. We have various funding sources available to us on a parent-only basis as well as through our banking subsidiary, as outlined below.

On a parent-only basis, our commitments and debt service requirements at December 31, 2003 consisted primarily of $295.3 million of junior subordinated debentures and $150 million of 3.75% senior notes due May 1, 2008. See “Capital” and Notes 13 and 22 to the Consolidated Financial Statements. The principal sources of funds for us to meet parent-only obligations are dividends from our banking subsidiary, which are subject to regulatory limitations, income from investment securities and borrowings from public and private sources, including draws on our $110 million unsecured line of credit. At December 31, 2003, our subsidiary bank had $491.8 million available for dividends that could be paid without prior regulatory approval. In addition, the parent company had $253 million in cash or cash equivalents at December 31, 2003. See also “Financial Condition — Other Funding Sources” above. For information on restrictions on the payment of dividends by our banking subsidiary, see Note 14 to the Consolidated Financial Statements.


	*~~Banking Subsidiary~~*

We continually monitor and forecast our liquidity position. There are several interdependent methods used by us for this purpose, including daily review of fed funds positions, monthly review of balance sheet changes, monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans.

As of December 31, 2003, the Bank had in the aggregate $3.9 billion of “immediately accessible liquidity,” defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represented 22% of deposits, as compared to a policy minimum of 10% of deposits.

Also as of December 31, 2003, the Bank had in the aggregate “potentially volatile funds” of $2.4 billion. These are funds that might flow out of the Bank over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources.

~~As of December 31, 2003, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 165%, compared to a policy minimum of 100%.~~

~~For additional information regarding off-balance sheet risks and commitments, see Note 17 to the Consolidated Financial Statements.~~

We have a shelf registration on file with the Securities and Exchange Commission which allows us to sell up to $1.0 billion of debt securities, preferred stock, depository shares, common stock and warrants and which allows subsidiary trusts to sell capital securities. We had $650 million of remaining authority under this shelf registration statement as of December 31, 2003.

~~In addition, at December 31, 2003, we also had 100% of our $110 million unsecured line of credit available to us.~~

~~Capital~~

We are committed to managing capital for shareholder benefit and maintaining protection for depositors and creditors. At December 31, 2003 and 2002, our shareholders’ equity totaled $2.5 billion and $2.1 billion, respectively, or 9.53% and 8.81% of total assets, respectively.

The increase in shareholders’ equity in 2003 was attributable to our $350.8 million net income in 2003 and our issuance of our common stock with an aggregate value of $382.8 million in connection with acquisitions in 2003. These increases were partially offset by a $110.1 million net unrealized loss on securities available for sale, $105.1 million of stock repurchases (4,465,900 shares) and $111.9 million in dividends to shareholders.

In February 2002, our board authorized 8 million shares to be repurchased in the open market. During the year ended December 31, 2003, we repurchased 4.5 million shares at an average price of $23.53. As of December 31, 2003, a total of 2.9 million shares were available for repurchase under existing Board authorizations.

Capital guidelines issued by the Federal Reserve Board require us to maintain certain ratios. We maintain capital ratios to exceed “well capitalized” capital levels in accordance with capital guidelines approved by our board of directors. Our Tier 1 Capital, as defined by the Federal Reserve Board, was $1.7 billion or 6.65% of average assets at December 31, 2003, compared to $1.6 billion or 7.13% of average assets at December 31, 2002. We also are required to maintain capital ratios based on the level of our assets, as adjusted to reflect their perceived level of risk. Our regulatory capital ratios currently exceed all applicable requirements. See Note 13 to the Consolidated Financial Statements.

The Bank is also subject to federal regulatory capital requirements. At December 31, 2003, the Bank was deemed to be “well capitalized” under the regulations of the Office of the Comptroller of Currency of the United States and in compliance with applicable capital requirements. See Note 13 to the Consolidated Financial Statements.

~~At December 31, 2003, we had outstanding $295.3 million of capital securities issued by subsidiary trusts, which are classified as long-term debt by us in our consolidated balance sheet.~~

~~The following table summarizes our capital securities at December 31, 2003.~~

Issuance Stated Maturity
Name Date Amount Rate Date
Peoples Heritage Capital Trust I 1/31/1997 $ 61,775 9.06 % 2/1/2027
Banknorth Capital Trust I 5/1/1997 30,000 10.52 % 5/1/2027
Ipswich Statutory Trust I 2/22/2001 3,500 10.20 % 2/22/2031
Banknorth Capital Trust II 2/22/2002 200,000 8.00 % 4/1/2032

$ 295,275

The regulatory capital treatment of capital securities issued by subsidiary trusts of bank holding companies is currently under review by the banking regulators in light of the issuance by the Financial Accounting Standards Board of Interpretation No. 46R, Consolidation of Variable Interest Entities — An

Interpretation of ARB No. 51 (“FIN 46”). See Note 2 to the Consolidated Financial Statements. Our capital securities are currently included in the Tier 1 capital of Banknorth and, at December 31, 2003, amounted to 17.8% of its Tier 1 capital. Depending on the future determination of banking regulators, capital securities issued by certain subsidiary trusts may no longer qualify for Tier 1 capital treatment, but instead may qualify for Tier 2 capital treatment. Outstanding capital securities may or may not be grandfathered by the Federal Reserve Board for treatment as Tier 1 capital for regulatory purposes. On July 2, 2003, the Federal Reserve Board issued a Supervision and Regulation Letter requiring that bank holding companies continue to follow the current instructions for reporting capital securities in their regulatory reports. The effect of the letter is that we will continue to report our capital securities in Tier 1 capital until further notice from the Federal Reserve Board. As noted above, at December 31, 2003, we were classified as “well capitalized” for regulatory purposes, the highest classification. We believe that our classification would have remained “well-capitalized” were the capital securities issued by subsidiary trusts included in our Tier 2 capital and not in Tier 1 capital. If our trust capital securities were no longer allowed to be included in Tier 1 capital as a result of accounting and regulatory developments, we would be permitted to redeem the capital securities without penalty. If capital securities issued by subsidiary trusts were not granted Tier 2 status, we believe that we would remain in compliance with existing minimum capital requirements.

~~At December 31, 2003 and 2002, we also had $200 million of 7.625% subordinated notes due in 2011 issued by our banking subsidiary, which qualify as Tier 2 capital for regulatory purposes.~~

Banking regulators have also established guidelines as to the level of investments in BOLI. These guidelines are expressed in terms of a percentage of Tier 1 capital plus loan loss reserves. Our guideline (which is consistent with regulatory guidelines) is that BOLI should not exceed 25% of our Tier 1 capital plus loan loss reserves, which we monitor monthly. The ratio of BOLI to Tier 1 capital plus loan loss reserves was 25.9% at December 31, 2003 and 21.5% at December 31, 2002. This increase was the result of the $85.6 million of BOLI acquired in the merger with American on February 14, 2003. We currently do not anticipate any additional purchases or sales of BOLI.

~~Critical Accounting Policies~~


	*~~Allowance for Loan and Lease Losses~~*

We maintain an allowance for loan and lease losses at a level which we believe is sufficient to cover potential charge-offs on loans and leases deemed to be uncollectible based on continuous review of a variety of factors. These factors consist of the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors. The primary means of adjusting the level of this allowance is through provisions for loan and lease losses, which are established and charged to income on a quarterly basis. Although we use available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because our estimates of the potential losses in our loan and lease portfolio are susceptible to change as a result of changes in the factors noted above. Any such increases would adversely affect our results of operations. At December 31, 2003, our allowance for loan and lease losses amounted to $232.3 million, and during 2003, 2002 and 2001 our provisions for loan and lease losses amounted to $42.3 million, $44.3 million and $41.9 million, respectively. See also “Credit Risk Management” section.

For the commercial business loans and leases and the commercial real estate loans portfolios, we evaluate specific loan status reports on certain loans rated “substandard” or worse in excess of a specified dollar amount. On an ongoing basis, an independent loan review department reviews classified loans to ensure the accuracy of the loan classifications. Estimated reserves for each of these credits are determined

by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. In addition, the appraisal function reviews the reasonableness of the third party appraisals related to these loans. Provisions for losses on the remaining commercial loans are based on pools of similar loans using a combination of historical loss experience and migration analysis, which considers the probability of a loan moving from one risk rating category to another over the passage of time and qualitative adjustments.

Our Board Risk Management Committee is responsible for the review and approval of the allowance for loan and lease losses as well as policies and procedures surrounding the calculation of the allowance. We continuously monitor qualitative and quantitative trends in the loan portfolio, including changes in the levels of past due, criticized and nonperforming loans. As a result, our historical experience has provided for an adequate allowance for loan and lease losses.


	*~~Accounting for Acquisitions and Review of Goodwill and Other Intangible Assets~~*

In connection with acquisitions of other companies, we generally record as assets on our financial statements both goodwill and identifiable intangible assets such as core deposit intangibles, non-compete agreements and customer lists. Due to a change in an accounting standard, since January 1, 2002 we no longer amortize the amount of our goodwill through a charge to expense over the period of its expected life. Instead, we regularly evaluate whether the carrying value of our goodwill has become impaired, in which case we reduce its carrying value through a charge to our earnings. Goodwill is evaluated for impairment at the reporting unit level, and there is goodwill recorded in the following reporting units: Community Banking, Insurance Brokerage and Investment Management. Core deposit and other identifiable intangible assets are amortized to expense over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The valuation techniques used by us to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and ~~other factors. Any changes in the estimates which we use to determine the carrying value~~trends.

Accounting for Acquisitions and Review of ~~our goodwill~~Goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives would adversely affect our results of operations. At December 31, 2003, our goodwill and identifiable intangible assets amounted to $1.1 billion and $36.4 million, respectively, and during 2003, 2002 and 2001 our amortization expense amounted to $8.9 million, $6.5 million and $22.1 million, respectively (which reflects our cessation of the amortization of goodwill in 2002). There was no impairment recorded in 2003 or 2002.
Other Intangible Assets
      In connection with acquisitions of other companies, we generally record as assets on our financial statements both goodwill and identifiable intangible assets such as core deposits intangibles, non-compete agreements and customer lists. Due to a change in an accounting standard, since January 1, 2002 we no longer amortize the amount of our goodwill through a charge to expense over the period of its expected life. Instead, we regularly evaluate whether the carrying value of our goodwill has become impaired, in which case we reduce its carrying value through a charge to our earnings. Goodwill is evaluated for impairment at the reporting unit level, and there is goodwill recorded in the following reporting units: Community Banking, Insurance Agency and Wealth Management. Core deposit and other identifiable intangible assets are amortized to expense over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The valuation techniques used by us to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Any change in the estimates which we use to determine the carrying value of our goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives would adversely affect our results of operations. At December 31, 2004, our goodwill and identifiable intangible assets amounted to $1.4 billion and $50.4 million, respectively, and during 2004, 2003, and 2002 our amortization expense amounted to $8.6 million, $8.9 million, and $6.5 million, respectively. There was no impairment recorded in 2004, 2003 or 2002.
Accounting for Pension Plans
      We use a December 31 measurement date to determine our pension expense and related financial disclosure information. In accordance with SFAS No. 87, we set the discount rate for our retirement plans by reference to investment grade bond yields. We use Moody’s published AA yield for long-term corporate bonds as of December 31st as an index, and our discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.01% for December 2003 to 5.66% for December 2004. Similarly, we evaluate the expected long-term rate of return on the assets held in our defined benefit pension plan based on market and economic conditions, the plan’s asset allocation and other factors. As a consequence of our most recent annual review, we reduced the discount rate for all of our employee benefit plans from 6.25% as of December 31, 2003 to 5.75% as of December 31, 2004. Our expected rate of return on our pension plan assets was 8.5% for 2004 and is the same for 2005.
      Pension expense is sensitive to changes in the expected return on assets. For example, adjusting the expected rate of return by 25 basis points (while holding other assumptions constant) would increase or decrease the forecasted 2005 expense for our defined benefit plan by approximately $650 thousand.
53
      Pension expense is also sensitive to changes in the discount rate. For example, adjusting the discount rate by 25 basis points (while holding other assumptions constant) would increase or decrease the forecasted 2005 expense for our defined benefit plan by approximately $1.6 million.
      As with the computations on pension expense, cash contribution requirements to the pension plan are sensitive to changes in the assumed discount rate and the assumed rate of return on plan assets. We have traditionally contributed the maximum tax-deductible amount to our pension plan each year.
Accrued Income Taxes
      We estimate income taxes payable based on the amount we expect to owe various tax authorities. Taxes are discussed in more detail in Note 9 to the Consolidated Financial Statements. Accrued income taxes represent the net estimated amount due to or to be received from taxing authorities. In estimating accrued income taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. We also rely on tax opinions, recent state audits and historical experience. Although we use available information to record accrued income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws influencing our overall tax position.
Accounting Changes
      For information on the impact of new accounting standards, see Note 2 to the Consolidated Financial Statements.
Forward Looking Statements
      Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of federal securities laws. See “Forward Looking Statements” at the beginning of this report.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
      The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset Liability Management” in Item 7 hereof is incorporated herein by reference.
54
Item 8. ~~Accounting for Pension Plans~~
     We use a December 31 measurement date to determine our pension expense and related financial disclosure information. In accordance with SFAS No. 87, we set the discount rate for our retirement plans by reference to investment grade bond yields. We use Moody’s published AA yield for long-term corporate bonds as of December 31st as an index, and our discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.63% for December 2002 to 6.01% for December 2003. Similarly, we evaluate the expected long-term rate of return on the assets held in our defined benefit pension plan based on market and economic conditions, the plan’s asset allocation and other factors. As a consequence of our most recent annual review, we reduced the discount rate for all of our employee benefit plans from 6.75% as of December 31, 2002 to 6.25% as of December 31, 2003. Our expected rate of return on our pension plan assets was 8.5% for 2003 and is the same for 2004.
49
     Pension expense is sensitive to changes in the expected return on assets. For example, adjusting the expected rate of return by 25 basis points (while holding other assumptions constant) would increase or decrease the forecasted 2004 expense for the our defined benefit plan by approximately $600,000.
     Pension expense is also sensitive to changes in the discount rate. For example, adjusting the discount rate by 25 basis points (while holding other assumptions constant) would increase or decrease the forecasted 2004 expense for our defined benefit plan by approximately $1.5 million.
As with the computations on pension expense, cash contribution requirements to the pension plan are sensitive to changes in the assumed discount rate and the assumed rate of return on plan assets. We have traditionally contributed the maximum tax-deductible amount to the pension plan each year, and we do not anticipate that any increases in contribution requirements generated by recent poor stock market performance will have a material impact on future cash flows.
~~Accrued Income Taxes~~
     We estimate income taxes payable based on the amount we expect to owe various tax authorities. Taxes are discussed in more detail in Note 9 of the consolidated financial statements. Accrued income taxes represent the net estimated amount due to or to be received from taxing authorities. In estimating accrued income taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. We also rely on tax opinions, recent state audits and historical experience. Although we use available information to record accrued income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws influencing our overall tax position.
~~Accounting Changes~~
     ~~For information on the impact of new accounting standards, see Note 2 to the Consolidated Financial Statements.~~
~~Forward Looking Statements~~
Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of federal securities laws. See “Forward Looking Statements” at the beginning of this report.
~~Item 7A.~~     ~~Quantitative and Qualitative Disclosures About Market Risk~~
     The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset Liability Management” in Item 7 hereof is incorporated herein by reference.
50
~~Item 8.~~      ~~Financial Statements and Supplementary Data~~
~~BANKNORTH GROUP, INC.~~
~~CONSOLIDATED BALANCE SHEETS~~

December 31,
2003 2002
Assets

Cash and due from banks $ 669,686 $ 690,250
Federal funds sold and other short-term investments 4,645 79,753
Securities available for sale, at market value 7,122,992 6,731,467
Securities held to maturity, market value $124,344 in 2003 and $221,571 in 2002 124,240 216,409
Loans held for sale, market value $42,801 in 2003 and $135,799 in 2002 41,696 128,622
Loans and leases:
Residential real estate mortgages 2,710,483 2,382,197
Commercial real estate mortgages 5,528,862 4,792,049
Commercial business loans and leases 3,287,094 2,968,474
Consumer loans and leases 4,819,523 3,913,288

Total loans and leases 16,345,962 14,056,008
Less: Allowance for loan and lease losses 232,287 208,273

Net loans and leases 16,113,675 13,847,735

Premises and equipment, net 264,818 271,677
Goodwill 1,126,639 660,684
Identifiable intangible assets 36,415 34,474
Bank-owned life insurance 488,756 380,405
Other assets 460,173 377,465

Total assets $ 26,453,735 $ 23,418,941

Liabilities and Shareholders’ Equity

Deposits:
Savings accounts $ 2,460,522 $ 1,940,195
Money market access and NOW accounts 7,130,534 6,091,429
Certificates of deposit (including certificates of $100 or more of $998,546 in 2003 and $1,090,731 in 2002) 4,733,104 4,658,778
Noninterest-bearing deposits 3,577,025 2,974,199

Total deposits 17,901,185 15,664,601
Short-term borrowings 1,522,297 1,276,467
Long-term debt 4,360,567 4,156,114
Other liabilities 149,167 258,274

Total liabilities 23,933,216 21,355,456

Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $0.01; 5,000,000 shares authorized, none issued — —
Common stock, par value $0.01; 400,000,000 and 200,000,000 shares authorized, 182,292,973 issued in 2003 and 168,892,284 issued in 2002 1,823 1,689
Paid-in capital 1,435,005 1,059,778
Retained earnings 1,508,292 1,269,422
Treasury stock at cost (20,105,254 shares in 2003 and 18,313,517 shares in 2002) (430,608 ) (382,350 )
Accumulated other comprehensive income 6,007 114,946

Total shareholders’ equity 2,520,519 2,063,485

Total liabilities and shareholders’ equity $ 26,453,735 $ 23,418,941

~~See accompanying notes to Consolidated Financial Statements.~~
51
~~BANKNORTH GROUP, INC.~~
~~CONSOLIDATED STATEMENTS OF INCOME~~

Year Ended December 31,
2003 2002 2001
Interest and dividend income:
Interest and fees on loans and leases $ 880,185 $ 882,190 $ 892,197
Interest and dividends on securities 312,784 352,927 371,592

Total interest and dividend income 1,192,969 1,235,117 1,263,789

Interest expense:
Interest on deposits 188,836 244,648 363,974
Interest on borrowed funds 163,302 193,952 219,925

Total interest expense 352,138 438,600 583,899

Net interest income 840,831 796,517 679,890
Provision for loan and lease losses 42,301 44,314 41,889

