##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31,
2003



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to
.

Commission File Number: 001-31251

Banknorth Group, Inc.


(Exact name of registrant as specified in its
charter)


|                                                                                                      |  |                                                      
|----------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------
|Maine(State or other jurisdiction
    of incorporation or organization)                               |  | 01-0437984(I.R.S. Employer
    Identification Number)
|P.O. Box 9540
    Two Portland Square
    Portland, Maine(Address of principal executive
    offices) |  | 04112-9540(Zip Code)                                 

Registrants telephone number, including
area code: (207) 761-8500

Securities registered pursuant to
Section 12(b) of the Act:

|                                                                 |  |                                                                
|---------------------------------------------------------------- |  | ---------------------------------------------------------------
|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.

Securities registered pursuant to
Section 12(g) of the Act: Not Applicable

Indicate by check mark whether the Registrant
(1) has filed all reports required by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such
filing requirements for the past
90 days. Yes þ No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o

As of June 30, 2003, the aggregate market
value of the 160,842,923 shares of Common Stock of the
Registrant issued and outstanding on such date, excluding the
approximately 1,145,533 shares held by all directors and
executive officers of the Registrant as a group (which does not
include unexercised stock options), was $4.1 billion. This
figure is based on the last sale price of $25.52 per share
of the Registrants Common Stock on June 30, 2003, as
reported in The Wall Street Journal on July 1, 2003.
Although directors of the Registrant and executive officers of
the Registrant and its subsidiaries were assumed to be
affiliates of the Registrant for purposes of this
calculation, the classification is not to be interpreted as an
admission of such status.

Number of shares of Common Stock outstanding as
of February 26, 2004: 162,830,806

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if
incorporated by reference and the part of the Form 10-K
into which the document is incorporated:

Portions of the definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on April 27,
2004 are incorporated by reference into Part III,
Items 10-14 of this Form 10-K.



---






---










BANKNORTH GROUP, INC.

2003 FORM 10-K ANNUAL REPORT


TABLE OF CONTENTS

|                                                   |  |                                                                                                                   |  |      |     | 
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                   |  |                                                                                                                   |  | Page
|                                                   |  |                                                                                                                   |  |     
|PART I                                            
|                                                  
|Item 1.                                            |  | BUSINESS                                                                                                          |  |      | 1   | 
|                                                   |  | General                                                                                                           |  |      | 1   | 
|                                                   |  | Business                                                                                                          |  |      | 1   | 
|                                                   |  | Acquisitions                                                                                                      |  |      | 2   | 
|                                                   |  | Subsidiaries and Other
    Equity Investments                                                                     |  |      | 2   | 
|                                                   |  | Competition                                                                                                       |  |      | 3   | 
|                                                   |  | Employees                                                                                                         |  |      | 3   | 
|                                                   |  | Supervision and
    Regulation                                                                                    |  |      | 3   | 
|                                                   |  | Taxation                                                                                                          |  |      | 8   | 
|                                                   |  | Statistical Disclosure by
    Bank Holding Companies                                                              |  |      | 8   | 
|                                                   |  | Availability of
    Information                                                                                   |  |      | 9   | 
|Item 2.                                            |  | PROPERTIES                                                                                                        |  |      | 9   | 
|Item 3.                                            |  | LEGAL PROCEEDINGS                                                                                                 |  |      | 9   | 
|Item 4.                                            |  | SUBMISSION OF MATTERS TO A
    VOTE OF SECURITY HOLDERS                                                           |  |      | 10  | 
|PART II                                           
|                                                  
|Item 5.                                            |  | MARKET FOR THE
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF 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                                                    |  |      | 50  | 
|Item 8.                                            |  | FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA                                                                   |  |      | 51  | 
|Item 9.                                            |  | CHANGES IN AND DISAGREEMENTS
    WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                          |  |      | 103 | 
|Item 9A.                                           |  | CONTROLS AND PROCEDURES                                                                                           |  |      | 103 | 
|PART III                                          
|                                                  
|Item 10.                                           |  | DIRECTORS AND EXECUTIVE
    OFFICERS OF THE REGISTRANT                                                            |  |      | 103 | 
|Item 11.                                           |  | EXECUTIVE COMPENSATION                                                                                            |  |      | 103 | 
|Item 12.                                           |  | SECURITY OWNERSHIP OF
    CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
    MATTERS            |  |      | 103 | 
|Item 13.                                           |  | CERTAIN RELATIONSHIPS AND
    RELATED TRANSACTIONS                                                                |  |      | 104 | 
|Item 14.                                           |  | PRINCIPAL ACCOUNTANT FEES
    AND SERVICES                                                                        |  |      | 104 | 
|PART IV                                           
|                                                  
|Item 15.                                           |  | EXHIBITS, FINANCIAL
    STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                              |  |      | 105 | 
|                                                   |  | SIGNATURES                                                                                                        |  |      | 108 | 
|Ex-10.(A) Severance Agreement William J. Ryan     
|Ex-10.(B) Severance Agreement Executive Officers  
|Ex-10.(C)Supplemental Retirement Agmnt (Ryan)     
|Ex-10.(D) Supplemental Retirement Agmnt (Verrill) 
|Ex-10.(E)(3) Suppl. Retirement Agmnt (Fridlington)
|Ex-10.(K) 1995 Stock Option Plan                  
|Ex-10.(L) 401 (K) Plan                            
|Ex-21 List of Subsidiaries                        
|Ex-23 Consent of KPMG LLP                         
|Ex-31.1 CEO CERTIFICATION                         
|Ex-31.2 CERTIFICATION OF CFO                      
|Ex-32.1 CERTIFICATION OF CEO                      
|EX-32.2 CERTIFICATION OF CFO                      



i



---



##### Table of Contents



FORWARD-LOOKING STATEMENTS

In the normal course of business, we, in an
effort to help keep our shareholders and the public informed
about our operations, may from time to time issue or make
certain statements, either in writing or orally, that are or
contain forward-looking statements, as that term is defined in
the U.S. federal securities laws. Generally, these
statements relate to business plans or strategies, projected or
anticipated benefits from acquisitions made by or to be made by
us, projections involving anticipated revenues, earnings,
profitability or other aspects of operating results or other
future developments in our affairs or the industry in which we
conduct business. Forward-looking statements may be identified
by reference to a future period or periods or by the use of
forward-looking terminology such as anticipate,
believe, expect, intend,
plan, estimate or similar expressions.

Although we believe that the anticipated results
or other expectations reflected in our forward-looking
statements are based on reasonable assumptions, we can give no
assurance that those results or expectations will be attained.
Forward-looking statements involve risks, uncertainties and
assumptions (some of which are beyond our control), and as a
result actual results may differ materially from those expressed
in forward-looking statements. Factors that could cause actual
results to differ from forward-looking statements include, but
are not limited to, the following, as well as those discussed
elsewhere herein:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

You should not put undue reliance on any
forward-looking statements. Forward-looking statements speak
only as of the date they are made, and we undertake no
obligation to update them in light of new information or future
events except to the extent required by federal securities laws.

ii



---



##### Table of Contents






PART I.





|        |         
|------- | --------
|Item 1. | Business



General

We, Banknorth Group, Inc., are a Maine
corporation and a registered bank holding company and financial
holding company under the Bank Holding Company Act of 1956, as
amended. We conduct business from our headquarters in Portland,
Maine and, as of December 31, 2003, 359 banking offices
located in Maine, New Hampshire, Massachusetts, Vermont, New
York and Connecticut. 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, a national bank which was initially formed as
a Maine-chartered savings bank in the mid-19th century.
Effective January 1, 2002, we consolidated all eight of our
other banking subsidiaries and our trust company subsidiary into
Banknorth, NA, which was known as Peoples Heritage
Bank prior to these consolidations. 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 to take advantage of the
strong brand identity associated with the names of these
predecessor banks. Banknorth, NA operates under its name
elsewhere in our market areas. Through Banknorth, NA we offer a
full range of banking services and products to individuals,
businesses and governments throughout our market areas,
including commercial, consumer and trust and investment services.

Unless the context otherwise requires, the words
Banknorth, we, our and
us herein refer to Banknorth Group, Inc. and its
subsidiaries.




Business

Our principal business consists of attracting
deposits from the general public through our banking offices and
using these deposits to originate loans secured by first
mortgage liens on existing single-family (one-to-four units)
residential real estate and existing multi-family (over four
units) residential and commercial real estate, construction
loans, commercial business loans and leases and consumer loans.
We also provide various mortgage banking services and investment
management services, as well as, through subsidiaries of
Banknorth, NA, engage in equipment leasing, investment planning,
securities brokerage and insurance brokerage activities. We also
invest in investment securities and other permitted investments.

We derive our income principally from interest
charged on loans and leases and, to a lesser extent, from
interest and dividends earned on investments. We also
increasingly derive income from non-interest sources such as
fees received in connection with various lending services,
deposit services, trust and investment management services,
investment planning services and merchant and electronic banking
services, as well as insurance brokerage commissions and, from
time to time, gains on the sale of assets. Our principal
expenses are interest expense on deposits and borrowings,
operating expenses, provisions for loan and lease losses and
income tax expense. Funds for activities are provided
principally by deposits, advances from the Federal Home Loan
Bank, securities sold under repurchase agreements, amortization
and prepayments of outstanding loans, maturities and sales of
investment securities and other sources.

Through Banknorth, NA we provide extensive trust
and investment management services to our customers. We offer
employee benefit trust services in which we act as trustee,
custodian, administrator and/or investment advisor, among other
things, for employee benefit plans and for corporate,
self-employed, municipal and not-for-profit employers located
throughout our market areas. In addition, we serve as trustee of
both living trusts and trusts under wills and in this capacity
hold, account for and manage financial assets, real estate and
special assets. Custody, estate settlement and fiduciary tax
services, among others, also are offered by us. Assets held in a
fiduciary capacity by us are not included in our consolidated
balance sheet for financial reporting purposes.





---



##### Table of Contents



We are subject to extensive regulation and
supervision under federal and state banking laws. For additional
information in this regard, see Supervision and
Regulation below.




Acquisitions

Our profitability and market share have been
enhanced in recent years through internal growth and
acquisitions of both financial and nonfinancial institutions. We
continually evaluate acquisition opportunities and frequently
conduct due diligence in connection with possible acquisitions.
As a result, acquisition discussions and, in some cases,
negotiations frequently take place and future acquisitions
involving cash, debt or equity securities can be expected.
Acquisitions typically involve the payment of a premium over
book and market values, and therefore, some pro forma dilution
of our book value and net income per common share may occur in
connection with any future transactions. Moreover, acquisitions
commonly result in significant one-time charges against
earnings, although cost-savings, especially incident to
in-market acquisitions, frequently are anticipated, as are
revenue enhancements.




Subsidiaries and Other Equity
Investments

Our only direct subsidiaries at December 31,
2003 were Banknorth, NA, Northgroup Realty, Inc., an acquired
subsidiary which holds certain commercial real estate located in
Burlington, Vermont, Northgroup Captive Insurance, Inc. and the
following financing vehicles: Peoples Heritage Capital
Trust I, Banknorth Capital Trust I, Banknorth Capital
Trust II and Ipswich Statutory Trust I. For additional
information on these trusts, see Note 14 to the
Consolidated Financial Statements included in Item 8
hereof. Northgroup Captive Insurance, Inc. is a subsidiary
formed in 2002 to self-insure against certain of our risks.

Set forth below is a brief description of certain
of our indirect non-banking subsidiaries and certain other
equity investments.

Insurance Brokerage Activities.We conduct insurance brokerage
activities through Banknorth Insurance Group, Inc., which holds
all of the outstanding stock of Morse, Payson & Noyes
Insurance, the largest insurance brokerage firm in Maine. Morse
Payson & Noyes Insurance also conducts business in
(i) Vermont, (ii) New Hampshire under the trade name
A.D. Davis Insurance, (iii) Massachusetts through Banknorth
Insurance Agency, Inc./MA, a wholly-owned subsidiary of Morse,
Payson & Noyes Insurance, (iv) Connecticut under
the trade name Banknorth Insurance Agency and (v) upstate
New York under the trade name Community Insurance Agencies.

Investment Planning and Securities Brokerage
Activities.We conduct investment
planning and securities brokerage activities, as well as offer
investments in mutual funds and annuities, throughout our market
areas through Primevest Financial Services, Inc., an
unaffiliated company which uses the marketing name Bancnorth
Investment Planning Group. Through Banknorth, NA, Bancnorth
Investment Planning Group, Inc., a wholly-owned subsidiary of
Banknorth, NA, and Primevest Financial Services, Inc., we offer
these services to individuals and small businesses from an
office located in Portland, Maine and from certain of our other
locations in Maine, Massachusetts, New Hampshire, Vermont, New
York and Connecticut. Sales professionals at Banknorth, NA and
Bancnorth Investment Planning Group are registered
representatives of Primevest Financial Services, Inc., a
registered broker/dealer, and all securities brokerage
activities are conducted through Primevest Financial Services,
Inc. The sales professionals receive referrals from our branch
offices throughout our market areas.

In addition to the foregoing, Bancnorth
Investment Planning Group, Inc., conducts insurance sales
activities directly in Maine, New Hampshire, Connecticut,
Vermont and New York and indirectly, through its wholly-owned
insurance agency, Bancnorth Investment and Insurance Agency,
Inc., in Massachusetts. Bancnorth Investment Planning Group,
either directly or through other agencies, offers life insurance
and long-term care insurance products in conjunction with the
sales of investments and annuities.

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

2



---



##### Table of Contents



the States of Maine, New Hampshire,
Massachusetts, Vermont, New York, Connecticut, Rhode Island and
California. At December 31, 2003, Banknorth Leasing Corp.
had $98.1 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 Investments.We hold certain other investments,
primarily through Banknorth, NA and Four Eighty-One Corp., a
wholly-owned subsidiary of Banknorth, NA. At December 31,
2003, these investments consisted of (i) $59.4 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 million in such partnerships, and (ii) an
aggregate of $20.5 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 million in such partnerships. For
additional information about these investments see Note 18 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 full-time equivalent
employees as of December 31, 2003. 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.

3



---



##### Table of Contents



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
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

4



---



##### Table of Contents



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, our Tier 1 risk-based capital and
total risk-based capital ratios under these guidelines were
8.96% and 11.29%, 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, our
leverage ratio was 6.65%.

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.

5



---



##### Table of Contents



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
Community Reinvestment Act rating of Banknorth, NA was
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.

6



---



##### Table of Contents



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 of the 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.

7



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



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 10  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 11  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 13  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 14  Scheduled Contractual
Amortization of Certain Loans and Leases at December 31,
2003, which presents maturities and sensitivities of loans and
leases to changes in interest rates and is included in
Item 7;

Table 20  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 21  Five-Year Table of
Activity in the Allowance for Loan and Lease Losses, included in
Item 7;

Table 22  Allocation of the
Allowance for Loan and Lease Losses  Five Year
Schedule, included in Item 7;

Table 21  Net Charge-offs as a
Percent of Average Loans and Leases Outstanding, included in
Item 7;

8



---



##### Table of Contents



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

Table 18  Maturity of
Certificates of Deposit of $100,000 or more at December 31,
2003, 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 12 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 at http://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

At December 31, 2003, we conducted business
from our executive offices at Two Portland Square, Portland,
Maine and have 359 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.

|              |       |                 |     |                        |  |   |           |            | 
|------------- | ----- | --------------- | --- | ---------------------- |  | - | --------- | ---------- | 
|              |       | Number of       |     |                       
|State         |       | Banking Offices |     | Deposits              
|              |       |                 |     |                       
|              |       |                 |     | (Dollars in Thousands)
|Maine         |       |                 | 60  |                        |  | $ | 2,801,185 |           
|New Hampshire |       |                 | 77  |                        |  |   | 3,989,394 |           
|Massachusetts |       |                 | 115 |                        |  |   | 5,906,579 |           
|Vermont       |       |                 | 36  |                        |  |   | 2,451,052 |           
|New York      |       |                 | 27  |                        |  |   | 1,658,404 |           
|Connecticut   |       |                 | 44  |                        |  |   | 1,094,571 |           
|              |       |                 |     |                        |  |   |           |           
|              | Total |                 |     | 359                    |  |   | $         | 17,901,185 | 
|              |       |                 |     |                        |  |   |           |           

For additional information regarding our premises
and equipment and lease obligations, see Notes 7 and 18
respectively, to the Consolidated Financial Statements included
in Item 8 hereof.




