##### Table of Contents



FORM 10-Q UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2005 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-51179 TD BANKNORTH INC. 
 Delaware
    
    01-0437984(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)Two Portland Square, Portland, Maine
    
    04112(Address of principal executive offices)
    
    (Zip Code)
 (207) 761-8500 
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes þ No o The number of shares outstanding of the Registrants common stock and related stock purchase rights
as of April 30, 2005 is: Common stock, par value $.01 per share
    
    173,273,821(Class)
    
    (Outstanding)
 Available on the Web @ www.tdbanknorth.com




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##### Table of Contents



INDEX
TD BANKNORTH INC. AND SUBSIDIARIES PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Income
    
    
    4Consolidated Statements of Changes in Shareholders Equity
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    

    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    50Item 4. Controls and Procedures
    
    
    50PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    50Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 3. Defaults Upon Senior Securities
    
    
    51Item 4. Submission of Matters to a Vote of Security Holders
    
    
    51Item 5. Other Information
    
    
    53Item 6. Exhibits
    
    
    53Signatures
    
    
    54Exhibits
    
    
    55Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
 2




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TD BANKNORTH INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)
 Successor
    
    
    PredecessorMarch 31, 2005
    
    
    December 31, 2004AssetsCash and due from banks
    
    $
    540,812
    
    
    $
    541,994Federal funds sold and other short-term investments
    
    
    3,247
    
    
    
    2,312Securities available for sale
    
    
    4,656,122
    
    
    
    6,728,523Securities held to maturity (fair value of $80,394 and $87,507 at
March 31, 2005 and December 31, 2004, respectively)
    
    
    80,259
    
    
    
    87,013Loans held for sale
    
    
    558,137
    
    
    
    51,693Loans and leases:Residential real estate mortgages
    
    
    3,388,907
    
    
    
    3,081,217Commercial real estate mortgages
    
    
    6,559,459
    
    
    
    6,249,513Commercial business loans and leases
    
    
    4,094,627
    
    
    
    3,928,594Consumer loans and leases
    
    
    5,606,950
    
    
    
    5,333,670Total loans and leases
    
    
    19,649,943
    
    
    
    18,592,994Less: Allowance for loan and lease losses
    
    
    228,165
    
    
    
    243,152Net loans and leases
    
    
    19,421,778
    
    
    
    18,349,842Premises and equipment, net
    
    
    308,109
    
    
    
    300,120Goodwill
    
    
    4,537,623
    
    
    
    1,365,780Identifiable intangible assets
    
    
    757,504
    
    
    
    50,376Bank-owned life insurance
    
    
    556,265
    
    
    
    523,129Other assets
    
    
    714,965
    
    
    
    687,028Total assets
    
    $
    32,134,821
    
    
    $
    28,687,810Liabilities and Shareholders EquityDeposits:Savings accounts
    
    $
    2,703,160
    
    
    $
    2,546,018Money market and NOW accounts
    
    
    8,168,207
    
    
    
    7,907,513Certificates of deposit
    
    
    4,753,407
    
    
    
    4,484,370Brokered deposits
    
    
    80,951
    
    
    
    576Noninterest-bearing deposits
    
    
    4,215,574
    
    
    
    4,289,104Total deposits
    
    
    19,921,299
    
    
    
    19,227,581Short-term borrowings
    
    
    4,236,334
    
    
    
    3,797,823Long-term debt
    
    
    1,117,559
    
    
    
    2,192,882Deferred tax liability on identifiable intangible assets
    
    
    268,303
    
    
    
    17,632Other liabilities
    
    
    242,833
    
    
    
    275,778Total liabilities
    
    
    25,786,328
    
    
    
    25,511,696Commitments and contingenciesShareholders Equity:Preferred stock (par value $0.01 per share, 5,000,000 shares authorized,
none issued)
    
    
    
    
    
    
    Common stock (par value $0.01 per share, 400,000,000 shares authorized,
Issued - 188,428,502 in 2005 and 191,672,502 in 2004)
    
    
    1,884
    
    
    
    1,917Common stock, Class B (par value $0.01 per share, authorized and
issued 1 share in 2005)Paid-in capital
    
    
    6,836,042
    
    
    
    1,763,572Retained earnings
    
    
    23,627
    
    
    
    1,677,802Unearned compensation
    
    
    (2,256
    )
    
    
    Treasury stock, at cost (15,220,790 shares in 2005 and 12,374,515
shares in 2004)
    
    
    (483,614
    )
    
    
    (265,020
    )Accumulated other comprehensive loss
    
    
    (27,190
    )
    
    
    (2,157
    )Total shareholders equity
    
    
    6,348,493
    
    
    
    3,176,114Total liabilities and shareholders equity
    
    $
    32,134,821
    
    
    $
    28,687,810
 See accompanying notes to unaudited Consolidated Financial Statements. 3




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##### Table of Contents



TD BANKNORTH INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
 Successor
    
    
    Predecessor
    
    
    PredecessorMarch 1, 2005 to
    
    
    January 1, 2005 to
    
    
    Three Months EndedMarch 31, 2005
    
    
    February 28, 2005
    
    
    March 31, 2004Interest and dividend income:Interest and fees on loans and leases
    
    $
    95,664
    
    
    $
    176,949
    
    
    $
    215,779Interest and dividends on securities
    
    
    20,758
    
    
    
    52,670
    
    
    
    76,873Total interest and dividend income
    
    
    116,422
    
    
    
    229,619
    
    
    
    292,652Interest expense:Interest on deposits
    
    
    14,750
    
    
    
    30,694
    
    
    
    38,818Interest on borrowed funds
    
    
    12,814
    
    
    
    32,654
    
    
    
    36,225Total interest expense
    
    
    27,564
    
    
    
    63,348
    
    
    
    75,043Net interest income
    
    
    88,858
    
    
    
    166,271
    
    
    
    217,609Provision for loan and lease losses
    
    
    1,000
    
    
    
    1,069
    
    
    
    9,500Net interest income after provision
for loan and lease losses
    
    
    87,858
    
    
    
    165,202
    
    
    
    208,109Noninterest income:Deposit services
    
    
    9,823
    
    
    
    18,359
    
    
    
    26,153Insurance agency commissions
    
    
    5,640
    
    
    
    8,252
    
    
    
    13,736Merchant and electronic banking income, net
    
    
    5,363
    
    
    
    7,751
    
    
    
    10,404Wealth management services
    
    
    3,545
    
    
    
    6,959
    
    
    
    9,149Bank-owned life insurance
    
    
    1,929
    
    
    
    4,169
    
    
    
    5,496Investment planning services
    
    
    1,874
    
    
    
    2,815
    
    
    
    4,839Net securities (losses) gains
    
    
    (3,928
    )
    
    
    (46,548
    )
    
    
    3,581Loans held for sale  Lower of cost or market adjustment
    
    
    
    
    
    
    (7,500
    )
    
    
    Change in unrealized loss on derivatives
    
    
    (8,175
    )
    
    
    
    
    
    
    Other noninterest income
    
    
    5,280
    
    
    
    7,617
    
    
    
    14,85921,351
    
    
    
    1,874
    
    
    
    88,217Noninterest expense:Compensation and employee benefits
    
    
    32,891
    
    
    
    67,977
    
    
    
    87,534Occupancy
    
    
    6,490
    
    
    
    11,411
    
    
    
    15,709Equipment
    
    
    4,397
    
    
    
    8,440
    
    
    
    11,890Data processing
    
    
    3,800
    
    
    
    7,233
    
    
    
    10,436Advertising and marketing
    
    
    2,322
    
    
    
    4,373
    
    
    
    7,523Amortization of identifiable intangible assets
    
    
    9,934
    
    
    
    1,561
    
    
    
    1,904Merger and consolidation costs
    
    
    3,927
    
    
    
    27,264
    
    
    
    1,614Prepayment penalties on borrowings
    
    
    3
    
    
    
    6,300
    

    
    
    Other noninterest expense
    
    
    8,899
    
    
    
    15,887
    
    
    
    23,10972,663
    
    
    
    150,446
    
    
    
    159,719Income before income tax expense
    
    
    36,546
    
    
    
    16,630
    
    
    
    136,607Provision for income taxes
    
    
    12,919
    
    
    
    6,182
    
    
    
    46,280Net income
    
    $
    23,627
    
    
    $
    10,448
    
    
    $
    90,327Basic earnings per share
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.55Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.54Weighted average shares outstanding:Basic
    
    
    180,581
    
    
    
    184,964
    
    
    
    162,965Dilutive effect of stock options
    
    
    924
    
    
    
    1,783
    
    
    
    3,692Diluted
    
    
    181,505
    
    
    
    186,747
    
    
    
    166,657
 See accompanying notes to unaudited Consolidated Financial Statements. 4




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TD BANKNORTH INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands) (Unaudited)
 AccumulatedCommon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherShares
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    Unearned
    
    
    Treasury
    
    
    ComprehensiveOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    Stock
    
    
    Income (Loss)
    
    
    TotalBalances at December 31, 2004 (Predecessor)
    
    
    179,298
    
    
    $
    1,917
    
    
    $
    1,763,572
    
    
    $
    1,677,802
    
    
    $
    
    
    
    ($
    265,020
    )
    
    ($
    2,157
    )
    
    $
    3,176,114Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,448Unrealized gains (losses) on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,463
    
    
    
    2,463Unrealized gains (losses) on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,714
    )
    
    
    (7,714
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,197Common stock issued for acquisitions
    
    
    6,152
    
    
    
    61
    
    
    
    199,764
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199,825Treasury stock issued for employee benefit
plans, including tax benefit of $16.0 million
    
    
    2,978
    
    
    
    
    
    
    
    7,489
    
    
    
    
    
    
    
    
    
    
    
    63,879
    
    
    
    
    
    
    
    71,368Cash dividends declared ($0.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,383
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,383
    )Balances at February 28, 2005 (Predecessor)
    
    
    188,428
    
    
    $
    1,978
    
    
    $
    1,970,825
    
    
    $
    1,650,867
    
    
    $
    
    
    
    ($
    201,141
    )
    
    ($
    7,408
    )
    
    $
    3,415,121Balances at March 1, 2005 (Successor)
    
    
    188,428
    
    
    $
    1,884
    
    
    $
    6,836,487
    
    
    $
    
    
    
    ($
    2,256
    )
    
    $
    
    
    
    $
    
    
    
    $
    6,836,115Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,627
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,627Unrealized gains (losses) on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,902
    )
    
    
    (26,902
    )Unrealized gains (losses)on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (288
    )
    
    
    (288
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,563
    )Treasury stock issued for employee benefit
plans, including tax benefit of $0.2 million
    
    
    80
    
    
    
    
    
    
    
    (445
    )
    
    
    
    
    
    
    
    
    
    
    2,794
    
    
    
    
    
    
    
    2,349Treasury stock purchased
    
    
    (15,300
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (486,408
    )
    
    
    
    
    
    
    (486,408
    )Balances at March 31, 2005 (Successor)
    
    
    173,208
    
    
    $
    1,884
    
    
    $
    6,836,042
    
    
    $
    23,627
    
    
    ($
    2,256
    )
    
    ($
    483,614
    )
    
    ($
    27,190
    )
    
    $
    6,348,493Balances at December 31, 2003 (Predecessor)
    
    
    162,188
    
    
    $
    1,823
    
    
    $
    1,435,005
    
    
    $
    1,508,292
    
    
    $
    
    
    
    ($
    430,608
    )
    
    $
    6,007
    
    
    $
    2,520,519Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,327
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,327Unrealized gains (losses) on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    54,583
    
    
    
    54,583Unrealized gains on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    48Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,958Treasury stock issued for employee benefit
plans, including tax benefit of $3.9 million
    
    
    858
    
    
    
    
    
    
    
    (226
    )
    
    
    
    
    
    
    
    
    
    
    18,375
    
    
    
    
    
    
    
    18,149Cash dividends declared ($0.195 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,715
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,715
    )Balances at March 31, 2004 (Predecessor)
    
    
    163,046
    
    
    $
    1,823
    
    
    $
    1,434,779
    
    
    $
    1,566,904
    
    

    $
    
    
    
    ($
    412,233
    )
    
    $
    60,638
    
    
    $
    2,651,911
 See accompanying notes to unaudited Consolidated Financial Statements. 5




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##### Table of Contents



TD BANKNORTH INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 Successor
    
    
    Predecessor
    
    
    PredecessorMarch 1, 2005 to
    
    
    January 1, 2005 to
    
    
    Three Months EndedMarch 31, 2005
    
    
    February 28, 2005
    
    
    March 31, 2004Cash flows from operating activities:Net income
    
    $
    23,627
    
    
    $
    10,448
    
    
    $
    90,327Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan and lease losses
    
    
    1,000
    
    
    
    1,069
    
    
    
    9,500Depreciation of banking premises and equipment
    
    
    4,034
    
    
    
    7,807
    
    
    
    10,762Net amortization of premium and discounts
    
    
    2,275
    
    
    
    3,703
    
    
    
    7,204Amortization of intangible assets
    
    
    9,934
    
    
    
    1,561
    
    
    
    1,904Provision for deferred tax expense
    
    
    4,200
    
    
    
    2,000
    
    
    
    3,800Net losses (gains) realized from sales of securities and loans
    
    
    3,928
    
    
    
    46,548
    
    
    
    (5,092
    )Net losses  lower of cost or market
    
    
    
    
    
    
    7,500
    
    
    
    Prepayment penalties on borrowings
    
    
    3
    
    
    
    6,300
    
    
    
    Net (gains) realized from sales of loans held for sale
    
    
    (204
    )
    
    
    (616
    )
    
    
    (1,289
    )Increase in cash surrender value of bank owned life insurance
    
    
    (1,929
    )
    
    
    (4,169
    )
    
    
    (5,496
    )Proceeds from sales of loans held for sale
    
    
    40,171
    
    
    
    72,258
    
    
    
    94,688Residential loans originated and purchased for sale
    
    
    (43,251
    )
    
    
    (58,800
    )
    
    
    (98,599
    )Net change in other assets
    
    
    (155
    )
    
    
    47,443
    
    
    
    (55,225
    )Net change in other liabilities
    
    
    (32,193
    )
    
    
    (42,559
    )
    
    
    92,686Net cash provided by operating activities
    
    
    11,440
    
    
    
    100,493
    
    
    
    145,170Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    
    
    
    
    83,271
    
    
    
    984,631Proceeds from sales of securities as part of deleveraging program
    
    
    374,488
    
    
    
    2,461,701
    
    
    
    Proceeds from maturities and principal repayments of securities available for sale
    
    
    67,710
    
    
    
    190,117
    
    
    
    308,779Purchases of securities available for sale
    
    
    (325,436
    )
    
    
    (969,979
    )
    
    
    (1,473,468
    )Proceeds from maturities and principal repayments of securities held to maturity
    
    
    2,084
    
    
    
    4,670
    
    
    
    8,798Net decrease (increase) in loans and leases
    
    
    1,921
    
    
    
    (222,430
    )
    
    
    (327,274
    )Proceeds from sales of portfolio loans
    
    
    
    
    
    
    
    
    
    
    37,097Net additions to premises and equipment
    
    
    (1,875
    )
    
    
    798
    
    
    
    (6,246
    )Proceeds from policy coverage on bank-owned life insurance
    
    
    217
    
    
    
    141
    
    
    
    Cash paid for acquisitions, net of cash acquired
    
    
    
    
    
    
    130,685
    
    
    
    Net cash provided by (used in) investing activities
    
    
    119,109
    
    
    
    1,678,974
    
    
    
    (467,683
    )Cash flows from financing activities:Net (decrease) increase in deposits
    
    
    (249,259
    )
    
    
    (160,662
    )
    
    
    59,277Net increase (decrease) in short-term borrowings
    
    
    821,621
    
    
    
    1,100,739
    
    
    
    (34,449
    )Payments on short-term borrowings as part of deleveraging program
    
    
    (374,491
    )
    
    
    (1,461,701
    )
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    8,467
    
    
    
    27,566Payments on long-term debt
    
    
    (16,939
    )
    
    
    (474,664
    )
    
    
    (10,518
    )Payments on long-term debt as part of deleveraging program
    
    
    
    
    
    
    (1,006,300
    )
    
    
    Treasury stock issued for employee benefit plans
    
    
    2,349
    
    
    