Net interest income after provision for loan and lease losses 798,530 752,203 638,001

Noninterest income:
Deposit services 97,323 82,139 72,634
Insurance brokerage commissions 45,714 44,439 39,360
Merchant and electronic banking income, net 41,778 37,643 32,115
Trust and investment management services 31,956 32,453 34,060
Bank-owned life insurance 22,930 20,002 18,392
Investment planning services 15,692 11,572 8,286
Net securities gains 42,460 7,282 1,329
Other noninterest income 69,306 38,978 34,329

367,159 274,508 240,505

Noninterest expense:
Compensation and employee benefits 326,621 311,385 261,317
Occupancy 59,200 52,422 45,921
Equipment 47,459 40,933 34,572
Data processing 40,940 40,702 38,670
Advertising and marketing 22,000 17,239 11,907
Amortization of goodwill — — 11,061
Amortization of identifiable intangible assets 8,946 6,492 11,023
Merger and consolidation costs 8,104 14,691 7,614
Prepayment penalties on borrowings 30,490 — 5,995
Write-off of branch automation project — 6,170 —
Other noninterest expense 97,510 89,358 87,237

641,270 579,392 515,317

Income before income tax expense 524,419 447,319 363,189
Applicable income tax expense 173,660 148,681 124,104

Net income before cumulative effect of change in accounting principle 350,759 298,638 239,085
Cumulative effect of change in accounting principle, net of tax — — (290 )

Net income $ 350,759 $ 298,638 $ 238,795

Basic earnings per share:
Net income before cumulative effect of change in accounting principle $ 2.18 $ 2.01 $ 1.70
Cumulative effect of change in accounting principle, net of tax — — —

Net income $ 2.18 $ 2.01 $ 1.70

Diluted earnings per share:
Net income before cumulative effect of change in accounting principle $ 2.15 $ 1.99 $ 1.68
Cumulative effect of change in accounting principle, net of tax — — —

Net income $ 2.15 $ 1.99 $ 1.68

Weighted average shares outstanding:
Basic 160,914 148,213 140,473
Diluted 163,520 149,829 141,802
~~See accompanying notes to Consolidated Financial Statements.~~
52
~~BANKNORTH GROUP, INC.~~
~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY~~

Common Unearned Accumulated Other
Shares Par Paid-in Retained Compen- Treasury Comprehensive
Outstanding Value Capital Earnings sation Stock Income (Loss) Total
Balances at December 31, 2000
141,245 $ 1,496 $ 617,234 $ 897,214 $ (1,354 ) $ (149,246 ) $ (34,487 ) $ 1,330,857
Net income — — — 238,795 — — — 238,795
Unrealized gains on securities, net of reclassification adjustment and taxes — — — — — — 74,781 74,781
Unrealized gains on cash flow hedges, net of reclassification adjustment and taxes — — — — — — 274 274

Comprehensive income 313,850

Premium on repurchase of trust preferred securities — — (71 ) — — — — (71 )
Treasury stock issued for employee benefit plans 1,772 — 297 (6,811 ) — 32,662 — 26,148
Treasury stock purchased (7,336 ) — — — — (151,546 ) — (151,546 )
Distribution of restricted stock — — (161 ) (243 ) — 601 — 197
Common stock issued for acquisitions 15,540 155 339,804 — — — — 339,959
Decrease in unearned compensation — ESOP — — 1,668 — 337 — — 2,005
Payment of fractional shares — — (7 ) — — — — (7 )
Cash dividends declared �� — — — (72,277 ) — — — (72,277 )

Balances at December 31, 2001
151,221 1,651 958,764 1,056,678 (1,017 ) (267,529 ) 40,568 1,789,115
Net income — — — 298,638 — — — 298,638
Unrealized gains on securities, net of reclassification adjustment net of tax — — — — — — 77,257 77,257
Unrealized losses on cash flow hedges, net of reclassification adjustment net of tax — — — — — — (2,054 ) (2,054 )
Minimum pension liability, net of tax — — — — — — (825 ) (825 )

Comprehensive income 373,016

Treasury stock issued for employee benefit plans 1,939 — (6,989 ) — — 37,395 — 30,406
Treasury stock purchased (6,350 ) — — — — (154,054 ) — (154,054 )
Distribution of restricted stock — — (963 ) — — 1,838 — 875
Common stock issued for acquisitions 3,769 38 102,829 — — — — 102,867
Decrease in unearned compensation — ESOP — — 6,137 — 1,017 — — 7,154
Cash dividends declared — — — (85,894 ) — — — (85,894 )

Balances at December 31, 2002
150,579 1,689 1,059,778 1,269,422 — (382,350 ) 114,946 2,063,485
Net income — — — 350,759 — — — 350,759
Unrealized losses on securities, net of reclassification adjustment net of tax — — — — — — (110,068 ) (110,068 )
Unrealized gains on cash flow hedges, net of reclassification adjustment net of tax — — — — — — 1,575 1,575
Minimum pension liability, net of tax — — — — — — (446 ) (446 )

Comprehensive income 241,820

Treasury stock issued for employee benefit plans 2,674 — (6,546 ) — — 55,223 — 48,677
Treasury stock purchased (4,466 ) — — — — (105,071 ) — (105,071 )
Distribution of restricted stock — — (896 ) — — 1,590 — 694
Common stock issued for acquisitions 13,401 134 382,669 — — — — 382,803
Cash dividends declared — — — (111,889 ) — — — (111,889 )

Balances at December 31, 2003
162,188 $ 1,823 $ 1,435,005 $ 1,508,292 $ — $ (430,608 ) $ 6,007 $ 2,520,519

~~See accompanying notes to Consolidated Financial Statements.~~
53
~~BANKNORTH GROUP, INC.~~
~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Year Ended December 31,
2003 2002 2001
Cash flows from operating activities:
Net income $ 350,759 $ 298,638 $ 238,795
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses 42,301 44,314 41,889
Depreciation of banking premises and equipment 43,368 36,360 30,248
Net amortization of premium and discounts 56,135 37,230 30,705
Write-off of branch automation project — 6,170 —
Amortization of intangible assets 8,946 6,492 22,084
Provision for deferred tax expense 26,073 12,522 6,940
ESOP expense — 7,154 2,005
Distribution of restricted stock units 694 875 197
Net (gains) realized from sales of securities (42,460 ) (9,456 ) (1,325 )
Prepayment penalties on borrowings 30,490 — 5,995
Net (gains) realized from sales of loans held for sale (12,483 ) (12,577 ) (11,066 )
Increase in cash surrender value of bank owned life insurance (22,930 ) (20,002 ) (18,392 )
Net decrease in mortgage servicing rights 1,287 5,487 23,451
Proceeds from sales of loans held for sale 923,811 863,560 911,347
Residential loans originated and purchased for sale (821,870 ) (865,068 ) (966,824 )
Net (increase) decrease in other assets 29,195 (70,583 ) 21,924
Net (decrease) increase in other liabilities (119,348 ) 63,619 (22,278 )

Net cash provided by operating activities 493,968 404,735 315,695

Cash flows from investing activities:
Proceeds from sales of securities available for sale 3,392,506 1,001,605 717,514
Proceeds from maturities and principal repayments of securities available for sale 3,066,107 2,263,728 1,779,234
Purchases of securities available for sale (6,370,761 ) (4,110,201 ) (1,905,296 )
Proceeds from maturities and principal repayments of securities held to maturity 92,169 123,214 115,924
Net (increase) in loans and leases (690,512 ) (582,280 ) (35,603 )
Proceeds from sales of loans — 104,366 39,303
Net additions to premises and equipment (20,901 ) (43,503 ) (41,759 )
Purchases of bank owned life insurance — (40,000 ) —
Proceeds from policy coverage on bank owned life insurance 182 — 3,690
Cash (paid) for acquisitions, net of cash acquired 10,903 (12,074 ) 14,877

Net cash (used) provided by investing activities (520,307 ) (1,295,145 ) 687,884

Cash flows from financing activities:
Net increase in deposits 95,039 380,379 114,042
Net increase in securities sold under repurchase agreements 818,119 729,645 583,929
Proceeds from Federal Home Loan Bank borrowings 4,804 10,092 5,737,151
Payments on Federal Home Loan Bank borrowings (1,348,638 ) (324,114 ) (6,925,917 )
Net increase (decrease) in other borrowings 75,933 (43,408 ) (29,772 )
Issuance of senior notes, net 148,693 — —
Issuance of subordinated long-term debt — — 197,982
Proceeds from issuance (repurchase) of securities of subsidiary trusts, net — 193,150 (5,090 )
Treasury stock issued for employee benefit plans 48,677 30,406 26,141
Purchase of treasury stock (105,071 ) (154,054 ) (151,546 )
Cash dividends paid to shareholders (111,889 ) (85,894 ) (72,277 )

Net cash (used) provided by financing activities (374,333 ) 736,202 (525,357 )

(Decrease) increase in cash and cash equivalents (400,672 ) (154,208 ) 478,222
Cash and cash equivalents at beginning of year 717,003 871,211 392,989

Cash and cash equivalents at end of year $ 316,331 $ 717,003 $ 871,211

In conjunction with the purchase acquisitions detailed in Note 3 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows:
Fair value of assets acquired $ 3,347,137 $ 1,693,715 $ 3,025,847
Less liabilities assumed 2,586,080 1,355,197 2,521,054
Interest paid $ 358,555 $ 434,685 $ 596,315
Income taxes paid 145,600 104,810 121,592
~~See accompanying notes to Consolidated Financial Statements.~~
54
~~BANKNORTH GROUP INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All dollar amounts expressed in thousands, except per share data)~~
1. ~~Summary of Significant Accounting Policies~~
The accounting and reporting policies of Banknorth Group, Inc. (“Banknorth”) and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. Banknorth’s principal business activity is retail and commercial banking and, to a lesser extent, trust and investment management, investment planning and insurance brokerage services, and are conducted through Banknorth’s direct and indirect subsidiaries located in Maine, New Hampshire, Massachusetts, Connecticut, Vermont and New York. Banknorth and its subsidiaries are subject to regulation of, and periodic examination by, the Office of the Comptroller of Currency and the Federal Reserve Board and the Superintendent of the Maine Bureau of Financial Regulations, among other agencies. The following is a description of the more significant accounting policies.
~~Financial Statement Presentation~~
     ~~The Consolidated~~ Financial Statements ~~include the accounts of Banknorth~~ and its subsidiaries. Banknorth’s principal operating subsidiary is Banknorth, NA (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation.
     ~~Assets held in a fiduciary capacity are not assets of Banknorth and, accordingly, are not included in the Consolidated Balance Sheets.~~

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan and lease losses, accounting for acquisitions and review of goodwill and intangible assets, accounting for pension plans and accrued income taxes.Supplementary Data

BANKNORTH GROUP, INC.

CONSOLIDATED BALANCE SHEETS


			December 31,

			2004			2003

Assets
Cash and due from banks			$	541,994		$	669,686
Federal funds sold and other short-term investments				2,312			4,645
Securities available for sale, at market value				6,905,765			7,122,992
Securities held to maturity, market value $87,507 in 2004 and $124,344 in 2003				87,013			124,240
Loans held for sale, market value $52,936 in 2004 and $42,801 in 2003				51,693			41,696
Loans and leases:
	Residential real estate mortgages			3,081,217			2,710,483
	Commercial real estate mortgages			6,249,513			5,528,862
	Commercial business loans and leases			3,928,594			3,287,094
	Consumer loans and leases			5,333,670			4,819,523

		Total loans and leases		18,592,994			16,345,962
	Less: Allowance for loan and lease losses			243,152			232,287

		Net loans and leases		18,349,842			16,113,675

Premises and equipment, net				300,120			264,818
Goodwill				1,365,780			1,126,639
Identifiable intangible assets				50,376			36,415
Bank-owned life insurance				523,129			488,756
Other assets				509,786			460,173

		Total assets	$	28,687,810		$	26,453,735

Liabilities and Shareholders’ Equity
Deposits:
	Savings accounts		$	2,546,018		$	2,460,522
	Money market and NOW accounts			7,907,513			7,130,534
	Certificates of deposit (including certificates of $100 thousand or more of $1,129,360 in 2004 and $998,546 in 2003)			4,484,370			4,733,104
	Brokered deposits			576			—
	Noninterest-bearing deposits			4,289,104			3,577,025

		Total deposits		19,227,581			17,901,185
Short-term borrowings				3,797,823			2,336,947
Long-term debt				2,192,882			3,545,917
Other liabilities				293,410			149,167

		Total liabilities		25,511,696			23,933,216

Commitments and contingencies
Shareholders’ equity:
	Preferred stock, par value $0.01; 5,000,000 shares authorized, none issued			—			—
	Common stock, par value $0.01; 400,000,000 and 200,000,000 shares authorized, 191,672,502 issued in 2004 and 182,292,973 issued in 2003			1,917			1,823
	Paid-in capital			1,763,572			1,435,005
	Retained earnings			1,677,802			1,508,292
	Treasury stock at cost (12,374,515 shares in 2004 and 20,105,254 shares in 2003)			(265,020	)		(430,608	)
	Accumulated other comprehensive (loss) income			(2,157	)		6,007

		Total shareholders’ equity		3,176,114			2,520,519

		Total liabilities and shareholders’ equity	$	28,687,810		$	26,453,735

See accompanying notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME


			Year Ended December 31,

			2004			2003		2002

Interest and dividend income:
	Interest and fees on loans and leases		$	933,833		$	880,185	$	882,190
	Interest and dividends on securities			323,172			312,784		352,927

		Total interest and dividend income		1,257,005			1,192,969		1,235,117

Interest expense:
	Interest on deposits			161,004			188,836		244,648
	Interest on borrowed funds			162,619			163,302		193,952

		Total interest expense		323,623			352,138		438,600

		Net interest income		933,382			840,831		796,517
Provision for loan and lease losses				40,340			42,301		44,314

		Net interest income after provision for loan and lease losses		893,042			798,530		752,203

Noninterest income:
	Deposit services			109,321			97,323		82,139
	Insurance agency commissions			50,311			45,714		44,439
	Merchant and electronic banking income, net			50,564			41,778		37,643
	Wealth management services			39,788			31,956		32,453
	Bank-owned life insurance			23,282			22,930		20,002
	Investment planning services			19,418			15,692		11,572
	Net securities (losses) gains			(7,701	)		42,460		7,282
	Other noninterest income			54,816			69,306		38,978

				339,799			367,159		274,508

Noninterest expense:
	Compensation and employee benefits			356,611			326,621		311,385
	Occupancy			63,892			59,200		52,422
	Equipment			48,480			47,459		40,933
	Data processing			43,141			40,940		40,702
	Advertising and marketing			25,550			22,000		17,239
	Amortization of identifiable intangible assets			8,627			8,946		6,492
	Merger and consolidation costs			49,635			8,104		14,691
	Prepayment penalties on borrowings			61,546			30,490		—
	Write-off of branch automation project			—			—		6,170
	Other noninterest expense			107,619			97,510		89,358

				765,101			641,270		579,392

Income before income tax expense				467,740			524,419		447,319
Applicable income tax expense				163,097			173,660		148,681

		Net income	$	304,643		$	350,759	$	298,638

Basic earnings per share			$	1.78		$	2.18	$	2.01
Diluted earnings per share			$	1.75		$	2.15	$	1.99
Weighted average shares outstanding:
	Basic			170,766			160,914		148,213
	Dilutive effect of stock options			3,392			2,606		1,616

	Diluted			174,158			163,520		149,829

See accompanying notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


																			Accumulated
																			Other
		Common											Unearned						Comprehensive
		Shares			Par		Paid-in			Retained			Compen-			Treasury			Income
		Outstanding			Value		Capital			Earnings			sation			Stock			(Loss)			Total

Balances at December 31, 2001			151,221		$	1,651	$	958,764		$	1,056,678		$	(1,017	)	$	(267,529	)	$	40,568		$	1,789,115
Net income			—			—		—			298,638			—			—			—			298,638
Unrealized gains on securities, net of reclassification adjustment and taxes			—			—		—			—			—			—			77,257			77,257
Unrealized losses on cash flow hedges, net of reclassification adjustment and taxes			—			—		—			—			—			—			(2,054	)		(2,054	)
Minimum pension liability, net of tax			—			—		—			—			—	��		—			(825	)		(825	)

	Comprehensive income																						373,016

Treasury stock issued for employee benefit plans			1,939			—		(6,989	)		—			—			37,395			—			30,406
Treasury stock purchased			(6,350	)		—		—			—			—			(154,054	)		—			(154,054	)
Distribution of restricted stock			—			—		(963	)		—			—			1,838			—			875
Common stock issued for acquisitions			3,769			38		102,829			—			—			—			—			102,867
Decrease in unearned compensation — ESOP			—			—		6,137			—			1,017			—			—			7,154
Cash dividends declared			—			—		—			(85,894	)		—			—			—			(85,894	)

Balances at December 31, 2002			150,579			1,689		1,059,778			1,269,422			—			(382,350	)		114,946			2,063,485
Net income			—			—		—			350,759			—			—			—			350,759
Unrealized losses on securities, net of reclassification adjustment net of tax			—			—		—			—			—			—			(110,068	)		(110,068	)
Unrealized gains on cash flow hedges, net of reclassification adjustment net of tax			—			—		—			—			—			—			1,575			1,575
Minimum pension liability, net of tax			—			—		—			—			—			—			(446	)		(446	)

	Comprehensive income																						241,820

Treasury stock issued for employee benefit plans			2,674			—		(6,546	)		—			—			55,223			—			48,677
Treasury stock purchased			(4,466	)		—		—			—			—			(105,071	)		—			(105,071	)
Distribution of restricted stock			—			—		(896	)		—			—			1,590			—			694
Common stock issued for acquisitions			13,401			134		382,669			—			—			—			—			382,803
Cash dividends declared			—			—		—			(111,889	)		—			—			—			(111,889	)

Balances at December 31, 2003			162,188			1,823		1,435,005			1,508,292			—			(430,608	)		6,007			2,520,519
Net income			—			—		—			304,643			—			—			—			304,643
Unrealized losses on securities, net of reclassification adjustment net of tax			—			—		—			—			—			—			(7,231	)		(7,231	)
Unrealized gains on cash flow hedges, net of reclassification adjustment net of tax			—			—		—			—			—			—			146			146
Minimum pension liability, net of tax			—			—		—			—			—			—			(1,079	)		(1,079	)