Item 3.     Legal
Proceedings

We are involved in routine legal proceedings
occurring in the ordinary course of business which in the
aggregate are believed by us to be immaterial to our financial
condition and results of operations.

9



---



##### Table of Contents






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 2003.




PART II.






|        |                                                                                                             
|------- | ------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Stock,
    Related Stockholder Matters and Issuer Purchases of
    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 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 which were held
by approximately 19,750 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.During the year ended
December 31, 2003, we repurchased 4.5 million shares
at an 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.

10



---



##### Table of Contents








|        |                                         
|------- | ----------------------------------------
|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     |      
|                                                                    |       |      |            |       |  |      |            |       |  |      |            |       |  |   |            |       |  |   |            |      

11



---



##### Table of Contents





---



|    |                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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.                                                                                                                                                                                                             

12



---



##### Table of Contents








|        |                                                                                                                                                     
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|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.

13



---



##### Table of Contents



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                                                                                                                                                                                                                                                                                                                                                                                                                                 

14



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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).

15



---



##### Table of Contents



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.

16



---



##### Table of Contents



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.

17



---



##### Table of Contents



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 to 1.78% during 2003, a decrease of 83 basis points,
or 32%. This decrease more that offset a $3.0 billion, or
18%, increase in the average balance of interest-bearing
liabilities during 2003, as compared to 2002. Average
interest-bearing deposits increased by $2.1 billion, or
18%, in 2003, as compared to 2002. Excluding acquisitions,
average deposits increased by $232 million, or 1.4%, as
strong growth in demand and money market accounts 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 decrease in interest expense in 2003 more
than offset a $41.3 million, or 3.3%, decrease in
tax-equivalent interest 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

18



---



##### Table of Contents



average loans and leases due to internal 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 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.

19



---



##### Table of Contents



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.

20



---



##### Table of Contents



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 | %
|                    |                                                |                                                            |                                 |           |        |           |         |         |        |         |         |         |        |         |         |        |       |       |        |      |    |    |    |         |        |       |        |     

21



---



##### Table of Contents



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.

22



---



##### Table of Contents



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.

23



---



##### Table of Contents



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      | %

24



---



##### Table of Contents



|                                                                            |  |                              |            |           |  |            |        |            |  |       |        |   |  |   |        |   |  |   |            |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ---------- | --------- |  | ---------- | ------ | ---------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ---------- | -
|                                                                            |  |                             
|                                                                            |  | 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      | %

25



---



##### Table of Contents



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

26



---



##### Table of Contents



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

27



---



##### Table of Contents



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  | %
|                                     |                         |              |           |           |  |        |       |       |   |        |           |           |  |  |       |       |   |   |           |           |  |  |       |      

28



---



##### Table of Contents



|                                              |  |              |           |       |  |        |        |       |  |        |           |       |  |  |        |   |  |   |           |   |  |  |        |  
|--------------------------------------------- |  | ------------ | --------- | ----- |  | ------ | ------ | ----- |  | ------ | --------- | ----- |  |  | ------ | - |  | - | --------- | - |  |  | ------ | -
|                                              |  |             
|                                              |  | 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

29



---



##### Table of Contents



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 | %    
|                                     |                                    |              |            |           |  |        |        |       |   |        |            |           |  |        |        |       |   |        |            |           |  |  |        |       |   |   |            |           |  |  |        |       |   |   |           |           |  |  |        |      

30



---



##### Table of Contents



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 million, or 10%,
in 2003. Massachusetts reflected the greatest amount of growth.
The yield on commercial business 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.

31



---



##### Table of Contents



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 loans and leases averaged
$4.5 billion in 2003 and $3.6 billion in 2002, an
increase of 23%. Acquisitions accounted for approximately $502
million of the $836 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 5.61% 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%.

32



---



##### Table of Contents



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.

33



---



##### Table of Contents



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 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 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 | 
|                                  |                               |       |           |                        |  |           |         |           |  |         |           |           |  |   |         |         |  |   |           |          



---



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

34



---



##### Table of Contents



|                                   |                   |           |           |                                              |  |           |           |           |  |         |         |         |  |   |        |         |  |   |           |           | 
|---------------------------------- | ----------------- | --------- | --------- | -------------------------------------------- |  | --------- | --------- | --------- |  | ------- | ------- | ------- |  | - | ------ | ------- |  | - | --------- | --------- | 
|                                   |                   |           |           |                                             
|                                   |                   |           |           | 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 |           |        |         |  |         |       |  |  |         |        |  |  |        



---



|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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

35



---



##### Table of Contents



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



| |        
| | -------
| | 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 assess 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. 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 by 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 commitments 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 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.

36



---



##### Table of Contents





| |                     
| | --------------------
| | 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 0.24% at
December 31, 2003 and 0.29% at December 31, 2002.
Total nonperforming assets as a percentage of total loans and
other nonperforming assets amounted to 0.39% and 0.49% at
December 31, 2003 and 2002, respectively.

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.

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

37



---



##### Table of Contents



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 |       
|                                     |                                      |                                    |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       

38



---



##### Table of Contents



|                                                                                                 |                                      |                         |            |       |    |      |            |       |    |      |            |      |   |   |            |      |   |   |           |      |  
|------------------------------------------------------------------------------------------------ | ------------------------------------ | ----------------------- | ---------- | ----- | -- | ---- | ---------- | ----- | -- | ---- | ---------- | ---- | - | - | ---------- | ---- | - | - | --------- | ---- | -
|                                                                                                 |                                      |                        
|                                                                                                 |                                      | 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 |     



---



|    |                                                         
|--- | --------------------------------------------------------
|(1) | Excludes residential real estate loans held for
    sale



| |                        
| | -----------------------
| | 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 $142 million and $139 million
at December 31, 2003 and 2002, respectively. These loans
and delinquency trends are considered in the evaluation of the
allowance for 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

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, 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 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.

39



---



##### Table of Contents





|           |                                                                               
|---------- | ------------------------------------------------------------------------------
|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 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 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

40



---



##### Table of Contents



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.

41



---



##### Table of Contents





| |                         
| | ------------------------
| | 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.

42



---



##### Table of Contents





| |                         
| | ------------------------
| | 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.

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, 2003, our designated hedging activities
consisted of forward commitments related to hedging our mortgage
banking operations, a $150 million interest rate swap at
3-month LIBOR plus 0.41% that

43



---



##### Table of Contents



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.


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. Purchased mortgage-backed security
options are also used to hedge rate-locked loans.

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

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 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.

44



---



##### Table of Contents



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

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

45



---



##### Table of Contents



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

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, 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%.

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.

46



---



##### Table of Contents



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

47



---



##### Table of Contents



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

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.



| |                                        
| | ---------------------------------------
| | 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

48



---



##### Table of Contents



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.

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 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, 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.



| |                             
| | ----------------------------
| | 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



---



##### Table of Contents



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



---



##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|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



---



##### Table of Contents



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



---



##### Table of Contents



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



---



##### Table of Contents



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



---



##### Table of Contents



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.



| |                          
| | -------------------------
| | 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

55



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
Significant Accounting Policies 
(Continued)


considered other than temporary, generally six
months or longer, the cost basis of the individual security is
written down to market value 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 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



---



##### Table of Contents



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 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.



| |                       
| | ----------------------
| | 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 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.



| |                                                
| | -----------------------------------------------
| | 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



---



##### Table of Contents



BANKNORTH GROUP INC.


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.

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 useful lives are shown below:

|                         |  |  |              | 
|------------------------ |  |  | ------------ | 
|Core deposit intangibles |  |  | 7  10 years | 
|Noncompete agreements    |  |  | 1  4 years  | 
|Customer lists           |  |  | 1  8 years  | 



| |                                                        
| | -------------------------------------------------------
| | Impairment of Long-Lived Assets Other than
    Goodwill

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

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. 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 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 periodically
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.

58



---



##### Table of Contents



BANKNORTH GROUP INC.


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.



| |                                     
| | ------------------------------------
| | 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.

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.

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.

59



---



##### Table of Contents



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.

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 6.63% 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 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.

60



---



##### Table of Contents



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

61



---



##### Table of Contents



BANKNORTH GROUP INC.


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.



| |             
| | ------------
| | 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



---



##### Table of Contents



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



---



##### Table of Contents



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 of a 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.



| |                    
| | -------------------
| | 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 | 

64



---



##### Table of Contents



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   | 
|                          |                           |   |           |          

65



---



##### Table of Contents



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   | 
|                   |                                                                                              |                                     |   |            |           |            |   |         |         |  |   |         |         |   |   |          

66



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Securities
Available for Sale and Held to Maturity 
(Continued)

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, 2003.

|                                                                                             |  |                  |     |                  |  |            |           |             |  |       |         |            |  |             |    |       |  |            |        |  |  |   |      |   |  |  |     |  |  |   |           |  |  |   |         |  
|-------------------------------------------------------------------------------------------- |  | ---------------- | --- | ---------------- |  | ---------- | --------- | ----------- |  | ----- | ------- | ---------- |  | ----------- | -- | ----- |  | ---------- | ------ |  |  | - | ---- | - |  |  | --- |  |  | - | --------- |  |  | - | ------- | -
|                                                                                             |  |                  |     |                  |  |           
|                                                                                             |  | 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 | 
|                                       |                       |                    |           |                  |  |           |           |           |  |   |         |         |  |   |         |        

67



---



##### Table of Contents



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



---



##### Table of Contents



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 | 
|                                                                                  |  |              |       |      |  |   |       | 

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.

69



---



##### Table of Contents



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 |  
|                                           |  |                         |         |      |  |      |         |   |  |   |         |  

7.     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.

70



---



##### Table of Contents



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. | 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  |  
|                                                  |  |          |           |              |  |              |        |              |  |   |         |   |  |   |         |  

71



---



##### Table of Contents



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 | 
|                                |       |                   |        |              |  |              |        |        |  |   |        |       

72



---



##### Table of Contents



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    |       
|                                    |                                     |                         |         |      |  |      |         |   |  |   |         |       



|   |             
|-- | ------------
|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 |        
|         |         |                         |         |         |  |      |         |         |  |   |         |        

73



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                           
|-- | --------------------------
|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 |  
|                                                   |  |                         |         |      |  |      |         |   |  |   |         |  

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, 2003 and 2002 follow:

|                                   |                                                   |                                      |        |        |         |   |         |        |         | 
|---------------------------------- | ------------------------------------------------- | ------------------------------------ | ------ | ------ | ------- | - | ------- | ------ | ------- | 
|                                   |                                                   |                                     
|                                   |                                                   | 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 | )     
|                                   |                                                   |                                      |        |        |         |   |         |       

74



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                           
|-- | --------------------------
|9. | Income Taxes  (Continued)

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.



| |                     
| | --------------------
| | 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.

75



---



##### Table of Contents



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 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  |  
|                                                                                                |  |      |       |      |  |      |        |   |  |   |        |  

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

76



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                 
|--- | ------------------------------------------------
|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 | 
|Warren Bancorp, 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.

77



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                 
|--- | ------------------------------------------------
|10. | Merger and Consolidation Costs 
    (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.

|                                     |  |          |       |             |  |               |        |          |  |                 |       |          |  |   |         |   |  |   |        |   |  |   |       | 
|------------------------------------ |  | -------- | ----- | ----------- |  | ------------- | ------ | -------- |  | --------------- | ----- | -------- |  | - | ------- | - |  | - | ------ | - |  | - | ----- | 
|                                     |  |          |       |             |  | 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 | 
|                                     |  |          |       |             |  |               |        |          |  |                 |       |          |  |   |         |   |  |   |        |   |  |   |       | 

|                                       |  |          |        |             |  |               |       |          |  |                 |        |          |  |   |         |   |  |   |        |   |  |   |       | 
|-------------------------------------- |  | -------- | ------ | ----------- |  | ------------- | ----- | -------- |  | --------------- | ------ | -------- |  | - | ------- | - |  | - | ------ | - |  | - | ----- | 
|                                       |  |          |        |             |  | Merger &      |       |          |  | Non-cash Write  |        |         
|                                       |  | Balance  |        | Accrued at  |  | Consolidation |       | Cash     |  | Downs and Other |        | Balance 
|                                       |  | 12/31/01 |        | Acquisition |  | Costs         |       | Payments |  | Adjustments     |        | 12/31/02
|                                       |  |          |        |             |  |               |       |          |  |                 |        |         
|Andover/MetroWest Merger               |  | $        | 11,207 |             |  | $             |      |          |  | $               | 5,830  |          |  | $ | (16,474 | ) |  | $ | (242   | ) |  | $ | 321   | 
|Ipswich Merger                         |  |          |       |             |  |               | 1,791 |          |  |                 | 1,900  |          |  |   | (3,155  | ) |  |   | (536   | ) |  |   |      | 
|Bancorp Connecticut Merger             |  |          |       |             |  |               | 4,413 |          |  |                 | 2,746  |          |  |   | (4,062  | ) |  |   |       |   |  |   | 3,097 | 
|Warren Merger                          |  |          |       |             |  |               | 2,250 |          |  |                 | 240    |          |  |   | (438    | ) |  |   |       |   |  |   | 2,052 | 
|American Merger                        |  |          |       |             |  |               |      |          |  |                 | 855    |          |  |   | (855    | ) |  |   |       |   |  |   |      | 
|Banknorth Group, Inc. (Vermont) Merger |  |          | 330    |             |  |               |      |          |  |                 | (574   | )        |  |   | 244     |   |  |   |       |   |  |   |      | 
|Charter Consolidation                  |  |          |       |             |  |               |      |          |  |                 | 3,601  |          |  |   | (2,927  | ) |  |   | (674   | ) |  |   |      | 
|Branch Closings                        |  |          | 296    |             |  |               |      |          |  |                 | 93     |          |  |   | (310    | ) |  |   | 5      |   |  |   | 84    | 
|                                       |  |          |        |             |  |               |       |          |  |                 |        |          |  |   |         |   |  |   |        |   |  |   |       | 
|Total                                  |  | $        | 11,833 |             |  | $             | 8,454 |          |  | $               | 14,691 |          |  | $ | (27,977 | ) |  | $ | (1,447 | ) |  | $ | 5,554 | 
|                                       |  |          |        |             |  |               |       |          |  |                 |        |          |  |   |         |   |  |   |        |   |  |   |       | 

11.     Short-term
Borrowings

A summary of short-term borrowings follows:

|                                     |                                                             |                                       |           |           |  |      |           |           |  |   |           |         | 
|------------------------------------ | ----------------------------------------------------------- | ------------------------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | ------- | 
|                                     |                                                             |                                      
|                                     |                                                             | 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 |        
|                                     |                                                             |                                       |           |           |  |      |           |           |  |   |           |        

78



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



11.     Short-term
Borrowings  (Continued)


|                                                            |                                                          |                                       |   |           |   |      |   |           |   |  |   |           |  
|----------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | - | --------- | - | ---- | - | --------- | - |  | - | --------- | -
|                                                            |                                                          |                                      
|                                                            |                                                          | At or for the Year Ended December 31,
|                                                            |                                                          |                                      
|                                                            |                                                          | 2003                                  |   | 2002      |   | 2001
|                                                            |                                                          |                                       |   |           |   |     
|Securities sold under agreements to
    repurchase  retail |                                                          |                                       |   |           |   |      |   |           |   |  |   |          
|                                                            | Balance outstanding at end of period                     |                                       | $ | 1,086,900 |   |      | $ | 1,222,466 |   |  | $ | 999,506   |  
|                                                            | Market value of collateral at end of period              |                                       |   | 1,352,308 |   |      |   | 1,614,686 |   |  |   | 1,072,288 |  
|                                                            | Amortized cost of collateral at end of period            |                                       |   | 1,350,568 |   |      |   | 1,563,198 |   |  |   | 1,056,099 |  
|                                                            | Average balance outstanding during the year              |                                       |   | 1,059,077 |   |      |   | 955,887   |   |  |   | 803,186   |  
|                                                            | Maximum outstanding at any month end during the
    year |                                       |   | 1,167,325 |   |      |   | 1,200,524 |   |  |   | 999,506   |  
|                                                            | Average interest rate during the year                    |                                       |   | 0.90      | % |      |   | 1.40      | % |  |   | 3.31      | %
|                                                            | Average interest rate at end of year                     |                                       |   | 0.59      | % |      |   | 1.22      | % |  |   | 1.72      | %

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.