    71,368
    
    
    
    18,149Purchase of treasury stock
    
    
    (486,408
    )
    
    
    
    
    
    
    Cash dividends paid to shareholders
    
    
    
    
    
    
    (37,383
    )
    
    
    (31,715
    )Net cash (used in) provided by financing activities
    
    
    (303,127
    )
    
    
    (1,960,136
    )
    
    
    28,310Decrease in cash and cash equivalents
    
    
    (172,578
    )
    
    
    (180,669
    )
    
    
    (294,203
    )Cash and cash equivalents at beginning of period
    
    
    (254,363
    )
    
    
    (73,694
    )
    
    
    316,331Cash and cash equivalents at end of period
    
    ($
    426,941
    )
    
    ($
    254,363
    )
    
    $
    22,128In 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
    
    $
    27,924,518
    
    
    $
    1,469,630
    
    
    $
    Fair value of liabilities assumed
    
    
    25,626,026
    
    
    
    1,422,658
    
    
    
    Interest paid
    
    $
    22,673
    
    
    $
    68,238
    
    
    $
    70,273Income taxes (received)
    
    
    (24,960
    )
    
    
    (779
    )
    
    
    (8,388
    )
 See accompanying notes to unaudited Consolidated Financial Statements. 6




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##### Table of Contents



TD BANKNORTH INC. AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements
 March 31, 2005
 (In thousands, except per share data and as noted) (Unaudited)
 Note 1  Basis of Presentation We, TD Banknorth Inc., are a majority-owned subsidiary of The Toronto-Dominion Bank (TD) and
successor to Banknorth Group, Inc. TD acquired its majority interest in us effective March 1, 2005
in a two-step transaction in which Banknorth Group, Inc. first reincorporated from Maine to
Delaware by means of a migratory merger into a newly-formed, wholly-owned Delaware subsidiary of
Banknorth Group, Inc., and then TD acquired its majority interest in us by means of the merger of a
newly-formed, wholly-owned subsidiary of TD with and into this reincorporated entity, which changed
its name to TD
Banknorth Inc. upon completion of the transaction. In accordance with the guidelines for
accounting for business combinations, the transaction meets the technical definition of a business
combination, and therefore, is being accounted for as a purchase business combination with the
purchase price being comprised of all the consideration received by the shareholders of Banknorth
Group, Inc., namely:  
    cash paid by TD,
    value of TD common shares issued and
    the value of TD Banknorth Inc. shares issued. The purchase price and related purchase accounting adjustments have been recorded in our financial
statements at and for the period commencing March 1, 2005. This resulted in a new basis of
accounting reflecting the fair value of our assets and liabilities at March 1, 2005 and for the
Successor period beginning on March 1, 2005. Information for all dates and Predecessor periods
prior to the acquisition on March 1, 2005 is presented using our historical basis of accounting.
Although the TD transaction was consummated as of the close of business on March 1, 2005, for
practical considerations all purchase accounting and fair value adjustments were calculated based
on February 28, 2005 month end balances and the results of operations for March 1, 2005 are
included in the successor period. Had the purchase accounting and fair value adjustments been
calculated based on March 1, 2005 end of day balances, the adjustments would have been
substantially the same as those calculated based on February 28, 2005 month end balances. The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and predominant practices
within the banking industry. Except as noted above, we have not changed our significant accounting
and reporting policies from those disclosed in our 2004 Annual Report on Form 10-K. There have
been no significant changes in the methods or assumptions used in the accounting policies which
require material estimates and assumptions. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary
for a fair statement of the unaudited consolidated financial statements have been included herein.
The results of operations for the one month ended March 31, 2005 and two months ended February 28,
2005 are not necessarily indicative of the results that may be expected for any other interim
period or the entire year ending December 31, 2005. Certain amounts in the prior periods have been
reclassified to conform to the current presentation. All significant intercompany balances and
transactions have been eliminated in the accompanying unaudited consolidated financial statements. Note 2  Accounting for the Transaction with The Toronto-Dominion Bank As discussed in Note 1, the form of the transaction with TD requires that the transaction be
accounted for as a purchase business combination and the assets and liabilities of the predecessor
company be adjusted to fair value as of the date of completion of the transaction. Accordingly,
the purchase price was allocated to 7




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##### Table of Contents



the assets and liabilities assumed based on their estimated
fair values at the March 1, 2005 transaction date, as summarized below: Implied Purchase PriceValue of TD common shares exchanged (1)
    
    $
    1,806,535Cash Consideration (including cash in lieu of fractional shares)
    
    
    2,306,947Value of 49% of TD Banknorth shares exchanged (2)
    
    
    2,686,802Fair value of TD Banknorth stock options
    
    
    35,831Total implied purchase price
    
    
    6,836,115Allocation of the Implied Purchase PricePredecessor stockholders equity as of March 1, 2005
    
    
    3,415,121Predecessor goodwill and intangible assets
    
    
    (1,565,293
    )Adjustments to reflect assets acquired and liabilities
assumed at fair value:Loans
    
    
    109,630Loan relationship intangibles
    
    
    95,826Core deposit intangibles
    
    
    566,000Other identifiable intangibles
    
    
    105,612Deferred income taxes on identifiable intangible assets
    
    
    (272,056
    )Other assets
    
    
    12,172Fixed maturity deposits
    
    
    (46,790
    )Borrowings
    
    
    (59,731
    )Pension and post-employment benefit plans
    
    
    (93,546
    )Other liabilities
    
    
    31,547Fair value of net assets acquired
    
    
    2,298,492Estimated goodwill resulting from the transaction
    
    $
    4,537,623
   (1)
    
    Based on 188,428,501 Banknorth shares times exchange ratio of 0.2351 times
$40.78, the closing price of the TD common shares on March 1, 2005.(2)
    
    Based on 188,428,501 Banknorth shares times 49% times $29.10, the opening
price of the TD Banknorth common stock on March 2, 2005. TD Banknorth expects that some adjustments of the estimated fair values assigned to the assets
acquired and liabilities assumed will be recorded in periods after March 31, 2005, although such
adjustments are not expected to be significant. It is expected that none of the goodwill will be
deductible for income tax purposes. The transaction also triggered the change in control provision of certain stock option agreements
whereby employee stock options became immediately exercisable. Certain executive officers entered
into retention agreements under which the executives waived the accelerated vesting of options, but
will earn retention payments consisting of cash payments, restricted stock units and enhanced
retirement benefits if the executive remains with the Company for the retention period. Note 3  Acquisitions Acquisitions are an important part of our strategic plan. The following table summarizes bank
acquisitions completed since January 1, 2004. The acquisitions were accounted for as purchases
and, as such, were included in our results of operations from the date of acquisition. 8




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##### Table of Contents



Transaction-Related ItemsBalance at
    
    
    
    
    
    
    Identifiable
    
    
    
    
    
    
    
    
    
    
    TotalAcquisition
    
    
    Acquisition Date
    
    
    
    
    
    
    Intangible
    
    
    Cash
    
    
    Shares
    
    
    Purchase(Dollars and shares in millions)
    
    Date
    
    
    Assets
    
    
    Equity
    
    
    Goodwill
    
    
    Assets
    
    
    Paid
    
    
    Issued
    
    
    PriceBostonFed Bancorp, Inc.
    
    
    1/21/2005
    
    
    $
    1,467.8
    
    
    $
    102.7
    
    
    $
    140.0
    
    
    $
    13.2
    
    
    $
    0.3
    
    
    
    6.2
    
    
    $
    200.2CCBT Financial Companies, Inc.
    
    
    4/30/2004
    
    
    
    1,292.9
    
    
    
    108.5
    
    
    
    176.0
    
    
    
    19.4
    
    
    
    
    
    
    
    9.2
    
    
    
    298.1Foxborough Savings Bank
    
    
    4/30/2004
    
    
    
    241.8
    
    
    
    22.8
    
    
    
    62.0
    
    
    
    2.2
    
    
    
    88.9
    
    
    
    
    
    
    
    88.9
 On January 21, 2005, we acquired BostonFed Bancorp, Inc. (BostonFed) for a total purchase
price of $200.2 million. The purchase price was comprised of 6,154,155 shares of our common stock
and $0.3 million in cash. The total value of shares issued was $199.8 million, calculated based on
the average of the closing price of our common stock for the period commencing two trading days
before, and ending two trading days after, June 21, 2004, the date of the merger agreement. The
purchase price was allocated to the fair value of assets acquired ($1.5 billion), liabilities
assumed ($1.4 billion), identifiable intangible assets ($13.2 million) and goodwill ($140.0
million). Note 4  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 fair 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 stock option 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. We have elected to
continue using the intrinsic value method in APB Opinion No. 25 and, as a result, must make
proforma disclosures of net income and earnings per share as if the fair value based method of
accounting had been applied. The proforma disclosures include the effects of accelerated vesting
of stock options in connection with the TD transaction and all other awards granted and the effects
of our employee stock purchase plan. Had we determined compensation cost based on the fair value
at the grant date for all stock options and recorded expense related to our employee stock purchase
plan under SFAS No. 123, our net income and earnings per share would have been reduced to the
proforma amounts indicated in the table below. 9




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##### Table of Contents



Successor
    
    
    Predecessor
    
    
    PredecessorMarch 1, 2005 to
    
    
    January 1, 2005 to
    
    
    Three Months EndedMarch 31, 2005
    
    
    February 28, 2005
    
    
    March 31, 2004Net income, as reported
    
    $
    23,627
    
    
    $
    10,448
    
    
    $
    90,327Deduct total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects:Effect of accelerated vesting of stock options
in connection with the TD transaction
    
    
    
    
    
    
    (9,293
    )
    
    
    All other
    
    
    (146
    )
    
    
    (2,159
    )
    
    
    (3,407
    )Proforma net
income (loss)
    
    $
    23,481
    
    
    ($
    1,004
    )
    
    $
    86,920Earnings per shareBasic  As reported
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.55Proforma
    
    $
    0.13
    
    
    ($
    0.01
    )
    
    $
    0.53Diluted  As reported
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.54Proforma
    
    $
    0.13
    
    
    
    ($0.01
    )
    
    $
    0.52
 Note 5  Securities Available for Sale The following table presents the fair value of investments with continuous unrealized losses for
less than one year as of March 31, 2005. SuccessorLess than one year
    
    More than one year
    
    TotalNumber of
    
    
    Fair
    
    
    Unrealized
    
    
    Number of
    
    
    Fair
    
    
    Unrealized
    
    
    Number of
    
    
    Fair
    
    
    UnrealizedInvestments
    
    
    Value
    
    
    Losses
    
    
    Investments
    
    
    Value
    
    
    Losses
    
    
    Investments
    
    
    Value
    
    
    LossesU. S. Government obligations and
obligations of U.S. Government
agencies and corporations
    
    
    7
    
    
    $
    15,054
    
    
    ($
    42
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    7
    
    
    $
    15,054
    
    
    ($
    42
    )Tax exempt bonds and notes
    
    
    212
    
    
    
    153,988
    
    
    
    (1,568
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212
    
    
    
    153,988
    
    
    
    (1,568
    )Other bonds and notes
    
    
    78
    
    
    
    147,040
    
    
    
    (818
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    147,040
    
    
    
    (818
    )Mortgage-backed securities
    
    
    1,053
    
    
    
    3,904,013
    
    
    
    (36,761
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,053
    
    
    
    3,904,013
    
    
    
    (36,761
    )Collateralized mortgage obligations
    
    
    27
    
    
    
    234,740
    
    
    
    (1,414
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    234,740
    
    
    
    (1,414
    )Equity securities
    
    
    11
    
    
    
    304
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    304
    
    
    
    (16
    )1,388
    
    
    $
    4,455,139
    
    
    ($
    40,619
    )
    
    
    
    
    
    $
    0
    
    
    $
    0
    
    
    
    1,388
    
    
    $
    4,455,139
    
    
    ($
    40,619
    )
 As a result of the TD transaction and related purchase accounting adjustments
recorded on March 1, 2005, all unrealized gains and/or losses on investment securities were
reclassified as basis adjustments of the individual securities as of March 1, 2005. Accordingly,
at March 31, 2005 there were no unrealized losses in a continuous unrealized loss position for more
than one month. For securities with unrealized losses, the following information was considered in determining that
the impairments are not other-than-temporary. U.S. Government securities are backed by the full
faith and credit of the United States and therefore bear nominal credit risk. U.S. Government
agencies securities are
believed by management to have minimal credit risk as they play a vital role in the nations
financial markets. Other bonds and notes are generally comprised of corporate securities which
have 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. 10




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##### Table of Contents



Note 6  Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill and identifiable intangible assets are summarized as
follows: Other
    
    
    TotalCore Deposit
    
    
    Identifiable
    
    
    IdentifiableGoodwill
    
    
    Intangibles
    
    
    Intangibles
    
    
    IntangiblesBalance, December 31, 2004 (Predecessor)
    
    $
    1,365,780
    
    
    $
    43,723
    
    
    $
    6,653
    
    
    $
    50,376Recorded during the period
    
    
    140,006
    
    
    
    13,172
    
    
    
    
    
    
    
    13,172Amortization expense
    
    
    
    
    
    
    (1,237
    )
    
    
    (324
    )
    
    
    (1,561
    )Adjustments of purchase accounting estimates
    
    
    (2,479
    )
    
    
    
    
    
    
    
    
    
    
    Balance, February 28, 2005 (Predecessor)
    
    
    1,503,307
    
    
    
    55,658
    
    
    
    6,329
    
    
    
    61,987Reversal of prior intangibles in connection with
the TD transaction
    
    
    (1,503,307
    )
    
    
    (55,658
    )
    
    
    (6,329
    )
    
    
    (61,987
    )Recorded in connection with the TD transaction
    
    
    4,537,623
    
    
    
    566,000
    
    
    
    201,438
    
    
    
    767,438Balance, March 1, 2005 (Successor)
    
    
    4,537,623
    
    
    
    566,000
    
    
    
    201,438
    
    
    
    767,438Amortization expense
    
    
    
    
    
    
    (8,583
    )
    
    
    (1,351
    )
    
    
    (9,934
    )Balance, March 31, 2005 (Successor)
    
    $
    4,537,623
    
    
    $
    557,417
    
    
    $
    200,087
    
    
    $
    757,504Estimated Annual Amortization Expense:Remaining  2005
    
    
    
    
    
    $
    77,250
    
    
    $
    12,156
    
    
    $
    89,4062006
    
    
    
    
    
    
    93,000
    
    
    
    15,764
    
    
    
    108,7642007
    
    
    
    
    
    
    72,667
    
    
    
    15,033
    
    
    
    87,7002008
    
    
    
    
    
    
    59,833
    
    
    
    14,353
    
    
    
    74,1862009
    
    
    
    
    
    
    49,667
    
    
    
    13,723
    
    
    
    63,390thereafter
    
    
    
    
    
    
    205,000
    
    
    
    129,058
    
    
    
    334,058
 The components of identifiable intangible assets are as follows: SuccessorMarch 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    AmountIdentifiable intangible assets:Core deposit intangibles
    
    $
    566,000
    
    

    $
    8,583
    
    
    $
    557,417Loan relationship intangibles
    
    
    95,826
    
    
    
    456
    
    
    
    95,370Other identifiable intangibles
    
    
    105,612
    
    
    
    895
    
    
    
    104,717Total
    
    $
    767,438
    
    
    $
    9,934
    
    
    $
    757,504
 As of March 31, 2005, there was a total of $268.3 million of deferred tax liabilities related
to identifiable intangible assets. 11




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##### Table of Contents



Note 7  Short-term Borrowings Short-term borrowings are all borrowings with an original maturity of one year or less. A summary
of short-term borrowings follows: Successor
    
    
    PredecessorMarch 31, 2005
    
    
    December 31, 2004Securities sold under agreements to repurchase  retail
    
    $
    1,269,947
    
    
    $
    1,234,476Federal funds purchased
    
    
    971,000
    
    
    
    618,000Treasury, tax and loan notes
    
    
    19,937
    
    
    
    375,347Federal Home Loan Bank advances
    
    
    1,975,450
    
    
    
    1,570,000$
    4,236,334
    
    
    $
    3,797,823
 Note 8  Long-term Debt A summary of long-term debt (debt with original maturities of more than one year) follows: Successor
    