	Comprehensive income																						296,479

Treasury stock issued for employee benefit plans, net of tax of $40.7 million			7,729			—		24,797			—			—			164,837			—			189,634
Distribution of restricted stock			—			—		(386	)		—			—			751			—			365
Common stock issued for acquisitions			9,381			94		304,156			—			—			—			—			304,250
Cash dividends declared			—			—		—			(135,133	)		—			—			—			(135,133	)

Balances at December 31, 2004			179,298		$	1,917	$	1,763,572		$	1,677,802		$	—		$	(265,020	)	$	(2,157	)	$	3,176,114

See accompanying notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


		Year Ended December 31,

		2004			2003			2002

Cash flows from operating activities:
Net income		$	304,643		$	350,759		$	298,638
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan and lease losses		40,340			42,301			44,314
	Depreciation of banking premises and equipment		44,199			43,368			36,360
	Net amortization of premium and discounts		23,082			56,135			37,230
	Write-off of branch automation project		—			—			6,170
	Amortization of intangible assets		8,627			8,946			6,492
	Provision for deferred tax expense		16,498			26,073			12,522
	ESOP expense		—			—			7,154
	Distribution of restricted stock units		365			694			875
	Net losses (gains) realized from sales of securities and loans		6,190			(42,460	)		(9,456	)
	Prepayment penalties on borrowings		61,546			30,490			—
	Net (gains) realized from sales of loans held for sale		(3,660	)		(12,483	)		(12,577	)
	Increase in cash surrender value of bank owned life insurance		(22,188	)		(22,930	)		(20,002	)
	Net decrease in mortgage servicing rights		1,287			1,287			5,487
	Proceeds from sales of loans held for sale		512,700			923,811			863,560
	Residential loans originated and purchased for sale		(511,053	)		(821,870	)		(865,068	)
	Net change in other assets		(55,329	)		29,195			(70,583	)
	Net change in other liabilities		18,481			(119,348	)		63,619

Net cash provided by operating activities			445,728			493,968			404,735

Cash flows from investing activities:
	Proceeds from sales of securities available for sale		3,380,300			3,392,506			1,001,605
	Proceeds from maturities and principal repayments of securities available for sale		1,303,648			3,066,107			2,263,728
	Purchases of securities available for sale		(4,067,304	)		(6,370,761	)		(4,110,201	)
	Proceeds from maturities and principal repayments of securities held to maturity		37,227			92,169			123,214
	Net increase in loans and leases		(1,300,987	)		(690,512	)		(582,280	)
	Proceeds from sales of loans		37,097			—			104,366
	Net additions to premises and equipment		(47,805	)		(20,901	)		(43,503	)
	Purchases of bank owned life insurance		—			—			(40,000	)
	Proceeds from policy coverage on bank owned life insurance		1,725			182			—
	Cash (paid) for acquisitions, net of cash acquired		49,061			10,903			(12,074	)

Net cash (used in) provided by investing activities			(607,038	)		(520,307	)		(1,295,145	)

Cash flows from financing activities:
	Net increase in deposits		148,206			95,039			380,379
	Net increase in short-term borrowings		1,200,876			755,480			182,248
	Proceeds from long-term debt		1,570			885,400			1,335,642
	Payments on long-term debt		(1,633,868	)		(1,941,969	)		(952,525	)
	Treasury stock issued for employee benefit plans		189,634			48,677			30,406
	Purchase of treasury stock		—			(105,071	)		(154,054	)
	Cash dividends paid to shareholders		(135,133	)		(111,889	)		(85,894	)

Net cash (used) provided by financing activities			(228,715	)		(374,333	)		736,202

(Decrease) increase in cash and cash equivalents			(390,025	)		(400,672	)		(154,208	)
Cash and cash equivalents at beginning of year			316,331			717,003			871,211

Cash and cash equivalents at end of period		$	(73,694	)	$	316,331		$	717,003


Interest paid		$	325,614		$	358,555		$	434,685
Income taxes paid			90,298			145,600			104,810

In conjunction with the purchase acquisitions detailed in Note 3 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows:
	Fair value of assets acquired	$	1,807,186		$	3,347,137		$	1,693,715
	Less liabilities assumed		1,420,086			2,586,080			1,355,197

See accompanying notes to Consolidated Financial Statements.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts expressed in thousands, except per share data)


1.
	*~~Cash and Cash Equivalents~~*

Banknorth is required to comply with various laws and regulations of the Federal Reserve Board which require that Banknorth maintain certain amounts of cash on deposit and is restricted from investing those amounts.

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and other short-term investments with maturities less than 90 days minus federal funds purchased. Generally, federal funds are sold or purchased for one-day periods.


	*~~Securities~~*

~~Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and reflected at amortized cost.~~

Investments not classified as “held to maturity” are classified as “available for sale.” Securities available for sale consist of debt and equity securities that are available for sale in order to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are carried at market value. Changes in market value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders’ equity and comprehensive income. When a decline in market value of a security is

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

1.     Summary of Significant Accounting Policies ~~— (Continued)~~
      The accounting and reporting policies of Banknorth Group, Inc. (“Banknorth”) and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. Banknorth’s principal business activity is retail and commercial banking and, to a lesser extent, wealth management, investment planning and insurance brokerage services, and are conducted through Banknorth’s direct and indirect subsidiaries located in Maine, New Hampshire, Massachusetts, Connecticut, Vermont and New York. Banknorth and its subsidiaries are subject to regulation of, and periodic examination by, the Office of the Comptroller of Currency and the Federal Reserve Board and the Superintendent of the Maine Bureau of Financial Regulations, among other agencies. The following is a description of the more significant accounting policies.
Financial Statement Presentation
      The Consolidated Financial Statements include the accounts of Banknorth and its subsidiaries. Banknorth’s principal operating subsidiary is Banknorth, NA (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation.
      Assets held in a fiduciary capacity are not assets of Banknorth and, accordingly, are not included in the Consolidated Balance Sheets.
      In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan and lease losses, accounting for acquisitions, subsequent review of goodwill and intangible assets for impairment, accounting for pension plans and accrued income taxes.
~~considered other than temporary, generally six months~~
Cash and Cash Equivalents
      For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and other short-term investments with maturities less than 90 days minus federal funds purchased. Generally, federal funds are sold or purchased for one-day periods.
      Banknorth is required to comply with various laws and regulations of the Federal Reserve Board which require that Banknorth maintain certain amounts of cash on deposit and is restricted from investing those amounts.
Securities
      Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and reflected at amortized cost.
      Investments not classified as “held to maturity” are classified as “available for sale.” Securities available for sale consist of debt and equity securities that are available for sale in order to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are carried at market value. Changes in market value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders’ equity and comprehensive income. When a decline in market value of a security is considered other than temporary, the cost basis of the individual security is written down to market value
59
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1.     Summary of Significant Accounting Policies — (Continued)
as the new cost basis and the loss is charged to net securities gains (losses) in the consolidated statements of income as a writedown. Banknorth does not have a trading portfolio.
      Premiums and discounts are amortized and accreted over the term of the securities on a method that approximates the interest method. Gains and losses on the sale of securities are recognized at the time of the sale using the specific identification method.
Loans and Leases
      Loans are carried at the principal amounts outstanding adjusted by partial charge-offs and net deferred loan costs or fees. Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Commercial real estate and commercial business loans are considered impaired when it is probable that Banknorth will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value.
      Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield using methods that approximate the level yield method over the estimated lives of the related loans.
      Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method.
Allowance for Loan and Lease Losses
      The allowance for loan and lease losses is maintained at a level determined to be adequate by management and approved by the Board Risk Committee to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense, by recoveries on loans previously charged off, and by allowances acquired in acquisitions and reduced by charge-offs on loans and leases.
      Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors.
      For the commercial business loan and lease and the commercial real estate loan portfolios, we formally evaluate specific commercial and commercial real estate loans rated “substandard” or worse in excess of $300 thousand. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and
60
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1.     Summary of Significant Accounting Policies — (Continued)
migration analysis (which considers the probability of a loan moving from one risk rating category to another over time), transition matrix and qualitative adjustments.
      For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months.
      Using the determined mid-point of the range, management uses various quantitative and qualitative factors to determine the appropriate point above or below the range mid-point. This process is supported by objective factors including:
• Historical loss experience;
• Trends in delinquency and nonperforming loans;
• Changes in product offerings or ~~longer, the cost basis~~loan terms;
• Changes in underwriting and/or collections policies;
• Changes in management of ~~the individual security is written down to market value as the new cost basis~~underwriting and ~~the loss is charged to net securities gains (losses) in the consolidated statements of income as a writedown. Banknorth does not have a trading portfolio.~~
~~Premiums~~collection departments;
• Regional and discounts are amortized and accreted over the term of the securities on a method that approximates the interest method. Gains and losses on the sale of securities are recognized at the time of the sale using the specific identification method.
~~Loans and Leases~~
     Loans are carried at the principal amounts outstanding adjusted by partial charge-offs and net deferred loan costs or fees. Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Commercial real estate and commercial business loans are considered impaired when it is probable that Banknorth will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value.
     Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield using methods that approximate the level yield method over the estimated lives of the related loans.
~~Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method.~~
~~Allowance for Loan and Lease Losses~~
     The allowance for loan and lease losses is maintained at a level determined to be adequate by management and approved by the Board Risk Committee to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense, by recoveries on loans previously charged off, and by allowances acquired in acquisitions and reduced by charge-offs on loans and leases.
     Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors.
     For the commercial business loan and lease and the commercial real estate loan portfolios, we evaluate specific loan status reports on certain commercial and commercial real estate loans rated “substandard” or worse in excess of a specified dollar amount. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and
56
~~BANKNORTH GROUP INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~1.     Summary of Significant Accounting Policies — (Continued)~~
trends and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and migration analysis, which considers the probability of a loan moving from one risk rating category to another over the passage of time, transition matrix and qualitative adjustments.
     For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months.
Although management uses available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because estimates are susceptible to change as a result of changes innational economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Banknorth’s allowance for loan and lease losses. Such agencies may require Banknorth to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.trends.
      Although management uses available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because estimates are susceptible to change as a result of changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Banknorth’s allowance for loan and lease losses. Such agencies may require Banknorth to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Bank-Owned Life Insurance
      Bank-owned life insurance (“BOLI”) represents life insurance on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other noninterest income, and are not subject to income taxes. The cash value is included in assets. Banknorth reviews the financial strength of the insurance carrier prior to the purchase of BOLI and annually thereafter, and BOLI with any individual carrier is limited to 10% of capital plus reserves.
~~Bank Owned Life Insurance~~
Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other noninterest income, and are not subject to income taxes. The cash value is included in assets. Banknorth reviews the financial strength of the insurance carrier prior to the purchase of BOLI and annually thereafter, and BOLI with any individual carrier is limited to 10% of capital plus reserves.
~~Premises and Equipment~~

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of related assets; generally 25 to 40 years for premises and 3 to 7 years for furniture and equipment. Leasehold improvements are generally amortized over the lesser of the estimated life or the remaining term of the lease including the first renewal option.

Costs of software developed for internal use, such as those related to software licenses, programming, testing, configuration, direct materials and integration, are capitalized and included in premises and equipment. Included in the capitalized costs are those costs related to both Company personnel and third party consultants involved in the software development and installation. Once placed in service, the capitalized asset is amortized on a straight-line basis over its estimated useful life, generally three to five years. Capitalized costs of software developed for internal use are reviewed periodically for impairment.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

Significant judgment is exercised in these impairment reviews including the periodic evaluation of the cost/benefit analyses of software projects under development and the determination of the remaining useful life of completed software projects.

Goodwill and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of related assets; generally 25 to 40 years for premises and 3 to 7 years for equipment. Leasehold improvements are generally amortized over the lesser of the estimated life or the remaining term of the lease including the first renewal option.
Costs of software developed for internal use, such as those related to software licenses, programming, testing, configuration, direct materials and integration, are capitalized and included in premises and equipment. Included in the capitalized costs are those costs related to both Company personnel and third party consultants involved in the development and installation. Once placed in service, the capitalized asset is amortized on a straight-line basis over its estimated useful life, generally three to five years. Capitalized costs of software developed for internal use are reviewed periodically for impairment. Significant judgment is exercised in these impairment reviews including the periodic evaluation of the cost/benefit analyses of software projects under development and the determination of the remaining useful life of completed software projects.
Identifiable Intangible Assets
~~Goodwill and Identifiable Intangible Assets~~
The price paid over the net fair value of the acquired businesses (“goodwill”) is not amortized. Goodwill is evaluated for impairment quarterly using several fair value techniques, including market capitalization, discounted future cash flows and multiples of revenues/earnings. The valuation techniques contain estimates such as discount rate, projected future cash flows and time period in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the
57
~~BANKNORTH GROUP INC.~~

The price paid over the net fair value of the acquired businesses (“goodwill”) is not amortized. Goodwill is evaluated for impairment at least quarterly using several fair value techniques, including market capitalization, discounted future cash flows and multiples of revenues/earnings. The valuation techniques contain estimates such as discount rate, projected future cash flows and time period in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets. Goodwill is recorded and evaluated for impairment in the following reporting units: Community Banking, Insurance Brokerage and Wealth Management.

Identifiable intangible assets consists of core deposit intangibles, noncompete agreements and customer lists and are amortized over their estimated useful lives on a method that approximates the amount of economic benefits to Banknorth. They are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The ranges of useful life are shown below:

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~1. Summary of Significant Accounting Policies — (Continued)~~

determination of the amortization period for such intangible assets. Goodwill is evaluated for impairment at the reporting unit level, and there is goodwill recorded in the following reporting units: Community Banking, Insurance Brokerage and Investment Management.


~~Core deposit intangibles~~			~~7 – 10 years~~
~~Noncompete agreements~~			~~1 – 4 years~~
~~Customer lists~~			~~1 – 8 years~~


	*~~Impairment of Long-Lived Assets Other than Goodwill~~*
Core deposit intangibles		7 – 10 years

Banknorth reviews long-lived assets, including premises and equipment and other intangible assets for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. Banknorth performs undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.


	*~~Mortgage Banking and Loans Held for Sale~~*
Noncompete agreements		1 – 4 years

~~Residential mortgage loans originated for sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or~~ Customer listsestimated market value. Market value is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Forward commitments to sell residential real estate mortgages are contracts that Banknorth enters into for the purpose of reducing the market risk associated with originating loans for sale should interest rates change. Forward commitments to sell are recorded at fair value and are included with loans held for sale. Commitments to originate rate-locked loans are also accounted for at fair value and are classified in loans held for sale.

Gains and losses on sales of mortgage loans are determined using the specific identification method and recorded as mortgage sales income, a component of mortgage banking services income. The gains and losses resulting from the sales of loans with servicing retained are adjusted to recognize the present value of future servicing fee income over the estimated lives of the related loans. Residential real estate loans and the related servicing rights are sold on a flow basis.

~~Mortgage servicing rights are amortized on a method that approximates the estimated weighted average~~ life of the ~~underlying loans serviced~~list


	*Impairment of Long-Lived Assets Other than Goodwill*


	Mortgage Banking and Loans Held for others. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking services income. Banknorth’s assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted periodicallySale

Residential mortgage loans originated for sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or estimated market value. Market value is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Forward commitments to sell residential real estate mortgages are contracts that Banknorth enters into for the purpose of reducing the market risk associated with originating loans for sale should interest rates change. Forward commitments to sell are recorded at fair value and are included with loans held for sale and changes in fair value are included in other comprehensive income and are reclassified into mortgage banking income when the related transaction affects earnings. Commitments to originate rate-locked loans are also accounted for at fair value and are classified in other assets. Gains and losses related to commitments to originate rate-locked loans are included in earnings with mortgage banking income.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

Gains and losses on sales of mortgage loans are determined using the specific identification method and recorded as mortgage sales income, a component of mortgage banking services income. The gains and losses resulting from the sales of loans with servicing retained are adjusted to recognize the present value of future servicing fee income over the estimated lives of the related loans. Residential real estate loans originated for sale and the related servicing rights are generally sold on a flow basis.

Retained mortgage servicing rights are amortized on a method that approximates the estimated weighted average life of the underlying loans serviced for others. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking services income. Banknorth’s assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted quarterly to reflect current circumstances. In evaluating the realizability of the carrying values of mortgage servicing rights, Banknorth obtains third party valuations based on loan level data including note rate, type and term on the underlying loans.

Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to noninterest expense when incurred.


	*Derivative Financial Instruments*

Banknorth recognizes all derivatives on the balance sheet at fair value. On the date the derivative is entered into, Banknorth designates whether the derivative is part of a hedging relationship (cash flow or fair value hedge). Banknorth formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. Banknorth also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.

From time to time Banknorth may use certain hedging strategies which include the use of derivative financial instruments. The primary objective of Banknorth’s hedging strategies is to reduce net interest rate exposure arising from Banknorth’s asset and liability structure and mortgage banking activities. Banknorth uses forward delivery contracts to reduce interest rate risk on residential mortgage loans held for sale (which are included in loans held for sale on our balance sheet) and rate-locked loans expected to be closed and held for sale (which are included in other assets on our balance sheet). Banknorth also purchases mortgage-backed security options (which are included in other assets on our balance sheet at fair value) to modify its forward mortgage commitments. Changes in fair value of the options are included in other noninterest income.

Changes in fair value of a derivative that is highly effective and that qualifies as a cash flow hedge are recorded in other comprehensive income and are reclassified into earnings when the related forecasted transaction affects earnings, generally within 60 to 90 days. For fair value hedges that are fully effective, the gain or loss on the hedge would exactly offset the loss or gain on the hedged item attributable to the hedged risk. Any difference that does arise would be the result of hedge ineffectiveness, which is recognized in earnings. Banknorth discontinues hedge accounting when it is determined that the derivative is no longer effective in offsetting changes in the hedged risk of the hedge item, because it is unlikely that the forecasted transaction will occur, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.

Banknorth offers commercial customers interest rate swap and cap products to enable these customers to synthetically fix the interest rate on variable interest rate loans. These pay variable, receive fixed interest

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

rate swaps are offset by entering into simultaneous pay fixed, receive variable rate swaps with a third party broker/ dealer. Both of these swap products are marked to market and are included with other assets and other liabilities on our balance sheet at fair value. Changes in the fair value of the commercial interest rate swaps are included in net interest income.

Banknorth has also entered into interest rate swap agreements in order to synthetically convert certain fixed-rate debt to variable-rate debt tied to 1-month or 3-month LIBOR. These swaps are accounted for as fair value hedges and included with long-term debt on our balance sheet. Changes in the fair value of the swap agreements are included in net interest income.