12.     Long-term
Debt

A summary of long-term debt (debt with original
maturities of more than one year) follows:

|                                                               |  |              |           |      |  |   |           | 
|-------------------------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                                               |  |             
|                                                               |  | December 31,
|                                                               |  |             
|                                                               |  | 2003         |           | 2002
|                                                               |  |              |           |     
|Federal Home Loan Bank advances                                |  | $            | 1,495,821 |      |  | $ | 2,482,582 | 
|Securities sold under agreements to
    repurchase  wholesale |  |              | 2,214,650 |      |  |   | 1,171,049 | 
|Capital trust securities                                       |  |              | 295,275   |      |  |   | 295,056   | 
|Subordinated long-term debt 7.625%, due 2011                   |  |              | 200,000   |      |  |   | 200,000   | 
|Senior notes 3.75%, due 2008                                   |  |              | 149,753   |      |  |   |          | 
|Hedge-related basis adjustments on long-term debt              |  |              | (1,896    | )    |  |   |          | 
|Other long-term debt                                           |  |              | 6,964     |      |  |   | 7,427     | 
|                                                               |  |              |           |      |  |   |           | 
|Total                                                          |  | $            | 4,360,567 |      |  | $ | 4,156,114 | 
|                                                               |  |              |           |      |  |   |           | 

Wholesale securities sold under agreements to
repurchase have maturities greater than one year and are
generally sold to broker/dealers.

79



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Long-term
Debt  (Continued)

The following table presents the maturities of
long-term debt outstanding at the dates indicated:

|                  |             |                   |  |                |           |          |  |           |              |                |  |  |             |  |  |   |           |  |  |  |              |  
|----------------- | ----------- | ----------------- |  | -------------- | --------- | -------- |  | --------- | ------------ | -------------- |  |  | ----------- |  |  | - | --------- |  |  |  | ------------ | -
|                  |             |                  
|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 |  |  |  |              |  
|                  |             |                   |  |                |           |          |  |           |              |                |  |  |             |  |  |   |           |  |  |  |              |  

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:

|                                 |  |          |           |        |  |        |         |          |  |  |       |   |  |  |           | 
|-------------------------------- |  | -------- | --------- | ------ |  | ------ | ------- | -------- |  |  | ----- | - |  |  | --------- | 
|                                 |  | 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 |          |  |  |       |   |  |  |           | 
|                                 |  |          |           |        |  |        |         |          |  |  |       |   |  |  |           | 

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 junior subordinated debentures issued by Banknorth.
The proceeds 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.

80



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Regulatory
Matters

Banknorth, NA must maintain noninterest-bearing
cash balances on reserve with the Federal Reserve Bank
(FRB). In 2003 and 2002, the average required
reserve balances were $79.5 million and $60.0 million,
respectively.

FRB adopted quantitative measures which assign
risk weightings 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.

|                        |                                                   |        |   |                      |  |        |  |       |   |        |   |           |  |  |  |      |   |  |   |         |  |  |  |      |  
|----------------------- | ------------------------------------------------- | ------ | - | -------------------- |  | ------ |  | ----- | - | ------ | - | --------- |  |  |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                        |                                                   |        |   |                      |  |       
|                        |                                                   | 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 | %

81



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     Shareholders
Equity

In 2003, Banknorth issued 13.4 million
shares of common stock in connection with acquisitions. In
February 2002, Banknorths Board of Directors authorized
the repurchase of up to 8 million shares, or approximately
6% of the outstanding Company common stock in addition to the
13 million share repurchase program authorized in 2001.
During 2003, Banknorth repurchased 4.5 million shares at a
total cost of $105.1 million. A total of 2.9 million
shares remain under this authorization at December 31, 2003.



| |                     
| | --------------------
| | Dividend Limitations

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.



| |                        
| | -----------------------
| | Stockholder Rights Plan

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).

15.     Accumulated
Other Comprehensive Income, Net

The following table presents the reconciliation
of transactions affecting Accumulated Other Comprehensive Income
included in shareholders equity for the periods indicated.

|                                                                   |  |         |          |            |  |            |        |  |  |   |          |  
|------------------------------------------------------------------ |  | ------- | -------- | ---------- |  | ---------- | ------ |  |  | - | -------- | -
|                                                                   |  | Pre-tax |          |            |  |           
|                                                                   |  | Amount  |          | Tax Effect |  | Net of Tax
|                                                                   |  |         |          |            |  |           
|December 31, 2003                                                  |  |         |          |            |  |            |        |  |  |   |          |  
|Unrealized (loss) on securities available
    for sale             |  | $       | (126,873 | )          |  | $          | 44,405 |  |  | $ | (82,468  | )
|Unrealized (loss) on cash flow hedges                              |  |         | (6,226   | )          |  |            | 2,179  |  |  |   | (4,047   | )
|Minimum pension liability                                          |  |         | (687     | )          |  |            | 241    |  |  |   | (446     | )
|Reclassification adjustment for
    (gains) realized in net income |  |         | (33,812  | )          |  |            | 11,834 |  |  |   | (21,978  | )
|                                                                   |  |         |          |            |  |            |        |  |  |   |          |  
|Net change in unrealized (losses)                                  |  | $       | (167,598 | )          |  | $          | 58,659 |  |  | $ | (108,939 | )
|                                                                   |  |         |          |            |  |            |        |  |  |   |          |  

82



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



15.     Accumulated
Other Comprehensive Income, Net 
(Continued)


|                                                                   |  |         |         |            |  |            |         |   |  |   |        |  
|------------------------------------------------------------------ |  | ------- | ------- | ---------- |  | ---------- | ------- | - |  | - | ------ | -
|                                                                   |  | Pre-tax |         |            |  |           
|                                                                   |  | Amount  |         | Tax Effect |  | Net of Tax
|                                                                   |  |         |         |            |  |           
|December 31, 2002                                                  |  |         |         |            |  |            |         |   |  |   |        |  
|Unrealized gain on securities available for sale                   |  | $       | 126,028 |            |  | $          | (44,038 | ) |  | $ | 81,990 |  
|Unrealized (loss) on cash flow hedges                              |  |         | (9,590  | )          |  |            | 3,355   |   |  |   | (6,235 | )
|Minimum pension liability                                          |  |         | (1,270  | )          |  |            | 445     |   |  |   | (825   | )
|Reclassification adjustment for
    (gains) realized in net income |  |         | (850    | )          |  |            | 298     |   |  |   | (552   | )
|                                                                   |  |         |         |            |  |            |         |   |  |   |        |  
|Net change in unrealized gains                                     |  | $       | 114,318 |            |  | $          | (39,940 | ) |  | $ | 74,378 |  
|                                                                   |  |         |         |            |  |            |         |   |  |   |        |  
|December 31, 2001                                                  |  |         |         |            |  |            |         |   |  |   |        |  
|Unrealized gain on securities available for sale                   |  | $       | 116,377 |            |  | $          | (40,732 | ) |  | $ | 75,645 |  
|Unrealized (loss) on cash flow hedges                              |  |         | (1,365  | )          |  |            | 478     |   |  |   | (887   | )
|Reclassification adjustment for losses realized
    in net income  |  |         | 457     |            |  |            | (160    | ) |  |   | 297    |  
|                                                                   |  |         |         |            |  |            |         |   |  |   |        |  
|Net change in unrealized gains                                     |  | $       | 115,469 |            |  | $          | (40,414 | ) |  | $ | 75,055 |  
|                                                                   |  |         |         |            |  |            |         |   |  |   |        |  

16.     Earnings Per
Share

The following table presents a computation of
earnings per share for the periods indicated.

|                                    |         |                                  |         |         |       |      |         |         |       |   |         |         |       | 
|----------------------------------- | ------- | -------------------------------- | ------- | ------- | ----- | ---- | ------- | ------- | ----- | - | ------- | ------- | ----- | 
|                                    |         |                                 
|                                    |         | Year Ended December 31,         
|                                    |         |                                 
|                                    |         | 2003                             |         | 2002    |       | 2001
|                                    |         |                                  |         |         |       |     
|Net income                          |         | $                                | 350,759 |         |       | $    | 298,638 |         |       | $ | 238,795 |        
|                                    |         |                                  |         |         |       |      |         |         |       |   |         |        
|Weighted average shares outstanding |         |                                  |         |         |       |      |         |         |       |   |         |        
|                                    | Basic   |                                  |         | 160,914 |       |      |         | 148,213 |       |   |         | 140,473 |      
|                                    |         | Dilutive effect of stock options |         |         | 2,606 |      |         |         | 1,616 |   |         |         | 1,329 | 
|                                    |         |                                  |         |         |       |      |         |         |       |   |         |        
|                                    | Diluted |                                  |         | 163,520 |       |      |         | 149,829 |       |   |         | 141,802 |      
|                                    |         |                                  |         |         |       |      |         |         |       |   |         |        
|Net income per share:               |         |                                  |         |         |       |      |         |         |       |   |         |        
|                                    | Basic   |                                  | $       | 2.18    |       |      | $       | 2.01    |       |   | $       | 1.70    |      
|                                    | Diluted |                                  |         | 2.15    |       |      |         | 1.99    |       |   |         | 1.68    |      

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



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|17. | Commitments, Contingent Liabilities and Other
    Off-Balance Sheet Risks  (Continued)

loans, the contract or notional amounts do not
represent exposure to credit loss. Banknorth controls the credit
risk of its forward commitments to sell loans through credit
approvals, limits and monitoring procedures.

Financial instruments with off-balance sheet risk
at December 31, 2003 and 2002 follow:

|                                                                                                    |                                                                                                                               |                                               |   |           |         |  |   |           |        | 
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | - | --------- | ------- |  | - | --------- | ------ | 
|                                                                                                    |                                                                                                                               |                                              
|                                                                                                    |                                                                                                                               | Contract or Notional Amount                  
|                                                                                                    |                                                                                                                               | at December 31,                              
|                                                                                                    |                                                                                                                               |                                              
|                                                                                                    |                                                                                                                               | 2003                                          |   | 2002     
|                                                                                                    |                                                                                                                               |                                               |   |          
|Financial instruments with notional or contract
    amounts which represent credit risk:            |                                                                                                                               |                                               |   |           |         |  |   |          
|                                                                                                    | Commitments to originate loans, unused lines,
    standby letters of credit and unadvanced portions of
    construction loans |                                               | $ | 6,245,086 |         |  | $ | 5,523,827 |       
|                                                                                                    | Commitments to invest in real estate limited
    partnerships                                                                 |                                               |   | 24,971    |         |  |   | 24,863    |       
|                                                                                                    | Commitments to invest in small business
    investments limited partnerships                                                  |                                               |   | 17,663    |         |  |   | 15,751    |       
|                                                                                                    | Loans serviced with recourse                                                                                                  |                                               |   | 5,569     |         |  |   | 13,103    |       
|Financial instruments with notional or contract
    amounts which exceed the amount of credit risk: |                                                                                                                               |                                               |   |           |         |  |   |          
|                                                                                                    | Forward commitments to sell loans                                                                                             |                                               |   | 61,000    |         |  |   | 234,651   |       
|                                                                                                    | Foreign currency forward contracts (notional
    amount)                                                                      |                                               |   |           |         |  |   |           |       
|                                                                                                    |                                                                                                                               | Forward contracts with customers              |   |           | 23,438  |  |   |           | 22,275 | 
|                                                                                                    |                                                                                                                               | Forward contracts with dealers                |   |           | 23,438  |  |   |           | 22,275 | 
|                                                                                                    | Commercial loan swap program:                                                                                                 |                                               |   |           |         |  |   |           |       
|                                                                                                    |                                                                                                                               | Interest rate swaps with commercial borrowers |   |           | 325,023 |  |   |           | 60,325 | 
|                                                                                                    |                                                                                                                               | Interest rate swaps with dealers              |   |           | 325,023 |  |   |           | 60,325 | 
|                                                                                                    | Interest rate swaps on borrowings                                                                                             |                                               |   | 566,500   |         |  |   |          |       
|                                                                                                    | Rate-locked loan commitments                                                                                                  |                                               |   | 30,779    |         |  |   | 83,791    |       

Commitments to originate loans, unused lines of
credit and unadvanced portions of construction loans are
agreements to lend to a customer provided there is no violation
of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Because many of the
commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future
cash requirements. Banknorth evaluates each customers
creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by Banknorth upon
extension of credit, is based on managements credit
evaluation of the borrower.

Standby letters of credit are conditional
commitments issued by Banknorth to guarantee the performance by
a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loan facilities to customers.

At December 31, 2003, Banknorth had
$59.4 million of investments in tax advantaged limited
partnerships primarily involved in approved low income housing
investment tax credit projects in Banknorths market area
and commitments to invest up to an additional $25.0 million
in such partnerships. At December 31, 2003, Banknorth had
$20.5 million invested in small business limited
partnerships which primarily provide seed money to businesses in
Banknorths market area and commitments to invest up to

84



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.                        Commitments,
Contingent Liabilities and Other Off-Balance Sheet
Risks  (Continued)

an additional $17.7 million in such
partnerships. Investments in both of the foregoing categories of
assets are included under other assets.

Loans serviced with recourse represent
Banknorths recourse obligations in certain of
Banknorths servicing arrangements with investors for
serviced loan portfolios. In the event of foreclosure on a
serviced loan, Banknorth is obligated to repay the investor to
the extent of the investors remaining balance after
application of proceeds from the sale of the underlying
collateral. To date, losses related to these recourse
arrangements have been insignificant and while Banknorth cannot
project future losses, the fair value of this recourse
obligation is deemed to be likewise insignificant.

Forward commitments to sell residential mortgage
loans are contracts which Banknorth enters into for the purpose
of reducing the market risk associated with originating loans
for sale. Risks may arise from the possible inability of
Banknorth to originate loans to fulfill the contracts, in which
case Banknorth would normally purchase loans from correspondent
banks or in the open market to deliver against the contract.

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.

Commercial loan swaps enable customers to
synthetically convert variable interest rate loans to fixed 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 carried on
our balance sheet at fair value.

Interest rate swap agreements on borrowings
synthetically convert fixed-rate debt to variable-rate debt tied
to 1-month or 3-month LIBOR. These swaps are accounted for as
fair value hedges.



| |                  
| | -----------------
| | Legal Proceedings

Banknorth and certain of its subsidiaries have
been named as defendants in various legal proceedings arising
from their normal business activities. Although the amount of
any ultimate liability with respect to such proceedings cannot
be determined, in the opinion of management, based upon the
opinions of counsel, any such liability will not have a material
effect on the consolidated financial position, results of
operations or liquidity of Banknorth and its subsidiaries.



| |                            
| | ---------------------------
| | Operating Lease Obligations

Banknorth leases certain properties and equipment
used in operations under terms of operating leases which include
renewal options. Rental expense under these leases approximated
$20.3 million, $20.9 million and $19.9 million
for the years ended 2003, 2002 and 2001, respectively.