    
    PredecessorMarch 31, 2005
    
    
    December 31, 2004Federal Home Loan Bank advances
    
    $
    358,646
    
    
    $
    428,825Securities sold under agreements to repurchase  wholesale
    
    
    
    
    
    
    1,100,000Junior subordinated debentures issued to affiliated trusts
    
    
    374,699
    
    
    
    310,746Subordinated debt 7.625%, due 2011
    
    
    228,844
    
    
    
    200,000Senior notes 3.75%, due 2008
    
    
    148,505
    
    
    
    149,810Hedge-related basis adjustments on long-term debt
    
    
    
    
    
    
    (4,420
    )Other long-term debt
    
    
    6,865
    
    
    
    7,921Total
    
    $
    1,117,559
    
    
    $
    2,192,882
 Borrowings callable by the lender amounted to $105.0 million at March 31, 2005 and December
31, 2004. Note 9  Comprehensive Income The following table presents the reconciliation of transactions affecting accumulated other
comprehensive income included in shareholders equity for the periods indicated. Successor
    
    
    Predecessor
    
    
    PredecessorMarch 1, 2005 to
    
    
    January 1, 2005 to
    
    
    Three Months EndedMarch 31, 2005
    
    
    February 28, 2005
    
    
    March 31, 2004Pre-tax
    
    
    Tax
    
    
    Net of
    
    
    Pre-tax
    
    
    Tax
    
    
    Net of
    
    
    Pre-tax
    
    
    Tax
    
    
    Net ofAmount
    
    
    Effect
    
    
    Tax
    
    
    Amount
    
    
    Effect
    
    
    Tax
    
    
    Amount
    
    
    Effect
    
    
    TaxChange in:Unrealized gain (loss) on
securities available for sale
    
    ($
    45,307
    )
    
    $
    15,852
    
    
    ($
    29,455
    )
    
    ($
    42,769
    )
    
    $
    14,975
    
    
    ($
    27,794
    )
    
    $
    87,555
    
    
    ($
    30,644
    )
    
    $
    56,911Unrealized gain (loss) on
cash flow hedges
    
    
    (226
    )
    
    
    79
    
    
    
    (147
    )
    
    
    (7,851
    )
    
    
    (48
    )
    
    
    (7,899
    )
    
    
    (789
    )
    
    
    276
    
    
    
    (513
    )Reclassification adjustment for
losses (gains) realized in net income
    
    
    3,711
    
    
    
    (1,299
    )
    
    
    2,412
    
    
    
    46,834
    
    
    
    (16,392
    )
    
    
    30,442
    
    
    
    (2,718
    )
    
    
    951
    
    
    
    (1,767
    )Net change in unrealized gains (losses)
    
    ($
    41,822
    )
    
    $
    14,632
    
    
    ($
    27,190
    )
    
    ($
    3,786
    )
    
    ($
    1,465
    )
    
    ($
    5,251
    )
    
    $
    84,048
    
    
    ($
    29,417
    )
    
    $
    54,631
 12




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##### Table of Contents



Note 10   Allowance for Loan and Lease Losses In connection with the TD transaction, and in accordance with American Institute of Certified
Public Accountants Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer, on March 1, 2005 $21.4 million of the allowance for loan and lease losses
related to impaired commercial loans was transferred out of the allowance for loan and lease losses
and applied to reduce the carrying value of the impaired commercial loans. Note 11   Balance Sheet Deleveraging Coincident with the TD transaction, TD Banknorth implemented a balance sheet deleveraging program
under which $2.9 billion of investment securities were sold and the proceeds from these sales were
used to prepay borrowings. In addition, single-family residential mortgage loans with a carrying
value of $521 million were reclassified to Loans Held for Sale; these loans are expected to be
packaged and sold in May 2005, with the servicing being retained by TD Banknorth. In connection
with these deleveraging activities, TD Banknorth recorded during the
three months ended March 31, 2005 a $50.2 million pre-tax loss on sale of securities, a $7.5 million pre-tax loss to record
the single-family residential mortgage loans at the lower of cost or market value and a $6.3
million pre-tax charge for prepayment penalties on borrowings. In connection with the deleveraging program, TD Banknorth entered into interest rate swap
agreements with an aggregate notional amount of $2.2 billion. These agreements are designed to
synthetically convert variable rate loans tied to the prime rate or LIBOR to fixed-rate assets. At
March 31, 2005, a total of $1.0 billion of these agreements were designated to hedge the cash flows
associated with prime-based home equity lines of credit and accounted for as cash flow hedges,
while $1.2 billion of these agreements were undesignated and accounted for as trading derivatives.
On April 21, 2005, these $1.2 billion of interest rate swap agreements were specifically designated
to hedge the cash flows associated with LIBOR-based commercial loans, and accordingly will be
accounted for using cash flow hedge accounting beginning on that date. Note 12   Other Noninterest Income Other noninterest income consisted of the following for the periods indicated. Successor
    
    
    Predecessor
    
    
    PredecessorMarch 1, 2005 to
    
    
    January 1, 2005 to
    
    
    Three Months EndedMarch 31, 2005
    
    
    February 28, 2005
    
    
    March 31, 2004Loan fee income
    
    $
    2,372
    
    
    $
    4,549
    
    
    $
    5,170Covered call premiums
    
    
    1,658
    
    
    
    1,412
    
    
    
    6,074Mortgage banking services income
    
    
    404
    
    
    
    923
    
    
    
    3,004Venture capital gains (write-downs)
    
    
    (106
    )
    
    
    (297
    )
    
    
    (359
    )Miscellaneous income
    
    
    952
    
    
    
    1,030
    
    
    
    970Total
    
    $
    5,280
    
    
    $
    7,617
    
    
    $
    14,859
 The following table presents the significant components of mortgage banking income during the
periods indicated. 13




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##### Table of Contents



Successor
    
    
    Predecessor
    
    
    PredecessorMarch 1, 2005 to
    
    
    January 1, 2005 to
    
    
    Three Months EndedMarch 31, 2005
    
    
    February 28, 2005
    
    
    March 31, 2004Residential mortgage sales/fee incomeGains on sales and fee income
    
    $
    452
    
    
    $
    460
    
    
    $
    2,469Net effect of derivatives
    
    
    (247
    )
    
    
    159
    
    
    
    331205
    
    
    
    619
    
    
    
    2,800Residential mortgage servicing income
    
    
    199
    
    
    
    304
    
    
    
    204$
    404
    
    
    $
    923
    
    
    $
    3,004
 Note 13  Pension and Other Postretirement Plans The following table presents the amount of net periodic benefit cost recognized for the periods
indicated. Components of net periodic benefit cost Successor
    
    
    Predecessor
    
    
    PredecessorMarch 1, 2005 to
    
    
    January 1, 2005 to
    
    
    Three Months EndedMarch 31, 2005
    
    
    February 28, 2005
    
    
    March 31, 2004Qualified PensionService cost
    
    $
    1,184
    
    
    $
    2,369
    
    
    $
    2,784Interest cost
    
    
    1,126
    
    
    
    2,253
    
    
    
    3,331Expected return on plan assets
    
    
    (1,836
    )
    
    
    (3,671
    )
    
    
    (4,828
    )Amortization of prior service cost
    
    
    
    
    
    
    1
    
    
    
    2Amortization of transition obligation
    
    
    
    
    
    
    (39
    )
    
    
    (64
    )Amortization of net loss
    
    
    
    
    
    
    809
    
    
    
    1,066Net periodic benefit cost
    
    
    474
    
    
    
    1,722
    
    
    
    2,291Nonqualified PensionService cost
    
    
    72
    
    
    
    106
    
    
    
    99Interest cost
    
    
    188
    
    
    
    305
    
    
    
    405Amortization of prior service cost
    
    
    132
    
    
    
    39
    
    
    
    43Amortization of transition obligation
    
    
    
    
    
    
    2
    
    
    
    3Amortization of net loss
    
    
    
    
    
    
    84
    
    
    
    50Net periodic benefit cost
    
    
    392
    
    
    
    536
    
    
    
    600Total net periodic benefit cost  pensions plans
    
    $
    866
    
    
    $
    2,258
    
    
    $
    2,891Other Postretirement BenefitsService cost
    
    $
    19
    
    
    $
    37
    
    
    $
    40Interest cost
    
    
    107
    
    
    
    215
    
    
    
    353Amortization of prior service cost
    
    
    
    
    
    
    23
    
    
    
    35Amortization of transition obligation
    
    
    
    
    
    
    65
    
    
    
    98Amortization of net loss
    
    
    
    
    
    
    35
    
    
    
    99Net periodic benefit cost  other
postretirement benefit plans
    
    $
    126
    
    
    $
    375
    
    
    $
    625
 As a result of purchase accounting adjustments recorded as of March 1, 2005,
unrecognized actuarial losses, unamortized prior service costs and unrecognized transition
obligations on pension and other benefit plans as of February 28, 2005 were written off.
Accordingly, there is no amortization on these items after March 1, 2005. We expect to contribute approximately $20 million to our pension plans in 2005, none of which is
required to satisfy minimum funding requirements. The discretionary contribution will be paid
entirely in cash and, 14




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##### Table of Contents



as in prior years, the entire contribution is anticipated to be paid in
December after final review of the 2005 pension obligation. The Medicare Prescription Drugs, Improvement and Modernization Act (the Act) which was signed
into law in December 2003 introduced a prescription drug benefit under Medicare as well as a
federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FSP 106-2) we have determined that the benefits we provide are at
least actuarially equivalent to Medicare Part D. The effects of the federal subsidy resulted in an
actuarial gain of approximately $1.7 million. The gain did not have a material effect on our net
periodic postretirement cost or on our accumulated postretirement benefit obligation. The amount
was incorporated in our net periodic postretirement cost amortizing over a period of approximately
10 years. Note 14  Merger and Consolidation Costs The following table summarizes merger and consolidation costs for the periods indicated. Successor
    
    
    Predecessor
    
    
    PredecessorMarch 1, 2005 to
    
    
    January 1, 2005 to
    
    
    Three Months EndedMarch 31, 2005
    
    
    February 28, 2005
    
    
    March 31, 2004The Toronto-Dominion Bank Merger ChargesTransaction costs
    
    $
    1,503
    
    
    $
    18,148
    
    
    $
    Personnel costs
    
    
    890
    
    
    
    2,285
    
    
    
    Name change
    
    
    24
    
    
    
    2,061
    
    
    
    Other costs
    
    
    41
    
    
    
    2,941
    
    
    
    2,458
    
    
    
    25,435
    
    
    
    BostonFed Bancorp, Inc. Merger ChargesPersonnel costs
    
    
    451
    
    
    
    673
    
    
    
    Systems conversion and integration/customer communications
    
    
    358
    
    
    
    987
    
    
    
    Other costs
    
    
    374
    
    
    
    211
    
    
    
    1,183
    
    
    
    1,871
    
    
    
    Foxborough Savings Bank Merger ChargesPersonnel costs
    
    
    1
    
    
    
    1
    
    
    
    Systems conversion and integration/customer communications
    
    
    
    
    
    
    
    
    
    
    130Other costs
    
    
    8
    
    
    
    10
    
    
    
    279
    
    
    
    11
    
    
    
    157CCBT Financial Companies, Inc. Merger ChargesPersonnel costs
    
    
    1
    
    
    
    (219
    )
    
    
    Systems conversion and integration/customer communications
    
    
    
    
    
    
    12
    
    
    
    535Other costs
    
    
    113
    
    
    
    36
    
    
    
    153114
    
    
    
    (171
    )
    
    
    688Other CostsAmerican Financial Holdings, Inc. Merger Charges
    
    
    162
    
    
    
    117
    
    
    
    169First & Ocean Bancorp Merger Charges
    
    
    1
    
    
    
    1
    
    
    
    1,040Warren Bancorp, Inc. Merger Charges
    
    
    
    
    
    
    
    
    
    
    24Reverse auto lease reserves (Banknorth  Vermont)
    
    
    
    
    
    
    
    
    
    
    (470
    )Other costs
    
    
    
    
    
    
    
    
    
    
    6163
    
    
    
    118
    
    
    
    769Total merger and consolidation costs
    
    $
    3,927
    
    
    $
    27,264
    
    
    $
    1,614
 The following tables summarize activity in the accrual account for merger and consolidation
costs from December 31, 2004 through March 31, 2005. 15




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##### Table of Contents



Purchase
    
    
    
    
    
    
    
    
    
    
    Non-cashAccounting
    
    
    Merger and
    
    
    
    
    
    
    Write DownsBalance
    
    
    Adjustments
    
    
    Consolidation
    
    
    Cash
    
    
    and Other
    
    
    Balance12/31/04
    
    
    at Acquisition
    
    
    Costs
    
    
    Payments
    
    
    Adjustments
    
    
    2/28/05The Toronto-Dominion Bank Merger
    
    $
    432
    
    
    $
    
    
    
    $
    25,435
    
    
    ($
    2,976
    )
    
    $
    
    
    
    $
    22,891BostonFed Bancorp, Inc. Merger
    
    
    
    
    
    
    25,764
    
    
    
    1,871
    
    
    
    (18,855
    )
    
    
    27
    
    
    
    8,807Foxborough Savings Bank Merger
    
    
    461
    
    
    
    
    
    
    
    11
    
    
    
    (14
    )
    
    
    
    
    
    
    458CCBT Financial Companies, Inc. Merger
    
    
    1,966
    
    
    
    
    
    
    
    (171
    )
    
    
    (124
    )
    
    
    
    
    
    
    1,671First & Ocean Bancorp Merger
    
    
    206
    
    
    
    
    
    
    
    1
    
    
    
    (3
    )
    
    
    
    
    
    
    204American Financial Holdings, Inc. Merger
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    (117
    )
    
    
    
    
    
    
    Andover / MetroWest Merger
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    Total
    
    $
    3,143
    
    
    $
    25,764
    
    
    $
    27,264
    
    
    ($
    22,089
    )
    
    ($
    51
    )
    
    $
    34,031
 Purchase
    
    
    
    
    
    
    
    
    
    
    Non-cashAccounting
    
    
    Merger and
    
    
    
    
    
    
    Write DownsBalance
    
    
    Adjustments
    
    
    Consolidation
    
    
    Cash
    
    
    and Other
    
    
    Balance02/28/05
    
    
    at Acquisition
    
    
    Costs
    
    
    Payments
    
    
    Adjustments
    
    
    3/31/05The Toronto-Dominion Bank Merger
    
    $
    22,891
    
    
    $
    
    
    
    $
    2,458
    
    
    ($
    20,777
    )
    
    $
    
    
    
    $
    4,572BostonFed Bancorp, Inc. Merger
    
    
    8,807
    
    
    
    
    
    
    
    1,183
    
    
    
    (4,816
    )
    
    
    (26
    )
    
    
    5,148Foxborough Savings Bank Merger
    
    
    458
    
    
    
    
    
    
    
    9
    
    
    
    (10
    )
    
    
    
    
    
    
    457CCBT Financial Companies, Inc. Merger
    
    
    1,671
    
    
    
    
    
    
    
    114
    
    
    
    (150
    )
    
    
    
    
    
    
    1,635First & Ocean Bancorp Merger
    
    
    204
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    (203
    )
    
    
    1American Financial Holdings, Inc. Merger
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    (162
    )
    
    
    
    
    
    
    Andover / MetroWest Merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    34,031
    
    
    $
    0
    
    
    $
    3,927
    
    
    ($
    25,916
    )
    
    ($
    229
    )
    
    $
    11,813
 Note 15  Related Party Transactions TD Banknorth Inc. maintains a line of credit of $110 million with TD at prevailing market terms and
conditions. TD Banknorth did not have any amounts outstanding under this line of credit during the
quarter ended March 31, 2005. During March 2005, TD Banknorth entered into a $12.5 million interest rate swap agreement on
certain variable rate commercial loans and a $1.0 billion interest rate swap agreement on certain
variable rate consumer loans. These swap agreements were entered into with TD at prevailing market
terms and conditions. TD Banknorth maintains a commercial customer hedging program which 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 agreement with us. These interest rate swap
agreements are offset by entering into simultaneous pay fixed, receive variable rate swap
agreements with a third party broker/dealer, including TD Securities, Inc., a wholly-owned
subsidiary of TD. We entered into $41.6 million of notional amount of these swap agreements with
TD Securities, Inc. during the quarter ended March 31, 2005. These swap agreements are marked to
market and are included with other assets and other liabilities on our balance sheet at fair value.
Changes in fair value on both sides of these commercial interest rate swap agreements are included
in net interest income. Note 16   Accounting Changes The following information addresses new or proposed accounting pronouncements. 16