Foreign exchange rate contracts are contracts and options that Banknorth enters into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these customers, Banknorth generally sets aside a percentage of their available line of credit until the foreign currency contract is settled. Generally, Banknorth enters into foreign exchange rate contracts with approved reputable dealers. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting Banknorth’s exposure to the replacement value of the contracts rather than the notional principal or contract amounts. The foreign exchange contracts outstanding at December 31, 2004 all mature within two years. The foreign exchange rate contracts with customers and dealers are carried at fair value in other assets and other liabilities. The changes in the fair value of the foreign exchange rate contracts and the associated fees are included in other noninterest income.

Pension, 401(k), and ~~term on the underlying loans.~~
58
~~BANKNORTH GROUP INC.~~Other Employee Benefit Plans
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~1. Summary of Significant Accounting Policies — (Continued)~~
Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to noninterest expense when incurred.

Banknorth has a qualified non-contributory defined benefit pension plan that covers most employees. The benefits are based on years of service and the employee’s career average earnings. Banknorth has historically made cash contributions to the defined benefit pension plan for the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.

In addition to the qualified plan, Banknorth has adopted supplemental retirement plans for certain key officers. These plans, which are unfunded and nonqualified, were designed to offset the impact of changes in the pension plans that limit the benefits for highly-paid employees under qualified pension plans.

Banknorth and its subsidiaries sponsor limited post-retirement benefit programs which provide medical coverage and life insurance benefits to a closed group of employees and directors who meet minimum age and service requirements. Banknorth and its subsidiaries recognize costs related to post-retirement benefits under the accrual method, which recognizes costs over the employee’s period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty-year period beginning January 1, 1993.

Banknorth uses a December 31 measurement date to determine its pension expense and related financial disclosure information. In accordance with SFAS No. 87, the discount rate is set for the retirement plans by reference to investment grade bond yields. Banknorth uses Moody’s published AA yield for long-term corporate bonds for the month of December as an index, and the discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.01% for December 2003 to 5.66% for December 2004. Similarly, we evaluated the expected long-term rate of return on the assets held in our defined benefit pension plan based on market and economic conditions, the Plan’s asset allocation and other factors. As a consequence of the most recent annual review, the discount rate for all of our employee benefit plans was reduced from 6.25% as of December 31, 2003 to 5.75% as of December 31, 2004 and the

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

expected long-term rate of return on the pension plan assets was 8.5% for 2004 and will be the same for 2005. Pension expense is very sensitive to changes in the discount rate and the expected return on assets. Continued volatility in pension expense is expected as assumed investment returns vary from actual.

In December 2003, the Medicare Prescription Drugs, Improvement and Modernization Act (“the Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-2, “Accounting and Disclosure Requirement Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”) we have determined that the benefits we provide are at least actuarially equivalent to Medicare Part D. The effects of the federal subsidy will result in an actuarial gain of approximately $1.7 million. The gain will not have a material effect on our net periodic postretirement cost or on our accumulated postretirement benefit obligation. Therefore, we will incorporate the effects of the Act at the next measurement date, which is January 2005. As a result, we have not reflected the impact of FSP 106-2 in our net periodic postretirement cost or in our accumulated postretirement benefit obligation as of December 31, 2004 but will begin to amortize the benefit of the Act prospectively starting January 1, 2005 over a period of approximately 10 years.

Banknorth maintains Section 401(k) savings plans for substantially all of its employees. Employees are eligible to participate in the 401(k) Plan on the first day of the month following their date of hire. Under the plans, Banknorth makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee’s annual salary. The plans allow for supplementary profit sharing contributions by Banknorth, at its discretion, for the benefit of participating employees.


	*Stock Compensation Plans*

Statement of Financial Accounting Standards SFAS No. 123, “Accounting for Stock-Based Compensation” encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the underlying stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock upon exercise of the stock option. Banknorth has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted and the effects of the Employee Stock Purchase Plan. Had Banknorth determined cost based on the fair value at the grant date for its stock options and expense related to the

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

employee stock purchase plan under SFAS No. 123, its net income and earnings per share data would have been reduced to the pro forma amounts indicated as follows:


				Year Ended December 31,

				2004			2003			2002

Net Income, as reported				$	304,643		$	350,759		$	298,638
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects					(16,089	)		(12,723	)		(8,354	)

Proforma net income				$	288,554		$	338,036		$	290,284

Earnings per share
	Basic — As reported			$	1.78		$	2.18		$	2.01
		Proforma		$	1.69		$	2.10		$	1.96
	Diluted — As reported			$	1.75		$	2.15		$	1.99
			Proforma	$	1.67		$	2.08		$	1.94


	*~~Derivative Financial Instruments~~*

Banknorth recognizes all derivatives on the balance sheet at fair value. On the date the derivative is entered into, Banknorth designates whether the derivative is part of a hedging relationship (cash flow or fair value hedge). Banknorth formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. Banknorth also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items.

From time to time Banknorth may use certain hedging strategies which include the use of derivative financial instruments. The primary objective of Banknorth’s hedging strategies is to reduce net interest rate exposure arising from Banknorth’s asset and liability structure and mortgage banking activities. Banknorth uses forward delivery contracts to reduce interest rate risk on closed residential mortgage loans held for sale and rate-locked loans expected to be closed and held for sale. Banknorth also purchases mortgage-backed security options to modify its forward mortgage commitments. Changes in fair value of the options are included in earnings.

In 2002, Banknorth began offering commercial customers interest rate swap and cap products to enable these customers to synthetically fix the interest rate on variable interest rate loans. These pay variable, receive fixed interest rate swaps on our books are offset by entering into simultaneous pay fixed, receive variable rate swaps with a third party broker/dealer. Both of these swap products are marked to market and are carried on our balance sheet at fair value.

Banknorth also enters into interest rate swap agreements in order to synthetically convert its fixed-rate debt to variable-rate debt tied to 1-month or 3-month LIBOR. These swaps are accounted for as fair value hedges.

Foreign currency forward contracts are contracts that Banknorth enters into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these customers, Banknorth generally sets aside a percentage of their available line of credit until the foreign currency contract is settled. Generally, Banknorth enters into forward foreign contracts with approved reputable dealers. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting Banknorth’s exposure to the replacement value of the contracts rather than the notional principal or contract amounts. The foreign exchange contracts outstanding at December 31, 2003 all mature within two years. The foreign currency forward contracts are carried on our balance sheet at fair value.

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~1. Summary of Significant Accounting Policies — (Continued)~~


	*~~Pension, 401(k), and Other Employee Benefit Plans~~*

Banknorth has non-contributory defined benefit pension plans that cover most employees. The benefits are based on years of service and the employee’s career average earnings. Banknorth has historically made cash contributions to the defined benefit pension plan for the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.

Banknorth uses a December 31 measurement date to determine its pension expense and related financial disclosure information. In accordance with SFAS No. 87, the discount rate is set for the retirement plans by reference to investment grade bond yields. Banknorth uses Moody’s published AA yield for long-term corporate bonds for the month of December as an index, and the discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.63% for December 2002 to 6.01% for December 2003. Similarly, we evaluated the expected long-term rate of return on the assets held in our defined benefit pension plan based on market and economic conditions, the Plan’s asset allocation and other factors. As a consequence of the most recent annual review, the discount rate for all of our employee benefit plans was reduced from 6.75% as of December 31, 2002 to 6.25% as of December 31, 2003 and the expected long-term rate of return on the pension plan assets was 8.5% for 2003 and will be the same for 2004. Pension expense is very sensitive to changes in the discount rate and the expected return on assets. Continued volatility in pension expense is expected as assumed investment returns vary from actual.

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. Banknorth sponsors retiree medical programs for certain of its employees and retirees and the Company expects that this legislation will eventually reduce the Company’s costs for some of these programs.

Due to various uncertainties, the amount of the savings related to the Act can not yet be estimated. Therefore, we have elected to defer financial recognition of this legislation, as permitted under FSP FAS 106-1, until the FASB issues final accounting guidance. When issued, that final guidance could require the Company to change previously reported information. The adoption of FSP FAS 106-1 is not expected to materially affect our financial condition, results of operations, earnings per share or cash flows.

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~1. Summary of Significant Accounting Policies — (Continued)~~

Banknorth previously sponsored a Profit Sharing Employee Stock Ownership Plan (the “ESOP”) which was designed to invest primarily in Banknorth common stock. The ESOP was merged into the 401(k) Plan effective January 1, 2001. Banknorth previously sponsored a leveraged employee stock ownership plan which was merged with and into the ESOP. The debt of the ESOP was fully paid in the fourth quarter of 2002.


	*~~Stock Compensation Plans~~*

Statement of Financial Accounting Standards SFAS No. 123, “Accounting for Stock-Based Compensation” encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the underlying stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock upon exercise of the stock option. Banknorth has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995 and the effects of the Employee Stock Purchase Plan. Had Banknorth determined cost based on the fair value at the grant date for its stock options and expense related to the employee stock purchase plan under SFAS No. 123, its net income and earnings per share data would have been reduced to the pro forma amounts indicated as follows:

Year Ended December 31,
2003 2002 2001
Net Income, as reported $ 350,759 $ 298,638 $ 238,795
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (12,723 ) (8,354 ) (5,613 )

Proforma net income $ 338,036 $ 290,284 $ 233,182

Earnings per share
Basic — As reported $ 2.18 $ 2.01 $ 1.70
Proforma $ 2.10 $ 1.96 $ 1.66
Diluted — As reported $ 2.15 $ 1.99 $ 1.68
Proforma $ 2.08 $ 1.94 $ 1.64


	*~~Investments in Limited Partnerships~~*

Banknorth has investments in both tax advantaged and small business investment limited partnerships. The tax advantaged limited partnerships are primarily involved in approved low income housing investment tax credit projects in Banknorth’s market area while the small business investment limited partnerships are primarily providing seed money to small businesses also in Banknorth’s market area. These investments are included in other assets and are not required to be consolidated under FIN 46. Investments in the tax advantaged limited partnerships are amortized over the same period the tax benefits are expected to be received. The investments in small business investment limited partnerships, for which Banknorth has the ability to exercise significant influence (generally, a 3% or greater ownership interest), are reviewed and adjusted quarterly based on the equity method. If Banknorth does not exercise significant influence, Banknorth’s investment is accounted for under the cost method and the carrying value is periodically evaluated for other than temporary impairment. Except for fixed capital or loan commitments agreed to in advance, the partnerships have no recourse to Banknorth.


	*Income Taxes*

Banknorth uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. Management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. Management also relies on tax opinions, recent state audits and historical experience. These judgments and estimates are reviewed on a regular basis as regulatory and business factors change.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes.


	*Earnings Per Share*

Earnings per share have been computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution and adjusted to exclude the weighted average number of unallocated shares held by the ESOP. Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if the potential common shares were converted into common stock using the treasury stock method.


	*Segment Reporting*

An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. Banknorth’s primary business is community banking, which provided approximately 91% of its total revenues and 96% of its pre-tax income for the year ended December 31, 2004 and approximately 92% of its total revenues and 97% of its pre-tax income in 2003. Accordingly, disaggregated segment information is not presented in the notes to the financial statements.

2. Accounting Changes

The following information addresses new or proposed accounting pronouncements related to our industry.


	*Consolidations*

FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“VIE’s”) (“FIN 46R”) establishes the criteria used to identify VIE’s and to determine whether or not to consolidate a VIE. VIE’s are those entities in which the total equity investment at risk does not provide the holders of that investment with the characteristics of a controlling financial interest. Pursuant to the criteria established by FIN 46R in 2004, we deconsolidated five affiliated trusts which had been formed for the purposes of issuing capital securities to unaffiliated parties and investing the proceeds in junior subordinated debentures issued by us. Our investment in these affiliated trusts totaled $10.5 million at December 31, 2004, which funds were also used by the trusts to invest in junior subordinated debentures issued by us. The result of the deconsolidation and the accounting for these entities was to recognize our equity investments in these entities of approximately $10.5 million in the aggregate as securities available for sale and to increase long-term debt by $10.5 million. The adoption of FIN 46R did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.

Banknorth’s trust preferred securities are included in its Tier 1 capital for regulatory purposes. On May 6, 2004, the Federal Reserve Board issued a proposed regulation which proposed to permit bank holding companies to continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative and qualitative standards. For information about this proposed regulation and its possible effect on Banknorth, see Note 12.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2. Accounting Changes — (Continued)

Accounting for ~~which Banknorth has the ability to exercise significant influence (generally, a 3% or greater ownership interest), are reviewed and~~
61
~~BANKNORTH GROUP INC.~~Share-Based Payments
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~1.     Summary of Significant Accounting Policies — (Continued)~~
adjusted quarterly based on the equity method. If Banknorth does not exercise significant influence, Banknorth’s investment is accounted for under the cost method and the carrying value is periodically evaluated for other than temporary impairment. Except for fixed capital or loan commitments agreed to in advance, the partnerships have no recourse to Banknorth.
      In December 2004, the FASB issued FASB Statement No. 123 (Revised 2004), “Share-Based Payment” (“FAS 123R”) which requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees, including employee stock purchase plans. Current disclosure provisions under FAS 123 are still applicable (see Note 1). In addition to stock option awards granted after July  1, 2005, compensation expense on unvested equity-based awards that were granted prior to the effective date must be recognized in the income statement. FAS 123R is effective for interim or annual periods beginning after June  15, 2005. The adoption of FAS 123R is expected to decrease earnings per share by $.03 in 2005. FAS 123 R will no effect on our financial condition, or cash flows.
~~Income Taxes~~
     Banknorth uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. Management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. Management also relies on the opinions, recent state audits and historical experience. These judgments and estimates are reviewed on a regular basis as regulatory and business factors change.
~~Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes.~~
~~Earnings Per Share~~
Earnings per share have been computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution and adjusted to exclude the weighted average number of unallocated shares held by the ESOP. Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if the potential common shares were converted into common stock using the treasury stock method.
~~Segment Reporting~~
     An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. Banknorth’s primary business is community banking, which provided approximately 92% of its total revenues and 97% of its pre-tax income in 2003 and approximately 92% of its total revenues and 96% of its pre-tax income in 2002. Accordingly, disaggregated segment information is not presented in the notes to the financial statements.
62
~~BANKNORTH GROUP INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
2.     Accounting ~~Changes~~
~~The following information addresses new or proposed accounting pronouncements related to our industry.~~
~~Liabilities and Equity~~
~~In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting~~ for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement applies generally to freestanding financial instruments that embody obligations of the issuing entity to redeem the instrument or to settle the obligation by repurchasing its equity shares through the transfer of assets or through issuance of its own shares. Such freestanding instruments must be classified as liabilities or, in some cases, assets. SFAS No. 150 requires that financial instruments containing obligations to repurchase the issuing entity’s equity shares and, under certain circumstances, obligations that are settled by delivery of the issuer’s shares, be classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003 and for contracts in existence at the start of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.
~~Derivatives~~
In April 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, resulting in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. Implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 continued to be applied in accordance with their respective effective dates. The adoption of this standard on July 1, 2003 did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.
~~Consolidations~~
     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51” (“FIN 46”). FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. Our application of the provisions of FIN 46 as of December 31, 2003 with respect to variable-interest entities formed after its issuance resulted in no significant impact on our financial condition, results of operations, earnings per share or cash flows.
     In December 2003, the FASB issued a revised FIN No. 46, FIN 46R, which in part specifically addresses limited purpose trusts formed to issue trust preferred securities. The guidance will require Banknorth to deconsolidate its investment in its capital trusts as of March 31, 2004. In July 2003, the Board of Governors of the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of an accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes. As of December 31, 2003 assuming Banknorth was not allowed to include the $295.3 million in trust preferred securities issued in Tier 1 capital, Banknorth would still exceed the regulatory required minimums for capital adequacy purposes. If
63
~~BANKNORTH GROUP INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~2.     Accounting Changes — (Continued)~~
the trust preferred securities were no longer allowed to be included in Tier 1 capital, Banknorth would also be permitted to redeem the capital securities without penalty. The adoption of this standard for these entities will not have a material effect on our financial condition, results of operations, earnings per share or cash flows.
~~Accounting for Certain~~ Loan or Debt Securities Acquired ~~in a Transfer~~

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, be recognized at their fair value. This SOP requires that the original excess of contractual cash flows over cash flows expected to be collected will not be recognized as an adjustment of yield, loss accrual or valuation allowance. Any future excess of contractual cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow over the original expected cash flow is recognized as a valuation allowance and expensed immediately. Valuation allowances can not be created or “carried over” in the initial accounting for loans acquired in a ~~transfer of loans subject to SFAS 114 “Accounting by Creditor’s for Impairment~~Transfer

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, be recognized at their fair value. This SOP requires that the original excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment of yield, loss accrual, or valuation allowance. Any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow are recognized as a valuation allowance and expensed immediately. Valuation allowances cannot be created or “carried over” in the initial accounting for impaired loans acquired. This SOP is effective for impaired loans acquired in a business combination in fiscal years beginning after December 15, 2004. The adoption of this SOP is not expected to have a material impact on our financial condition, results of operations, earnings per share or cash flows.


	*Loan ~~(an amendment of FASB Statement No. 5 and 15)”. This SOP is effective for impaired loans acquired in a business combination after December 31, 2004.~~Commitments*

In March 2004, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan Commitments,” which provided guidance on accounting for loan commitments at fair value that meet the definition of a derivative. SAB 105 is effective for commitments entered into after March 31, 2004. The guidance clarifies that expected future cash flows related to the servicing of the loan may be recognized only when the servicing asset has been contractually separated from the underlying loan by sale with servicing retained. SAB 105 did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.


	*Guidance on “Other-Than-Temporary Impairment”*

In 2003, the Emerging Issues Task Force reached a consensus on EITF 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provided application guidance to assess whether there have been any events or economic circumstance to indicate that a security is impaired on an other-than-temporary basis. Factors to consider include the length of time the security has had a market value less that the cost basis, the intent and ability of the company to hold the security for a period time sufficient for a recover in value, recent events specific to the issuer or industry and for debt securities, external credit rating and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2. Accounting Changes — (Continued)

In December 2004, the FASB announced that it will reconsider in its entirety all guidance on disclosing, measuring and recognizing other-than-temporary impairments of debt and equity securities. Until new guidance is issued, companies must continue to comply with the disclosure requirements of EITF 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” and all relevant measurement and recognition requirements in other accounting literature. Companies evaluating whether an impairment is other-than-temporary under existing requirements should continue to consider the length of time a security has been impaired, the severity of the impairment and the financial condition and near-term prospects of the issue of the security.