85



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|17. | Commitments, Contingent Liabilities and Other
    Off-Balance Sheet Risks  (Continued)

The following table sets forth the approximate
future minimum lease payments over the remaining terms of the
leases as of December 31, 2003.

|               |  |   |         | 
|-------------- |  | - | ------- | 
|2004           |  | $ | 24,658  | 
|2005           |  |   | 22,492  | 
|2006           |  |   | 20,534  | 
|2007           |  |   | 16,636  | 
|2008           |  |   | 14,407  | 
|2009 and after |  |   | 62,013  | 
|               |  |   |         | 
|               |  | $ | 160,740 | 
|               |  |   |         | 

18.     Other
Noninterest Income

The following table presents other noninterest
income during the periods indicated.

|                                 |       |                         |        |           |  |           |        |        |  |         |        |        |  |         |        |        |  |  |     |    |   |   |        |       |  |  |     |    |  
|-------------------------------- | ----- | ----------------------- | ------ | --------- |  | --------- | ------ | ------ |  | ------- | ------ | ------ |  | ------- | ------ | ------ |  |  | --- | -- | - | - | ------ | ----- |  |  | --- | -- | -
|                                 |       |                         |        |           |  |           |        |       
|                                 |       |                         |        |           |  |           |        | Change
|                                 |       |                         |        |           |  |           |        |       
|                                 |       |                         |        |           |  |          
|                                 |       | Year Ended December 31, |        | 2003-2002 |  | 2002-2001
|                                 |       |                         |        |           |  |          
|                                 |       | 2003                    |        | 2002      |  | 2001      |        | Amount |  | Percent |        | Amount |  | Percent
|                                 |       |                         |        |           |  |           |        |        |  |         |        |        |  |        
|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 |                         | $      | 69,306    |  |           | $      | 38,978 |  |         | $      | 34,329 |  |         | $      | 30,328 |  |  |     | 78 | % |   | $      | 4,649 |  |  |     | 14 | %
|                                 |       |                         |        |           |  |           |        |        |  |         |        |        |  |         |        |        |  |  |     |    |   |   |        |       |  |  |     |   

19.     Stock-Based
Compensation Plans



| |                   
| | ------------------
| | Stock Option Plans

As part of its employee and director compensation
programs, Banknorth may grant certain stock awards under the
provisions of the existing stock option and compensation plans.
Banknorth has stock options outstanding under various plans at
December 31, 2003, including plans assumed in acquisitions.
The plans provide for grants of options to purchase shares of
common stock generally at the stocks fair market value at
the date of grant. In addition, the plans provide for grants of
shares of common stock that are subject to forfeiture if certain
vesting requirements are not met.

Banknorth has adopted or assumed in acquisitions
various stock option plans for key employees. These plans
include a stock option plan adopted in 2003 (the 2003
Equity Incentive Plan) and in 1996 (the 1996 Option
Plan). The 2003 Equity Incentive Plan authorizes grants of
options and other stock awards covering up to 8,100,000 shares
of Common Stock. The 1996 Option Plan, as amended, authorizes
grants of options and other stock awards covering up to
13,000,000 shares of Common Stock. Stock options are
granted with an exercise price equal to the stocks fair
market value at the date of the grant and expire 10 years
from the date of the grant. At December 31, 2003, there
were 4,067,960 additional shares available for grant under the
2003 Equity Incentive Plan and 2,116,576 additional shares
available for grant under the 1996 Option Plan.

86



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                 
|--- | ------------------------------------------------
|19. | Stock-Based Compensation Plans 
    (Continued)

In 1995, Banknorth adopted a stock option plan
for non-employee directors, which was amended and restated in
2000 to authorize the issuance of up to an additional 530,000
shares. The maximum number of shares which may be issued under
the amended plan is 1,060,000 shares, of which
205,750 shares had been issued upon exercise of the stock
options granted pursuant to this plan through December 31,
2003. Options to purchase 112,500 shares were granted in
2003 at an exercise price of $23.37 per share, options to
purchase 113,500 shares were granted in 2002 at $26.34 per
share and options to purchase 109,750 shares were granted
in 2001 at $19.80 per share. At December 31, 2003, there
were 350,250 shares available for future grants under this
plan.

The per share weighted-average fair value of all
stock options granted by Banknorth during 2003, 2002 and 2001
was $7.15, $7.09 and $6.10 on the date of the grants using the
Black Scholes option-pricing model with the following weighted
average assumptions:

|                        |  |      |       |       |  |      |       |       |  |  |       |      
|----------------------- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | -----
|                        |  | 2003 |       | 2002  |  | 2001
|                        |  |      |       |       |  |     
|Expected dividend yield |  |      | 2.65  | %     |  |      | 2.36  | %     |  |  | 2.48  | %    
|Risk-free interest rate |  |      | 3.31  |       |  |      | 3.82  |       |  |  | 4.50  |      
|Expected life           |  |      | 5.00  | years |  |      | 5.00  | years |  |  | 5.00  | years
|Volatility              |  |      | 32.22 | %     |  |      | 36.26 | %     |  |  | 33.91 | %    

Stock incentive plans of acquired companies are
generally terminated at the merger closing dates. Option holders
under such plans generally receive options to buy Banknorth
common stock based on the conversion terms of the various merger
agreements.

Activity for all stock option plans during the
three-year period ended December 31, 2003 is summarized as
follows:

|                                 |                                 |           |            |                |   |           |       |                |  |           |            |                |   |   |       |       |  |  |           |            |   |   |       |       | 
|-------------------------------- | ------------------------------- | --------- | ---------- | -------------- | - | --------- | ----- | -------------- |  | --------- | ---------- | -------------- | - | - | ----- | ----- |  |  | --------- | ---------- | - | - | ----- | ----- | 
|                                 |                                 |           |            |                |   |          
|                                 |                                 | 2003      |            | 2002           |   | 2001     
|                                 |                                 |           |            |                |   |          
|                                 |                                 |           |            | Weighted       |   |           |       | Weighted       |  |           |            | Weighted      
|                                 |                                 | Number of |            | Average        |   | Number of |       | Average        |  | Number of |            | Average       
|                                 |                                 | Shares    |            | Exercise Price |   | Shares    |       | Exercise Price |  | Shares    |            | Exercise Price
|                                 |                                 |           |            |                |   |           |       |                |  |           |            |               
|Outstanding at beginning of year |                                 |           | 12,488,419 |                |   | $         | 19.23 |                |  |           | 9,655,231  |                |   | $ | 16.90 |       |  |  | 7,195,939 |            |   | $ | 15.00 |      
|                                 | Granted                         |           |            | 4,185,340      |   |           |       | 27.84          |  |           |            | 3,898,047      |   |   |       | 23.45 |  |  |           | 3,193,168  |   |   |       | 20.81 | 
|                                 | Granted in purchase acquisition |           |            | 2,402,938      |   |           |       | 13.92          |  |           |            | 714,798        |   |   |       | 12.51 |  |  |           | 1,018,863  |   |   |       | 10.01 | 
|                                 | Exercised                       |           |            | (2,441,520     | ) |           |       | 15.11          |  |           |            | (1,684,671     | ) |   |       | 12.58 |  |  |           | (1,589,917 | ) |   |       | 11.46 | 
|                                 | Forfeited                       |           |            | (256,124       | ) |           |       | 23.45          |  |           |            | (94,986        | ) |   |       | 20.71 |  |  |           | (162,822   | ) |   |       | 18.76 | 
|                                 |                                 |           |            |                |   |           |       |                |  |           |            |                |   |   |       |       |  |  |           |            |   |   |       |      
|Outstanding at end of year       |                                 |           | 16,379,053 |                |   | $         | 21.23 |                |  |           | 12,488,419 |                |   | $ | 19.23 |       |  |  | 9,655,231 |            |   | $ | 16.90 |      
|                                 |                                 |           |            |                |   |           |       |                |  |           |            |                |   |   |       |       |  |  |           |            |   |   |       |      
|Options exercisable at year end  |                                 |           | 8,947,350  |                |   | $         | 17.64 |                |  |           | 6,729,062  |                |   | $ | 16.46 |       |  |  | 5,935,610 |            |   | $ | 14.98 |      
|                                 |                                 |           |            |                |   |           |       |                |  |           |            |                |   |   |       |       |  |  |           |            |   |   |       |      

87



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                 
|--- | ------------------------------------------------
|19. | Stock-Based Compensation Plans 
    (Continued)

The range of per share exercise prices for
outstanding and exercisable stock options at December 31,
2003 was as follows:

|                |  |                     |            |                     |  |                  |           |               |  |                  |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | ---------- | ------------------- |  | ---------------- | --------- | ------------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |            |                    
|                |  | Options Outstanding |            | Options Exercisable
|                |  |                     |            |                    
|                |  |                     |            |                    
|                |  | Number              |            | Weighted Average    |  |                  |           | Number        |  |                 
|Range of        |  | Outstanding         |            | Remaining           |  | Weighted Average |           | Outstanding   |  | Weighted Average
|Exercise Prices |  | at 12/31/2003       |            | Contractual Life    |  | Exercise Price   |           | at 12/31/2003 |  | Exercise Price  
|                |  |                     |            |                     |  |                  |           |               |  |                 
|up to $12.99    |  |                     | 833,520    |                     |  |                  | 2.7 years |               |  | $                | 10.22 |  |  |  | 833,520   |  |  | $ | 10.22 | 
|$13.00  $16.24 |  |                     | 2,269,986  |                     |  |                  | 6.2       |               |  |                  | 13.67 |  |  |  | 2,269,986 |  |  |   | 13.67 | 
|$16.25  $19.49 |  |                     | 2,055,112  |                     |  |                  | 5.9       |               |  |                  | 17.25 |  |  |  | 2,055,112 |  |  |   | 17.25 | 
|$19.50  $22.74 |  |                     | 3,394,049  |                     |  |                  | 7.1       |               |  |                  | 20.79 |  |  |  | 2,372,986 |  |  |   | 20.78 | 
|$22.75  $25.98 |  |                     | 3,754,071  |                     |  |                  | 8.7       |               |  |                  | 23.37 |  |  |  | 1,274,142 |  |  |   | 23.36 | 
|$25.99  $29.23 |  |                     | 4,070,315  |                     |  |                  | 9.7       |               |  |                  | 28.10 |  |  |  | 141,604   |  |  |   | 26.30 | 
|$29.24  $32.48 |  |                     | 2,000      |                     |  |                  | 10.0      |               |  |                  | 32.48 |  |  |  |          |  |  |   |      | 
|                |  |                     |            |                     |  |                  |           |               |  |                  |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 16,379,053 |                     |  |                  | 7.6       |               |  |                  | 21.23 |  |  |  | 8,947,350 |  |  |   | 17.64 | 
|                |  |                     |            |                     |  |                  |           |               |  |                  |       |  |  |  |           |  |  |   |       | 



| |            
| | -----------
| | 401(k) Plan

Banknorth and its subsidiaries have 401(k) Plans
covering substantially all permanent employees. Banknorth
matches employee contributions based on a predetermined formula
and may make additional discretionary contributions. The total
expense for these plans in 2003, 2002 and 2001 was
$9.2 million, $7.5 million and $5.2 million,
respectively.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

Banknorth has an Employee Stock Purchase Plan
that is available to employees with one year of service. Under
the plan, shares of Banknorths common stock may be
purchased at six-month intervals at 85% of the lower of the fair
market value on the first or the last business day of each
six-month period, subject to limitations set forth in the plan.
Employees have the right to authorize payroll deductions up to
10% of their salary. During 2003, 2002 and 2001, employees
purchased 201,307 shares, 180,955 shares and
139,427 shares at average prices of $20.67, $19.24 and
$17.51 per share, respectively. The maximum number of shares
which may be issued under the Employee Stock Purchase Plan is
2,852,000 shares, of which an additional
1,500,000 shares was approved by shareholders in April
2002. As of December 31, 2003, 1,628,311 shares have
been issued out of this plan with 1,223,689 shares
remaining to be issued. The proforma expense included in the
SFAS No. 123 calculation disclosed in Note 1 to
the Consolidated Financial Statements approximated
$1.6 million, $933 thousand and $709 thousand for
2003, 2002 and 2001, respectively.

Restricted
Stock Plan

In 1990, Banknorth adopted a Restricted Stock
Plan under which up to $10,000 of the annual fee payable to each
non-employee Director of Banknorth and participating
subsidiaries is payable solely in shares of Company common
stock. Shares issued under this plan totaled 8,869, 5,599 and
6,358 in 2003, 2002 and 2001, respectively.

88



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                 
|--- | ------------------------------------------------
|19. | Stock-Based Compensation Plans 
    (Continued)

Incentive
Plans

Banknorth has an Incentive Plan covering all full
and part-time employees. Incentives are earned based on
Banknorths, department or individual performance as
measured against targets set in connection with the annual
budget. Each employees incentive potential is a fixed
percentage of their base pay and, for a significant number of
employees, can be modified up or down based on actual
performance versus target.

In 2002, shareholders approved the Executive
Incentive Plan under which Banknorth may pay cash incentive
awards to selected officers based on Banknorths
performance over specified periods. The Executive Incentive Plan
is administered by a committee of the Board of Directors.



|    |                                   
|--- | ----------------------------------
|20. | Retirement and Other Benefit Plans

Pension
Plans

Banknorth has a noncontributory defined benefit
plan covering most permanent, full-time employees. Employees are
fully vested after five years of service. Benefits are based on
career average earnings and length of service. 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
contributed $47.4 million to the plan in 2003 and estimates
that the 2004 contribution will be between $15 and
$20 million.

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.



| |                                                 
| | ------------------------------------------------
| | Post Retirement Benefits Other Than
    Pensions

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.