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##### Table of Contents



Accounting for Share-Based Payments. In December 2004, the FASB issued FASB Statement No. 123 (Revised 2004), Share-Based Payment
(FAS 123R), which requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees, including employee
stock purchase plans over the service period. Current disclosure provisions under FAS 123 are
still applicable. In addition to stock option awards granted after July 1, 2005, compensation
expense on unvested equity-based awards that were granted prior to the effective date must be
recognized in the income statement. FAS 123R is effective for interim or annual periods beginning
after June 15, 2005. FAS 123R was scheduled to be effective for us starting July 1, 2005. The U.
S. Securities and Exchange Commission announced on April 14, 2005 the adoption of a new rule that
amends the required compliance dates allowing companies to implement FAS 123R at the beginning of
their next fiscal year instead of the next reporting period that begins after June 15, 2005. We
expect to adopt FAS 123R on January 1, 2006. Assuming employee share-based compensation awards
which are anticipated to be made in October 2005 and October 2006 are granted at the same level as
the awards granted in March 2005, the adoption of FAS 123R effective January 1, 2006 is expected to
decrease diluted earnings per share by approximately $.05 in 2006. FAS 123R will not have a
material effect on our financial condition 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, at the date of
acquisition or business combination, the excess of contractual cash flows over expected cash flows
expected to be collected may not be recognized as an adjustment of yield, loss accrual or valuation
allowance. Any future excess of cash flows over the original expected cash flows is to be
recognized as an adjustment of future
yield. Future decreases in actual cash flow compared to the original expected cash flow are
recognized as a valuation allowance and expensed immediately. Valuation allowances cannot be
created or carried over in the initial accounting for impaired loans acquired. This SOP is
effective for impaired loans acquired in a business combination in fiscal years beginning after
December 15, 2004. The adoption of this SOP on January 1, 2005 did not have a material impact on
our financial condition, results of operations, earnings per share or
cash flows. Also see Note 10
for information regarding the effects of SOP 03-3 related to the TD transaction and purchase
accounting adjustments recorded on March 1, 2005. Guidance on Other-Than-Temporary Impairment. In 2003, the Emerging Issues Task Force reached a consensus on EITF 03-1 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provided
guidance to assess whether there have been any events or economic circumstances which indicate that
a security is impaired on an other-than-temporary basis. Factors to consider include the length of
time the security has had a market value less that the cost basis, the intent and ability of the
company to hold the security for a period of time sufficient for it to recover in value, recent
events specific to the issuer or industry and for debt securities, external credit rating and
recent downgrades. Securities on which there is an unrealized loss that is deemed to be
other-than-temporary are written down to fair value with the write-down recorded as a realized
loss. In December 2004, the FASB announced that it will reconsider in its entirety all guidance on
disclosing, measuring and recognizing other-than-temporary impairments of debt and equity
securities. Until new guidance is issued, companies must continue to comply with the disclosure
requirements of EITF 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments and all relevant measurement and recognition requirements in other accounting
literature. Companies evaluating whether an impairment is other-than-temporary under existing
requirements should continue to consider the length of time a security has been impaired, the
severity of the impairment and the financial condition and near-term prospects of the issue of the
security. 17




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##### Table of Contents



TD BANKNORTH INC. AND SUBSIDIARIES 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In thousands, except per share data and as noted) EXECUTIVE OVERVIEW Method of Accounting. We, TD Banknorth Inc., are a majority-owned subsidiary of The Toronto-Dominion Bank (TD) and
successor to Banknorth Group, Inc. TD acquired its majority interest in us effective March 1, 2005
in a two-step transaction in which Banknorth Group, Inc. first reincorporated from Maine to
Delaware by means of a migratory merger into a newly-formed, wholly-owned Delaware subsidiary of
Banknorth Group, Inc., and then TD acquired its majority interest in us by means of the merger of a
newly-formed, wholly-owned subsidiary of TD with and into this reincorporated entity, which changed
its name to TD Banknorth Inc. upon completion of the transaction. In accordance with the
guidelines for accounting for business combinations, the transaction meets the technical definition
of a business combination, and therefore, is being accounted for as a purchase business combination
with the purchase price being comprised of all the consideration received by the shareholders of
Banknorth Group, Inc., namely:  
    cash paid by TD,
    value of TD common shares issued and
    the value of TD Banknorth Inc. shares issued. The purchase price and related purchase accounting adjustments have been recorded in our financial
statements at and for the period commencing on March 1, 2005. This resulted in a new basis of
accounting
reflecting the fair value of our assets and liabilities at March 1, 2005 and for the Successor
period beginning on March 1, 2005. Information for all dates and Predecessor periods prior to the
acquisition on March 1, 2005 is presented using our historical basis of accounting. To assist in the comparability of our financial results and to make it easier to discuss and
understand our results of operations, the financial information presented herein combines the
predecessor period (January 1, 2005 to February 28, 2005) with the successor period (March 1,
2005 to March 31, 2005) to present combined quarterly results for the three months ended March
31, 2005. A summary of the purchase accounting and fair value adjustments recorded as of March 1,
2005 in connection with the TD transaction is included in Note 2 to the unaudited consolidated
financial statements. The most significant effect of the adjustments was to increase goodwill by
$3.0 billion, identifiable intangible assets by $705 million and shareholders equity by $3.4
billion. As a result, amortization of identifiable intangible assets for March 2005 (successor
period) was $9.1 million higher than it otherwise would have been under historical cost accounting.
Estimated amortization expense for identifiable intangible assets for the remainder of 2005 and
future years is included in Note 6 to the unaudited consolidated financial statements. For comparative purposes, the following table sets forth selected income data on a historical basis
for the periods January 1, 2005 to February 28, 2005 and March 1, 2005 to March 31, 2005, on a
combined basis for the three months ended March 31, 2005 and on a historical basis for the three
months ended March 31, 2004. 18




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##### Table of Contents



Table 1  Selected Income Data Predecessor
    
    
    Successor
    
    
    Combined
    
    
    PredecessorJanuary 1, 2005 to
    
    
    March 1, 2005 to
    
    
    Three Months Ended
    
    
    Three Months EndedFebruary 28, 2005
    
    
    March 31, 2005
    
    
    March 31, 2005
    
    
    March 31, 2004Interest and dividend income:Interest and fees on loans and leases
    
    $
    176,949
    
    
    $
    95,664
    
    
    $
    272,613
    
    
    $
    215,779Interest and dividends on securities
    
    
    52,670
    
    
    
    20,758
    
    
    
    73,428
    
    
    
    76,873Total interest and dividend income
    
    
    229,619
    
    
    
    116,422
    
    
    
    346,041
    
    
    
    292,652Interest expense:Interest on deposits
    
    
    30,694
    
    
    
    14,750
    
    
    
    45,444
    
    
    
    38,818Interest on borrowed funds
    
    
    32,654
    
    
    
    12,814
    
    
    
    45,468
    
    
    
    36,225Total interest expense
    
    
    63,348
    
    
    
    27,564
    
    
    
    90,912
    
    
    
    75,043Net interest income
    
    
    166,271
    
    
    
    88,858
    
    
    
    255,129
    
    
    
    217,609Provision for loan and lease losses
    
    
    1,069
    
    
    
    1,000
    
    
    
    2,069
    
    
    
    9,500Net interest income after provision
for loan and lease losses
    
    
    165,202
    
    
    
    87,858
    
    
    
    253,060
    
    
    
    208,109Noninterest income:Deposit services
    
    
    18,359
    
    
    
    9,823
    
    
    
    28,182
    
    
    
    26,153Insurance agency commissions
    
    
    8,252
    
    
    
    5,640
    
    
    
    13,892
    
    
    
    13,736Merchant and electronic banking income, net
    
    
    7,751
    
    
    
    5,363
    
    
    
    13,114
    
    
    
    10,404Wealth management services
    
    
    6,959
    
    
    
    3,545
    
    
    
    10,504
    
    
    
    9,149Bank-owned life insurance
    
    
    4,169
    
    
    
    1,929
    
    
    
    6,098
    
    
    
    5,496Investment planning services
    
    
    2,815
    
    
    
    1,874
    
    
    
    4,689
    
    
    
    4,839Net securities (losses) gains
    
    
    (46,548
    )
    
    
    (3,928
    )
    
    
    (50,476
    )
    
    
    3,581Loans held for sale  Lower of cost or market
adjustment
    
    
    (7,500
    )
    
    
    
    
    
    
    (7,500
    

    )Change in unrealized loss on derivatives
    
    
    
    
    
    
    (8,175
    )
    
    
    (8,175
    )
    
    
    Other noninterest income
    
    
    7,617
    
    
    
    5,280
    
    
    
    12,897
    
    
    
    14,8591,874
    
    
    
    21,351
    
    
    
    23,225
    
    
    
    88,217Noninterest expense:Compensation and employee benefits
    
    
    67,977
    
    
    
    32,891
    
    
    
    100,868
    
    
    
    87,534Occupancy
    
    
    11,411
    
    
    
    6,490
    
    
    
    17,901
    
    
    
    15,709Equipment
    
    
    8,440
    
    
    
    4,397
    
    
    
    12,837
    
    
    
    11,890Data processing
    
    
    7,233
    
    
    
    3,800
    
    
    
    11,033
    
    
    
    10,436Advertising and marketing
    
    
    4,373
    
    
    
    2,322
    
    
    
    6,695
    
    
    
    7,523Amortization of identifiable intangible assets
    
    
    1,561
    
    
    
    9,934
    
    
    
    11,495
    
    
    
    1,904Merger and consolidation costs
    
    
    27,264
    
    
    
    3,927
    
    
    
    31,191
    
    
    
    1,614Prepayment penalties on borrowings
    
    
    6,300
    
    
    
    3
    
    
    
    6,303
    
    
    
    Other noninterest expense
    
    
    15,887
    
    
    
    8,899
    
    
    
    24,786
    
    
    
    23,109150,446
    
    
    
    72,663
    
    
    
    223,109
    
    
    
    159,719Income before income tax expense
    
    
    16,630
    
    
    
    36,546
    
    
    
    53,176
    
    
    
    136,607Provision for income taxes
    
    
    6,182
    
    
    
    12,919
    
    
    
    19,101
    
    
    
    46,280Net income
    
    $
    10,448
    
    
    $
    23,627
    
    
    $
    34,075
    
    
    $
    90,327Basic earnings per share
    
    
    
    
    
    
    
    
    
    $
    0.19
    
    
    $
    0.55Diluted earnings per share
    
    
    
    
    
    
    
    
    
    $
    0.18
    
    
    $
    0.54Weighted average shares outstanding:Basic
    
    
    
    
    
    
    
    
    
    
    183,393
    
    
    
    162,965Dilutive effect of stock options
    
    
    
    
    
    
    
    
    
    
    1,497
    
    
    
    3,692Diluted
    
    
    
    
    
    
    
    
    
    
    184,890
    
    
    
    166,657
 Because of the effects of accounting for the TD transaction under the purchase method
effective March 1, 2005, information on a combined basis for the three months ended March 31, 2005
may not be comparable to information presented for the three months ended March 31, 2004 on a
historical basis, and information presented on a historical basis at December 31, 2004 may not be
comparable to information presented at March 31, 2005. We are currently evaluating whether, in connection with our accounting for the TD transaction,
to apply push down accounting to Banknorth, NA, our wholly-owned banking subsidiary. Under this
approach, the purchase price for the TD transaction would be pushed down to Banknorth, NA and
used to establish a new accounting basis in the separate, stand-alone financial statements of
Banknorth, NA based on the fair values of the assets and liabilities of Banknorth, NA. Although
the application of push-down accounting would result in certain adjustments to Banknorth, NAs
capital accounts, we believe that Banknorth, NA would continue to be a well capitalized
institution under regulations of the Office of the Comptroller of the Currency of the United States
(OCC) under such circumstances. The application of push-down accounting would result in the
elimination of Banknorth, NAs retained earnings for accounting purposes, however, which would
reduce the amount of dividends which Banknorth, NA could pay to TD Banknorth without prior approval
of the OCC because a national bank must obtain prior OCC approval to declare a dividend if the
total of all dividends, including the proposed dividend, would exceed its net income of that year
to date plus the retained income of the preceding two years. Based on historical accounting at
March 31, 2005, Banknorth had $263 million available for dividends that could be paid to TD
Banknorth without prior OCC approval; in the event of the application of push-down accounting this
amount would be reduced to approximately $35 million. 19




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##### Table of Contents



Acquisitions. During 2004 and the three months ended March 31, 2005, we acquired the three financial institutions
listed below. Our financial statements include the results of these bank acquisitions since
acquisition date. Table 2  Acquisitions Total AssetsDate
    
    
    at AcquisitionAcquisition
    
    Acquired
    
    
    Date(in millions)BostonFed Bancorp, Inc.
    
    
    1/21/2005
    
    
    $
    1,467.8CCBT Financial Companies, Inc.
    
    
    4/30/2004
    
    
    
    1,292.9Foxborough Savings Bank
    
    
    4/30/2004
    
    
    
    241.8
 Operations. Diluted earnings per share was $0.18 for the three months ended March 31, 2005, compared to
$0.54 for the comparable period last year. The decline was attributable to the following:  
    costs of a balance sheet deleveraging program in the first quarter of 2005 ($0.22 per
diluted share), which was implemented coincident with the TD transaction,
    merger and consolidation costs ($0.13 per diluted share), including those associated
with the acquisition of 51% of our shares by TD, and additional amortization of
identifiable intangible assets as a result of the new basis of accounting ($0.04 per
diluted share) and
    losses incurred as result of the termination of hedge accounting on certain derivative
instruments in connection with the new basis of accounting resulting from the TD
transaction ($0.03 per diluted share). These losses are expected to reverse in the second
quarter of 2005. The following were significant factors related to the results for the first quarter of 2005
compared to the first quarter of 2004.  
    In February 2005, we implemented a deleveraging program under which we sold
approximately $2.9 billion of securities with a weighted average yield of 4.03 % and
prepaid a similar amount of short-term borrowings, consisting of repurchase agreements and
FHLB advances. In addition, $521 million of single-family residential loans were
reclassified to loans held for sale, and marked down by $7.5 million to the estimated
selling price. A $41.6 million after-tax loss was incurred in connection with this
deleverging program in the first quarter.
    During February and March 2005, a total of $2.2 billion notional amount of interest
rate swap agreements were entered into to convert $2.2 billion of variable-rate loans into
fixed-rate assets. These swap agreements mature ratably over 96 months.
    During March 2005, we repurchased 15.3 million shares at an average cost of $31.79 per
share.
    We completed the acquisitions of BostonFed Bancorp Inc. on January 21, 2005.
Acquisitions continue to be an important part of our long-term strategy for growth.
    Net interest income increased 17% over the first quarter of last year due primarily to
a $866 million (or 24%) increase in net average earning assets. The net interest margin
of 3.97% for the quarter ended March 31, 2005 increased 29 basis points from the first
quarter of 2004 due to the deleveraging programs in the fourth quarter of 2004 and the
first quarter of 2005. 20




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##### Table of Contents




    Income from deposit services and our fee-based businesses increased by $6.1 million (or
10%) in the aggregate due in part to acquisitions.
    Noninterest expense increased $63.4 million, or 40%, primarily due to a $29.6 million
increase in merger and consolidation costs relating primarily to the transaction with TD,
a $9.6 million increase in amortization of identifiable intangible assets resulting
primarily to the transaction with TD and $6.3 million in prepayment penalties on
borrowings resulting from the deleveraging program mentioned above. Acquisitions and
internal growth accounted for the balance of the increase.
    Total average loans and leases increased 20% during the first quarter of 2005 compared
to the first quarter of 2004 due to acquisitions and internal growth.
    Total average deposits increased 11% during the first quarter of 2005 compared to the
first quarter of 2004 primarily due to acquisitions. Excluding the effects of
acquisitions, total average deposits remained flat, as increases in checking, money market
and NOW account balances were offset by lower savings and certificate of deposit balances.
Noninterest-bearing accounts increased 21% during the first quarter of 2005 compared to
the first quarter of 2004. Selected quarterly data, ratios and per share data are provided in Table 3. 21