	*Business Combinations*

In October 2004, the EITF issued EITF 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination.” The Task Force determined that a business combination between two parties that have a preexisting relationship is a multiple-element transaction with one element being the business combination and the other element being the settlement of the preexisting relationship. This guidance is applicable to business combinations consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004. The application of this EITF did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.


3.	Acquisitions

Acquisitions are an important part of Banknorth’s strategic plans. The following table summarizes bank acquisitions completed since January 1, 2002. The acquisitions were accounted for as purchases and, as such, were included in our results of operations from the date of acquisition.


							Transaction-Related Items
			Balance at
			Acquisition Date						Other						Total
	Acquisition								Identifiable		Cash		Shares		Purchase
(Dollars and shares in millions)	Date		Assets		Equity		Goodwill		Intangibles		Paid		Issued		Price

CCBT Financial Companies, Inc.		4/30/2004	$	1,292.9	$	108.5	$	178.2	$	19.4	$	—		9.2	$	298.1
Foxbrough Savings Bank		4/30/2004		241.8		22.8		62.2		2.2		88.9		—		88.9
First & Ocean Bancorp		12/31/2003		274.4		15.6		35.1		1.8		49.7		—		49.7
American Financial Holdings, Inc.		2/14/2003		2,690.3		408.2		422.2		9.3		328.5		13.4		711.4
Warren Bancorp, Inc.		12/31/2002		466.1		45.3		90.5		2.7		59.8		2.7		136.6
Bancorp Connecticut, Inc.		8/31/2002		661.7		61.4		96.9		8.7		161.2		—		161.2
Ipswich Bancshares, Inc.		7/26/2002		318.0		13.9		22.0		4.8		19.9		0.9		40.1

In addition, Banknorth acquired four insurance agencies from 2002 to 2004. The total cost of these agencies was $16.8 million.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Acquisitions — (Continued)

On April 30, 2004, Banknorth acquired CCBT Financial Companies, Inc. (“CCBT”) and Foxborough Savings Bank (“Foxborough”). The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for CCBT and Foxborough at the date of acquisition. Banknorth expects that some adjustments of the estimated fair values assigned to the assets acquired and liabilities assumed will be recorded in periods after December 31, 2004, although such adjustments are not expected to be significant. It is estimated that none of the goodwill will be deductible for income tax purposes.


Assets:
Investments		$	319,403
Loans held for sale			7,758
Loans and leases, net			1,026,915
Premises and equipment			31,508
Other assets			159,610

	Assets acquired		1,545,194

Liabilities:
Deposits			1,188,294
Borrowings			210,903
Other liabilities			20,889

	Liabilities assumed		1,420,086

	Net assets acquired		125,108
Goodwill			240,427
Identifiable intangible assets			21,565

	Total purchase price	$	387,100

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


4.
	*~~Extraordinary Items~~*

In April 2002, the FASB issued SFAS No. 145 which rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. We adopted SFAS 145 on January 1, 2003. Upon adoption, we reclassified to other expense an extraordinary item from the early extinguishment of debt of $3.9 million after-tax, or $.03 per diluted share, in the fourth quarter of 2001.

~~3. Acquisitions~~

Acquisitions are an important part of Banknorth’s strategic plans. The following table summarizes acquisitions completed since January 1, 2001. The acquisitions were accounted for as purchases and, as such, were included in our results of operations from the date of acquisition.

Transaction-Related Items
Balance at
Acquisition Date Other Total
Acquisition
Identifiable Cash Shares Purchase
(Dollars and shares in millions) Date Assets Equity Goodwill Intangibles Paid Issued Price
First & Ocean Bancorp 12/31/2003 $ 274.4 $ 15.6 $ 33.8 $ 1.8 $ 49.7 — $ 49.7
American Financial Holdings, Inc. 2/14/2003 2,690.3 408.2 426.3 9.3 328.5 13.4 711.4
Insurance agency acquisitions 2003 1.2 0.1 2.4 0.7 3.2 — 3.2
Warren Bancorp, Inc. 12/31/2002 466.1 45.3 91.8 2.7 59.8 2.7 136.6
Bancorp Connecticut, Inc. 8/31/2002 661.7 61.4 97.0 8.7 161.2 — 161.2
Ipswich Bancshares, Inc. 7/26/2002 318.0 13.9 22.2 4.8 19.9 0.9 40.1
Insurance agency acquisitions 2002 2.5 — 5.7 2.2 — 0.2 7.4
Andover Bancorp, Inc. 10/31/2001 1,796.0 162.9 188.5 13.2 — 16.5 340.0
Metrowest Bank 10/31/2001 907.7 62.0 96.5 5.0 164.8 — 164.8

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~3. Acquisitions — (Continued)~~

During 2003, Banknorth acquired American Financial Holdings, Inc. (“American”) and First & Ocean Bancorp (“F&O”). The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for American and F&O at the dates of acquisition. Banknorth expects that some adjustments of the estimated fair values assigned to the assets acquired and liabilities assumed will be recorded in 2004, although such adjustments are not expected to be significant. It is estimated that none of the goodwill will be deductible for income tax purposes.

Assets:
Investments $ 650,701
Loans and leases, net 1,647,304
Premises and equipment 15,607
Mortgage servicing rights 472
Goodwill 460,102
Other intangibles 11,065
Other assets 561,886

Total assets acquired 3,347,137

Liabilities:
Deposits 2,152,098
Borrowings 423,741
Other liabilities 10,241

Total liabilities assumed 2,586,080

Net assets acquired $ 761,057

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

4. Securities Available for Sale and Held to Maturity

~~A summary of the amortized cost and market values of securities available for sale and held to maturity follows:~~

Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for Sale

December 31, 2003:

U.S. Government obligations and obligations of U.S. Government agencies and corporations $ 2,359,347 $ 1,993 $ (41,165 ) $ 2,320,175
Tax-exempt bonds and notes 138,280 3,191 (21 ) 141,450
Other bonds and notes 365,109 16,279 (886 ) 380,502
Mortgage-backed securities 3,834,958 50,167 (21,747 ) 3,863,378
Collateralized mortgage obligations 264,545 4,138 (648 ) 268,035

Total debt securities 6,962,239 75,768 (64,467 ) 6,973,540
Federal Home Loan Bank stock 104,397 — — 104,397
Federal Reserve Bank stock 37,666 — — 37,666
Other equity securities 6,868 521 — 7,389

Total equity securities 148,931 521 — 149,452

Total securities available for sale $ 7,111,170 $ 76,289 $ (64,467 ) $ 7,122,992

December 31, 2002:

U.S. Government obligations and obligations of U.S. Government agencies and corporations $ 1,539,447 $ 21,514 $ (13 ) $ 1,560,948
Tax-exempt bonds and notes 95,332 2,053 (7 ) 97,378
Other bonds and notes 356,551 14,796 (3,192 ) 368,155
Mortgage-backed securities 3,659,334 139,974 (87 ) 3,799,221
Collateralized mortgage obligations 581,357 7,112 (1,143 ) 587,326

Total debt securities 6,232,021 185,449 (4,442 ) 6,413,028
Federal Home Loan Bank stock 275,768 0 0 275,768
Federal Reserve Bank stock 35,250 0 0 35,250
Other equity securities 7,177 415 (171 ) 7,421

Total equity securities 318,195 415 (171 ) 318,439

Total securities available for sale $ 6,550,216 $ 185,864 $ (4,613 ) $ 6,731,467

Held to Maturity:

December 31, 2003:

Collateralized mortgage obligations $ 124,240 $ 104 $ — $ 124,344

Total securities held to maturity $ 124,240 $ 104 $ — $ 124,344

December 31, 2002:

Collateralized mortgage obligations $ 216,409 $ 5,162 $ — $ 221,571

Total securities held to maturity $ 216,409 $ 5,162 $ — $ 221,571

A summary of the amortized cost and market values of securities available for sale and held to maturity follows:


					Gross		Gross
			Amortized		Unrealized		Unrealized			Market
			Cost		Gains		Losses			Value

Available for Sale
	December 31, 2004:
	U.S. Government obligations and obligations of U.S. Government agencies and corporations		$	528,973	$	181	$	(12,722	)	$	516,432
	Tax-exempt bonds and notes			166,901		3,045		(148	)		169,798
	Other bonds and notes			285,742		10,674		(644	)		295,772
	Mortgage-backed securities			5,130,478		33,081		(31,641	)		5,131,918
	Collateralized mortgage obligations			599,304		1,748		(3,129	)		597,923

		Total debt securities		6,711,398		48,729		(48,284	)		6,711,843
	Federal Home Loan Bank stock			116,904		—		—			116,904
	Federal Reserve Bank stock			60,338		—		—			60,338
	Other equity securities			16,456		247		(23	)		16,680

		Total equity securities		193,698		247		(23	)		193,922

		Total securities available for sale	$	6,905,096	$	48,976	$	(48,307	)	$	6,905,765

	December 31, 2003:
	U.S. Government obligations and obligations of U.S. Government agencies and corporations		$	2,359,347	$	1,993	$	(41,165	)	$	2,320,175
	Tax-exempt bonds and notes			138,280		3,191		(21	)		141,450
	Other bonds and notes			365,109		16,279		(886	)		380,502
	Mortgage-backed securities			3,834,958		50,167		(21,747	)		3,863,378
	Collateralized mortgage obligations			264,545		4,138		(648	)		268,035

		Total debt securities		6,962,239		75,768		(64,467	)		6,973,540
	Federal Home Loan Bank stock			104,397		—		—			104,397
	Federal Reserve Bank stock			37,666		—		—			37,666
	Other equity securities			6,868		521		—			7,389

		Total equity securities		148,931		521		—			149,452

		Total securities available for sale	$	7,111,170	$	76,289	$	(64,467	)	$	7,122,992

Held to Maturity:
	December 31, 2004:
	Collateralized mortgage obligations		$	87,013	$	494	$	—		$	87,507

		Total securities held to maturity	$	87,013	$	494	$	—		$	87,507

	December 31, 2003:
	Collateralized mortgage obligations		$	124,240	$	104	$	—		$	124,344

		Total securities held to maturity	$	124,240	$	104	$	—		$	124,344

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Securities Available for Sale and Held to Maturity — (Continued)

Included in securities in U.S. Government obligations and obligations of U.S. Government agencies and corporations at December 31, 2004 were $475.1 million of Federal National Mortgage Association and Federal Home Loan Mortgage Corp. securities.

The following presents the fair value of investments with continuous unrealized losses for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer as of December 31, 2004.


	Less than 1 year							More than 1 year							Total

	Number of		Fair		Unrealized			Number of		Fair		Unrealized			Number of		Fair		Unrealized
Available for Sale:	Investments		Value		Losses			Investments		Value		Losses			Investments		Value		Losses

U.S. Government obligations and obligations of U.S. Government agencies and corporations		6	$	140,522	$	(1,108	)		5	$	345,432	$	(11,614	)		11	$	485,954	$	(12,722	)
Tax-exempt bonds and notes		54		83,367		(148	)		—		—		—			54		83,367		(148	)
Other bonds and notes		10		20,990		(616	)		2		4,434		(28	)		12		25,424		(644	)
Mortgage-backed securities		99		2,125,235		(16,495	)		41		947,126		(15,146	)		140		3,072,361		(31,641	)
Collateralized mortgage obligations		18		377,830		(3,128	)		2		540		(1	)		20		378,370		(3,129	)
Equity securities		1		5		(10	)		1		95		(13	)		2		100		(23	)

		188	$	2,747,949	$	(21,505	)		51	$	1,297,627	$	(26,802	)		239	$	4,045,576	$	(48,307	)

For securities with unrealized losses, the following information was considered in determining that the impairments are not other-than-temporary. U.S. Government securities are backed by the full faith and credit of the United States and therefore bear no credit risk. U.S. Government agencies securities have minimal credit risk as they play a vital role in the nation’s financial markets. Other bonds and notes are generally comprised of corporate securities and all investments maintain a credit rating of at least investment grade by one of the nationally recognized rating agencies. Mortgage-backed securities or collateralized mortgage obligations are either issued by federal government agencies or by private issuers with minimum security ratings of AA. No unrealized losses were determined to be other-than-temporary.

The amortized cost and market values of debt securities at December 31, 2004 by contractual maturities are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2004, Banknorth had $393.6 million of securities available for sale with call provisions.


		Available for Sale				Held to Maturity

		Amortized Cost		Market Value		Amortized Cost		Market Value

December 31, 2004:
Due in one year or less		$	153,426	$	153,931	$	118	$	119
Due after one year through five years			556,879		547,852		5,315		5,345
Due after five years through ten years			390,249		400,335		26,703		26,854
Due after ten years			5,610,844		5,609,725		54,877		55,189

	Total debt securities	$	6,711,398	$	6,711,843	$	87,013	$	87,507

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Securities Available for Sale and Held to Maturity — (Continued)

A summary of realized gains and losses on securities available for sale for the years ended December 31, 2004, 2003 and 2002 follows:


	Realized

	Gains		Losses		Net

2004	$	10,230	$	17,931	$	(7,701	)
2003		44,744		2,284		42,460
2002		9,823		2,541		7,282

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~4. Securities Available for Sale and Held to Maturity — (Continued)~~

Less than 1 year More than 1 year Total
Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
Available for Sale: Investments Value Losses Investments Value Losses Investments Value Losses
U.S. Government obligations and obligations of U.S. Government agencies and corporations 31 $ 1,924,041 $ (41,165 ) — $ — $ — 31 $ 1,924,041 $ (41,165 )
Tax-exempt bonds and notes 1 390 (21 ) — — — 1 390 (21 )
Other bonds and notes 16 20,781 (743 ) 6 9,372 (143 ) 22 30,153 (886 )
Mortgage-backed securities 109 1,652,061 (21,739 ) 5 434 (8 ) 114 1,652,495 (21,747 )
Collateralized mortgage obligations 14 96,875 (647 ) 3 441 (1 ) 17 97,316 (648 )

171 $ 3,694,148 $ (64,315 ) 14 $ 10,247 $ (152 ) 185 $ 3,704,395 $ (64,467 )

For securities exhibiting unrealized losses, the following information was considered in determining that the impairments are not other-than-temporary. U.S. Government securities are backed by the full faith and credit of the United States and therefore bear no credit risk. U.S. Government agencies securities have minimal credit risk as they play a vital role in the nations financial markets. Other bonds and notes are generally comprised of corporate securities and all investments maintain a credit rating of at least investment grade by one of the nationally recognized rating agencies. Mortgage-backed securities or collateralized mortgage obligations are either issued by federal government agencies or by private issuers with minimum security ratings of AA.

The amortized cost and market values of debt securities at December 31, 2003 by contractual maturities are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2003, Banknorth had $404.5 million of securities available for sale with call provisions.

Available for Sale Held to Maturity
Amortized Market Amortized Market
Cost Value Cost Value
December 31, 2003:

Due in one year or less $ 119,723 $ 120,506 $ — $ —
Due after one year through five years 2,121,355 2,101,956 — —
Due after five years through ten years 874,492 881,262 — —
Due after ten years 3,846,669 3,869,816 124,240 124,344

Total debt securities $ 6,962,239 $ 6,973,540 $ 124,240 $ 124,344

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~4. Securities Available for Sale and Held to Maturity — (Continued)~~

~~A summary of realized gains and losses on securities available for sale for 2003, 2002, and 2001 follows:~~

Gross Realized
Gains Losses
2003 $ 44,744 $ 2,284
2002 9,823 2,541
2001 4,291 2,962

5. Loans and Leases
Banknorth’s lending activities are conducted principally in New England and upstate New York. The principal categories of loans in Banknorth’s portfolio are residential real estate loans, which are secured by single-family (one to four units) residences; commercial real estate loans, which are secured by multi-family (five or more units) residential and commercial real estate; commercial business loans and leases; and consumer loans and leases. A summary of loans and leases follows:

December 31,
2003 2002
Residential real estate loans:
Permanent first mortgage loans $ 2,681,925 $ 2,354,001
Construction and development 28,558 28,196

2,710,483 2,382,197
Commercial real estate loans:
Permanent first mortgage loans 4,696,428 4,151,674
Construction and development 832,434 640,375

5,528,862 4,792,049
Commercial business loans and leases:
Commercial business loans 3,188,504 2,865,617
Commercial business leases 98,590 102,857

3,287,094 2,968,474
Consumer loans and leases 4,819,523 3,913,288

Total loans and leases $ 16,345,962 $ 14,056,008

Loans and leases include net deferred charges of $21.8 million at December 31, 2003 and $14.5 million at December 31, 2002. Deferred charges include deferred loan origination costs, net of deferred loan origination fees, and unearned discounts.
68

Banknorth’s lending activities are conducted principally in New England and upstate New York. The principal categories of loans in Banknorth’s portfolio are residential real estate loans, which are secured by single-family (one to four units) residences; commercial real estate loans, which are secured by multi-family (five or more units) residential and commercial real estate; commercial business loans and leases; and consumer loans and leases. A summary of loans and leases follows:

December 31,

2004 2003

Residential real estate loans
Permanent first mortgage loans $ 3,024,799 $ 2,681,925
Construction and development 56,418 28,558

3,081,217 2,710,483
Commercial real estate loans:
Permanent first mortgage loans 5,297,812 4,696,428
Construction and development 951,701 832,434

6,249,513 5,528,862
Commercial business loans and leases
Commercial business loans 3,838,366 3,188,504
Commercial business leases 90,228 98,590

3,928,594 3,287,094
Consumer loans and leases
Consumer loans 5,333,448 4,816,217
Consumer leases 222 3,306

5,333,670 4,819,523

Total loans and leases $ 18,592,994 $ 16,345,962

Loans and leases include net deferred charges of $23.0 million at December 31, 2004 and $21.8 million at December 31, 2003. Deferred charges include deferred loan origination costs, net of deferred loan origination fees and unearned discounts.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Loans and Leases — (Continued)

Nonperforming Loans

The following table sets forth the information regarding nonperforming loans and accruing loans 90 days or more overdue at the dates indicated:

December 31,

2004 2003

Nonaccrual loans
Residential real estate mortgages $ 7,846 $ 7,157
Commercial real estate loans 29,948 19,700
Commercial business loans and leases 32,421 24,412
Consumer loans and leases 7,344 8,493

Total nonperforming loans $ 77,559 $ 59,762

Accruing loans which are 90 days or more overdue $ 5,254 $ 4,915

Impaired loans are commercial and commercial real estate loans which Banknorth believes will probably not result in the collection of all amounts due according to the contractual terms of the loan agreement. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. All commercial and commercial real estate nonaccrual loans are impaired, but not all impaired loans are on nonaccrual. Accrual of interest on commercial and commercial real estate loans is generally discontinued when collectibility of principal or interest is uncertain or on which payments of principal or interest have become contractually past due 90 days. Banknorth may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility. The amount of reserves for impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral less cost to sell.