89



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                     
|--- | ----------------------------------------------------
|20. | Retirement and Other Benefit Plans 
    (Continued)

The following tables set forth the funded status
and amounts recognized in Banknorths Consolidated Balance
Sheets at December 31, 2003 and 2002 for the pension plans
(defined benefit and supplemental executive retirement plans)
and other post-retirement benefit plans:

|                                               |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ----------------- | ------- | -------------------- |  | -------------------- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                               |  |                   |         |                      |  |                      |         |      |  |     
|                                               |  |                   |         |                      |  | Other Postretirement
|                                               |  | Qualified Pension |         | Nonqualified Pension |  | Benefits            
|                                               |  |                   |         |                      |  |                     
|                                               |  | 2003              |         | 2002                 |  | 2003                 |         | 2002 |  | 2003 |         | 2002
|                                               |  |                   |         |                      |  |                      |         |      |  |      |         |     
|Change in benefit obligation                   |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Benefit obligation at beginning of year        |  | $                 | 147,666 |                      |  | $                    | 121,331 |      |  | $    | 21,288  |      |  | $ | 17,491  |   |  | $ | 15,813  |   |  | $ | 12,416  |  
|Service cost                                   |  |                   | 9,251   |                      |  |                      | 6,810   |      |  |      | 311     |      |  |   | 208     |   |  |   | 123     |   |  |   | 99      |  
|Interest cost                                  |  |                   | 12,168  |                      |  |                      | 9,223   |      |  |      | 1,580   |      |  |   | 1,322   |   |  |   | 1,155   |   |  |   | 1,001   |  
|Assumption changes                             |  |                   | 14,916  |                      |  |                      | 10,130  |      |  |      | (2,406  | )    |  |   | 1,058   |   |  |   | 517     |   |  |   | 1,788   |  
|Plan amendment                                 |  |                   |        |                      |  |                      |        |      |  |      |        |      |  |   | 892     |   |  |   |        |   |  |   |        |  
|Actuarial loss                                 |  |                   | 7,408   |                      |  |                      | 2,562   |      |  |      | 4,111   |      |  |   | 293     |   |  |   | 653     |   |  |   | 1,777   |  
|Acquisitions                                   |  |                   | 21,698  |                      |  |                      | 6,410   |      |  |      | 2,289   |      |  |   | 1,311   |   |  |   | 1,566   |   |  |   | 307     |  
|Benefits paid                                  |  |                   | (8,268  | )                    |  |                      | (8,236  | )    |  |      | (909    | )    |  |   | (1,287  | ) |  |   | (1,498  | ) |  |   | (1,575  | )
|Expenses paid                                  |  |                   | (430    | )                    |  |                      | (564    | )    |  |      |        |      |  |   |        |   |  |   |         |   |  |   |        |  
|                                               |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Benefit obligation at end of year              |  | $                 | 204,409 |                      |  | $                    | 147,666 |      |  | $    | 26,264  |      |  | $ | 21,288  |   |  | $ | 18,329  |   |  | $ | 15,813  |  
|                                               |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Change in plan assets                          |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Fair value of plan assets at beginning of year |  | $                 | 154,902 |                      |  | $                    | 140,971 |      |  | $    |        |      |  | $ |        |   |  | $ |        |   |  | $ |        |  
|Actual return (loss) on plan assets            |  |                   | 25,929  |                      |  |                      | (12,576 | )    |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  
|Employer contribution                          |  |                   | 47,442  |                      |  |                      | 30,300  |      |  |      | 909     |      |  |   | 1,287   |   |  |   | 1,498   |   |  |   | 1,575   |  
|Benefits paid                                  |  |                   | (8,268  | )                    |  |                      | (8,236  | )    |  |      | (909    | )    |  |   | (1,287  | ) |  |   | (1,498  | ) |  |   | (1,575  | )
|Expenses paid                                  |  |                   | (430    | )                    |  |                      | (564    | )    |  |      |        |      |  |   |        |   |  |   |         |   |  |   |        |  
|Acquisitions                                   |  |                   | 17,961  |                      |  |                      | 5,007   |      |  |      |        |      |  |   |        |   |  |   |         |   |  |   |        |  
|                                               |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Fair value of plan assets at end of year       |  | $                 | 237,536 |                      |  | $                    | 154,902 |      |  | $    |        |      |  | $ |        |   |  | $ |        |   |  | $ |        |  
|                                               |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Funded (unfunded) status                       |  | $                 | 33,127  |                      |  | $                    | 7,236   |      |  | $    | (26,264 | )    |  | $ | (21,288 | ) |  | $ | (18,329 | ) |  | $ | (15,813 | )
|Unrecognized net actuarial (gain) loss         |  |                   | 54,896  |                      |  |                      | 47,233  |      |  |      | 5,462   |      |  |   | 3,882   |   |  |   | 6,620   |   |  |   | 5,107   |  
|Unrecognized prior service cost                |  |                   | 50      |                      |  |                      | 57      |      |  |      | 1,607   |      |  |   | 1,778   |   |  |   | 1,076   |   |  |   | 1,215   |  
|Unrecognized net transition obligation         |  |                   | (756    | )                    |  |                      | (1,014  | )    |  |      | 121     |      |  |   | 132     |   |  |   | 3,685   |   |  |   | 4,078   |  
|                                               |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Prepaid (accrued) benefit cost                 |  | $                 | 87,317  |                      |  | $                    | 53,512  |      |  | $    | (19,074 | )    |  | $ | (15,496 | ) |  | $ | (6,948  | ) |  | $ | (5,413  | )
|                                               |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  

90



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                     
|--- | ----------------------------------------------------
|20. | Retirement and Other Benefit Plans 
    (Continued)

|                                                                          |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------- |  | ----------------- | ------- | -------------------- |  | -------------------- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                                                          |  |                   |         |                      |  |                      |         |      |  |     
|                                                                          |  |                   |         |                      |  | Other Postretirement
|                                                                          |  | Qualified Pension |         | Nonqualified Pension |  | Benefits            
|                                                                          |  |                   |         |                      |  |                     
|                                                                          |  | 2003              |         | 2002                 |  | 2003                 |         | 2002 |  | 2003 |         | 2002
|                                                                          |  |                   |         |                      |  |                      |         |      |  |      |         |     
|Amounts recognized in the statement of
    financial position consist of: |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |        |   |  |   |        |  
|Prepaid (accrued) benefit cost                                            |  | $                 | 87,317  |                      |  | $                    | 53,512  |      |  | $    | (19,074 | )    |  | $ | (15,496 | ) |  | $ | (6,948 | ) |  | $ | (5,413 | )
|Accrued benefit liability                                                 |  |                   |        |                      |  |                      |        |      |  |      | 22,758  |      |  |   | 18,676  |   |  |   |       |   |  |   |       |  
|Intangible asset                                                          |  |                   |        |                      |  |                      |        |      |  |      | (1,728  | )    |  |   | (1,910  | ) |  |   |       |   |  |   |       |  
|Accumulated other comprehensive income                                    |  |                   |        |                      |  |                      |        |      |  |      | (1,956  | )    |  |   | (1,270  | ) |  |   |       |   |  |   |       |  
|                                                                          |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |        |   |  |   |        |  
|Net amount recognized                                                     |  | $                 | 87,317  |                      |  | $                    | 53,512  |      |  | $    |        |      |  | $ |        |   |  | $ | (6,948 | ) |  | $ | (5,413 | )
|                                                                          |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |        |   |  |   |        |  
|Accumulated benefit obligation                                            |  | $                 | 193,835 |                      |  | $                    | 135,569 |      |  | $    | 22,760  |      |  | $ | 17,365  |   |  |   |        |   |  |   |        |  
|                                                                          |  |                   |         |                      |  |                      |         |      |  |      |         |      |  |   |         |   |  |   |        |   |  |   |        |  

|                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                            |  |                        
|                                            |  | Year Ended December 31,
|                                            |  |                        
|                                            |  | 2003                    |         | 2002 |  | 2001
|                                            |  |                         |         |      |  |     
|Components of net periodic benefit
    cost |  |                         |         |      |  |      |         |   |  |   |         |  
|Qualified Pension                           |  |                         |         |      |  |      |         |   |  |   |         |  
|Service cost                                |  | $                       | 9,251   |      |  | $    | 6,810   |   |  | $ | 4,733   |  
|Interest cost                               |  |                         | 12,168  |      |  |      | 9,223   |   |  |   | 8,076   |  
|Expected (gain) on plan assets              |  |                         | (14,343 | )    |  |      | (12,373 | ) |  |   | (10,670 | )
|Recognized actuarial loss                   |  |                         | 3,865   |      |  |      |        |   |  |   |        |  
|Net amortization and deferral               |  |                         | (251    | )    |  |      | (251    | ) |  |   | (896    | )
|                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Net periodic benefit cost                   |  | $                       | 10,690  |      |  | $    | 3,409   |   |  | $ | 1,243   |  
|                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Nonqualified Pension                        |  |                         |         |      |  |      |         |   |  |   |         |  
|Service cost                                |  | $                       | 311     |      |  | $    | 208     |   |  | $ | 330     |  
|Interest cost                               |  |                         | 1,580   |      |  |      | 1,322   |   |  |   | 1,197   |  
|Expected return on plan assets              |  |                         |        |      |  |      |        |   |  |   |        |  
|Recognized actuarial loss                   |  |                         | 124     |      |  |      | 70      |   |  |   | 10      |  
|Net amortization and deferral               |  |                         | 183     |      |  |      | 258     |   |  |   | 242     |  
|                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Net periodic benefit cost                   |  | $                       | 2,198   |      |  | $    | 1,858   |   |  | $ | 1,779   |  
|                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Other Postretirement Benefits               |  |                         |         |      |  |      |         |   |  |   |         |  
|Service cost                                |  | $                       | 123     |      |  | $    | 99      |   |  | $ | 87      |  
|Interest cost                               |  |                         | 1,155   |      |  |      | 1,001   |   |  |   | 883     |  
|Expected return on plan assets              |  |                         |        |      |  |      |        |   |  |   |        |  
|Recognized actuarial loss                   |  |                         | 310     |      |  |      | 132     |   |  |   | 2       |  
|Net amortization and deferral               |  |                         | 532     |      |  |      | 532     |   |  |   | 532     |  
|                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Net periodic benefit cost                   |  | $                       | 2,120   |      |  | $    | 1,764   |   |  | $ | 1,504   |  
|                                            |  |                         |         |      |  |      |         |   |  |   |         |  

91



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                     
|--- | ----------------------------------------------------
|20. | Retirement and Other Benefit Plans 
    (Continued)

Weighted-average assumptions used to determine
benefit obligations as of December 31

|                              |  |      |      |      |  |  |       |  
|----------------------------- |  | ---- | ---- | ---- |  |  | ----- | -
|                              |  | 2003 |      | 2002
|                              |  |      |      |     
|Discount rate                 |  |      | 6.25 | %    |  |  | 6.75  | %
|Rate of compensation increase |  |      | 4.50 | %    |  |  | 4.50  | %
|Medical inflation rate        |  |      | 9.00 | %    |  |  | 10.00 | %

Weighted-average assumptions used to determine
net periodic benefit cost for years ended
December 31

|                               |  |      |       |      |  |  |      |  
|------------------------------ |  | ---- | ----- | ---- |  |  | ---- | -
|                               |  | 2003 |       | 2002
|                               |  |      |       |     
|Discount rate                  |  |      | 6.75  | %    |  |  | 7.25 | %
|Expected return on plan assets |  |      | 8.50  | %    |  |  | 8.50 | %
|Rate of compensation increase  |  |      | 4.50  | %    |  |  | 4.50 | %
|Medical inflation rate         |  |      | 10.00 | %    |  |  | 5.86 | %

|                                                                   |  |      |      |      |  |  |      |  
|------------------------------------------------------------------ |  | ---- | ---- | ---- |  |  | ---- | -
|                                                                   |  | 2003 |      | 2002
|                                                                   |  |      |      |     
|Assumed health care cost trend rates at
    December 31            |  |      |      |      |  |  |      |  
|Health care cost trend rate assumed for next year                  |  |      | 8.00 | %    |  |  | 9.00 | %
|Rate that the cost trend rate gradually declines
    to            |  |      | 5.00 | %    |  |  | 5.00 | %
|Year that the rate reaches the rate it is assumed
    to remain at |  |      | 2007 |      |  |  | 2007 |  

Effect of one-percentage change in assumed
health care cost trend rates in 2003

|                                                         |  |             |           |             |  |   |          |  
|-------------------------------------------------------- |  | ----------- | --------- | ----------- |  | - | -------- | -
|                                                         |  | 1% Increase |           | 1% Decrease
|                                                         |  |             |           |            
|Effect on total service and interest cost
    components |  | $           | 66,961    |             |  | $ | (59,508  | )
|Effect on postretirement benefit obligation              |  |             | 1,014,703 |             |  |   | (901,834 | )

Estimated Future Benefit Payments

The following benefit payments, which reflect
expected future service, as appropriate, are expected to be paid:

|            |  |           |        |              |  |                |        |  |  |   |        | 
|----------- |  | --------- | ------ | ------------ |  | -------------- | ------ |  |  | - | ------ | 
|            |  |           |        |              |  | Other         
|            |  | Qualified |        | Nonqualified |  | Postretirement
|            |  | Pension   |        | Pension      |  | Benefits      
|            |  |           |        |              |  |               
|2004        |  | $         | 6,331  |              |  | $              | 1,362  |  |  | $ | 1,768  | 
|2005        |  |           | 6,700  |              |  |                | 1,365  |  |  |   | 1,766  | 
|2006        |  |           | 6,939  |              |  |                | 1,317  |  |  |   | 1,748  | 
|2007        |  |           | 7,472  |              |  |                | 1,316  |  |  |   | 1,710  | 
|2008        |  |           | 8,192  |              |  |                | 1,290  |  |  |   | 1,639  | 
|2009  2013 |  |           | 55,374 |              |  |                | 12,299 |  |  |   | 7,442  | 
|            |  |           |        |              |  |                |        |  |  |   |        | 
|            |  | $         | 91,008 |              |  | $              | 18,949 |  |  | $ | 16,073 | 
|            |  |           |        |              |  |                |        |  |  |   |        | 

Assumptions for long-term expected return on
pension plan assets in the qualified Banknorth Group, Inc.
Retirement Plan are periodically reviewed. As part of the
review, the Banknorths independent consulting actuaries
performed a stochastic analysis of expected returns based on the
plans asset allocation as of both January 1, 2003 and
January 1, 2004 to develop expected rates of return. This
forecast reflects the actuarial firms expected long-term
rates of return for each significant asset class or economic

92



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                     
|--- | ----------------------------------------------------
|20. | Retirement and Other Benefit Plans 
    (Continued)

indicator, for example, 9.8% for US large cap
stocks, 6.0% for US long-term corporate bonds, and 2.4%
inflation as of January 1, 2003. The range of returns
developed relies both on forecasts and on broad-market
historical benchmarks for expected return, correlation, and
volatility for each asset class.

The following table presents the plan assets as
of December 31, 2003 and 2002 and respective target
allocations.

|               |  |               |     |               |  |            |     |   |  |  |         |  
|-------------- |  | ------------- | --- | ------------- |  | ---------- | --- | - |  |  | ------- | -
|               |  |               |     |              
|               |  | December 31,  |     |              
|               |  |               |     |              
|               |  | 2003          |     | 2002          |  |           
|               |  |               |     |               |  |           
|               |  | Actual        |     | Actual        |  | Target    
|               |  | Percentage    |     | Percentage    |  | Allocation
|Asset category |  | of Fair Value |     | of Fair Value |  | Percentage
|               |  |               |     |               |  |           
|Cash           |  |               | 20  | %             |  |            | 21  | % |  |  | 0 - 25  | %
|Equities       |  |               | 53  | %             |  |            | 45  | % |  |  | 40 - 75 | %
|Fixed Income   |  |               | 27  | %             |  |            | 34  | % |  |  | 25 - 60 | %
|               |  |               |     |               |  |            |     |   |  |  |         |  
|               |  |               | 100 | %             |  |            | 100 | % |  |  |         |  
|               |  |               |     |               |  |            |     |   |  |  |         |  

Equity securities at December 31, 2003 and
2002 do not include any Banknorth common stock.

Banknorths key investment objectives in
managing its defined benefit plan assets are to ensure that
present and future benefit obligations to all participants and
beneficiaries are met as they become due; to provide a total
return that, over the long-term, maximizes the ratio of the plan
assets to liabilities, while minimizing the present value of
required Company contributions, at the appropriate levels of
risk; to meet statutory requirements and regulatory
agencies requirements; and to satisfy applicable
accounting standards. Banknorth periodically evaluates the asset
allocations, funded status, investment manager structure, rate
of return assumption and contribution strategy for satisfaction
of our investment objectives. The Retirement Committee meets
quarterly to review the performance management reports prepared
by our investment managers.

The expected return on plan assets equals the
long-term rate of return multiplied by the market related value,
plus the expected contributions, weighted for timing, plus
expected expenses, minus the expected distributions, weighted
for timing.

Interest cost equals the discount rate multiplied
by the projected benefit obligation plus the service cost minus
expected expenses, minus the expected distributions, weighted
for timing.



|    |                                    
|--- | -----------------------------------
|21. | Fair Value of Financial Instruments

Banknorth discloses fair value information about
financial instruments for which it is practicable to estimate
fair value. Fair value estimates are made as of a specific point
in time based on the characteristics of the financial
instruments and relevant market information. Where available,
quoted market prices are used. In other cases, fair values are
based on estimates using present value or other valuation
techniques. These techniques involve uncertainties and are
significantly affected by the assumptions used and judgments
made regarding risk characteristics of various financial
instruments, discount rates, estimates of future cash flows,
future expected loss experience and other factors. Changes in
assumptions could significantly affect these estimates. Derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in certain cases, could not be realized
in an immediate sale of the instrument. Also, because of
differences in methodologies and assumptions used to estimate
fair values, Banknorths fair values should not be compared
to those of other banks.