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##### Table of Contents



Table 3  Selected Quarterly Data Combined
    
    
    Predecessor2005
    
    
    2004First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstCondensed Income StatementInterest income
    
    
    
    
    
    $
    346,041
    
    
    $
    329,846
    
    
    $
    325,361
    
    
    $
    309,146
    
    
    $
    292,652Interest expense
    
    
    
    
    
    
    90,912
    
    
    
    83,783
    
    
    
    85,701
    
    
    
    79,096
    
    
    
    75,043Net interest income
    
    
    (A
    )
    
    
    255,129
    
    
    
    246,063
    
    
    
    239,660
    
    
    
    230,050
    
    
    
    217,609Provision for loan and lease losses
    
    
    
    
    
    
    2,069
    
    
    
    10,670
    
    
    
    10,670
    
    
    
    9,500
    
    
    
    9,500Net interest income after provision
for loan and lease losses
    
    
    
    
    
    
    253,060
    
    
    
    235,393
    
    
    
    228,990
    
    
    
    220,550
    
    
    
    208,109Noninterest income (1)
    
    
    (B
    )
    
    
    23,225
    
    
    
    70,591
    
    
    
    91,513
    
    

    
    89,476
    
    
    
    88,217Noninterest expense, excluding merger and
consolidation costs (2)
    
    
    (C
    )
    
    
    191,918
    
    
    
    229,073
    
    
    
    168,595
    
    
    
    159,691
    
    
    
    158,105Merger and consolidation costs
    
    
    (D
    )
    
    
    31,191
    
    
    
    38,286
    
    
    
    5,603
    
    
    
    4,135
    
    
    
    1,614Income before income taxes
    
    
    
    
    
    
    53,176
    
    
    
    38,625
    
    
    
    146,305
    
    
    
    146,200
    
    
    
    136,607Income tax expense
    
    
    
    
    
    
    19,101
    
    
    
    17,927
    
    
    
    48,534
    
    
    
    50,353
    
    
    
    46,280Net income (1) (2)
    
    
    
    
    
    $
    34,075
    
    
    $
    20,698
    
    
    $
    97,771
    
    
    $
    95,847
    
    
    $
    90,327Weighted average shares outstanding:Basic
    
    
    
    
    
    
    183,393
    
    
    
    177,071
    
    
    
    173,271
    
    
    
    169,637
    
    
    
    162,965Diluted
    
    
    
    
    
    
    184,890
    
    
    
    179,953
    
    
    
    176,756
    
    
    
    173,109
    
    
    
    166,657Basic earnings per share
    
    
    
    
    
    $
    0.19
    
    
    $
    0.12
    
    
    $
    0.56
    
    
    $
    0.57
    
    
    $
    0.55Diluted earnings per share
    
    
    
    
    
    $
    0.18
    
    
    $
    0.12
    
    
    $
    0.55
    
    
    $
    0.55
    
    
    $
    0.54Financial RatiosReturn on average assets (1) (2) (3)
    
    
    
    
    
    
    0.45
    %
    
    
    0.29
    %
    
    
    1.33
    %
    
    
    1.36
    %
    
    
    1.37
    %Return on average equity (1) (2) (3)
    
    
    
    
    
    
    3.09
    %
    
    
    2.66
    %
    
    
    13.24
    %
    
    
    13.54
    %
    
    
    14.13
    %Net interest margin (fully-taxable equivalent) (3)
    
    
    
    
    
    
    3.97
    %
    
    
    3.87
    %
    
    
    3.68
    %
    
    
    3.66
    %
    
    
    3.68
    %Noninterest income as a percent of total income (4)
    
    
    
    
    
    
    8.34
    %
    
    
    22.29
    %
    
    
    27.63
    %
    
    
    28.00
    %
    
    
    28.85
    %Efficiency ratio (1) (2) (5)
    
    
    
    
    
    
    80.15
    %
    
    
    84.43
    %
    
    
    52.60
    %
    
    
    51.27
    %
    
    
    52.23
    %Per Share DataBook value per share
    
    
    
    
    
    $
    36.65
    
    
    $
    17.71
    
    
    $
    17.50
    
    
    $
    16.61
    
    
    $
    16.26Dividends per share
    
    
    
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.195
    
    
    $
    0.195
   (1)
    
    Noninterest income included net securities losses of $50.0 million and $17.8 million in the first quarter of
2005 and fourth quarter of 2004, respectively, and lower of cost or market adjustments of $7.5 million in the first quarter
of 2005 relating to the reclassification of $521 million of residential loans from held in portfolio to held for sale. These
items were incurred as part of balance sheet deleveraging programs
implemented during these periods. Noninterest income also included a
change in unrealized loss on derivatives of 8.2 million in March
2005.(2)
    
    Noninterest expense included prepayment penalties on borrowings of $6.3 million and $61.5 million in the
first quarter of 2005 and fourth quarter of 2004, respectively, which were incurred as part of balance sheet
deleveraging programs implemented during these periods.(3)
    
    Annualized.(4)
    
    Represents noninterest income as a percentage of net interest income plus noninterest income.
Noninterest income as a percent of total income is calculated as (B) divided by (A+B).(5)
    
    Represents noninterest expense as a percentage of net interest income and noninterest income.
Efficiency ratio is calculated as (C+D) divided by (A+B). 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 revenue source. Net interest income is affected by the level of
interest rates, changes in interest rates and by changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. Fully-taxable equivalent net interest income for the first quarter of 2005 increased $37.8 million,
or 17%, compared to the first quarter of 2004. This increase was primarily attributable to an
increase in net earning assets and, to a lesser extent, noninterest-bearing deposits were a larger
share of the funding base while higher-costing certificates of deposit comprised a smaller share of
the funding base. Fully-taxable equivalent interest income increased by $53.6 million in the first quarter of 2005,
as compared to the first quarter of 2004, as a result of a $2.2 billion increase in total average
earning assets and, to a lesser extent, an 22




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increase in the weighted average yield on earning assets
to 5.38% during the three months ended March 31, 2005 from 4.94% in the same period last year. The
increase in average earning assets resulted primarily from acquisitions and was partially offset by
a $2.2 billion decline from the effects of deleveraging programs. Interest expense increased by $15.9 million in the first quarter of 2005, as compared to the first
quarter of 2004, primarily as a result of an increase in the weighted average rate paid on
interest-bearing liabilities from 1.48% to 1.78% during the three months ended March 31, 2004 and
2005, respectively. Interest expense in the first quarter of 2005 also increased as a result of a
$1.4 billion, or 7%, increase in the average balance of interest-bearing liabilities, resulting
primarily from acquisitions. The deleveraging programs reduced interest-bearing liabilities by
$2.8 billion. Average deposits increased by $2.0 billion primarily from acquisitions. Excluding
acquisitions, average noninterest-bearing and money market and NOW deposits increased by $594
million in the aggregate, or 5.1%, while savings and certificates of deposits and brokered deposits
decreased by $684 million in the aggregate, or 8.4%. Net interest margin, which represents fully-taxable equivalent net interest income as a percentage
of average interest-earning assets, increased to 3.97% in the first quarter of 2005 from 3.68% in
the first quarter of 2004 due to the $37.8 million increase in fully-taxable equivalent net
interest income and the $866 million increase in net earning assets in the first quarter of 2005 as
compared to the first quarter for 2004. 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, increased to 3.68%
from 3.46% on a fully-taxable equivalent basis during the three
months ended March 31, 2005 and
2004, respectively, as the weighted average yield on interest-earning assets increased by 44 basis
points while the weighted average rate paid on interest-bearing liabilities increased by only 22
basis points. See Asset-Liability Management below. Our net interest margin in 2005 benefited from the deleveraging programs completed in October 2004
and March 2005. The deleveraging programs added approximately 40 basis points to the net interest
margin for the first quarter of 2005. As part of the deleveraging program in the first quarter of
2005 which was implemented coincident with the TD transaction, we also entered into $2.2 billion of
interest rate swap agreements, which increased net interest income by $2.7 million in the first
quarter of 2005, as compared to the same period in the prior year. Table 4 sets forth, for the periods indicated, information regarding (i) the total dollar amount of
interest income from 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 tables and the above 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) nonaccrual loans have been included in the
appropriate average balance loan category, but unpaid interest on nonaccrual loans has not been
included for purposes of determining interest income. Average balances are based on average daily
balances during the indicated periods. 23




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##### Table of Contents



Table 4  Average Balances, Yields and Rates Combined
    
    
    Predecessor2005 First Quarter
    
    
    2004 First QuarterYield/
    
    
    
    
    
    
    
    
    
    
    Yield/Average Balance
    
    
    Interest
    
    
    Rate (1)
    
    
    Average Balance
    
    
    Interest
    
    
    Rate (1)Loans and leases (2):Residential real estate mortgages
    
    $
    3,806,469
    
    
    $
    48,796
    
    
    
    5.13
    %
    
    $
    2,725,221
    
    
    $
    35,376
    
    
    
    5.19
    %Commercial real estate mortgages
    
    
    6,447,894
    
    
    
    94,777
    
    
    
    5.96
    
    
    
    5,540,489
    
    
    
    78,614
    
    
    
    5.71Commercial business loans and leases
    
    
    4,018,664
    
    
    
    56,039
    
    
    
    5.65
    
    
    
    3,387,309
    
    
    
    40,579
    
    
    
    4.82Consumer loans and leases
    
    
    5,501,291
    
    
    
    74,196
    
    
    
    5.47
    
    
    
    4,883,031
    
    
    
    62,206
    
    
    
    5.12Total loans and leases
    
    
    19,774,318
    
    
    
    273,808
    
    
    
    5.60
    
    
    
    16,536,050
    
    
    
    216,775
    
    
    
    5.27Investment securities (3)
    
    
    6,316,949
    
    
    
    73,892
    
    
    
    4.68
    
    
    
    7,339,247
    
    
    
    77,352
    
    
    
    4.22Federal funds sold and other short-term investments
    
    
    11,427
    
    
    
    83
    
    
    
    2.96
    
    
    
    7,624
    
    
    
    15
    
    
    
    0.80Total earning assets
    
    
    26,102,694
    
    
    
    347,783
    
    
    
    5.38
    
    
    
    23,882,921
    
    
    
    294,142
    
    
    
    4.94Bank-owned life insurance
    
    
    545,954
    
    
    
    
    
    
    
    
    
    
    
    490,428Goodwill
    
    
    2,517,379
    
    
    
    
    
    
    
    
    
    
    
    1,127,670Indentifiable intangible assets
    
    
    301,197
    
    
    
    
    
    
    
    
    
    
    
    35,213Noninterest-earning assets
    
    
    1,238,280
    
    
    
    
    
    
    
    
    
    
    
    990,795Total assets
    
    $
    30,705,504
    
    
    
    
    
    
    
    
    
    
    $
    26,527,027Interest-bearing deposits:Regular savings
    
    $
    2,643,204
    
    
    
    1,881
    
    
    
    0.29
    
    
    $
    2,468,416
    
    
    
    1,838
    
    
    
    0.30NOW and money market accounts
    
    
    8,088,136
    
    
    
    20,962
    
    
    
    1.05
    
    
    
    7,118,939
    
    
    
    14,160
    
    
    
    0.80Certificates of deposit
    
    
    4,698,450
    
    
    
    21,967
    
    
    
    1.90
    
    
    
    4,660,009
    
    
    
    22,820
    
    
    
    1.97Brokered deposits
    
    
    65,860
    
    
    
    634
    
    
    
    3.90
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing deposits
    
    
    15,495,650
    
    
    
    45,444
    
    
    
    1.19
    
    
    
    14,247,364
    
    
    
    38,818
    
    
    
    1.10Borrowed funds
    
    
    6,154,440
    
    
    
    45,468
    
    
    
    2.99
    
    
    
    6,048,457
    
    
    
    36,225
    
    
    
    2.41Total interest-bearing liabilities
    
    
    21,650,090
    
    
    
    90,912
    
    
    
    1.70
    
    
    
    20,295,821
    
    
    
    75,043
    
    
    
    1.48Non-interest bearing deposits
    
    
    4,221,735
    
    
    
    
    
    
    
    
    
    
    
    3,487,716Deferred tax liability related to
identifiable intangible assets
    
    
    105,419
    
    
    
    
    
    
    
    
    
    
    
    12,325Other liabilities
    
    
    250,610
    
    
    
    
    
    
    
    
    
    
    
    159,259Shareholders equity
    
    
    4,477,650
    
    
    
    
    
    
    
    
    
    
    
    2,571,906Total liabilities and shareholders equity
    
    $
    30,705,504
    
    
    
    
    
    
    
    
    
    
    $
    26,527,027Net earning assets
    
    $
    4,452,604
    
    
    
    
    
    
    
    
    
    
    $
    3,587,100Net interest income (fully-taxable equivalent)
    
    
    
    
    
    
    256,871
    
    
    
    
    
    
    
    
    
    
    
    219,099Less: fully-taxable equivalent adjustments
    
    
    
    
    
    
    (1,742
    )
    
    
    
    
    
    
    
    
    
    
    (1,490
    )Net interest income
    
    
    
    
    
    $
    255,129
    
    
    
    
    
    
    
    
    
    
    $
    217,609Net interest rate spread (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.68
    %
    
    
    
    
    
    
    
    
    
    
    3.46
    %Net interest margin (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.97
    %
    
    
    
    
    
    
    
    
    
    
    3.68
    %
   (1)
    
    Annualized.(2)
    
    Loans and leases include loans held for sale.(3)
    
    Includes securities available for sale and held to maturity. 24




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##### Table of Contents



Table 5 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 (i) changes in
volume (change in volume multiplied by old rate), (ii) changes in rate (change in rate multiplied
by old volume) and (iii) changes in rate/volume (change in rate multiplied by change in volume). Table 5   Rate /Volume Analysis Three Months EndedMarch 31, 2005 (Combined) vs. Three Months EndedMarch 31, 2004 (Predecessor)Increase (decrease) due toRate and
    
    
    TotalVolume (1)
    
    
    Rate
    
    
    Volume (2)
    
    
    ChangeInterest income:Loans and leases
    
    $
    42,080
    
    
    $
    13,455
    
    
    $
    1,498
    
    
    $
    57,033Investment securities
    
    
    (10,638
    )
    
    
    8,325
    
    
    
    (1,147
    )
    
    
    (3,460
    )Federal funds sold and
other short-term investments
    
    
    8
    
    
    
    41
    
    
    
    19
    
    
    
    68Total interest income
    
    
    31,450
    
    
    
    21,821
    
    
    
    370
    
    
    
    53,641Interest expense:Interest-bearing deposits:Regular savings
    
    
    129
    
    
    
    (61
    )
    
    
    (25
    )
    
    
    43NOW and money market accounts
    
    
    1,912
    
    
    
    4,388
    
    
    
    502
    
    
    
    6,802Certificates of deposit
    
    
    187
    
    
    
    (804
    )
    
    
    (236
    )
    
    
    (853
    )Brokered deposits
    
    
    0
    
    
    
    0
    
    
    
    634
    
    
    
    634Total interest-bearing deposits
    
    
    2,228
    
    
    
    3,523
    
    
    
    875
    
    
    
    6,626Borrowed funds
    
    
    630
    
    
    
    8,650
    
    
    
    (37
    )
    
    
    9,243Total interest expense
    
    
    2,858
    
    
    
    12,173
    
    
    
    838
    
    
    
    15,869Net interest income (fully
taxable equivalent)
    
    $
    28,592
    
    
    $
    9,648
    
    
    ($
    468
    )
    
    $
    37,772
   (1)
    
    Volume increases include the effects of acquisitions, including the acquisitions of BostonFed Bancorp, Inc.
on January 21, 2005 and Foxborough Savings Bank and CCBT Financial Companies, Inc. on April 30, 2004(2)
    
    Includes changes in interest income and expense not due solely to volume or rate changes. Table 6 summarizes the changes in the components of net interest income, average yields and rates
paid, net interest margin and average balances during the periods indicated. 25