The following table sets forth information on impaired loans at the dates indicated:

At or For the Year Ended December 31,

2004 2003

Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance

Impaired loans
Valuation allowance required $ 51,620 $ 13,805 $ 28,781 $ 4,662
No valuation allowance required 10,749 — 15,331 —

Total impaired loans $ 62,369 $ 13,805 $ 44,112 $ 4,662

Average balance of impaired loans during the year $ 53,580 $ 48,917

Interest income recognized on a cash basis on impaired loans during the year $ 2,501 $ 1,675

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~5. Loans and Leases — (Continued)~~

~~Nonperforming Loans~~

~~The following table sets forth the information regarding nonperforming loans and accruing loans 90 days or more overdue at the dates indicated:~~

December 31,
2003 2002
Nonaccrual loans
Residential real estate mortgages $ 7,157 $ 5,781
Commercial real estate loans 19,700 17,649
Commercial business loans and leases 24,412 32,693
Consumer loans and leases 8,493 9,194

Total nonperforming loans $ 59,762 $ 65,317

Accruing loans which are 90 days or more overdue $ 4,915 $ 3,373

~~The following table presents the amount of foregone revenue on nonperforming loans for the periods indicated.~~

Year Ended
December 31,
2003 2002
Interest income that would have been recognized at original contractual terms $ 4,748 $ 5,839
Amount recognized as interest income on a cash basis 2,746 2,900

Forgone revenue $ 2,002 $ 2,939

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~5. Loans and Leases — (Continued)~~

~~The following table sets forth information on impaired loans at the dates indicated:~~

As of or for the Year Ended December 31,
2003 2002
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
Impaired loans
Valuation allowance required $ 28,781 $ 4,662 $ 33,585 $ 10,924
No valuation allowance required 15,331 — 16,757 —

Total impaired loans $ 44,112 $ 4,662 $ 50,342 $ 10,924

Average balance of impaired loans during the year $ 48,917 $ 53,265

Interest income recognized on a cash basis on impaired loans during the year $ 1,675 $ 1,784

6. Allowance for Loan and Lease Losses
~~A summary of changes in the allowance for loan and lease losses follows:~~

Year Ended December 31,
2003 2002 2001
Balance at beginning of period $ 208,273 $ 189,837 $ 153,550
Allowance related to business combinations 19,008 12,794 31,277
Provisions charged to income 42,301 44,314 41,889
Loans and leases charged off (49,609 ) (52,002 ) (45,652 )
Recoveries 12,314 13,330 8,773

Balance at end of period $ 232,287 $ 208,273 $ 189,837

A summary of changes in the allowance for loan and lease losses follows:

Year Ended December 31,

2004 2003 2002

Balance at beginning of period $ 232,287 $ 208,273 $ 189,837
Allowance related to business combinations 13,665 19,008 12,794
Provisions charged to income 40,340 42,301 44,314
Transfer for off-balance sheet loan commitments (6,600 ) — —
Charge-offs (50,687 ) (49,609 ) (52,002 )
Recoveries 14,147 12,314 13,330

Balance at end of period $ 243,152 $ 232,287 $ 208,273

During 2004, a portion of the allowance for credit losses related to unfunded credit commitments was reclassified from the allowance for loan and lease losses to a separate liability account. The liability for unfunded credit commitments previously included in the allowance for loans and lease losses was $5.6 million and $3.3 million at December 31, 2003 and 2002, respectively.

Premises and Equipment

~~A summary of premises and equipment follows:~~

December 31,
2003 2002
Land $ 27,558 $ 23,079
Buildings and leasehold improvements 268,444 245,400
Capital lease on building 23,475 23,475
Furniture, fixtures and equipment 425,862 388,903

745,339 680,857
Accumulated depreciation and amortization (478,304 ) (408,528 )
Accumulated amortization on capital lease (2,217 ) (652 )

Net book value $ 264,818 $ 271,677

Details for internally developed software (consisting of software and dedicated hardware and is included with furniture, fixtures and equipment in the above table) is presented as follows as of the dates indicated.

~~BANKNORTH GROUP INC.~~

A summary of premises and equipment follows:

December 31,

2004 2003

Land $ 34,143 $ 27,558
Buildings and leasehold improvements 299,712 268,444
Capital leases on buildings 24,275 23,475
Furniture, fixtures and equipment 316,833 274,480

674,963 593,957
Accumulated depreciation and amortization (371,030 ) (326,922 )
Accumulated amortization on capital leases (3,813 ) (2,217 )

Net book value $ 300,120 $ 264,818

Details for internally developed software (consisting of software and dedicated hardware which is included with furniture, fixtures and equipment in the above table) is presented as follows as of the dates indicated.

December 31,

2004 2003

Internally developed software in use — cost $ 41,129 $ 32,367
Internally developed software in use — amortization (25,386 ) (15,420 )
Internally developed software in development 11,933 4,350

$ 27,676 $ 21,297

Amortization of the asset held under the capital lease is included with depreciation expense.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


7.	~~Premises and Equipment — (Continued)~~

December 31,
2003 2002
Internally developed software in use — cost $ 32,367 $ 20,904
Internally developed software in use — amortization (15,420 ) (8,535 )
Internally developed software in development 4,350 8,923

$ 21,297 $ 21,292

A project to develop software to automate teller stations and customer service platforms was abandoned in December 2002. As a result, $6.2 million of previously capitalized costs that have no future benefit were written-off in December 2002.

During 2002, Banknorth entered into a 15-year lease to occupy 140,000 square feet of office space in the Greater Portland, Maine area. This lease is being accounted for as a capital lease. As of December 31, 2003, the gross amount of premises and equipment under the capital lease was $23.5 million. Amortization of the asset held under the capital lease is included with depreciation expense. As of December 31, 2003, the $22.5 million capital lease obligation was partially offset by a $16.5 million loan held by the Bank. The net obligation under the capital lease obligation of $6.0 million is included in other long-term debt.

8.
8.	Goodwill ~~and Other Intangible Assets~~

~~At December 31, 2003, Banknorth had $36.4 million in unamortized identifiable intangible assets consisting of core deposit intangibles, noncompete agreements and customer lists.~~

~~The changes in the carrying amount of goodwill and other intangibles for the years ended December 31, 2003 and 2002 are as follows:~~

Other Total
Core Deposit Identifiable Identifiable
Goodwill Intangibles Intangibles Intangibles
Balance, December 31, 2001 $ 409,340 $ 21,321 $ 35,972 $ 57,293
Recorded during the year 215,586 14,817 5,754 20,571
Reclassification under SFAS No. 147 34,695 — (34,695 ) (34,695 )
Other reclassification 2,214 (2,214 ) (2,214 )
Amortization expense — (5,486 ) (1,006 ) (6,492 )
Adjustment of purchase accounting estimates (1,151 ) — 11 11

Balance, December 31, 2002 660,684 28,438 6,036 �� 34,474
Recorded during the year 462,531 6,807 6,861 13,668
Adjust Warren’s estimated CDI to actual 2,244 (2,244 ) — (2,244 )
Amortization expense — (4,574 ) (4,372 ) (8,946 )
Massachusetts REIT adjustment 2,473 — — —
Other adjustment of purchase accounting estimates (1,293 ) (262 ) (275 ) (537 )

Balance, December 31, 2003 $ 1,126,639 $ 28,165 $ 8,250 $ 36,415

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


8.	~~Goodwill and Other Intangible Assets — (Continued)~~

Other Total
Core Deposit Identifiable Identifiable
Goodwill Intangibles Intangibles Intangibles
Estimated Annual Amortization Expense:
2004 — $ 3,878 $ 2,628 $ 6,506
2005 — 3,562 1,471 5,033
2006 — 3,365 724 4,089
2007 — 3,244 724 3,968
2008 — 3,238 353 3,591
Thereafter — 10,878 621 11,499

~~The components of identifiable intangible assets follow:~~

December 31, 2003
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
Identifiable intangible assets:
Core deposit intangibles $ 55,145 $ 26,980 $ 28,165
Other identifiable intangibles 13,703 5,453 8,250

Total $ 68,848 $ 32,433 $ 36,415

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


8.	~~Goodwill and Other Intangible Assets — (Continued)~~

~~Banknorth adopted the provisions of SFAS No. 142, “Goodwill~~ and Other Intangible Assets” (“SFAS No. 142”) effective January 1, 2002. As of the date of adoption, we had unamortized goodwill totaling $409.3 million and unamortized identifiable intangible assets totaling $57.3 million, all of which were subject to the transition provisions of SFAS No. 141, “Business Combinations” and SFAS No. 142. The following table sets forth the reconcilement of net income and earning per share excluding goodwill and SFAS No. 72 intangible amortization for the years ended December 31, 2003, 2002 and 2001:

Year Ended December 31,
2003 2002 2001
Reported net income $ 350,759 $ 298,638 $ 238,795
Add back, on a net of tax basis:
Goodwill amortization — — 10,986
SFAS No. 72 Intangible amortization — — 4,666

Adjusted net income $ 350,759 $ 298,638 $ 254,447

Basic earnings per share:
Reported net income $ 2.18 $ 2.01 $ 1.70
Add back, on a net of tax basis:
Goodwill amortization — — 0.08
SFAS No. 72 Intangible amortization — — 0.03

Adjusted basic earnings per share $ 2.18 $ 2.01 $ 1.81

Diluted earnings per share:
Reported net income $ 2.15 $ 1.99 $ 1.68
Add back, on a net of tax basis:
Goodwill amortization — — 0.08
SFAS No. 72 Intangible amortization — — 0.03

Adjusted diluted earnings per share $ 2.15 $ 1.99 $ 1.79

	Assets
9.	~~Income Taxes~~

~~The current and deferred components of income tax expense follow:~~

Year Ended December 31,
2003 2002 2001
Current
Federal $ 138,722 $ 128,523 $ 123,472
State 8,865 7,636 7,572
Deferred
Federal 25,138 12,419 (6,620 )
State 935 103 (320 )

$ 173,660 $ 148,681 $ 124,104

The changes in the carrying amount of goodwill and other intangibles for the years ended December 31, 2004 and 2003 were as follows:

Other Total
Core Deposit Identifiable Identifiable
Goodwill Intangibles Intangibles Intangibles

Balance, December 31, 2002 $ 660,684 $ 28,438 $ 6,036 $ 34,474
Recorded during the year 462,531 6,807 6,861 13,668
Adjust Warren’s estimated CDI to actual 2,244 (2,244 ) — (2,244 )
Amortization expense — (4,574 ) (4,372 ) (8,946 )
Massachusetts REIT adjustment 2,473 — — —
Other adjustment of purchase accounting estimates (1,293 ) (262 ) (275 ) (537 )

Balance, December 31, 2003 1,126,639 28,165 8,250 36,415
Recorded during the year 245,930 21,566 1,042 22,608
Amortization expense — (5,988 ) (2,639 ) (8,627 )
Reclassification — — — —
Other adjustment of purchase accounting estimates (6,789 ) (20 ) — (20 )

Balance, December 31, 2004 $ 1,365,780 $ 43,723 $ 6,653 $ 50,376

Estimated Annual Amortization Expense:
2005 — $ 6,350 $ 1,492 $ 7,842
2006 — 5,679 745 6,424
2007 — 5,194 745 5,939
2008 — 5,190 375 5,565
2009 — 5,190 375 5,565
Thereafter — 16,120 484 16,604

The components of identifiable intangible assets follow:

December 31, 2004

Gross Carrying Accumulated Net Carrying
Amount Amortization Amount

Identifiable intangible assets:
Core deposit intangibles $ 57,858 $ 14,135 $ 43,723
Other identifiable intangibles 14,746 8,093 6,653

Total $ 72,604 $ 22,228 $ 50,376

There was no impairment recorded in 2004 and 2003 based on the valuations at December 31, 2004 and 2003.

BANKNORTH GROUP INC.

~~BANKNORTH GROUP INC.~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	Income Taxes

The current and deferred components of income tax expense follow:

Year Ended December 31,

2004 2003 2002

Current
Federal $ 131,542 $ 138,722 $ 128,523
State 15,057 8,865 7,636
Deferred
Federal 16,393 25,138 12,419
State 105 935 103

$ 163,097 $ 173,660 $ 148,681

The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense.

Year Ended December 31,

2004 2003 2002

Computed federal tax expense $ 163,709 $ 183,547 $ 156,561
State income tax, net of federal benefits 9,855 6,370 5,030
Benefit of tax-exempt income (5,046 ) (3,412 ) (3,494 )
Low income/rehabilitation credits (4,270 ) (2,700 ) (1,540 )
Increase in cash surrender value of life insurance (8,149 ) (8,026 ) (7,000 )
Nondeductible compensation 6,931 — —
Other, net 67 (2,119 ) (876 )

Recorded income tax expense $ 163,097 $ 173,660 $ 148,681

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes — (Continued)

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities, which are included in Other Assets and Other Liabilities, respectively, at December 31, 2004 and 2003 follow:


			December 31,

			2004		2003

Deferred tax assets
	Allowance for loan and lease losses		$	86,505	$	83,061
	Compensation and employee benefits			20,268		18,597
	Loans distributed from subsidiary			6,616		13,017
	Book reserves not yet realized for tax purposes			405		1,304
	Intangible assets			5,696		2,435
	Other			2,023		1,643

		Total gross deferred tax assets		121,513		120,057

Deferred tax liabilities
	Pension plan			35,194		31,035
	Leases			7,488		7,820
	Premises and equipment			24,930		26,563
	Partnership investments			12,090		8,630
	Loan basis difference			11,439		12,819
	Purchase accounting			21,870		12,927
	Unrealized appreciation on securities and hedging			105		3,920
	Other			760		1,148

		Total gross deferred tax liabilities		113,876		104,862

Net deferred tax asset			$	7,637	$	15,195

Banknorth has determined that a valuation allowance is not required for any of its deferred tax assets since it is more likely than not that these assets will be realized principally through carryback to taxable income in prior years and future reversals of existing taxable temporary differences and by offsetting other future taxable income.

9.	~~Income Taxes — (Continued)~~

~~The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense:~~

Year Ended December 31,
2003 2002 2001
Computed federal tax expense $ 183,547 $ 156,561 $ 127,116
State income tax, net of federal benefits 6,370 5,030 4,714
Benefit of tax-exempt income (3,412 ) (3,494 ) (4,319 )
Amortization of goodwill and other intangibles — — 3,271
Low income/rehabilitation credits (2,700 ) (1,540 ) (1,530 )
Increase in cash surrender value of life insurance (8,026 ) (7,000 ) (6,437 )
Other, net (2,119 ) (876 ) 1,289

Recorded income tax expense $ 173,660 $ 148,681 $ 124,104

December 31,
2003 2002
Deferred tax assets
Allowance for loan and lease losses $ 83,061 $ 75,214
Compensation and employee benefits 18,597 15,788
Loan basis difference 13,017 —
Book reserves not yet realized for tax purposes 1,304 7,093
Intangible asset 2,435 5,010
Other 1,643 3,426

Total gross deferred tax assets 120,057 106,531

Deferred tax liabilities
Pension plan 31,035 —
Leases 7,820 10,889
Premises and equipment 26,563 22,377
Partnership investments 8,630 7,119
Loan origination costs 12,819 10,143
Purchase accounting 12,927 13,239
Deferred Income — 20,122
Tax bad debt reserve — 1,739
Unrealized appreciation on securities and hedging 3,920 62,338
Other 1,148 1,386

Total gross deferred tax liabilities 104,862 149,352

Net deferred tax (liability) asset $ 15,195 $ (42,821 )

State Tax Assessment

We are subject to examinations by various federal and state governmental tax authorities from time to time regarding tax returns we have filed. Currently, certain state income tax returns filed by us in recent years are under examination. In June 2004, the Vermont Department of Taxes assessed three Vermont-based banks, previously acquired by us, for taxes, interest and penalties for the years 2000 and 2001 on the basis that subsidiary investment companies established by these banks pursuant to Vermont law should be considered part of our banking subsidiary for purposes of calculating taxes due the State of Vermont. We believe that we have substantial defenses to this assessment and are in the process of appealing it in accordance with administrative procedures. Although not considered probable, there can be no assurance that Vermont will not ultimately prevail on this matter. Our estimate of the range of reasonably possible exposure above established reserves on this matter is from $0 to $2.0 million, after federal tax benefits.

BANKNORTH GROUP INC.

~~BANKNORTH GROUP INC.~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


10.	Merger and Consolidation Costs

Merger and consolidation costs include merger-related, charter consolidation, asset write-downs and branch closing expenses. The following table summarizes merger and consolidation costs for the years ended December 31, 2004, 2003 and 2002.

Year-Ended December 31,

2004 2003 2002

The Toronto-Dominion Bank Merger Charges

Personnel costs $ 34,986 $ — $ —
Other costs 3,890 — —

38,876 — —

Foxborough Savings Bank Merger Charges

Personnel costs 611 — —
Systems conversion and integration/customer communications 1,274 1 —
Other costs 348 — —

2,233 1 —

CCBT Financial Companies, Inc. Merger Charges

Personnel costs 1,795 — —
Systems conversion and integration/customer communications 2,720 — —
Other costs 1,324 — —

5,839 — —

BostonFed Bancorp, Inc. Merger Charges

Personnel costs 26
Systems conversion and integration/customer communications 1,297 — —
Other costs 114 — —

1,437 — —

Other

American Financial Holdings, Inc. merger charges 400 5,358 855
First & Ocean Bancorp merger charges 1,342 458 —
Warren Bancorp, Inc. merger charges 29 2,424 240
Bancorp Connecticut merger charges 49 363 2,746
Ipswich Bancshares merger charges — 143 1,900
Andover Bancorp, Inc./MetroWest Bank merger charges — 12 5,830
Banknorth Group, Inc. (Vermont) reverse reserves for auto lease residuals (570 ) (615 ) (574 )
Charter consolidation costs — — 3,601
Branch Closings — (40 ) 93

1,250 8,103 14,691

Total Merger and Consolidation Costs
$ 49,635 $ 8,104 $ 14,691

Merger-related personnel costs on business combinations accounted for under the purchase method of accounting includes the costs of maintaining duplicate employees at the acquired bank during the systems integration period and related employee benefits and outplacement services. For business combinations accounted for under the purchase method of accounting, severance costs are accrued at merger date (and

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10.