93



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                      
|--- | -----------------------------------------------------
|21. | Fair Value of Financial
    Instruments  (Continued)

Fair value estimates are based on existing
financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not
purport to represent the underlying market value of Banknorth.
For certain assets and liabilities, the information required
under SFAS No. 107 is supplemented with additional
information relevant to an understanding of the fair value.

The following describes the methods and
assumptions used by Banknorth in estimating the fair values of
financial instruments and certain non-financial instruments:

Cash and cash equivalents, including cash and
due from banks, short-term investments and federal funds sold.For these cash and cash equivalents,
which have maturities of 90 days or less, the carrying
amounts reported in the balance sheet approximate fair values.

Securities and loans held for sale.Fair values are based on quoted bid
market prices, where available. Where quoted market prices for
an instrument are not available, fair values are based on quoted
market prices of similar instruments, adjusted for differences
between the quoted instruments and the instrument being valued.
Fair values are calculated based on the value of one unit
without regard to premiums or discounts that might result from
selling all of Banknorths holdings of a particular
security in one transaction.

Loans and leases.The fair values of portfolio loans and
leases are estimated by discounting the contractual cash flows
using interest rates currently being offered for loans with
similar terms to borrowers of similar quality.

For certain variable-rate consumer loans,
including home equity lines of credit the carrying value
approximates fair value.

For nonperforming loans and certain loans where
the credit quality of the borrower has deteriorated
significantly, fair values are estimated by discounting cash
flows at a rate commensurate with the risk associated with those
cash flows.

Commitments and letters of credit not included in
the table have contractual values of $6.2 billion and
$5.5 billion at December 31, 2003 and 2002,
respectively. These instruments generate ongoing fees at
Banknorths current pricing levels. Of the commitments at
December 31, 2003, 24% mature within one year. At
December 31, 2003, the approximate fair value of standby
letter of credit was $696 thousand, of which
$312 thousand was unamortized and included in other
liabilities on the balance sheet. At December 31, 2002, the
approximate fair value of the standby letter of credit was
$590 thousand. The fair value of the issuance of the
guarantees was recorded on January 1, 2003 in accordance
with the implementation of FASB Interpretation No. 45,
Guarantors Accounting and Disclosure for Guarantees,
Including Indirect Guarantees of Indebtedness of Others.

Mortgage Servicing Rights.The fair value of Banknorths
mortgage servicing rights was based on a third party valuation
analysis (performed as of November 30, 2003) which
considered the expected present value of future mortgage
servicing income, net of estimated servicing costs, considering
market consensus loan prepayment predictions at that date.

Deposits.The fair
value of deposits with no stated maturity is equal to the
carrying amount. The fair value of time deposits is based on the
discounted value of contractual cash flows, applying interest
rates currently being offered on wholesale funding products of
similar maturities.

94



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                      
|--- | -----------------------------------------------------
|21. | Fair Value of Financial
    Instruments  (Continued)

The fair value estimates for deposits do not
include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of
alternative forms of funding (deposit base
intangibles).

Borrowings, including federal funds purchased,
securities sold under repurchase agreements, borrowings from the
Federal Home Loan Bank and other borrowings.The fair value of Banknorths
long-term borrowings is estimated by discounting cash flows
based on current rates available to Banknorth for similar types
of borrowing arrangements taking into account any optionality.
For short-term borrowings that mature or reprice in 90 days
or less, carrying value approximates fair value.

Off-balance
sheet financial instruments:

Forward commitments to sell loans held for
sale.The fair value of
Banknorths forward commitments to sell loans reflects the
amount Banknorth would receive or pay to terminate the
commitment at the reporting date. Of the $61.0 million of
forward sales commitments at December 31, 2003, Banknorth
had $41.7 million in loans available to sell at that date
as well as sufficient loan originations subsequent to
December 31, 2003 to fulfill the commitments. Consequently,
Banknorth expects to meet all of its forward sales commitments.

Rate-lock commitments to originate loans held
for sale.The fair values on
commitment to originate residential loans at an agreed upon rate
(rate-locked) are based on the estimated gain or loss that would
be recognized had the underlying loans been funded and sold on
the reporting date (i.e., mark-to-market value).

Commercial loan interest rate swaps.The estimated fair value of these
derivative financial instruments is based on dealer quotes.

Loans serviced with recourse.Under certain of Banknorths
servicing arrangements with investors, Banknorth has
$5.6 million of recourse obligations to those serviced loan
portfolios. In the event of foreclosure on a serviced loan,
Banknorth is obligated to repay the investor to the extent of
the investors remaining balance after application of
proceeds from the sale of the underlying collateral. To date,
losses related to these recourse arrangements have been
insignificant and while Banknorth cannot project future losses,
the fair value of this recourse obligation is deemed to be
likewise insignificant.

A summary of the carrying values and estimated
fair values of Banknorths significant financial
instruments at December 31, 2003 and 2002 follows:

|        |                                 |          |   |            |  |          |   |            |  |  |   |            |  |  |   |            | 
|------- | ------------------------------- | -------- | - | ---------- |  | -------- | - | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|        |                                 |          |   |           
|        |                                 | 2003     |   | 2002      
|        |                                 |          |   |           
|        |                                 | Carrying |   | Fair       |  | Carrying |   | Fair      
|        |                                 | Value    |   | Value      |  | Value    |   | Value     
|        |                                 |          |   |            |  |          |   |           
|Assets: |                                 |          |   |            |  |          |   |            |  |  |   |            |  |  |   |           
|        | Cash and cash equivalents       |          | $ | 316,331    |  |          | $ | 316,331    |  |  | $ | 717,003    |  |  | $ | 717,003    | 
|        | Securities  available for sale |          |   | 7,122,992  |  |          |   | 7,122,992  |  |  |   | 6,731,467  |  |  |   | 6,731,467  | 
|        | Securities  held to maturity   |          |   | 124,240    |  |          |   | 124,344    |  |  |   | 216,409    |  |  |   | 221,571    | 
|        | Loans held for sale             |          |   | 41,696     |  |          |   | 42,801     |  |  |   | 128,622    |  |  |   | 135,799    | 
|        | Loans and leases, net           |          |   | 16,113,675 |  |          |   | 16,153,360 |  |  |   | 13,847,735 |  |  |   | 14,202,064 | 
|        | Mortgage servicing rights       |          |   | 2,783      |  |          |   | 3,115      |  |  |   | 3,598      |  |  |   | 3,598      | 

95



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                      
|--- | -----------------------------------------------------
|21. | Fair Value of Financial
    Instruments  (Continued)

|                                                                   |                                                            |          |  |            |   |          |  |            |   |  |  |            |   |  |  |            |  
|------------------------------------------------------------------ | ---------------------------------------------------------- | -------- |  | ---------- | - | -------- |  | ---------- | - |  |  | ---------- | - |  |  | ---------- | -
|                                                                   |                                                            |          |  |           
|                                                                   |                                                            | 2003     |  | 2002      
|                                                                   |                                                            |          |  |           
|                                                                   |                                                            | Carrying |  | Fair       |   | Carrying |  | Fair      
|                                                                   |                                                            | Value    |  | Value      |   | Value    |  | Value     
|                                                                   |                                                            |          |  |            |   |          |  |           
|Liabilities:                                                       |                                                            |          |  |            |   |          |  |            |   |  |  |            |   |  |  |           
|                                                                   | Deposits (with no stated maturity)                         |          |  | 13,168,081 |   |          |  | 13,168,081 |   |  |  | 11,005,823 |   |  |  | 11,005,823 |  
|                                                                   | Time deposits                                              |          |  | 4,733,104  |   |          |  | 4,763,865  |   |  |  | 4,658,778  |   |  |  | 4,719,291  |  
|                                                                   | Borrowings                                                 |          |  | 5,524,864  |   |          |  | 5,674,074  |   |  |  | 5,432,581  |   |  |  | 5,595,742  |  
|Financial instruments with off-balance sheet
    notional amounts: |                                                            |          |  |            |   |          |  |            |   |  |  |            |   |  |  |           
|                                                                   | Forward commitments to sell loans                          |          |  | (425       | ) |          |  | (425       | ) |  |  | (3,532     | ) |  |  | (3,532     | )
|                                                                   | Rate-lock commitments to originate loans held for
    sale |          |  | 188        |   |          |  | 188        |   |  |  | 766        |   |  |  | 766        |  
|                                                                   | Commercial loan interest rate swaps with borrower          |          |  | 7,357      |   |          |  | 7,357      |   |  |  | 1,546      |   |  |  | 1,546      |  
|                                                                   | Commercial loan interest rate swaps with broker            |          |  | (7,357     | ) |          |  | (7,357     | ) |  |  | (1,546     | ) |  |  | (1,546     | )
|                                                                   | Interest rate contracts on borrowings                      |          |  | (1,896     | ) |          |  | (1,896     | ) |  |  |           |   |  |  |           |  
|                                                                   | Foreign currency forward contracts with customers          |          |  | 3,132      |   |          |  | 3,132      |   |  |  | 175        |   |  |  | 175        |  
|                                                                   | Foreign currency forward contracts with dealers            |          |  | (3,132     | ) |          |  | (3,132     | ) |  |  | (175       | ) |  |  | (175       | )

96



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                          
|--- | ---------------------------------------------------------
|22. | Condensed Financial Information 
    Parent Company Only

Condensed Financial Statements of
Banknorth

|                                     |                                                                              |                                            |   |           |           |  |   |           |           | 
|------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------------------ | - | --------- | --------- |  | - | --------- | --------- | 
|                                     |                                                                              |                                           
|                                     |                                                                              | December 31,                              
|                                     |                                                                              |                                           
|                                     |                                                                              | 2003                                       |   | 2002     
|                                     |                                                                              |                                            |   |          
|Balance Sheets                       |                                                                              |                                            |   |           |           |  |   |          
|Assets:                              |                                                                              |                                            |   |           |           |  |   |          
|                                     | Cash and due from banks                                                      |                                            | $ | 27,492    |           |  | $ | 22,879    |          
|                                     | Interest bearing deposits with subsidiaries                                  |                                            |   | 225,492   |           |  |   | 115,452   |          
|                                     | Securities available for sale                                                |                                            |   | 45,216    |           |  |   | 42,180    |          
|                                     | Investment in subsidiaries                                                   |                                            |   | 2,710,080 |           |  |   | 2,234,291 |          
|                                     | Goodwill and other intangibles                                               |                                            |   | 618       |           |  |   | 618       |          
|                                     | Amounts receivable from subsidiaries                                         |                                            |   |          |           |  |   | 83        |          
|                                     | Other assets                                                                 |                                            |   | 16,679    |           |  |   | 16,917    |          
|                                     |                                                                              |                                            |   |           |           |  |   |          
|                                     |                                                                              | Total assets                               |   | $         | 3,025,577 |  |   | $         | 2,432,420 | 
|                                     |                                                                              |                                            |   |           |           |  |   |          
|Liabilities and shareholders equity |                                                                              |                                            |   |           |           |  |   |          
|                                     | Amounts payable to subsidiaries                                              |                                            | $ | 978       |           |  | $ |          |          
|                                     | Senior notes, net of hedge                                                   |                                            |   | 149,991   |           |  |   |          |          
|                                     | Subordinated debentures supporting mandatory
    redeemable trust securities |                                            |   | 344,403   |           |  |   | 344,424   |          
|                                     | Other liabilities                                                            |                                            |   | 9,686     |           |  |   | 24,511    |          
|                                     | Shareholders equity                                                         |                                            |   | 2,520,519 |           |  |   | 2,063,485 |          
|                                     |                                                                              |                                            |   |           |           |  |   |          
|                                     |                                                                              | Total liabilities and shareholders equity |   | $         | 3,025,577 |  |   | $         | 2,432,420 | 
|                                     |                                                                              |                                            |   |           |           |  |   |          

97



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                        
|--- | -----------------------------------------------------------------------
|22. | Condensed Financial Information 
    Parent Company Only  (Continued)

Statements of Income

|                                                                                      |                                                |                         |         |         |  |      |         |         |  |   |         |         | 
|------------------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                                                      |                                                |                        
|                                                                                      |                                                | Year Ended December 31,
|                                                                                      |                                                |                        
|                                                                                      |                                                | 2003                    |         | 2002    |  | 2001
|                                                                                      |                                                |                         |         |         |  |     
|Operating income:                                                                     |                                                |                         |         |         |  |      |         |         |  |   |         |        
|                                                                                      | Dividends from subsidiaries                    |                         | $       | 193,950 |  |      | $       | 112,331 |  |   | $       | 175,793 | 
|                                                                                      | Net gains (losses) on sales of securities      |                         |         | 53      |  |      |         | 648     |  |   |         |        | 
|                                                                                      | Other operating income                         |                         |         | 6,226   |  |      |         | 6,456   |  |   |         | 4,989   | 
|                                                                                      |                                                |                         |         |         |  |      |         |         |  |   |         |        
|                                                                                      | Total operating income                         |                         |         | 200,229 |  |      |         | 119,435 |  |   |         | 180,782 | 
|                                                                                      |                                                |                         |         |         |  |      |         |         |  |   |         |        
|Operating expenses:                                                                   |                                                |                         |         |         |  |      |         |         |  |   |         |        
|                                                                                      | Interest on borrowings                         |                         |         | 31,266  |  |      |         | 26,994  |  |   |         | 12,900  | 
|                                                                                      | Amortization of goodwill and other intangibles |                         |         |        |  |      |         |        |  |   |         | 1,847   | 
|                                                                                      | Merger and consolidation costs                 |                         |         |        |  |      |         |        |  |   |         | 4,277   | 
|                                                                                      | Write-off of branch automation project         |                         |         |        |  |      |         | 6,170   |  |   |         |        | 
|                                                                                      | Other operating expenses                       |                         |         | 3,944   |  |      |         | 3,603   |  |   |         | 224     | 
|                                                                                      |                                                |                         |         |         |  |      |         |         |  |   |         |        
|                                                                                      | Total operating expenses                       |                         |         | 35,210  |  |      |         | 36,767  |  |   |         | 19,248  | 
|                                                                                      |                                                |                         |         |         |  |      |         |         |  |   |         |        
|Income before income taxes and equity in
    undistributed net income of subsidiaries |                                                |                         | 165,019 |         |  |      | 82,668  |         |  |   | 161,534 |        
|Income tax benefit                                                                    |                                                |                         | (10,126 | )       |  |      | (9,736  | )       |  |   | (4,485  | )      
|                                                                                      |                                                |                         |         |         |  |      |         |         |  |   |         |        
|Income before equity in undistributed net income
    of subsidiaries                  |                                                |                         | 175,145 |         |  |      | 92,404  |         |  |   | 166,019 |        
|Equity in undistributed net income of subsidiaries                                    |                                                |                         | 175,614 |         |  |      | 206,234 |         |  |   | 72,776  |        
|                                                                                      |                                                |                         |         |         |  |      |         |         |  |   |         |        
|Net income                                                                            |                                                | $                       | 350,759 |         |  | $    | 298,638 |         |  | $ | 238,795 |        
|                                                                                      |                                                |                         |         |         |  |      |         |         |  |   |         |        

The Parent Companys Statement of Changes in
Shareholders Equity are identical to the Consolidated
Statement of Changes in Shareholders Equity and therefore
are not presented here.