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##### Table of Contents



Table 6  Analysis of Net Interest Income Combined
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    ChangeComponents of net interest incomeIncome on earning assets (fully-taxable equivalent)
    
    $
    347,783
    
    
    $
    294,142
    
    
    $
    53,641Expenses on interest-bearing liabilities
    
    
    90,912
    
    
    
    75,043
    
    
    
    15,869Net interest income (fully-taxable equivalent)
    
    
    256,871
    
    
    
    219,099
    
    
    
    37,772Less: fully-taxable equivalent adjustments
    
    
    (1,742
    )
    
    
    (1,490
    )
    
    
    252Net interest income, as reported
    
    $
    255,129
    
    
    $
    217,609
    
    
    $
    37,520Average yields and rates paidEarning assets yield (fully-taxable equivalent)
    
    
    5.38
    %
    
    
    4.94
    %
    
    
    0.44
    %Rate paid on interest-bearing liabilities
    
    
    1.70
    %
    
    
    1.48
    %
    
    
    0.22
    %Net interest rate spread (fully-taxable equivalent)
    
    
    3.68
    %
    
    
    3.46
    %
    
    
    0.22
    %Net interest margin (fully-taxable equivalent)
    
    
    3.97
    %
    
    
    3.68
    %
    
    
    0.29
    %Average balancesLoans
    
    $
    19,774,318
    
    
    $
    16,536,050
    
    
    $
    3,238,268Investment securities
    
    
    6,316,949
    
    
    
    7,339,247
    
    
    
    (1,022,298
    )Securities purchased under agreements to resell
    
    
    
    
    
    
    
    
    
    
    Fed funds sold and other short term investments
    
    
    11,427
    
    
    
    7,624
    
    
    
    3,803Total earning assets
    
    
    26,102,694
    
    
    
    23,882,921
    
    
    
    2,219,773Total interest-bearing liabilities
    
    
    21,650,090
    
    
    
    20,295,821
    
    
    
    1,354,269Net earning assets
    
    $
    4,452,604
    
    
    $
    3,587,100
    
    
    $
    865,504
 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 under Analysis and
Determination of the Allowance for Loan and Lease Losses in the Risk Management section.
Because we utilize judgment in providing for estimated losses and the other reasons discussed under
the Risk Management section, there can be no assurance that we will not have to increase the
amount of our provision for loan and lease losses in future periods. We provided $2.1 million and $9.5 million for loan and lease losses in the quarters ended March 31,
2005 and 2004, respectively. The reduction in the provision for loan and lease losses in the first
quarter of 2005 reflected our consistently strong asset quality, loss experience and migration
analysis. Specifically, our recent favorable loss factors replaced higher historical factors,
resulting in a lower required allowance level and related provision for loan and lease losses. The
ratio of net charge-offs to average loans and leases was 0.21% (annualized) in both the first
quarter of 2005 and 2004. The coverage ratio (ratio of the allowance for credit losses to
nonperforming loans) was 373% at March 31, 2005, as compared to 322% at December 31, 2004 and 344%
at March 31, 2004. 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 our loan and lease
portfolio and establishing the allowance for loan and lease losses. 26




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##### Table of Contents



Noninterest Income The following table presents noninterest income for the periods indicated. Table 7  Noninterest Income Combined
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,
    
    
    Change2005
    
    
    2004
    
    
    Amount
    
    
    PercentNoninterest income:Deposit services
    
    $
    28,182
    
    
    $
    26,153
    
    
    $
    2,029
    
    
    
    8
    %Insurance agency commissions
    
    
    13,892
    
    
    
    13,736
    
    
    
    156
    
    
    
    1
    %Merchant and electronic banking income, net
    
    
    13,114
    
    
    
    10,404
    
    
    
    2,710
    
    
    
    26
    %Wealth management services
    
    
    10,504
    
    
    
    9,149
    
    
    
    1,355
    
    
    
    15
    %Bank-owned life insurance
    
    
    6,098
    
    
    
    5,496
    
    
    
    602
    
    
    
    11
    %Investment planning services
    
    
    4,689
    
    
    
    4,839
    
    
    
    (150
    )
    
    
    (3
    %)Net securities gains
    
    
    (50,476
    )
    
    
    3,581
    
    
    
    (54,057
    )
    
    
    N/MLoans held for sale  lower of cost or market adjustment
    
    
    (7,500
    )
    
    
    
    
    
    
    (7,500
    )
    
    
    N/MChange in unrealized loss on derivatives
    
    
    (8,175
    )
    
    
    
    
    
    
    (8,175
    )
    
    
    N/MOther noninterest income:Loan fee income
    
    
    6,921
    
    
    
    5,170
    
    
    
    1,751
    
    
    
    34
    %Covered call premiums
    
    
    3,070
    
    
    
    6,074
    
    
    
    (3,004
    )
    
    
    (49
    %)Mortgage banking services income
    
    
    1,327
    
    
    
    3,004
    
    
    
    (1,677
    )
    
    
    (56
    %)Venture capital write-downs
    
    
    (403
    )
    
    
    (359
    )
    
    
    (44
    )
    
    
    (12
    %)Miscellaneous income
    
    
    1,982
    
    
    
    970
    
    
    
    1,012
    
    
    
    104
    %Total other noninterest income
    
    
    12,897
    
    
    
    14,859
    
    
    
    (1,962
    )
    
    
    (13
    %)Total noninterest income
    
    $
    23,225
    
    
    $
    88,217
    
    (
    $
    64,992
    )
    
    
    (74
    %)
   N/M
    
    not meaningful Deposit services income for the three months ended March 31, 2005 increased $2.0 million, or 8%,
compared to the same period last year, primarily due to an increase in overdraft fees resulting
from increases in the number of transactions as well as fee increases. This increase was partially
offset by a decline in service charge income on business accounts resulting from the introduction
of Free Business Checking in 2004. Acquisitions comprised a portion of the increased number of
deposit accounts, increased overdraft fees and increased service charges. Insurance agency commissions in the three months ended March 31, 2005 were essentially unchanged
from the same period last year. 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. Merchant and electronic banking income in the three months ended March 31, 2005
increased $2.7 million, or 26%, compared to the same period last year. This increase was primarily
due to increases in the volume of transactions processed and increased market share from
acquisitions. Wealth management services income increased $1.4 million, or 15%, in the three months ended March
31, 2005 compared to the same period last year. These increases were primarily due to an increase
in assets under management, which increased to $10.5 billion at March 31, 2005 from $8.9 billion at
March 31, 2004, an increase of $1.6 billion. The increase in trust assets under management was
primarily due to the acquisition of CCBT in April 2004 and stock market improvements. Income from bank-owned life insurance (BOLI) for the three months ended March 31, 2005 increased
by $602 thousand, or 11%, from the same period last year. Income from BOLI represents the increase
in the cash surrender value of life insurance policies on the lives of certain employees who have
consented to allowing Banknorth, NA, 27




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##### Table of Contents



our wholly-owned banking subsidiary, to be the beneficiary of
such policies. The cash surrender value of our BOLI was $556.3 million at March 31, 2005 compared
to $523.1 million at December 31, 2004. The $33.2 million increase was primarily comprised of
amounts from acquisitions and increases in the cash surrender value of policies. 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 March 31, 2005. Investment in BOLI provides us a
means to mitigate increasing employee benefit costs. For the first quarter of 2005, the average
carrying value of BOLI was $546 million compared to $490 million for the first quarter of 2004. Investment planning services income decreased $151 thousand, or 3%, compared to the same period
last year primarily due to a decrease in sales of third party annuities. Investment planning
services income consists primarily of commissions earned from sales of third party fixed annuities,
variable annuities and mutual funds. Net securities losses amounted to $50.5 million during the first quarter of 2005, which included a
$50.2 million loss recorded in connection with the sale of $2.9 billion in securities pursuant to
the deleveraging program implemented by us in the first quarter of 2005. We recorded $3.6 million
of net securities gains in the first quarter of 2004. Gains and losses from the sale of securities
are subject to market and economic conditions and, as a result, there can be no assurance that
gains reported in prior periods will be achieved in the future. Loans held for sale lower of cost or market adjustment amounted to $7.5 million in the first
quarter of 2005. This amount is the adjustment to market value resulting from the reclassification
of $521 million of residential real estate loans in portfolio to loans held for sale as part of the
deleveraging program in the first quarter. The sale of the $521 million of loans is expected to be
completed in May 2005. We will retain the servicing on these loans. The change in unrealized loss on derivatives of $8.2 million in the first quarter of 2005 resulted
from a required change in accounting for certain interest rate swap agreements in connection with
the accounting for the TD transaction under the purchase method. Through February 28, 2005,
interest rate swap agreements with a notional amount of $541.5 million were accounted for as fair
value hedges of certain borrowings. In addition, interest rate swap agreements with a notional
amount of $1.2 billion were entered into in February 2005 and were accounted for as cash flow
hedges of certain variable rate commercial loans through February 28, 2005. Under hedge accounting
rules, the fair value of these interest rate swap agreements was recorded on our balance sheet with
the offset recorded as an adjustment of borrowings (in the case of the fair value hedges) or
shareholders equity  accumulated other comprehensive (in the case of cash flow hedges). On March
1, 2005, the date of completion of the TD transaction and resultant purchase accounting
adjustments, these interest rate swap agreements were not re-designated as hedges, and as a result,
hedge accounting for these interest rate swap agreements was no longer permitted. The $8.2 million
change in unrealized loss represents the change in the fair value of these swap agreements from
March 1, 2005 to March 31, 2005. On April 21, 2005, the interest rate swap agreements related to
variable rate commercial loans were re-designated as hedges, and a gain of $10.1 million was
recorded to reflect the change in fair value of these agreements from March 31, 2005 to April 21,
2005. The interest rate swaps related to
fixed rate borrowings could not be re-designated as hedges because they do not currently meet the
requirements to be considered highly effective. From March 31,
2005 to May 13, 2005 these interest
rate swap agreements increased in value by $4.8 million; these
interest rate swap agreements were terminated May 13, 2005. Other noninterest income decreased $2.0 million, or 13%, in the three months ended March 31, 2005
compared to the same period last year. This decrease was primarily due to lower income from
premiums on covered call options and lower mortgage banking services income, which were partially
offset by increases in loan fee income. The covered call option program is managed in conjunction
with the fixed income securities portfolio to provide revenue opportunities in addition to the
interest income earned on the securities. Covered call activity varies from quarter to quarter as
interest rates, levels of market volatility and our strategic objectives for the fixed income
securities portfolio change. Mortgage banking services income declined primarily due to reduced
volumes of residential loan originations and loan sales in the secondary market. Loan fees for the
three months ended March 31, 2005 increased primarily due to higher volumes of interest rate swap
agreements sold by us to commercial loan customers to synthetically fix the interest rate on their
variable rate loans. (We simultaneously enter into offsetting interest rate swap agreements with
third party dealers.) 28




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##### Table of Contents



Noninterest Expense The following table presents noninterest expense during the periods indicated. Table 8  Noninterest Expense Combined
    
    
    PredecessorThree Months Ended
    
    
    Three Months Ended
    
    
    ChangeMarch
31, 2005
    
    

March
31, 2005
    
    
    Amount
    
    
    PercentNoninterest expense:Compensation and employee benefits
    
    $
    100,868
    
    
    $
    87,534
    
    
    $
    13,334
    
    
    
    15
    %Occupancy
    
    
    17,901
    
    
    
    15,709
    
    
    
    2,192
    
    
    
    14
    %Equipment
    
    
    12,837
    
    
    
    11,890
    
    
    
    947
    
    
    
    8
    %Data processing
    
    
    11,033
    
    
    
    10,436
    
    
    
    597
    
    
    
    6
    %Advertising and marketing
    
    
    6,695
    
    
    
    7,523
    
    
    
    (828
    )
    
    
    (11
    %)Amortization of identifiable
intangible assets
    
    
    11,495
    
    
    
    1,904
    
    
    
    9,591
    
    
    
    504
    %Merger and consolidation costs
    
    
    31,191
    
    
    
    1,614
    
    
    
    29,577
    
    
    
    N/MPrepayment penalties on borrowings
    
    
    6,303
    
    
    
    
    
    
    
    6,303
    
    
    
    N/MOther noninterest expense:Telephone
    
    
    3,697
    
    
    
    3,370
    
    
    
    327
    
    
    
    10
    %Office supplies
    
    
    2,579
    
    
    
    2,438
    
    
    
    141
    
    
    
    6
    %Postage and freight
    
    
    2,874
    
    
    
    2,401
    
    
    
    473
    
    
    
    20
    %Miscellaneous loan costs
    
    
    1,285
    
    
    
    514
    
    
    
    771
    
    
    
    150
    %Deposits and other assessments
    
    
    1,076
    
    
    
    908
    
    
    
    168
    
    
    
    19
    %Collection and carrying costs
of non-performing assets
    
    
    768
    
    
    
    725
    
    
    
    43
    
    
    
    6
    %Miscellaneous
    
    
    12,507
    
    
    
    12,753
    
    
    
    (246
    )
    
    
    (2
    %)Total other noninterest expense
    
    
    24,786
    
    
    
    23,109
    
    
    
    1,677
    
    
    
    7
    %Total noninterest expense
    
    $
    223,109
    
    
    $
    159,719
    
    
    $
    63,390
    
    
    
    40
    %
    Noninterest expense increased $63.4 million, or 40%, in the first quarter of 2005 compared to the
same period last year. The increase in 2005 was primarily due to a $29.6 million increase in
merger and consolidation costs, which was primarily related to the transaction with TD, and a $6.3
million increase in prepayment penalties on borrowings
related to the first quarter deleveraging program, as well as increases in operating costs
attributable to acquired banks (staff and facilities costs.) Compensation and employee benefits expense increased $13.3 million, or 15%, in the first quarter of
2005 compared to the same period last year. This increase was primarily due to increased salaries
and benefit costs, which increased primarily due to acquisitions and merit increases. Occupancy expense increased $2.2 million, or 14%, in the first quarter of 2005 compared to the same
period last year. This increase was primarily due to the expense associated with facilities from
acquisitions. Merger and consolidation costs increased $29.6 million in the first quarter of 2005 compared
to the same period last year due primarily to costs incurred in connection with our transaction
with TD and, to a lesser extent, our acquisition of BostonFed in January 2005. For a tabular
analysis of our merger and consolidation costs, see Note 13 to the unaudited consolidated financial
statements. 29




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##### Table of Contents



Other noninterest expense increased $1.7 million, or 7%, in the first quarter of 2005 compared to
the same period last year. This increase was largely due to increased costs related to
acquisitions and higher loan costs. Taxes The effective tax rate was 36% for the three months ended March 31, 2005 compared to 34% for the
quarter ended March 31, 2004. The increase related primarily to non-deductible transaction
expenses related to the transaction with TD. Excluding the effects of merger-related charges, the
effective tax rate is expected to return to the 34%  35% range in the second quarter. We are subject to examinations by various federal and state governmental tax authorities from time
to time regarding tax returns we have filed. Certain state income tax returns filed by us in
recent years have recently been examined and assessments have been made by state tax authorities
with respect to certain of these returns. We believe that we have substantial defenses to these
assessments and intend to appeal them in accordance with administrative procedures. Although we
believe that our reserves for existing and potential state tax assessments are appropriate, we
estimate that the range of reasonably possible exposure over established reserves for existing and
potential state tax assessments is from $0 to $13 million, after federal tax benefits. To the
extent we settle these assessments for an amount greater than or less than the related reserves,
the excess or deficiency will be recorded as an adjustment to goodwill. Comprehensive Income Our comprehensive loss
amounted to $1.6 million for the quarter ended March 31, 2005 as compared to
$145 million for the first quarter of 2004. Comprehensive income differed from our net income as a
result of changes in the amount of unrealized gains and losses on our portfolio of securities
available for sale and, to a lesser extent, on our derivative contracts that are accounted for as
cash flow hedges. For additional information, see the Consolidated Statements of Changes in
Shareholders Equity. Our available for sale investment portfolio had net unrealized gains (losses) of ($41.3) million,
$669 thousand and $96.1 million (($26.9) million, $435 thousand and $62.5 million net of applicable
income tax effects, respectively) at March 31, 2005, December 31, 2004 and March 31, 2004,
respectively. The changes from period to period were primarily due to changes in prevailing
interest rates and to the composition of the available for sale investment securities portfolio.
The change in fair value of our interest-bearing liabilities, which tends to offset the change in
fair value of available for sale securities, is not included in other comprehensive income. FINANCIAL CONDITION Our consolidated total assets
increased by $3.4 billion, or 12%, from $28.7 billion at
December 31, 2004 to $32.1 billion at March 31, 2005,
primarily as a result of three factors. The purchase accounting
adjustments recorded on March 1, 2005 in connection with the TD
transaction resulted in the recognition of an additional
$3.0 billion of goodwill and an additional $696 million of
identifiable intangible assets. The acquisition of BostonFed Bancorp,
Inc. on January 21, 2005 increased assets by approximately
$1.6 billion. A deleveraging program implemented coincident
with the TD transaction reduced assets by $2.9 billion. Total average assets were $30.7 billion and $26.5 billion
for the three months ended March 31, 2005 and 2004, respectively. The increase in total average
assets was largely due to acquisitions, which increased average assets by approximately $2.8
billion in the three months ended March 31, 2005, as compared to the same period in 2004, as well
as growth. The increase was notwithstanding the effects of the deleveraging programs in the fourth
quarter of 2004 and the first quarter of 2005, which reduced average assets by approximately $2.3
billion in the first quarter of 2005 as compared to the first quarter of 2004. Shareholders
equity totaled $6.3 billion at March 31, 2005 and $3.2 billion at December 31, 2004, an increase of
$3.1 billion. The increase was due primarily to the effects of accounting for the transaction with
TD under the purchase method. See Note 2 to the unaudited Consolidated Financial Statements. 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 and is used as collateral for public deposits and wholesale
funding sources. 30