Merger and Consolidation Costs — (Continued)


9.	~~Income Taxes — (Continued)~~

are included in the determination of goodwill) for those employees identified to be severed at the time of closing. In 2004, personnel costs for the pending transaction with The Toronto-Dominion Bank (“TD”) included $33.2 million of long-term incentive payments pursuant to the change-in-control provision of the Executive Incentive Plan. These nonrefundable amounts were paid in anticipation of completion of this transaction, which constitutes a change in control for purposes of the Executive Incentive Plan.

The following table presents the approximate number of employees that were severed in each of the banking acquisitions in 2004, 2003 and 2002.

~~Banknorth has determined that a valuation allowance is not required for any~~

Number of its deferred tax assets since it is more likely than not that these assets will be realized principally through carryback to taxable income in prior years and future reversals of existing taxable temporary differences and by offsetting other future taxable income.


	*~~State Tax Assessment~~*

During the second quarter of 2003, we entered into a settlement with the Massachusetts Department of Revenue (“DOR”) concerning the dividends received deduction relating to certain banks that we had acquired prior to 2003. Legislation was enacted on March 5, 2003, which disallowed the dividends-received deduction for dividends received from a Real Estate Investment Trust (“REIT”) retroactive to 1999.

The aggregate assessment of $5.9 million (net of Federal income tax benefit) was recorded in the first quarter of 2003 as an increase to goodwill related to the acquired banks. During the second quarter of 2003, we entered into (and paid) a settlement of $2.5 million, net of Federal income tax benefit, to the DOR, which was part of a global settlement negotiated with the DOR by approximately 50 similarly-situated financial institutions doing business in Massachusetts. Goodwill was reduced to reflect the final settlement.

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

		Terminated
~~10.~~	~~Merger and Consolidation Costs~~

Merger and consolidation costs include merger-related, charter consolidation, asset write-downs and branch closing expenses. The following table summarizes special charges for the years ended December 31, 2003, 2002 and 2001.

2003 2002 2001
First & Ocean Bancorp

Personnel costs $ 25 $ — $ —
Systems conversion and integration/customer communications 357 — —
Other costs 76 — —

458 — —

American Merger Charges

Personnel costs 1,101 — —
Systems conversion and integration/customer communications 2,410 735 —
Other costs 1,847 120 —

5,358 855 —

Warren Merger Charges

Personnel costs 899 — —
Systems conversion and integration/customer communications 1,134 207 —
Other costs 391 33 —

2,424 240 —

Bancorp Connecticut Merger Charges

Personnel costs (10 ) 684 —
Systems conversion and integration/customer communications 24 1,486 —
Other costs 349 576 —

363 2,746 —

Ipswich Merger Charges

Personnel costs 16 62 —
Systems conversion and integration/customer communications — 1,537 —
Other costs 127 301 —

143 1,900 —

Andover/ MetroWest Merger Charges

Personnel costs 1 735 1,710
Systems conversion and integration/customer communications — 4,365 1,131
Other costs 11 730 932

12 5,830 3,773

Banknorth Group, Inc. (Vermont) Merger Charges
(pooling of interest method acquisition)

Personnel costs — — 2,329
Asset write-downs/facility costs — 29 —
Reversal of prior accruals (615 ) (125 ) —
Gain on regulatory-mandated branch sales — (478 ) (2,906 )
Other costs — — 595

(615 ) (574 ) 18

Charter consolidation costs
— 3,601 974

Branch closings
(40 ) 93 1,957

Other Merger Charges

Foxborough merger charges 1 — —
Write-down of auto lease residuals — — 892

1 — 892

Total Merger and Consolidation Costs
$ 8,104 $ 14,691 $ 7,614

~~BANKNORTH GROUP INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Acquisition		Employees
~~10.~~	~~Merger and Consolidation Costs — (Continued)~~

accounted for under the purchase method of accounting, severance costs are accrued at merger date (and are included in the determination of goodwill) for those employees identified to be severed at the time of closing. Merger-related personnel costs on business combinations accounted for under the pooling of interests method include severance costs, the costs of maintaining duplicate employees at the acquired bank during the systems integration period, and related employee benefits and outplacement services. The following table presents the approximate number of employees that were severed in each of the banking acquisitions.


	~~Number of~~
	~~Terminated~~
~~Acquisition~~	~~Employees~~

~~First & Ocean Bancorp~~		30
~~American Financial Holdings, Inc.~~		~~140~~

CCBT Financial Companies, Inc.		155
Foxborough Savings Bank		25
First & Ocean Bancorp		60
American Financial Holdings, Inc.		330
Warren Bancorp, Inc.		85
Bancorp Connecticut, Inc.		90
Ipswich Bancshares, Inc.		60
~~Bancorp Connecticut, Inc.~~		75
~~Ipswich Bancshares, Inc.~~		30
~~Andover Bancorp, Inc./Metrowest Bank~~		~~220~~
~~Banknorth Vermont~~		~~220~~

Systems conversions and integration costs and customer communications costs are recorded as incurred and are associated with the costs of converting the accounts, records and data processing equipment of the acquired companies to the systems maintained by Banknorth, as well as the costs of required notices to customers of the acquired bank concerning the acquisition and conversion of their accounts to Banknorth systems.

Asset write-downs/facility costs relate primarily to branch closings and acquisitions accounted for under the pooling of interests. The costs represent lease termination costs and impairment of assets for redundant office space, closed branches and equipment to be disposed of or abandoned.

~~Charter consolidation costs represent costs incurred to consolidate the charters of the Company’s eight national bank subsidiaries to a single national bank charter effective January 1, 2002.~~

Other merger and consolidation costs include write-downs of $892 thousand in 2001 on the residual values assigned to auto lease receivables that were acquired in mergers completed prior to 2001. Banknorth ceased making auto leases in 1997.

Other costs include asset write-downs/facility costs relating primarily to facility closings. The costs represent lease termination costs and impairment of assets for redundant office space, closed branches and equipment to be disposed of or abandoned.

Charter consolidation costs represent costs incurred to consolidate the charters of the Company’s eight national bank subsidiaries to a single national bank charter effective January 1, 2002.

BANKNORTH GROUP INC.

~~BANKNORTH GROUP INC.~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The following table presents activity in the accrual account for merger and consolidation costs for the years ended December 31, 2003 and 2002, respectively.~~

~~Retail securities sold under repurchase agreements generally have maturities of 365 days or less and are collateralized by mortgage-backed securities and U.S. Government obligations.~~

At December 31, 2003, Banknorth also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. Banknorth did not utilize the line of credit in 2003.

~~A summary of long-term debt (debt with original maturities of more than one year) follows:~~

~~Wholesale securities sold under agreements to repurchase have maturities greater than one year and are generally sold to broker/dealers.~~

~~The following table presents the maturities of long-term debt outstanding at the dates indicated:~~

Callable borrowings of $1.8 billion are shown in their respective periods assuming that the callable debt is redeemed at the initial call date while all other borrowings are shown in the periods corresponding to their scheduled maturity date.

Borrowings from the Federal Home Loan Bank, which consist of both fixed and adjustable rate borrowings, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets.

~~The following is a summary of the capital trust securities outstanding as of December 31, 2003:~~

There were issuance costs associated with the issuance of the capital trust securities. The net interest cost of the securities, including the amortization of the issuance costs was 8.64% and 8.72% for the years ended December 31, 2003 and 2002, respectively.

On February 22, 2002, Banknorth Capital Trust II, a subsidiary of Banknorth issued $200 million of 8% trust preferred securities to the public and invested the proceeds from this offering in an equivalent amount of(1) Amounts include junior subordinated debentures ~~issued~~acquired by ~~Banknorth. The proceeds~~affiliated trusts from the offering to Banknorth, which was net of $6.8 million of issuance costs, were used for general corporate purposes. These securities pay interest quarterly, are mandatorily redeemable on April 1, 2032 and may be redeemed by the Trust at par any time on or after April 1, 2007.

~~The trust preferred securities currently qualify as Tier 1 capital for regulatory purposes. See additional discussion in Note 2 regarding the impact of FIN 46R on trust preferred securities.~~

~~Banknorth, NA must maintain noninterest-bearing cash balances on reserve~~us with the ~~Federal Reserve Bank (“FRB”). In 2003 and 2002,~~capital contributed by us in exchange for the ~~average required reserve balances were $79.5 million and $60.0 million, respectively.~~

~~FRB adopted quantitative measures which assign risk weightings~~common securities of such trusts. Junior subordinated debentures are equal to ~~assets and off-balance sheet items and also define and set minimum regulatory~~ capital requirements (risk-based capital ratios.) Banks are required to have core capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital consists principally of shareholders’ equity, including qualified perpetual preferred stock but excluding unrealized gains and losses on securities ~~available for sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital~~ plus certain debt instruments and the reserve for credit losses, subject to limitations. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. The regulations also define well-capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively. At December 31, 2003 and 2002, Banknorth and its depository subsidiary were “well-capitalized”, as defined, and in compliance with all applicable regulatory capital requirements. There are no conditions or events since December 31, 2003 that management believes would cause a change in Banknorth’s well-capitalized status.

~~The following table summarizes Banknorth’s and its depository subsidiary’s regulatory capital requirements at December 31, 2003 and 2002.~~

Dividends paid by subsidiaries are the primary source of funds available to Banknorth for payment of dividends to its shareholders. Banknorth’s banking subsidiary is subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the banking subsidiary to Banknorth. At December 31, 2003, Banknorth, NA had $491.8 million available for dividends that could be paid without prior regulatory approval.

~~In 1989, Banknorth’s Board of Directors adopted a~~ Stockholder Rights Plan declaring a dividend of one preferred Stock Purchase Right for each outstanding share of Company common stock. The rights will remain attached to the Common Stock and are not exercisable except under limited circumstances relating to the acquisition of, the right to acquire beneficial ownership of, or tender offer for 15% or more of the outstanding shares of Company common stock. The rights have no voting or dividend privileges and, until they become exercisable, have no dilutive effect on the earnings of Banknorth. On July 27, 1999 the Board of Directors amended and restated the Stockholder Rights Plan to, among other things, extend the expiration date of the rights to September 25, 2009. On July 25, 2000, Banknorth again amended and restated the Stockholder Rights Plan to reflect its acquisition of Banknorth (Vermont).

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
16. Derivative Instruments

~~The following table presents a computation of earnings per share for the periods indicated.~~

17. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks
Banknorth is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, commitments to invest in real estate limited partnerships, standby letters of credit, recourse arrangements on serviced loans, forward commitments to sell loans, foreign currency forward contracts and commercial loan interest rate swaps. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement Banknorth has in particular classes of financial instruments.
Banknorth’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. Banknorth uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward commitments to sell
83


Maine		01-0437984
(State or other jurisdiction of incorporation or organization)		~~01-0437984~~ (I.R.S. Employer Identification Number)


Title of Class		Name of Each Exchange on Which Registered

Common Stock, $.01 par value Preferred Stock Purchase Rights		New York Stock Exchange, Inc. New York Stock Exchange, Inc.


		Page

~~PART I~~

PART I
Item 1.	BUSINESS		1
	General		1
	~~Business~~Pending Acquisition		1
	Business		1
	Acquisitions		2
	Subsidiaries and Other Equity Investments		2
	Competition		3
	Employees		34
	Supervision and Regulation		34
	Taxation		7
	Statistical Disclosure by Bank Holding Companies		8
	~~Statistical Disclosure by Bank Holding Companies~~Availability of Information		8
Item 2.	~~Availability of Information~~PROPERTIES		9
Item 2.3.	~~PROPERTIES~~LEGAL PROCEEDINGS		9
Item 3.4.	~~LEGAL PROCEEDINGS~~		9
~~Item 4.~~	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		109
PART II

Item 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		10
Item 6.	SELECTED ~~CONSOLIDATED~~ FINANCIAL DATA		11
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		5054
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		5155
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		~~103~~109
Item 9A.	CONTROLS AND PROCEDURES		~~103~~109
Item 9B.	OTHER INFORMATION		109
PART III

Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		~~103~~109
Item 11.	EXECUTIVE COMPENSATION		~~103~~109
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		~~103~~110
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		~~104~~110
Item 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		~~104~~110
~~PART IV~~

PART IV
Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ~~AND REPORTS ON FORM 8-K~~		~~105~~110
	SIGNATURES		~~108~~114
~~Ex-10.(A) Severance Agreement~~EX-10.(I) Retention Agmt. dated September 30, 2004
EX-10.(J)(2) Retirement Agmt. with William J. Ryan
~~Ex-10.(B) Severance Agreement Executive Officers~~EX-10.(K)(2) Retirement Agmt. with Peter J. Verrill
~~Ex-10.(C)Supplemental~~EX-10.(L)(4) Retirement ~~Agmnt (Ryan)~~Agmt. with John W. Fridlington
~~Ex-10.(D)~~EX-10.(M)(2) Amendment to Supplemental Retirement ~~Agmnt (Verrill)~~
~~Ex-10.(E)(3) Suppl. Retirement Agmnt (Fridlington)~~
~~Ex-10.(K) 1995 Stock Option~~ Plan
~~Ex-10.(L) 401 (K)~~EX-10(N)(2) Amended Deferred Compensation Plan
~~Ex-21 List~~EX-10(S)(2) First Amendment to the Amended and Restated 401(k) Plan
EX-21 Subsidiaries of ~~Subsidiaries~~Banknorth Group, Inc.
Ex-23 Consent of ~~KPMG LLP~~Independent Registered Public Accounting Firm
~~Ex-31.1~~EX-31.1 Section 302 CEO ~~CERTIFICATION~~Certification
~~Ex-31.2 CERTIFICATION OF~~EX-31.2 Section 302 CFO Certification
~~Ex-32.1 CERTIFICATION OF~~EX-32.1 Section 906 CEO Certification
EX-32.2 ~~CERTIFICATION OF~~Section 906 CFO Certification


þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


P.O. Box 9540 Two Portland Square Portland, Maine (Address of principal executive offices)		04112-9540 (Zip Code)


	•	our investments in our businesses and in related technology could require additional incremental spending, and might not produce expected deposit and loan growth and anticipated contributions to our earnings;

	•	general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan and lease losses or a reduced demand for credit or fee-based products and services;

	•	changes in the domestic interest rate environment could reduce net interest income and could increase credit losses;

	•	the conditions of the securities markets could change, which could adversely affect, among other things, the value or credit quality of our assets, the availability and terms of funding necessary to meet our liquidity needs and our ability to originate loans and leases;

	•	changes in the extensive laws, regulations and policies governing financial holding companies and their subsidiaries could alter our business environment or affect our operations;

	•	the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending;

	•	competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments such as the internet or bank regulatory reform;

	•	acquisitions may result in large one-time charges to income, may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated and may result in unforeseen integration difficulties; and

	•	acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States generally and in our principal markets, which could have an adverse effect on our financial performance and that of our borrowers and on the financial markets and the price of our common stock.


	•	The new legislation creates a public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review. The new board is funded by mandatory fees paid by all public companies. The new legislation also improves the Financial Accounting Standards Board, giving it full financial independence from the accounting industry.

	•	The new legislation strengthens auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients.

	•	The new legislation heightens the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies. Among other things, the new legislation provides for a strong public company audit committee that will be directly responsible for the appointment, compensation and oversight of the work of the public company auditors.

	•	The new legislation contains a number of provisions to deter wrongdoing. CEOs and CFOs now have to certify that company financial statements fairly present the company’s financial condition. If a misleading financial statement later results in a restatement, the CEO and CFO must forfeit and return to the company any bonus, stock or stock option compensation received in the twelve months following the misleading financial report. The new legislation also prohibits any company officer or director from attempting to mislead or coerce an auditor. Among other reforms, the new legislation empowers the SEC to bar certain persons from serving as officers or directors of a public company; prohibits insider trades during pension fund “blackout periods;” directs the SEC to adopt rules requiring attorneys to report securities law violations; and requires that civil penalties imposed by the SEC go into a disgorgement fund to benefit harmed investors.

	•	The new legislation imposes a range of new corporate disclosure requirements. Among other things, the new legislation requires public companies to report all off-balance-sheet transactions and conflicts, as well as to present any pro forma disclosures in a way that is not misleading and in accordance with requirements established by the SEC. The new legislation also accelerated the required reporting of insider transactions, which now generally must be reported by the end of the second business day following a covered transaction; requires that annual reports filed with the SEC include a statement by management asserting that it is responsible for creating and maintaining adequate internal controls and assessing the effectiveness of those controls; and requires companies to disclose whether or not they have adopted an ethics code for senior financial officers, and, if not, why not, and whether the audit committee includes at least one “financial expert,” a term which has been defined by the SEC in accordance with specified requirements. The new legislation also requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.


	•	~~The new legislation contains provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts.~~

	•	Finally, the new legislation imposes a range of new criminal penalties for fraud and other wrongful acts, as well as extends the period during which certain types of lawsuits can be brought against a company or its insiders.