98



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                        
|--- | -----------------------------------------------------------------------
|22. | Condensed Financial Information 
    Parent Company Only  (Continued)

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
    (used) provided by operating activities: |                         |          |          |   |      |         |          |   |   |          |          |  
|                                                        | Undistributed net income from subsidiaries                                                   |                         |          | (175,614 | ) |      |         | (206,234 | ) |   |          | (72,776  | )
|                                                        | Amortization of goodwill and other intangibles                                               |                         |          |         |   |      |         |         |   |   |          | 1,847    |  
|                                                        | Decrease in unearned compensation                                                            |                         |          |         |   |      |         |         |   |   |          | 2,005    |  
|                                                        | Write-off of branch automation project                                                       |                         |          |         |   |      |         | 6,170    |   |   |          |         |  
|                                                        | (Increase) decrease in amounts receivable from
    subsidiaries                              |                         |          | 83       |   |      |         | 23,618   |   |   |          | (19,869  | )
|                                                        | Decrease (increase) in other assets                                                          |                         |          | 5,266    |   |      |         | (3,969   | ) |   |          | (13,705  | )
|                                                        | Increase (decrease) in amounts payable to
    subsidiaries                                   |                         |          | 978      |   |      |         | (1,029   | ) |   |          | (5,920   | )
|                                                        | Increase (decrease) in other liabilities                                                     |                         |          | (10,920  | ) |      |         | 4,813    |   |   |          | 24,931   |  
|                                                        | Other, net                                                                                   |                         |          |         |   |      |         |         |   |   |          | 68       |  
|                                                        |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|Net cash provided by operating activities               |                                                                                              |                         | 170,552  |          |   |      | 122,007 |          |   |   | 155,376  |         
|                                                        |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|Cash flows from investing activities:                   |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|                                                        | Net decrease (increase) in interest bearing
    deposits with subsidiaries                   |                         |          | (110,040 | ) |      |         | (97,097  | ) |   |          | 49,539   |  
|                                                        | Purchase of available for sale securities                                                    |                         |          | (3,171   | ) |      |         | (3,037   | ) |   |          | (4,990   | )
|                                                        | Sales of available for sale securities                                                       |                         |          | 840      |   |      |         |         |   |   |          |         |  
|                                                        | Capital contribution to subsidiaries                                                         |                         |          | (70,000  | ) |      |         |         |   |   |          |         |  
|                                                        | Cash acquired in acquisition                                                                 |                         |          | 36,022   |   |      |         | 6,110    |   |   |          | 6,328    |  
|                                                        |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|Net cash (used in) provided by investing
    activities |                                                                                              |                         | (146,349 | )        |   |      | (94,024 | )        |   |   | 50,877   |         
|                                                        |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|Cash flows from financing activities:                   |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|                                                        | Proceeds from line of credit                                                                 |                         |          |         |   |      |         | 25,000   |   |   |          | 35,000   |  
|                                                        | Payment of line of credit                                                                    |                         |          |         |   |      |         | (25,000  | ) |   |          | (35,000  | )
|                                                        | Proceeds from sale of trust preferred securities                                             |                         |          |         |   |      |         | 193,150  |   |   |          |         |  
|                                                        | Proceeds from sale of senior notes                                                           |                         |          | 148,693  |   |      |         |         |   |   |          |         |  
|                                                        | Payment of notes payable                                                                     |                         |          |         |   |      |         | (1,068   | ) |   |          | (356     | )
|                                                        | Dividends paid to shareholders                                                               |                         |          | (111,889 | ) |      |         | (85,894  | ) |   |          | (72,277  | )
|                                                        | Treasury stock acquired                                                                      |                         |          | (105,071 | ) |      |         | (154,054 | ) |   |          | (151,546 | )
|                                                        | Proceeds from stock issued in connection with
    employee benefit plans                     |                         |          | 48,677   |   |      |         | 30,406   |   |   |          | 26,148   |  
|                                                        |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|Net cash (used in) financing activities                 |                                                                                              |                         | (19,590  | )        |   |      | (17,460 | )        |   |   | (198,031 | )       
|                                                        |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|Net increase in cash due from banks                     |                                                                                              |                         | 4,613    |          |   |      | 10,523  |          |   |   | 8,222    |         
|Cash and due from banks at beginning of year            |                                                                                              |                         | 22,879   |          |   |      | 12,356  |          |   |   | 4,134    |         
|                                                        |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|Cash and due from banks at end of year                  |                                                                                              | $                       | 27,492   |          |   | $    | 22,879  |          |   | $ | 12,356   |         
|                                                        |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|Supplemental disclosure information:                    |                                                                                              |                         |          |          |   |      |         |          |   |   |          |         
|                                                        | Interest paid on borrowings                                                                  |                         | $        | 30,329   |   |      | $       | 22,867   |   |   | $        | 13,033   |  

99



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

23.     Subsequent
Events (unaudited)

On November 25, 2003, Banknorth announced
that it had entered into an agreement to acquire Foxborough
Savings Bank (Foxborough) for $89.6 million in
a cash transaction. Foxborough had $248.9 million of assets
and $27.6 million of shareholders equity at
December 31, 2003. The Banknorth and Foxborough boards of
directors have approved the agreement. The transaction is
expected to close in the first quarter of 2004 and is subject to
the approval of the shareholders of Foxborough and the receipt
of all regulatory approvals and other customary conditions.

On December 9, 2003, Banknorth announced
that it had entered into an agreement to acquire CCBT Financial
Companies, Inc. (CCBT), the parent company of Cape
Cod Bank and Trust Company NA. CCBT had $1.3 billion of
assets and $114.5 million of shareholders equity at
December 31, 2003. Under terms of the agreement, each
outstanding share of CCBT will be converted into 1.084 shares of
Banknorth common stock, plus cash in lieu of any fractional
share interest. The Banknorth and CCBT boards of directors have
approved the agreement. The transaction is expected to close in
the second quarter of 2004 and is subject to the approval of the
shareholders of CCBT and the receipt of all regulatory approvals
and other customary conditions.

100



---



##### Table of Contents



BANKNORTH GROUP INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

24.     Selected
Quarterly Data (unaudited)

|                                                                  |         |     |  |         |         |         |  |         |         |         |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |         | 
|----------------------------------------------------------------- | ------- | --- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                  |         |     |  |         |         |        
|                                                                  |         |     |  | 2003    |         | 2002   
|                                                                  |         |     |  |         |         |        
|                                                                  |         |     |  | Fourth  |         | Third   |  | Second  |         | First   |  | Fourth  |         | Third   |  | Second  |         | First  
|                                                                  |         |     |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Quarter |         | Quarter
|                                                                  |         |     |  |         |         |         |  |         |         |         |  |         |         |         |  |         |         |        
|Interest income                                                   |         |     |  | $       | 290,414 |         |  | $       | 290,750 |         |  | $       | 302,478 |         |  | $       | 309,327 |         |  | $ | 306,569 |         |  | $ | 313,156 |         |  | $ | 309,387 |         |  | $ | 306,006 |        
|Interest expense                                                  |         |     |  |         | 77,126  |         |  |         | 80,918  |         |  |         | 90,904  |         |  |         | 103,190 |         |  |   | 107,006 |         |  |   | 112,160 |         |  |   | 109,914 |         |  |   | 109,520 |        
|                                                                  |         |     |  |         |         |         |  |         |         |         |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        
|Net interest income                                               |         | (A) |  |         | 213,288 |         |  |         | 209,832 |         |  |         | 211,574 |         |  |         | 206,137 |         |  |   | 199,563 |         |  |   | 200,996 |         |  |   | 199,473 |         |  |   | 196,486 |        
|Provision for loan and lease losses                               |         |     |  |         | 10,400  |         |  |         | 10,500  |         |  |         | 10,500  |         |  |         | 10,901  |         |  |   | 10,829  |         |  |   | 10,829  |         |  |   | 10,828  |         |  |   | 11,828  |        
|                                                                  |         |     |  |         |         |         |  |         |         |         |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        
|Net interest income after provision for loan and
    lease losses |         |     |  |         | 202,888 |         |  |         | 199,332 |         |  |         | 201,074 |         |  |         | 195,236 |         |  |   | 188,734 |         |  |   | 190,167 |         |  |   | 188,645 |         |  |   | 184,658 |        
|Noninterest income(1)                                             |         | (B) |  |         | 84,435  |         |  |         | 88,656  |         |  |         | 115,828 |         |  |         | 78,238  |         |  |   | 84,441  |         |  |   | 65,505  |         |  |   | 62,986  |         |  |   | 61,576  |        
|Noninterest expense(2)                                            |         | (C) |  |         | 155,676 |         |  |         | 151,647 |         |  |         | 184,039 |         |  |         | 149,908 |         |  |   | 158,126 |         |  |   | 141,577 |         |  |   | 136,791 |         |  |   | 142,897 |        
|                                                                  |         |     |  |         |         |         |  |         |         |         |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        
|Income before income taxes                                        |         |     |  |         | 131,647 |         |  |         | 136,341 |         |  |         | 132,863 |         |  |         | 123,566 |         |  |   | 115,049 |         |  |   | 114,095 |         |  |   | 114,840 |         |  |   | 103,337 |        
|Income tax expense                                                |         |     |  |         | 40,085  |         |  |         | 46,063  |         |  |         | 45,338  |         |  |         | 42,173  |         |  |   | 37,911  |         |  |   | 37,233  |         |  |   | 38,680  |         |  |   | 34,859  |        
|                                                                  |         |     |  |         |         |         |  |         |         |         |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        
|Net income                                                        |         |     |  | $       | 91,562  |         |  | $       | 90,278  |         |  | $       | 87,525  |         |  | $       | 81,393  |         |  | $ | 77,138  |         |  | $ | 76,862  |         |  | $ | 76,160  |         |  | $ | 68,478  |        
|                                                                  |         |     |  |         |         |         |  |         |         |         |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        
|Weighted average shares outstanding:                              |         |     |  |         |         |         |  |         |         |         |  |         |         |         |  |         |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        
|                                                                  | Basic   |     |  |         |         | 162,149 |  |         |         | 161,517 |  |         |         | 162,312 |  |         |         | 157,667 |  |   |         | 148,226 |  |   |         | 148,099 |  |   |         | 147,233 |  |   |         | 149,347 | 
|                                                                  | Diluted |     |  |         |         | 165,685 |  |         |         | 164,446 |  |         |         | 164,559 |  |         |         | 159,328 |  |   |         | 149,389 |  |   |         | 149,662 |  |   |         | 149,064 |  |   |         | 151,116 | 
|Basic earnings per share:                                         |         |     |  | $       | 0.56    |         |  | $       | 0.56    |         |  | $       | 0.54    |         |  | $       | 0.52    |         |  | $ | 0.52    |         |  | $ | 0.52    |         |  | $ | 0.52    |         |  | $ | 0.46    |        
|Diluted earnings per share:                                       |         |     |  | $       | 0.55    |         |  | $       | 0.55    |         |  | $       | 0.53    |         |  | $       | 0.51    |         |  | $ | 0.52    |         |  | $ | 0.51    |         |  | $ | 0.51    |         |  | $ | 0.45    |        
|Return on average assets(3)                                       |         |     |  |         | 1.39%   |         |  |         | 1.39%   |         |  |         | 1.38%   |         |  |         | 1.32%   |         |  |   | 1.35%   |         |  |   | 1.40%   |         |  |   | 1.46%   |         |  |   | 1.36%   |        
|Return on average equity(3)                                       |         |     |  |         | 14.72%  |         |  |         | 14.85%  |         |  |         | 14.24%  |         |  |         | 14.26%  |         |  |   | 15.75%  |         |  |   | 16.25%  |         |  |   | 17.45%  |         |  |   | 15.73%  |        
|Net interest margin (fully-taxable equivalent)(3)                 |         |     |  |         | 3.65%   |         |  |         | 3.63%   |         |  |         | 3.71%   |         |  |         | 3.66%   |         |  |   | 3.86%   |         |  |   | 4.03%   |         |  |   | 4.18%   |         |  |   | 4.23%   |        
|Noninterest income as a percent of total income(4)                |         |     |  |         | 28.36%  |         |  |         | 29.70%  |         |  |         | 35.38%  |         |  |         | 27.51%  |         |  |   | 29.73%  |         |  |   | 24.58%  |         |  |   | 24.00%  |         |  |   | 23.86%  |        
|Efficiency ratio(5)                                               |         |     |  |         | 52.29%  |         |  |         | 50.81%  |         |  |         | 56.21%  |         |  |         | 52.71%  |         |  |   | 55.68%  |         |  |   | 53.12%  |         |  |   | 52.12%  |         |  |   | 55.37%  |        



---



|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the second quarter of 2003 noninterest income
    included $29.2 million of net securities gains incurred as
    part of the deleveraging program.                                          
|   
|(2) | In the second quarter of 2003, noninterest
    expense included $28.5 million of prepayment penalties on
    borrowings incurred as part of the deleveraging program.                          
|   
|(3) | Annualized.                                                                                                                                                                                    
|   
|(4) | Represents noninterest income as a percentage of
    net interest income and noninterest income. Noninterest income
    as a percent of total income is calculated as (B) divided
    by (A+B).
|   
|(5) | Represents noninterest expenses as a percentage
    of net interest income and noninterest income. Efficiency ratio
    is calculated as (C) divided by (A+B).                                 

101



---



##### Table of Contents



Independent Auditors Report

The Board of Directors

Banknorth Group, Inc.:


We have audited the accompanying consolidated
balance sheets of Banknorth Group, Inc. and subsidiaries
(Banknorth) as of December 31, 2003 and 2002,
and the related consolidated statements of income, changes in
shareholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of
Banknorths management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Banknorth Group, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 8 to the Consolidated
Financial Statements, effective January 1, 2002, Banknorth
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets, and SFAS No. 147,
Acquisitions of Certain Financial Institutions.



|            | 
|----------- | 
|(KPMG LOGO) | 

Boston, Massachusetts

February 23, 2004


102



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We carried out an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report.
Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls
and procedures are designed to ensure that the information
required to be disclosed by us in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms and are operating in
an effective manner.




PART III.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Incorporated by reference to Election of
Directors on pages 14 through 17 of our definitive
proxy statement, dated March 22, 2004 (the Proxy
Statement), Governance of Banknorth 
Committees of the Board of Directors on pages 6 and 7
of the Proxy Statement, Governance of
Banknorth  Code of Conduct and Ethics on
pages 10 and 11 of the Proxy Statement and Executive
Officers who are not Directors on pages 18 and 19 of
the Proxy Statement.

Incorporated by reference to
Section 16(a) Beneficial Ownership Reporting
Compliance on page 22 of the Proxy Statement.

Incorporated by reference to Code of
Conduct and Ethics on pages 10 to 11 of the Proxy
Statement.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Incorporated by reference to Compensation
of Executive Officers and Transactions with Management on
pages 23 through 30 of the Proxy Statement.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Security Ownership of Certain Beneficial
Owners and Management.Information
regarding security ownership of certain beneficial owners and
management is incorporated by reference to Beneficial
Ownership of Common Stock by Certain Beneficial Owners and
Management on pages 20 and 21 of the Proxy Statement.

Equity Compensation Plan Information.The following table provides
information as of December 31, 2003 with respect to shares
of Banknorth Common Stock that may be issued under our existing
equity compensation plans, which consist of the following plans:
2003 Equity Incentive Plan, 1996 Equity Incentive Plan, as
amended, Amended and Restated 1995 Stock Option Plan for
Non-Employee Directors, as amended, Amended and Restated
Restricted Stock Plan for Non-Employee Directors and our Amended
and Restated Employee Stock Purchase Plan, all of which have
been approved by our stockholders.