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##### Table of Contents



The securities portfolio (including securities classified as held to maturity) averaged $6.3
billion during the first quarter of 2005, as compared to $7.3 billion in the first quarter of 2004.
The decrease in the average securities portfolio resulted primarily from the deleveraging programs
in the fourth quarter of 2004 and the first quarter of 2005, which were partially offset by the
effects of the acquisitions in 2004 and 2005. The securities portfolio is held in and managed by
Northgroup Asset Management Company, a wholly-owned subsidiary of Banknorth, NA, and 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 a REMIC, and asset-backed securities. Substantially all
securities available for sale were rated AAA or equivalently rated at March 31, 2005. The average
yield on securities was 4.68% for the quarter ended March 31, 2005 compared to 4.22% for the
quarter ended March 31, 2004. With the exception of securitized residential real estate loans held
in a REMIC that were classified as held to maturity and carried at cost, all of our securities are
classified as available for sale and carried at fair value. Securities available for sale had an
after-tax unrealized gain (loss) of ($26.9) million and $435 thousand at March 31, 2005 and
December 31, 2004, respectively. These unrealized gains (losses) do not impact net income or
regulatory capital but are recorded as adjustments to shareholders equity, net of related deferred
income taxes. Unrealized gains (losses), net of related deferred income taxes, are a component of
Accumulated Other Comprehensive Income (Loss) contained in the unaudited Consolidated Statement
of Changes in Shareholders Equity. Loans and Leases Total loans and leases (including loans held for sale) averaged $19.8 billion during the first
quarter of 2005, an increase of $3.2 billion, or 20%, from the first quarter of 2004. Excluding
acquisitions, average loans and leases for the quarter ended March 31, 2005 were $1.1 billion, or
6%, higher than the comparable period in 2004. Average loans and leases as a percent of average
earning assets was 76% during the quarter ended March 31, 2005 compared to 69% during the quarter
ended March 31, 2004. Average residential real estate loans (which include mortgage loans held for sale) of $3.8 billion
during the first quarter of 2005 increased $1.1 billion from the average amount of such loans
during the first quarter of last year. Excluding acquisitions, average residential loans decreased
approximately $109 million, or 3%. The weighted average yield on residential real estate loans
decreased from 5.19% to 5.13% during the quarters ended March 31, 2004 and 2005, respectively,
primarily due to the repricing of adjustable-rate loans and the refinancing of fixed-rate loans at
lower rates. Mortgage loans held for sale amounted to $558.1 million and $51.7 million at March 31, 2005 and
December 31, 2004, respectively. The increase in mortgage loans held for sale related to the
designation of approximately $521 million of residential loans as loans held for sale as part of
the deleveraging program implemented in the first quarter
of 2005; the sale of these loans is expected to close in May 2005. In addition, we continue to
sell substantially all of the conforming 30-year fixed-rate loans we originate. Commercial real estate loans averaged $6.4 billion during the first quarter of 2005, an increase of
$907 million, or 16%, from the first quarter of last year. Excluding acquisitions, average
commercial real estate loans increased $345 million, or 6%, during this period. Most of our
markets posted increases, with the largest increases in Massachusetts, Maine and Connecticut. The
weighted average yield on commercial real estate loans during the first quarter of 2005 was 5.96%,
as compared to 5.71% in the first quarter of 2004, an increase of 25 basis points. The higher yield
reflects the effects of higher prevailing rates as a result of the increase in prime rates in 2004
and 2005. Commercial business loans and leases averaged $4.0 billion during the first quarter of 2005, an
increase of $631 million, or 19%, over the first quarter of 2004. Excluding acquisitions, average
commercial business loans and leases increased $514 million, or 15%. Massachusetts and Maine
reflected the strongest growth. The weighted average yield on commercial business loans and leases
increased to 5.65% in the first quarter of 2005 from 4.82% in the first quarter of 2004. The
increase in the yield was primarily due to higher rates on new loans, the upward repricing of
variable-rate loans and the benefit of a $1.2 billion interest rate swap agreement entered into in
February 2005. 31




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Consumer loans and leases averaged $5.5 billion during the first quarter of 2005, an increase of
$618 million, or 13%, from the first quarter of 2004. Excluding acquisitions, average consumer
loans and leases increased $401 million or 8%. The growth in consumer loans was primarily in home
equity loans. The weighted average yield on consumer loans and leases increased to 5.47% in the
first quarter of 2005 from 5.12% in the first quarter of 2004, resulting from the upward repricing
of variable rate loans and, to a lesser degree, the benefit of a $1.0 billion cash flow hedge
(interest rate swap agreement) entered into in March 2005. For a description of the types of loans
and leases in our consumer portfolio and a breakdown of our consumer loans and leases, see Credit
Risk. Deposits Total deposits averaged $19.7 billion during the first quarter of 2005, an increase of $2.0 billion
from the first quarter of 2004. This increase was primarily due to acquisitions.
Noninterest-bearing accounts and money market and NOW accounts reflected the largest increases.
The ratio of loans to deposits was 99% at March 31, 2005 and 97% at December 31, 2004. Average noninterest-bearing deposits totaled $4.2 billion during the first quarter of 2005, an
increase of $734 million, or 21%, from the first quarter of 2004. Excluding acquisitions, average
noninterest-bearing deposits increased $404 million, or 11%. Average interest-bearing deposits of $15.5 billion during the first quarter of 2005 increased $1.2
billion from the first quarter of 2004. Excluding acquisitions, average savings, money market and
NOW accounts increased $55 million, or 1%, while certificates of deposits declined by 12%. The
decline in certificates of deposit resulted from our decision to allow certain deposits priced
above alternate funding costs to run off. The average rates paid on all interest-bearing deposits
increased by 9 basis points from 1.10% in the first quarter of 2004 to 1.19% in the first quarter
of 2005, reflecting the increase in prevailing interest rates. Included within the deposit categories above are government banking deposits, which averaged $1.8
billion in the first quarter of 2005 and $1.5 billion in the first quarter of 2004. Government
banking deposits include deposits received from state and local governments, school districts,
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 include FHLB advances, federal funds purchased, securities sold under agreements to
repurchase and borrowings from the U. S. Treasury. Short-term borrowings amounted to $4.2 billion
and $3.8 billion at March 31, 2005 and December 31, 2004, respectively, an increase of $439
million. This increase was due primarily to debt assumed in acquisitions and lower long-term debt. At March 31, 2005, we had a $110 million unsecured line of credit with TD. The line is renewable
every 364 days and, if used, carries interest at LIBOR plus a maximum of 0.60%. There were no
drawdowns on this line during the three months ended March 31, 2005, or on a previous line of
credit with another entity in the first quarter of 2004. We have additional borrowing capacity as
more fully described under Liquidity below. Long-term debt includes FHLB advances, senior notes, subordinated notes, junior subordinated
debentures, wholesale securities sold under agreements to repurchase, capital lease obligations and
other debt with original maturities greater than one year. Long-term debt amounted to $1.1 billion
at March 31, 2005 and $2.2 billion at December 31, 2004. The decrease of $1.1 billion related to
the repayment of wholesale securities sold under repurchase agreements as part of the deleveraging
program. 32




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##### Table of Contents



At March 31, 2005 and December 31, 2004, long-term FHLB borrowings amounted to $359 million and
$429 million, respectively, and were collateralized primarily with first mortgage loans secured by
single-family properties. These borrowings had an average cost of 4.26% during the three months
ended March 31, 2005 as compared to 4.25% during the three months ended March 31, 2004. At March 31, 2005 and December 31, 2004, long-term wholesale securities sold under repurchase
agreements amounted to $0 and $1.1 billion, respectively, and were collateralized by
mortgage-backed securities and U.S. Government obligations. Wholesale securities sold under
repurchase agreements were repaid during the quarter ended March 31, 2005 as part of the
deleveraging program initiated in this quarter. At March 31, 2005 and December 31, 2004, we had outstanding $150 million of 5-year senior notes
carrying a fixed rate of 3.75%. These notes had a carrying value of $148.5 million at March 31,
2005, inclusive of a $1.5 million remaining fair value adjustment recorded under the purchase
method of accounting. These securities, which were issued in April 2003, are rated A3 by Moodys
Investor Services. At March 31, 2005 and December 31, 2004, our consolidated borrowings included $200 million of
7.625% subordinated notes due 2011 issued by our banking subsidiary in 2001. These notes had a
carrying value of $228.8 million at March 31, 2005,
inclusive of a $28.8 million remaining fair
value adjustment recorded under the purchase method of accounting. The notes qualify as Tier 2
capital for regulatory purposes. At March 31, 2005 and December 31, 2004, we had outstanding $343.7 million and $310.7 million,
respectively, of junior subordinated debentures issued by us to affiliated trusts. At March 31,
2005, these junior subordinated debentures had a fair value adjustment of $31.0 million. See
Capital below. Shareholders Equity Shareholders equity amounted to $6.3 billion at March 31, 2005, an increase of $3.1 billion from
our $3.2 billion of shareholders equity at December 31, 2004. This increase was primarily
attributable to the $3.4 billion increase resulting from accounting for the TD transaction under
the purchase method. This increase more than offset the repurchase of 15.3 million shares of our
common stock for $486 million in the aggregate (at an average cost of $31.79 per share) and the
payment of $37.4 million of cash dividends declared on our common stock. These items were also
impacted by $200 million of equity resulting from the issuance of common stock in connection with
our acquisition of BostonFed, $73.7 million of equity resulting from the issuance of common stock
for employee benefit plans and $1.6 million of comprehensive income. Our retained earnings at March 31, 2005 amounted to $23.6 million, as compared to $1.7 billion at
December 31, 2004. The use of the purchase method to account for the transaction with TD resulted
in the elimination of our retained earnings as of March 1, 2005. We do not believe that this
decrease in retained earnings will adversely affect our ability to maintain our quarterly dividend
policy in the future. Dividends declared in the first quarter of 2005 were $0.20 per share
compared to $0.195 per share for the same period last year. Book value per share amounted to $36.65 and $17.71 at March 31, 2005 and December 31, 2004,
respectively. For information regarding our compliance with applicable capital requirements, see Capital below. CONTRACTUAL OBLIGATIONS In March 2005, TD Banknorth entered into an agreement for the exclusive naming rights to the Boston
Garden, the home of the Boston Celtics and the Boston Bruins. Under the agreement, the official
name of the arena will become TD Banknorth Garden on July 1, 2005 for a 20-year term ending on
June 30, 2025. In exchange for the 33




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##### Table of Contents



naming, advertising and other benefits under the agreement, TD
Banknorth agreed to pay an initial fee of $1.1 million and an annual fee of $5.9 million and
committed to spend $1.5 million (to be adjusted annually for inflation) each year in marketing and
promoting the arena. TD has agreed with TD Banknorth to pay 50% of each of the initial fee and
annual fee, as well as the annual marketing and promotional commitment, and become a formal party
to the naming rights agreement, and the parties are currently working on finalizing these agreements. This future commitment has not been recorded on our balance sheet because it is
being accounted for in a manner consistent with the accounting for operating leases under Statement
of Financial Accounting Standards No. 13, Accounting for Leases. In February 2005, we entered into an agreement to sell $521 million of residential real estate
loans. The transaction is expected to close in the second quarter of 2005 and is not included with
commitments in the table below. The following tables summarize our contractual cash obligations, other commitments and derivative
financial instruments at March 31, 2005. Table 9  Contractual Obligations and Other Commitments  Successor Payments Due By PeriodLess than
    
    
    1 - 3
    
    
    4 -5
    
    
    After 5Contractual Obligations (1)
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsLong-term debt
    
    $
    1,110,593
    
    
    $
    216,706
    
    
    $
    25,185
    
    
    $
    159,826
    
    
    $
    708,876Capital lease obligations
    
    
    6,637
    
    
    
    69
    
    
    
    584
    
    
    
    1,315
    
    
    
    4,669Total long-term debt
    
    
    1,117,230
    
    
    
    216,775
    
    
    
    25,769
    
    
    
    161,141
    
    
    
    713,545Operating lease obligations
    
    
    137,010
    
    
    
    26,067
    
    
    
    42,352
    
    
    
    29,914
    
    
    
    38,677Pension plan contribution (2)
    
    
    20,000
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    Other benefit plan payments -
estimated
    
    
    46,875
    
    
    
    4,318
    
    
    
    9,055
    
    
    
    12,602
    
    
    
    20,900Other vendor obligations (3)
    
    
    95,809
    
    
    
    13,178
    
    
    
    18,900
    
    
    
    6,405
    
    
    
    57,326Total contractual obligations
    
    $
    1,416,924
    
    
    $
    280,338
    
    
    $
    96,076
    
    
    $
    210,062
    
    
    $
    830,448
   (1)
    
    Other liabilities which are short term in nature are not included in this table.(2)
    
    Funding requirements for pension benefits after 2005 are excluded due to the significant variability in
the assumptions required to project the timing of future cash contributions.(3)
    
    Includes our commitment for the naming rights for the TD Banknorth Garden effective
July 1, 2005 net of TDs 50% share. Total
    
    
    Amount of Commitment Expiration - Per PeriodAmounts
    
    
    Less than
    
    
    1 - 3
    
    
    4 -5
    
    
    After 5Other commitments
    
    Committed
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsUnused portions on lines of credit
    
    $
    5,128,009
    
    
    $
    1,347,342
    
    
    $
    255,884
    
    
    $
    56,384
    
    
    $
    3,468,399Standby letters of credit
    
    
    535,645
    
    
    
    116,533
    
    
    
    97,452
    
    
    
    88,463
    
    
    
    233,197Commercial letters of credit
    
    
    29,667
    
    
    
    27,054
    
    
    
    14
    
    
    
    71
    
    
    
    2,528Commitments to originate loans
    
    
    2,118,840
    
    
    
    1,244,796
    
    
    
    429,937
    
    
    
    88,671
    
    
    
    355,436Other commitments
    
    
    274,974
    
    
    
    9,580
    
    
    
    7,668
    
    
    
    2,684
    
    
    
    255,042Total commitments
    
    $
    8,087,135
    
    
    $
    2,745,305
    
    
    $
    790,955
    
    
    $
    236,273
    
    
    $
    4,314,602
 34




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##### Table of Contents



Total
    
    
    Amount of Commitment Expiration - Per PeriodAmounts
    
    
    Less than
    
    
    1 - 3
    
    
    4 -5
    
    
    After 5Derivative Financial Instruments
    
    Committed
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsInterest rate swaps (notional amount):Commercial loan swap program:Interest rate swaps with commercial
borrowers (1)
    