				Amount of Commitment Expiration — Per Period
		Total
		Amounts		Less than						After
Other Commitments		Committed		1 Year		1-3 Years		4-5 Years		5 Years

Unused portions on lines of credit		$	4,268,079	$	314,512	$	235,120	$	31,428	$	3,687,019
Standby letters of credit			407,395		95,268		78,812		93,179		140,136
Commitments to originate loans			1,569,612		1,063,842		247,390		37,942		220,438
Other commitments			48,203		18,218		4,818		1,935		23,232

	Total commitments	$	6,293,289	$	1,491,840	$	566,140	$	164,484	$	4,070,825



			December 31,

			2003			2002			2001			2000			1999

Nonaccrual loans
	Residential real estate loans		$	7,157		$	5,781		$	8,311		$	9,894		$	17,283
	Commercial real estate loans			19,700			17,649			17,124			12,155			16,754
	Commercial business loans and leases			24,412			32,693			40,341			32,583			17,027
	Consumer loans and leases			8,493			9,194			9,470			6,329			5,951

		Total nonaccrual loans		59,762			65,317			75,246			60,961			57,015
	Troubled debt restructurings			—			—			—			673			1,112

		Total nonperforming loans		59,762			65,317			75,246			61,634			58,127

Other nonperforming assets:
	Other real estate owned, net of related reserves			529			100			1,861			4,074			8,154
	Repossessions, net of related reserves			2,812			3,536			2,016			1,424			2,911
	Securities available for sale			—			—			2,104			—			—

		Total		3,341			3,636			5,981			5,498			11,065

Total nonperforming assets			$	63,103		$	68,953		$	81,227		$	67,132		$	69,192

Accruing loans 90 days or more overdue			$	4,915		$	3,373		$	6,227		$	5,973		$	12,131

Total nonperforming loans as a percentage of total loans				0.37	%		0.46	%		0.59	%		0.57	%		0.59	%
Total nonperforming assets as a percentage of total assets				0.24	%		0.29	%		0.39	%		0.37	%		0.37	%
Total nonperforming assets as a percentage of total loans and other nonperforming assets				0.39	%		0.49	%		0.64	%		0.62	%		0.70	%



			Year Ended December 31,

			2003		2002			2001		2000		1999

Allowance at the beginning of period			$	208,273	$	189,837		$	153,550	$	155,048	$	155,098
Additions due to acquisitions				19,008		12,794			31,277		—		—
Charge-offs:
	Residential real estate mortgages			197		(138	)		626		1,828		3,622
	Commercial real estate mortgages			577		1,290			2,267		3,566		5,076
	Commercial business loans and leases			16,272		24,455			20,899		7,790		5,125
	Consumer loans and leases			32,563		26,395			21,860		21,508		22,211

		Total loans and leases charged off		49,609		52,002			45,652		34,692		36,034

Recoveries:
	Residential real estate mortgages			64		122			241		107		626
	Commercial real estate mortgages			1,761		117			222		2,371		2,527
	Commercial business loans and leases			6,367		8,972			4,800		2,334		3,188
	Consumer loans and leases			4,122		4,119			3,510		4,563		6,068

		Total loans and leases recovered		12,314		13,330			8,773		9,375		12,409

		Net charge-offs		37,295		38,672			36,879		25,317		23,625
Provision for loan and lease losses				42,301		44,314			41,889		23,819		23,575

Allowance at the end of the period			$	232,287	$	208,273		$	189,837	$	153,550	$	155,048


	200 Basis Point			100 Basis Point			100 Basis Point
	Rate Increase			Rate Increase			Rate Decrease

December 31, 2003		(0.26	)%		0.24	%		(0.71	)%

December 31, 2002		3.40	%		2.15	%		(2.64	)%


Item 1.	*Business*



		Notional Amount Maturing
														Fair
December 31, 2003		2004		2005		2006		2007		Thereafter		Total		Value

Interest rate contracts
	Pay variable, receive fixed	$	—	$	216,500	$	—	$	—	$	350,000	$	566,500	$	(1,896	)
Forward commitments to sell loans			61,000		—		—		—		—		61,000		(425	)


	Issuance				Stated			Maturity
Name	Date		Amount		Rate			Date

Peoples Heritage Capital Trust I		1/31/1997	$	61,775		9.06	%		2/1/2027
Banknorth Capital Trust I		5/1/1997		30,000		10.52	%		5/1/2027
Ipswich Statutory Trust I		2/22/2001		3,500		10.20	%		2/22/2031
Banknorth Capital Trust II		2/22/2002		200,000		8.00	%		4/1/2032

			$	295,275



							Transaction-Related Items
			Balance at
			Acquisition Date						Other						Total
	Acquisition								Identifiable		Cash		Shares		Purchase
(Dollars and shares in millions)	Date		Assets		Equity		Goodwill		Intangibles		Paid		Issued		Price

First & Ocean Bancorp		12/31/2003	$	274.4	$	15.6	$	33.8	$	1.8	$	49.7		—	$	49.7
American Financial Holdings, Inc.		2/14/2003		2,690.3		408.2		426.3		9.3		328.5		13.4		711.4
Insurance agency acquisitions		2003		1.2		0.1		2.4		0.7		3.2		—		3.2
Warren Bancorp, Inc.		12/31/2002		466.1		45.3		91.8		2.7		59.8		2.7		136.6
Bancorp Connecticut, Inc.		8/31/2002		661.7		61.4		97.0		8.7		161.2		—		161.2
Ipswich Bancshares, Inc.		7/26/2002		318.0		13.9		22.2		4.8		19.9		0.9		40.1
Insurance agency acquisitions		2002		2.5		—		5.7		2.2		—		0.2		7.4
Andover Bancorp, Inc.		10/31/2001		1,796.0		162.9		188.5		13.2		—		16.5		340.0
Metrowest Bank		10/31/2001		907.7		62.0		96.5		5.0		164.8		—		164.8


Assets:
Investments		$	650,701
Loans and leases, net			1,647,304
Premises and equipment			15,607
Mortgage servicing rights			472
Goodwill			460,102
Other intangibles			11,065
Other assets			561,886

	Total assets acquired		3,347,137

Liabilities:
Deposits			2,152,098
Borrowings			423,741
Other liabilities			10,241

	Total liabilities assumed		2,586,080

	Net assets acquired	$	761,057


					Gross		Gross
			Amortized		Unrealized		Unrealized			Market
			Cost		Gains		Losses			Value

Available for Sale
	December 31, 2003:
	U.S. Government obligations and obligations of U.S. Government agencies and corporations		$	2,359,347	$	1,993	$	(41,165	)	$	2,320,175
	Tax-exempt bonds and notes			138,280		3,191		(21	)		141,450
	Other bonds and notes			365,109		16,279		(886	)		380,502
	Mortgage-backed securities			3,834,958		50,167		(21,747	)		3,863,378
	Collateralized mortgage obligations			264,545		4,138		(648	)		268,035

		Total debt securities		6,962,239		75,768		(64,467	)		6,973,540
	Federal Home Loan Bank stock			104,397		—		—			104,397
	Federal Reserve Bank stock			37,666		—		—			37,666
	Other equity securities			6,868		521		—			7,389

		Total equity securities		148,931		521		—			149,452

		Total securities available for sale	$	7,111,170	$	76,289	$	(64,467	)	$	7,122,992

	December 31, 2002:
	U.S. Government obligations and obligations of U.S. Government agencies and corporations		$	1,539,447	$	21,514	$	(13	)	$	1,560,948
	Tax-exempt bonds and notes			95,332		2,053		(7	)		97,378
	Other bonds and notes			356,551		14,796		(3,192	)		368,155
	Mortgage-backed securities			3,659,334		139,974		(87	)		3,799,221
	Collateralized mortgage obligations			581,357		7,112		(1,143	)		587,326

		Total debt securities		6,232,021		185,449		(4,442	)		6,413,028
	Federal Home Loan Bank stock			275,768		0		0			275,768
	Federal Reserve Bank stock			35,250		0		0			35,250
	Other equity securities			7,177		415		(171	)		7,421

		Total equity securities		318,195		415		(171	)		318,439

		Total securities available for sale	$	6,550,216	$	185,864	$	(4,613	)	$	6,731,467

Held to Maturity:
	December 31, 2003:
	Collateralized mortgage obligations		$	124,240	$	104	$	—		$	124,344

		Total securities held to maturity	$	124,240	$	104	$	—		$	124,344

	December 31, 2002:
	Collateralized mortgage obligations		$	216,409	$	5,162	$	—		$	221,571

		Total securities held to maturity	$	216,409	$	5,162	$	—		$	221,571



	Less than 1 year							More than 1 year							Total

	Number of		Fair		Unrealized			Number of		Fair		Unrealized			Number of		Fair		Unrealized
Available for Sale:	Investments		Value		Losses			Investments		Value		Losses			Investments		Value		Losses

U.S. Government obligations and obligations of U.S. Government agencies and corporations		31	$	1,924,041	$	(41,165	)		—	$	—	$	—			31	$	1,924,041	$	(41,165	)
Tax-exempt bonds and notes		1		390		(21	)		—		—		—			1		390		(21	)
Other bonds and notes		16		20,781		(743	)		6		9,372		(143	)		22		30,153		(886	)
Mortgage-backed securities		109		1,652,061		(21,739	)		5		434		(8	)		114		1,652,495		(21,747	)
Collateralized mortgage obligations		14		96,875		(647	)		3		441		(1	)		17		97,316		(648	)

		171	$	3,694,148	$	(64,315	)		14	$	10,247	$	(152	)		185	$	3,704,395	$	(64,467	)



		Available for Sale				Held to Maturity

		Amortized		Market		Amortized		Market
		Cost		Value		Cost		Value

December 31, 2003:
Due in one year or less		$	119,723	$	120,506	$	—	$	—
Due after one year through five years			2,121,355		2,101,956		—		—
Due after five years through ten years			874,492		881,262		—		—
Due after ten years			3,846,669		3,869,816		124,240		124,344

	Total debt securities	$	6,962,239	$	6,973,540	$	124,240	$	124,344



	Gross Realized

	Gains		Losses

2003	$	44,744	$	2,284
2002		9,823		2,541
2001		4,291		2,962


		At or For the Year Ended December 31,

		2004				2003

		Recorded		Valuation		Recorded		Valuation
		Investment		Allowance		Investment		Allowance

Impaired loans
	Valuation allowance required	$	51,620	$	13,805	$	28,781	$	4,662
	No valuation allowance required		10,749		—		15,331		—

Total impaired loans		$	62,369	$	13,805	$	44,112	$	4,662

Average balance of impaired loans during the year		$	53,580			$	48,917

Interest income recognized on a cash basis on impaired loans during the year		$	2,501			$	1,675



	Year Ended
	December 31,

	2003		2002

Interest income that would have been recognized at original contractual terms	$	4,748	$	5,839
Amount recognized as interest income on a cash basis		2,746		2,900

Forgone revenue	$	2,002	$	2,939


							Other				Total
				Core Deposit			Identifiable				Identifiable
	Goodwill			Intangibles			Intangibles				Intangibles

Balance, December 31, 2001	$	409,340		$	21,321		$	35,972			$	57,293
Recorded during the year		215,586			14,817			5,754				20,571
Reclassification under SFAS No. 147		34,695			—			(34,695	)			(34,695	)
Other reclassification		2,214			(2,214	)						(2,214	)
Amortization expense		—			(5,486	)		(1,006	)			(6,492	)
Adjustment of purchase accounting estimates		(1,151	)		—			11				11

Balance, December 31, 2002		660,684			28,438			6,036		��		34,474
Recorded during the year		462,531			6,807			6,861				13,668
Adjust Warren’s estimated CDI to actual		2,244			(2,244	)		—				(2,244	)
Amortization expense		—			(4,574	)		(4,372	)			(8,946	)
Massachusetts REIT adjustment		2,473			—			—				—
Other adjustment of purchase accounting estimates		(1,293	)		(262	)		(275	)			(537	)

Balance, December 31, 2003	$	1,126,639		$	28,165		$	8,250			$	36,415



		December 31, 2003

		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Identifiable intangible assets:
Core deposit intangibles		$	55,145	$	26,980	$	28,165
Other identifiable intangibles			13,703		5,453		8,250

	Total	$	68,848	$	32,433	$	36,415


								Other			Total
					Core Deposit			Identifiable			Identifiable
		Goodwill			Intangibles			Intangibles			Intangibles

Balance, December 31, 2002		$	660,684		$	28,438		$	6,036		$	34,474
Recorded during the year			462,531			6,807			6,861			13,668
Adjust Warren’s estimated CDI to actual			2,244			(2,244	)		—			(2,244	)
Amortization expense			—			(4,574	)		(4,372	)		(8,946	)
Massachusetts REIT adjustment			2,473			—			—			—
Other adjustment of purchase accounting estimates			(1,293	)		(262	)		(275	)		(537	)

Balance, December 31, 2003			1,126,639			28,165			8,250			36,415
Recorded during the year			245,930			21,566			1,042			22,608
Amortization expense			—			(5,988	)		(2,639	)		(8,627	)
Reclassification			—			—			—			—
Other adjustment of purchase accounting estimates			(6,789	)		(20	)		—			(20	)

Balance, December 31, 2004		$	1,365,780		$	43,723		$	6,653		$	50,376

Estimated Annual Amortization Expense:
	2005		—		$	6,350		$	1,492		$	7,842
	2006		—			5,679			745			6,424
	2007		—			5,194			745			5,939
	2008		—			5,190			375			5,565
	2009		—			5,190			375			5,565
	Thereafter		—			16,120			484			16,604


		December 31, 2004

		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Identifiable intangible assets:
Core deposit intangibles		$	57,858	$	14,135	$	43,723
Other identifiable intangibles			14,746		8,093		6,653

	Total	$	72,604	$	22,228	$	50,376


	Year-Ended December 31,

	2004			2003			2002

The Toronto-Dominion Bank Merger Charges
Personnel costs	$	34,986		$	—		$	—
Other costs		3,890			—			—

		38,876			—			—

Foxborough Savings Bank Merger Charges
Personnel costs		611			—			—
Systems conversion and integration/customer communications		1,274			1			—
Other costs		348			—			—

		2,233			1			—

CCBT Financial Companies, Inc. Merger Charges
Personnel costs		1,795			—			—
Systems conversion and integration/customer communications		2,720			—			—
Other costs		1,324			—			—

		5,839			—			—

BostonFed Bancorp, Inc. Merger Charges
Personnel costs		26
Systems conversion and integration/customer communications		1,297			—			—
Other costs		114			—			—

		1,437			—			—

Other
American Financial Holdings, Inc. merger charges		400			5,358			855
First & Ocean Bancorp merger charges		1,342			458			—
Warren Bancorp, Inc. merger charges		29			2,424			240
Bancorp Connecticut merger charges		49			363			2,746
Ipswich Bancshares merger charges		—			143			1,900
Andover Bancorp, Inc./MetroWest Bank merger charges		—			12			5,830
Banknorth Group, Inc. (Vermont) reverse reserves for auto lease residuals		(570	)		(615	)		(574	)
Charter consolidation costs		—			—			3,601
Branch Closings		—			(40	)		93

		1,250			8,103			14,691

Total Merger and Consolidation Costs	$	49,635		$	8,104		$	14,691


			Purchase								Non-cash
			Accounting		Merger and						Write Downs
	Balance		Adjustments at		Consolidation			Cash			and Other			Balance
	12/31/03		Acquisition		Costs			Payments			Adjustments			12/31/04

The Toronto-Dominion Bank Merger	$	—	$	623	$	38,879		$	(39,070	)	$	—		$	432
BostonFed Bancorp, Inc. Merger		—		—		1,436			(1,436	)		—			—
Foxborough Savings Bank Merger		—		1,196		2,232			(2,880	)		(87	)		461
CCBT Financial Companies, Inc. Merger		—		10,407		5,837			(13,908	)		(370	)		1,966
First & Ocean Bancorp Merger		250		1,715		1,342			(3,101	)		—			206
American Financial Holdings, Inc. Merger		266		—		400			(400	)		(266	)		—
Warren Bancorp, Inc. Merger		27		—		29			(29	)		(27	)		—
Bancorp Connecticut, Inc. Merger		466		—		50			(516	)		—			—
Andover/ MetroWest Merger		84		—		—			(6	)		—			78
Other merger and consolidation costs		4		—		(570	)		(2	)		568			—

Total	$	1,097	$	13,941	$	49,635		$	(61,348	)	$	(182	)	$	3,143


					Merger &						Non-cash Write
	Balance		Accrued at		Consolidation			Cash			Downs and Other			Balance
	12/31/02		Acquisition		Costs			Payments			Adjustments			12/31/03

First & Ocean	$	—	$	585	$	458		$	(792	)	$	—		$	251
American Merger		—		13,600		5,358			(17,257	)		(1,435	)		266
Warren Merger		2,052		—		2,424			(4,670	)		221			27
Bancorp Connecticut Merger		3,097		—		363			(1,196	)		(1,798	)		466
Ipswich Merger		—		—		143			(143	)		—			—
Andover/MetroWest Merger		321		—		12			(60	)		(189	)		84
Other Merger and Consolidation Costs		84		—		(654	)		(38	)		611			3

Total	$	5,554	$	14,185	$	8,104		$	(24,156	)	$	(2,590	)	$	1,097



		At or for the Year Ended December 31,

		2003		2002		2001

Balance outstanding at end of period
	Securities sold under agreements to repurchase — retail	$	1,086,900	$	1,222,466	$	999,506
	Federal funds purchased		358,000		53,000		50,000
	Treasury, tax and loan notes		77,397		1,001		41,713

		$	1,522,297	$	1,276,467	$	1,091,219



December 31, 2003							December 31, 2002

Maturity		Principal					Maturity		Principal
Dates		Amounts		Interest Rates			Dates		Amounts		Interest Rates

	2004	$	2,694,008		0.17 – 8.09	%		2003	$	1,170,870		1.68 – 7.14	%
	2005		625,744		1.72 – 7.45	%		2004		1,134,062		1.15 – 6.45	%
	2006		291,063		2.24 – 6.39	%		2005		718,134		2.32 – 7.45	%
	2007		9,934		2.70 – 8.04	%		2006		440,579		2.72 – 6.39	%
	2008		151,253		3.07 – 6.42	%		2007		8,199		3.45 – 8.04	%
	2009 – 2032		588,565		1.00 – 10.52	%		2008 – 2032		684,270		2.51 – 10.52	%

		$	4,360,567						$	4,156,114



		Actual					Capital Requirements					Excess

		Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2003
Banknorth Group, Inc.
	Total capital (to risk weighted assets)	$	2,088,061		11.29	%	$	1,479,352		8.00	%	$	608,709		3.29	%
	Tier 1 capital (to risk weighted assets)		1,656,848		8.96	%		739,676		4.00	%		917,172		4.96	%
	Tier 1 leverage capital ratio (to average assets)		1,656,848		6.65	%		996,777		4.00	%		660,071		2.65	%
Banknorth NA
	Total capital (to risk weighted assets)		1,970,705		10.67	%		1,477,591		8.00	%		493,114		2.67	%
	Tier 1 capital (to risk weighted assets)		1,539,814		8.34	%		738,796		4.00	%		801,018		4.34	%
	Tier 1 leverage capital ratio (to average assets)		1,539,814		6.18	%		995,893		4.00	%		543,921		2.18	%
As of December 31, 2002
Banknorth Group, Inc.
	Total capital (to risk weighted assets)	$	1,960,869		12.15	%	$	1,291,616		8.00	%	$	669,253		4.15	%
	Tier 1 capital (to risk weighted assets)		1,558,974		9.66	%		645,808		4.00	%		913,166		5.66	%
	Tier 1 leverage capital ratio (to average assets)		1,558,974		7.13	%		874,180		4.00	%		684,794		3.13	%
Banknorth NA
	Total capital (to risk weighted assets)		1,822,307		11.31	%		1,288,562		8.00	%		533,745		3.31	%
	Tier 1 capital (to risk weighted assets)		1,421,995		8.83	%		644,281		4.00	%		777,714		4.83	%
	Tier 1 leverage capital ratio (to average assets)		1,421,995		6.52	%		871,830		4.00	%		550,165		2.52	%