The table does not include information with
respect to shares of Common Stock subject to outstanding options
granted under equity compensation plans assumed by us in
connection with mergers and acquisitions of the companies which
originally granted those options. Note 5 to the table sets
forth the total number of shares of Common Stock issuable upon
the exercise of assumed options as of

103



---



##### Table of Contents



December 31, 2003 and the weighted average
exercise price of those options. No additional options may be
granted under those assumed plans.


|                                                               |       |                      |            |                   |  |                           |       |        |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------- | ---------- | ----------------- |  | ------------------------- | ----- | ------ |  |  | --------- | --------- | 
|                                                               |       |                      |            |                   |  | Number of securities     
|                                                               |       | Number of securities |            | Weighted-average  |  | remaining available for  
|                                                               |       | to be issued         |            | exercise price of |  | future issuance under    
|                                                               |       | upon exercise of     |            | outstanding       |  | equity compensation plans
|                                                               |       | outstanding options, |            | options, warrants |  | (excluding securities    
|                                                               |       | warrants and rights  |            | and rights        |  | reflected in column (a)) 
|Plan Category                                                  |       | (a)                  |            | (b)               |  | (c)                      
|                                                               |       |                      |            |                   |  |                          
|Equity compensation plans approved by security
    holders     |       |                      | 13,543,087 | (1)(2)            |  | $                         | 21.23 | (1)(2) |  |  | 3,690,515 | (3)(4)   
|Equity compensation plans not approved by
    security holders |       |                      |           |                   |  |                           |      |        |  |  |          |          
|                                                               |       |                      |            |                   |  |                           |       |        |  |  |           |          
|                                                               | Total |                      |            | 13,543,087        |  |                           | $     | 21.23  |  |  |           | 3,690,515 | 
|                                                               |       |                      |            |                   |  |                           |       |        |  |  |           |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes purchase rights accruing under the
    Employee Stock Purchase Plan, which has a stockholder approved
    reserve of 2,852,000 shares. Under the Employee Stock
    Purchase Plan, each eligible employee may purchase shares of
    Common Stock at semi-annual intervals each year at a purchase
    price determined by the committee of our board of directors
    which administers the plan, which shall not be less than the
    lesser of (i) 85% of the fair market value of a share of
    Common Stock on the first business day of the applicable
    semi-annual offering period or (ii) 85% of the fair market
    value of a share of Common Stock on the last business day of
    such offering period. In no event may the amount of Common Stock
    purchased by a participant in the Employee Stock Purchase Plan
    in a calendar year exceed $25,000, measured as of the time an
    option under the plan is granted.
|   
|(2) | Includes information about Banknorths 1986
    Stock Option and Stock Appreciation Rights Plan, which was
    approved by stockholders of Banknorth and has expired. No
    additional options may be granted under this plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(3) | Does not take into account shares available for
    future issuance under the Restricted Stock Plan for Non-Employee
    Directors, under which up to $10,000 of the annual fee payable
    to each non-employee director of Banknorth and participating
    subsidiaries is payable in shares of Common Stock. Because the
    number of shares of Common Stock issuable under the Restricted
    Stock Plan for Non-Employee Directors is based on a formula and
    not a specific reserve amount, the number of shares which may be
    issued pursuant to this plan in the future is not determinable.
    During 2003, 2002 and 2001, a total of 8,869, 5,599 and 6,358
    shares were issued under this plan, respectively.                                                                                                                                                                                                                   
|   
|(4) | Includes shares available for future issuance
    under the Employee Stock Purchase Plan. As of December 31,
    2003, an aggregate of 1,223,689 shares of Common Stock were
    available for issuance under this plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(5) | The table does not include information for equity
    compensation plans assumed by us in connection with mergers and
    acquisitions of the companies which originally established those
    plans. As of December 31, 2003, a total of
    2,835,966 shares of Common Stock were issuable upon
    exercise of outstanding options under those assumed plans and
    the weighted average exercise price of those outstanding options
    was $14.00 per share. No additional options may be granted under
    any assumed plans.                                                                                                                                                                                                                                                                                                                                                                                                                  






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Incorporated by reference to Indebtedness
of Directors and Management and Certain Transactions on
page 27 of the Proxy Statement.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Incorporated by reference to Relationship
with Independent Public Accountants on pages 11 and
12 of the Proxy Statement.

104



---



##### Table of Contents






PART IV.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1) The following financial statements
are incorporated by reference from Item 8 hereof:



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated balance sheets at December 31,
    2003 and 2002                                                                            
|
| | Consolidated statements of income for each of the
    years in the three-year period ended December 31, 2003                             
|
| | Consolidated statements of changes in
    shareholders equity for each of the years in the
    three-year period ended December 31, 2003
|
| | Consolidated statements of cash flows for each of
    the years in the three-year period ended December 31, 2003                         
|
| | Notes to Consolidated Financial Statements                                                                                               

Independent Auditors Report

(a)(2) All other schedules for which
provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are omitted because of
the absence of conditions under which they are required or
because the required information is included in the financial
statements and related notes thereto.

(a)(3) The following exhibits are included
as part of this Form 10-K. Where applicable, references to
Banknorth include Peoples Heritage Financial Group, Inc., its
name prior to May 10, 2000.

|            |    |         |  |                                                                                                                                                                                                                                   |  |  |     | 
|----------- | -- | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Exhibit No. |    | Exhibit |  | Location                                                                                                                                                                                                                         
|            |    |         |  |                                                                                                                                                                                                                                  
|            | 3  | (a)(1)  |  | Amended and Restated Articles of Incorporation of
    Banknorth                                                                                                                                                                   |  |  | (1) | 
|            | 3  | (a)(2)  |  | Amendments to the Articles of Incorporation of
    Banknorth                                                                                                                                                                      |  |  | (2) | 
|            | 3  | (b)     |  | Bylaws of Banknorth                                                                                                                                                                                                               |  |  | (3) | 
|            | 4  | (a)     |  | Specimen Common Stock certificate                                                                                                                                                                                                 |  |  | (4) | 
|            | 4  | (b)     |  | Stockholder Rights Agreement, dated as of
    September 12, 1989 and amended and restated as of
    July 27, 1999 and as of July 25, 2000, between
    Banknorth and American Stock Transfer & Trust Company,
    as Rights Agent |  |  | (5) | 
|            | 4  | (c)     |  | Instruments defining the rights of security
    holders, including indentures                                                                                                                                                     |  |  | (6) | 
|            | 10 | (a)     |  | Severance Agreement between Banknorth and William
    J. Ryan                                                                                                                                                                     |  |  |     | 
|            | 10 | (b)     |  | Form of Severance Agreement between Banknorth and
    each executive officer of Banknorth identified in the Proxy
    Statement, other than William J. Ryan                                                                       |  |  |     | 
|            | 10 | (c)     |  | Amended and Restated Supplemental Retirement
    Agreement between Banknorth and William J. Ryan                                                                                                                                  |  |  |     | 
|            | 10 | (d)     |  | Amended and Restated Supplemental Retirement
    Agreement between Banknorth and Peter J. Verrill                                                                                                                                 |  |  |     | 
|            | 10 | (e)(1)  |  | Supplemental Retirement Agreement between
    Banknorth and John W. Fridlington                                                                                                                                                   |  |  | (7) | 
|            | 10 | (e)(2)  |  | First Amendment to Supplemental Retirement
    Agreement between Banknorth and John W. Fridlington                                                                                                                                |  |  | (8) | 
|            | 10 | (e)(3)  |  | Second Amendment to Supplemental Retirement
    Agreement between Banknorth and John W. Fridlington                                                                                                                               |  |  |     | 
|            | 10 | (f)     |  | Banknorth Group, Inc. Supplemental Retirement
    Plan (which covers each executive officer of Banknorth named in
    the Proxy Statement, other than Messrs. Ryan, Verrill and
    Fridlington)                                  |  |  | (8) | 
|            | 10 | (g)     |  | Amended and Restated Deferred Compensation Plan
    for Non-Employee Directors and Key Employees, effective
    January 1, 2003                                                                                                   |  |  | (8) | 
|            | 10 | (h)     |  | 1986 Stock Option and Stock Appreciation Rights
    Plan, as amended                                                                                                                                                              |  |  | (9) | 

105



---



##### Table of Contents



|            |      |         |  |                                                                                                           |  |  |      | 
|----------- | ---- | ------- |  | --------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Exhibit No. |      | Exhibit |  | Location                                                                                                 
|            |      |         |  |                                                                                                          
|            | 10   | (i)     |  | Amended and Restated Employee Stock Purchase Plan                                                         |  |  | (10) | 
|            | 10   | (j)     |  | Amended and Restated Restricted Stock Plan for
    Non-Employee Directors                                 |  |  | (11) | 
|            | 10   | (k)     |  | Amended and Restated 1995 Stock Option Plan for
    Non-Employee Directors                                |  |  |      | 
|            | 10   | (l)     |  | Amended and Restated 401(k) Plan, effective
    January 1, 2004                                           |  |  |      | 
|            | 10   | (m)     |  | 1996 Equity Incentive Plan, as amended                                                                    |  |  | (8)  | 
|            | 10   | (n)     |  | Executive Incentive Plan                                                                                  |  |  | (8)  | 
|            | 10   | (o)     |  | Bank of New Hampshire Corporation Executive
    Excess Benefit Plan for Paul R. Shea                      |  |  | (12) | 
|            | 10   | (p)     |  | Supplemental Executive Retirement Plan of
    Evergreen Bancorp, Inc. (which covers only Director Dougan) |  |  | (13) | 
|            | 10   | (q)     |  | 2003 Equity Incentive Plan                                                                                |  |  | (14) | 
|            | 21   |         |  | Subsidiaries of Banknorth Group, Inc.                                                                     |  |  |      | 
|            | 23   |         |  | Consent of KPMG LLP                                                                                       |  |  |      | 
|            | 31.1 |         |  | Certification of Chief Executive Officer under
    Rules 13a-14 and 15d-14                                |  |  |      | 
|            | 31.2 |         |  | Certification of Chief Financial Officer under
    Rules 13a-14 and 15d-14                                |  |  |      | 
|            | 32.1 |         |  | Certification of Chief Executive Officer Under
    18 U.S.C. § 1350                                       |  |  |      | 
|            | 32.2 |         |  | Certification of Chief Financial Officer Under
    18 U.S.C. § 1350                                       |  |  |      | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Exhibit A to
    the Agreement and Plan of Merger, dated as of October 27,
    1997, between Banknorth and CFX Corporation, which
    agreement is included as Exhibit A to the Prospectus/ Proxy
    Statement included in the Form S-4 Registration Statement
    (No. 333-23991) filed by Banknorth with the SEC on
    December 31, 1997.                                                                     
|   
|(2) | Exhibits are incorporated by reference to
    (i) the proxy statement filed by Banknorth with the SEC on
    March 23, 1998, (ii) the proxy statement filed by
    Banknorth with the SEC on March 22, 2000 and (iii) the
    Form S-4 Registration Statement (No. 333-95587) filed
    by Banknorth with the SEC on January 28, 2000, which
    describes an amendment which changed the name of the registrant
    to Banknorth Group, Inc.
|   
|(3) | Exhibit is incorporated by reference to the
    Form 10-Q report filed by Banknorth for the three months
    ended September 30, 2003.                                                                                                                                                                                                                                                                                                         
|   
|(4) | Exhibit is incorporated by reference to the
    Form S-4 Registration Statement (No. 333-95587) filed
    by Banknorth with the SEC on January 28, 2000.                                                                                                                                                                                                                                                                                       
|   
|(5) | Exhibit is incorporated by reference to the
    Form 8-A/ A report filed by Banknorth with the SEC on
    July 26, 2000.                                                                                                                                                                                                                                                                                                                       
|   
|(6) | Banknorth has no instruments defining the rights
    of holders of its long-term debt where the amount of securities
    authorized under any such instrument exceeds 10% of the total
    assets of Banknorth and its subsidiaries on a consolidated
    basis. Banknorth hereby agrees to furnish a copy of any such
    instrument to the SEC upon request.                                                                                 
|   
|(7) | Exhibit is incorporated by reference to
    Banknorths Form 10-K report for the year ended
    December 31, 1995.                                                                                                                                                                                                                                                                                                                             
|   
|(8) | Exhibit is incorporated by reference to
    Banknorths Form 10-K report for the year ended
    December 31, 2002.                                                                                                                                                                                                                                                                                                                             
|   
|(9) | Exhibit is incorporated by reference to the
    Form S-4 Registration Statement (No. 33-20243) filed
    by Banknorth with the SEC on February 22, 1988. An
    amendment to the 1986 Stock Option and Stock Appreciation Rights
    Plan is incorporated by reference to the proxy statement filed
    by Banknorth with the SEC on March 24, 1994.                                                                                           



|     |                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------
|(10) | Exhibit is incorporated by reference to the proxy
    statement dated March 22, 2002 filed by Banknorth with the
    SEC.

106



---



##### Table of Contents





|     |                                                                                                                                                                        
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Exhibit is incorporated by reference to the
    Form 10-K report filed by Banknorth for the year ended
    December 31, 1996.                                          
|    
|(12) | Exhibit is incorporated by reference to the
    Form 10-K report filed by Bank of New Hampshire Corporation
    (File No. 0-9517) for the year ended December 31, 1994.
|    
|(13) | Exhibit is incorporated by reference to the
    Form 10-K report filed by Evergreen Bancorp, Inc. for the
    year ended December 31, 1996.                            
|    
|(14) | Exhibit is incorporated by reference to the proxy
    statement dated March 10, 2003 filed by Banknorth with the
    SEC.                                              

Banknorths management contracts or
compensatory plans or arrangements consist of
Exhibit Nos. 10(a)-(q).

(b) During the fourth quarter of the period
covered by this report, Banknorth filed a Current Report on
Form 8-K on October 16, 2003, November 5, 2003,
November 10, 2003, November 26, 2003 and
December 10, 2003.

(c) See (a)(3) above for all exhibits
filed herewith and the Exhibit Index.

(d) There are no other financial statements
and financial statement schedules which were excluded from this
report which are required to be included herein.

107



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
of the Securities Exchange Act of 1934, Banknorth has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                      
| | ---------------------
| | BANKNORTH GROUP, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ WILLIAM J. RYAN

| |                        
| | -----------------------
| |                        
| | William J. Ryan        
| | Chairman, President and
| | Chief Executive Officer

Date: February 27, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons in the capacities and on the dates indicated.

|                                                       |  |          |  |                         |  | 
|------------------------------------------------------ |  | -------- |  | ----------------------- |  | 
|                                                      
|Gary G. Bahre                                          |  | Director |  |                        
|                                                      
|/s/ ROBERT G. CLARKERobert G. Clarke                   |  | Director |  | Date: February 27, 2004
|                                                      
|/s/ P. KEVIN CONDRONP. Kevin Condron                   |  | Director |  | Date: February 27, 2004
|                                                      
|/s/ GEORGE W. DOUGANGeorge W. Dougan                   |  | Director |  | Date: February 27, 2004
|                                                      
|/s/ COLLEEN KHOURYColleen Khoury                       |  | Director |  | Date: February 27, 2004
|                                                      
|Dana S. Levenson                                       |  | Director |  |                        
|                                                      
|/s/ STEVEN T. MARTINSteven T. Martin                   |  | Director |  | Date: February 27, 2004
|                                                      
|John M. Naughton                                       |  | Director |  |                        
|                                                      
|/s/ MALCOLM W. PHILBROOK, JR.Malcolm W. Philbrook, Jr. |  | Director |  | Date: February 27, 2004
|                                                      
|/s/ ANGELO P. PIZZAGALIAngelo P. Pizzagali             |  | Director |  | Date: February 27, 2004

108



---



##### Table of Contents



|                                               |  |                                                                                                           |  |                         |  | 
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | ----------------------- |  | 
|                                              
|/s/ IRVING E. ROGERS, IIIIrving E. Rogers, III |  | Director                                                                                                  |  | Date: February 27, 2004
|                                              
|/s/ WILLIAM J. RYANWilliam J. Ryan             |  | Chairman, President and
    Chief Executive Officer
    (principal executive officer)                     |  | Date: February 27, 2004
|                                              
|Curtis M. Scribner                             |  | Director                                                                                                  |  |                        
|                                              
|/s/ PAUL R. SHEAPaul R. Shea                   |  | Director                                                                                                  |  | Date: February 27, 2004
|                                              
|/s/ GERRY S. WEIDEMAGerry S. Weidema           |  | Director                                                                                                  |  | Date: February 27, 2004
|                                              
|/s/ STEPHEN J. BOYLEStephen J. Boyle           |  | Executive Vice President and Chief Financial
    Officer
    (principal financial and accounting officer) |  | Date: February 27, 2004

109