    $
    829,404
    
    
    $
    4,975
    
    
    $
    46,211
    
    
    $
    186,384
    
    
    $
    591,834Interest rate swaps with dealers (2)
    
    
    829,404
    
    
    
    4,975
    
    
    
    46,211
    
    
    
    186,384
    
    
    
    591,834Interest rate swaps on loans (3)
    
    
    2,200,000
    
    
    
    150,000
    
    
    
    300,000
    
    
    
    300,000
    
    
    
    1,450,000Interest rate swaps on borrowings (4)
    
    
    541,500
    
    
    
    191,500
    
    
    
    
    
    
    
    150,000
    
    
    
    200,000Forward commitments to sell loans
    
    
    76,000
    
    
    
    76,000
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency rate contracts: (5)Forward contracts with customers
    
    
    40,300
    
    
    
    36,494
    
    
    
    3,806
    
    
    
    
    
    
    
    Forward contracts with dealers
    
    
    40,466
    
    
    
    36,648
    
    
    
    3,818
    
    
    
    
    
    
    
    Foreign exchange options to purchase
    
    
    42,303
    
    
    
    27,751
    
    
    
    14,552
    
    
    
    
    
    
    
    Foreign exchange options to sell
    
    
    42,303
    
    
    
    27,751
    
    
    
    14,552
    
    
    
    
    
    
    
    Rate-locked loan commitments
    
    
    45,097
    
    
    
    45,097
    
    
    
    
    
    
    
    
    
    
    
    
   (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 loans (Banknorth pays fixed, receives variable).(4)
    
    Swaps on borrowings (Banknorth pays variable, receives fixed).(5)
    
    Forward contracts for customer accommodations. RISK MANAGEMENT The primary goal of our risk management program is to determine how certain existing or emerging
issues in the financial services industry affect the nature and extent of the risks faced by us.
Based on a periodic self-evaluation, we determine key issues and develop plans and/or objectives to
address risk. Our board of directors and management believe that there are seven applicable risk
categories, consisting of credit, interest rate, liquidity, transaction, compliance, strategic and
reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or
low) coupled with a quality of risk management perspective. In addition, an aggregate level of
risk is assigned as a whole as well as the direction of risk (stable, increasing or decreasing).
Each risk category and the overall risk level is compared to regulatory views on a regular basis
and then reported to the board with an accompanying explanation as to the existence of any
differences. The risk program includes risk identification, measurement, control and monitoring. Our board of directors has established our overall strategic direction and approves our overall
risk policies and oversees our overall risk management process. The board has established two
board committees, consisting of Audit and Board Risk Management, and has charged each committee
with overseeing key risks. In addition, there is a management Operational Risk Committee, which is
comprised of senior officers in key business lines, and identifies and monitors key operational
risks. The Operational Risk Committee reports to the Board Risk Management Committee on a regular
basis. 35




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##### Table of Contents



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 and lease 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 Results of Operations   Provision
and Allowance for Loan and Lease Losses. Our residential loan portfolio (including loans held for sale) accounted for 20% of the total loan
and lease portfolio at March 31, 2005 and 17% at December 31, 2004. 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 March 31, 2005, 0.22% of our
residential loans were nonperforming, as compared to 0.25% at December 31, 2004 and 0.30% at March
31, 2004. Our commercial real estate loan portfolio accounted for 32% of the total loan and lease portfolio
at March 31, 2005 and 34% at December 31, 2004. 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 March 31, 2005,
0.36% of our commercial real estate loans were nonperforming, as compared to 0.48% at December 31,
2004 and 0.44% at March 31, 2004. Our commercial business loan and lease portfolio accounted for 20% of the total loan and
lease portfolio at March 31, 2005 and 21% at December 31, 2004. 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 $91.2 million at March 31, 2005. We do not emphasize the
purchase of participations in syndicated commercial loans. At March 31, 2005, we had $446.6
million of outstanding participations in syndicated commercial loans and had an additional $410.9
million of unfunded commitments related to these participations. At March 31, 2005, 0. 60% of our
commercial business loans were nonperforming, as compared to 0.83% at both December 31, 2004 and
March 31, 2004. The following table presents the geographic distribution of our commercial loans and leases at
March 31, 2005 and December 31, 2004. Table 10  Commercial Loans and Leases by State Commercial Real Estate Loans
    
    
    Commercial Business Loans and LeasesSuccessor
    
    
    Predecesor
    
    
    
    
    
    
    
    
    
    
    Successor
    
    
    PredecesorMarch 31,
    
    
    December 31,
    
    
    Change
    
    
    March 31,
    
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    Amount
    
    
    Percent
    
    
    2005
    
    
    2004
    
    
    Amount
    
    
    PercentMassachusetts
    
    $
    3,304,770
    
    
    $
    3,085,278
    
    
    $
    219,492
    
    
    
    7.11
    %
    
    $
    1,625,186
    
    
    $
    1,569,911
    
    
    $
    55,275
    
    
    
    3.52
    %Maine
    
    
    969,776
    
    
    
    933,677
    
    
    
    36,099
    
    
    
    3.87
    %
    
    
    857,836
    
    
    
    787,822
    
    
    
    70,014
    
    
    
    8.89
    %New Hampshire
    
    
    787,271
    
    
    
    767,590
    
    
    
    19,681
    
    
    
    2.56
    %
    
    
    540,829
    
    
    
    564,604
    
    
    
    (23,775
    )
    
    
    (4.21
    %)Vermont
    
    
    670,383
    
    
    
    664,063
    
    
    
    6,320
    
    
    
    0.95
    %
    
    
    450,162
    
    
    
    433,055
    
    
    
    17,107
    
    
    
    3.95
    %Connecticut
    
    
    608,430
    
    
    
    583,907
    
    
    
    24,523
    
    
    
    4.20
    %
    
    
    452,827
    
    
    
    412,601
    
    
    
    40,226
    
    
    
    9.75
    %New York
    
    
    218,829
    
    
    
    214,998
    
    
    
    3,831
    
    
    
    1.78
    %
    
    
    167,787
    
    
    
    160,601
    
    
    
    7,186
    
    
    
    4.47
    %Total
    
    $
    6,559,459
    
    
    $
    6,249,513
    
    
    $
    309,946
    
    
    
    4.96
    %
    
    $
    4,094,627
    
    
    $
    3,928,594
    
    
    $
    166,033
    
    
    
    4.23
    %
 36




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##### Table of Contents



Consumer loans and leases accounted for 28% of our total loan and lease portfolio at March 31,
2005 and 29% at December 31, 2004. At March 31, 2005, 0.11% of our consumer loans were
nonperforming, as compared to 0.14% at December 31, 2004 and 0.13% at March 31, 2004. Vision,
dental and orthodontia fee plan loans and mobile home loans continue to decline since we ceased
originating those loans in the fourth quarter of 2003. The following table presents our consumer loans and leases by type at March 31, 2005 and December
31, 2004. Table 11  Composition of Consumer Loans and Leases Successor
    
    
    PredecessorMarch 31,
    
    
    December 31,2005
    
    
    2004
    
    
    Change% of
    
    
    
    
    
    
    % ofAmount
    
    
    Total
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    PercentHome equity
    
    $
    3,330,450
    
    
    
    59.40
    %
    
    $
    3,123,525
    
    
    
    58.55
    %
    
    $
    206,925
    
    
    
    6.62
    %Automobile
    
    
    1,719,942
    
    
    
    30.67
    %
    
    
    1,678,817
    
    
    
    31.48
    %
    
    
    41,125
    
    
    
    2.45
    %Mobile home
    
    
    106,001
    
    
    
    1.89
    %
    
    
    111,874
    
    
    
    2.10
    %
    
    
    (5,873
    )
    
    
    (5.25
    %)Vision, dental, and
orthodontia fee plan
    
    
    38,766
    
    
    
    0.69
    %
    
    
    49,934
    
    
    
    0.94
    %
    
    
    (11,168
    )
    
    
    (22.37
    %)Education
    
    
    203,831
    
    
    
    3.64
    %
    
    
    159,314
    
    
    
    2.99
    %
    
    
    44,517
    
    
    
    27.94
    %Other
    
    
    207,960
    
    
    
    3.71
    %
    
    
    210,206
    
    
    
    3.94
    %
    
    
    (2,246
    )
    
    
    (1.07
    %)Total
    
    $
    5,606,950
    
    
    
    100.00
    %
    
    $
    5,333,670
    
    
    
    100.00
    %
    
    $
    273,280
    
    
    
    5.12
    %
 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 0.21% at March 31,
2005, 0.28% at December 31, 2004 and 0.26% at March 31, 2004. Total nonperforming assets as a
percentage of total loans and total other nonperforming assets amounted to 0. 32% at March 31,
2005, 0.44% at December 31, 2004 and 0.42% at March 31, 2004. See Table 11 for a summary of
nonperforming assets for the last five quarters. On a dollar basis, our nonperforming assets
decreased to $68.9 million at March 31, 2005 from $81.1 million at December 31, 2004 and amounted
to $70.6 million at March 31, 2004. The decrease at March 31, 2005 compared to December 31, 2004
was primarily due to the application of $21.4 million of specific reserves to the carrying value of
certain nonperforming commercial loans in accordance with the purchase method of accounting. 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, 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. The following table presents information regarding our nonperforming assets for the last five
quarters. 37




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##### Table of Contents



Table 12  Nonperforming Assets Successor
    
    
    Predecessor2005
    
    
    2004March 31
    
    
    December 31
    
    
    September 30
    
    
    June 30
    
    
    March 31Nonaccrual loans and leases:Residential real estate loans
    
    $
    8,614
    
    
    $
    7,846
    
    
    $
    7,274
    
    
    $
    7,870
    
    
    $
    7,990Commercial real estate loans (1)
    
    
    23,553
    
    
    
    29,948
    
    
    
    33,249
    
    
    
    27,951
    
    
    
    24,619Commercial business loans and leases (2)
    
    
    24,520
    
    
    
    32,421
    
    
    
    18,573
    
    
    
    23,636
    
    
    
    28,978Consumer loans and leases
    
    
    6,229
    
    
    
    7,344
    
    
    
    6,827
    
    
    
    5,685
    
    
    
    6,267Total nonaccrual loans and leases
    
    
    62,916
    
    
    
    77,559
    
    
    
    65,923
    
    
    
    65,142
    
    
    
    67,854Other nonperforming assets:Other real estate owned, net of related reserves
    
    
    3,925
    
    
    
    1,878
    
    
    
    698
    
    
    
    398
    
    
    
    389Repossessions, net of related reserves
    
    
    2,087
    
    
    
    1,666
    
    
    
    1,358
    
    
    
    1,627
    
    
    
    2,311Total other nonperforming assets
    
    
    6,012
    
    
    
    3,544
    
    
    
    2,056
    
    
    
    2,025
    
    
    
    2,700Total nonperforming assets
    
    $
    68,928
    
    
    $
    81,103
    
    
    $
    67,979
    
    
    $
    67,167
    
    
    $
    70,554Accruing loans and leases 90 days or more overdue
    
    $
    5,041
    
    
    $
    5,254
    
    
    $
    5,018
    
    
    $
    4,142
    
    
    $
    7,929Total nonperforming loans as a percentage of total
loans and leases(3)
    
    
    0.32
    %
    
    
    0.42
    %
    
    
    0.36
    %
    
    
    0.36
    %
    
    
    0.41
    %Total nonperforming assets as a percentage of total assets
    
    
    0.21
    %
    
    
    0.28
    %
    
    
    0.23
    %
    
    
    0.23
    %
    
    
    0.26
    %Total nonperforming assets as a percentage of total loans
and leases (3) and total other nonperforming assets
    
    
    0.35
    %
    
    
    0.44
    %
    
    
    0.37
    %
    
    
    0.37
    %
    
    
    0.42
    %
   (1)
    
    As of March 1, 2005, specific reserves of $6.9 million were applied to reduce the individual loan balances on impaired commercial business
loans and leases.(2)
    
    As of March 1, 2005, specific reserves of $14.5 million were applied to reduce the individual loan balances on impaired commercial real
estate loans.(3)
    
    Total loans and leases exclude residential real estate loans held for sale. 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, unless well
secured and in the process of collection, and any equity lines of credit in the process of
foreclosure are placed on nonaccrual status. Consumer loans are charged-off upon reaching 120 or
180 days past due depending on the type of loan. We generally place all commercial real estate
loans and commercial business loans and leases which are 90 days or more past due on nonaccrual
status, unless secured by sufficient cash or other assets immediately convertible to cash. At
March 31, 2005, we had $5.0 million of accruing loans which were 90 days or more delinquent, as
compared to $5.3 million at December 31, 2004 and $7.9 million at March 31, 2004. We may also
place loans which are less than 90 days past due on nonaccrual (and, therefore, nonperforming)
status when in our judgment these loans are likely to present future principal and/or interest
repayment problems and ultimately would be classified as nonperforming. Net Charge-offs Net charge-offs amounted to $10.1 million during the three months ended March 31, 2005, as compared
to $8.5 million during the three months ended March 31, 2004. Net charge-offs represented 0.21% of
average loans and leases outstanding for the quarters ended March 31, 2005 and 2004. 38




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##### Table of Contents



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. Table 13  Allowance for Credit Losses Combined
    
    
    Predecessor2005 First
    
    
    2004 Fourth
    
    
    2004 Third
    
    
    2004 Second
    
    
    2004 FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterAllowance for loan and lease losses at beginning of period
    
    $
    243,152
    
    
    $
    242,885
    
    
    $
    247,620
    
    
    $
    233,297
    
    
    $
    232,287Additions due to acquisitions
    
    
    14,494
    
    
    
    
    
    
    
    
    
    
    
    13,665
    
    
    
    Charge-offs:Residential real estate mortgages (1)
    
    
    65
    
    
    
    (4
    )
    
    
    101
    
    
    
    (25
    )
    
    
    (55
    )Commercial real estate mortgages
    
    
    5,551
    
    
    
    216
    
    
    
    4
    
    
    
    172
    
    
    
    221Commercial business loans and leases
    
    
    2,069
    
    
    
    7,531
    
    
    
    4,458
    
    
    
    5,460
    
    
    
    2,711Consumer loans and leases
    
    
    6,738
    
    
    
    6,494
    
    
    
    7,566
    
    
    
    7,434
    
    
    
    8,405Total loans and leases charged off
    
    
    14,423
    
    
    
    14,237
    
    
    
    12,129
    
    
    
    13,041
    
    
    
    11,282Recoveries:Residential real estate mortgages
    
    
    8
    
    
    
    5
    
    
    
    15
    
    
    
    17
    
    
    
    17Commercial real estate mortgages
    
    
    1,519
    
    
    
    703
    
    
    
    534
    
    
    
    835
    
    
    
    667Commercial business loans and leases
    
    
    1,524
    
    
    
    1,937
    
    
    
    1,519
    
    
    
    2,073
    
    
    
    926Consumer loans and leases
    
    
    1,257
    
    
    
    1,189
    
    
    
    1,256
    
    
    
    1,274
    
    
    
    1,182Total loans and leases recovered
    
    
    4,308
    
    
    
    3,834
    
    
    
    3,324
    
    
    
    4,199
    
    
    
    2,792Net charge-offs
    
    
    10,115
    
    
    
    10,403
    
    
    
    8,805
    
    
    
    8,842
    
    
    
    8,490Transfer for off-balance sheet loan commitments (2)
    
    
    
    
    
    
    
    
    
    
    (6,600
    )
    
    
    
    
    
    
    Provision for loan and lease losses
    
    
    2,069
    
    
    
    10,670
    
    
    
    10,670
    
    
    
    9,500
    
    
    
    9,500Specific reserves applied to reduce impaired loan carrying
values (3)
    
    
    (21,435
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance for loan and lease losses at end of period (2)
    
    $
    228,165
    
    
    $
    243,152
    
    
    $
    242,885
    
    
    $
    247,620
    
    
    $
    233,297Total Allowances for Credit Losses:Allowance for loan and lease losses
    
    $
    228,165
    
    
    $
    243,152
    
    
    $
    242,885Liability for unfunded credit commitments (2)
    
    
    6,707
    
    
    
    6,600
    
    
    
    6,600Total Allowances for Credit Losses
    
    $
    234,872
    
    
    $
    249,752
    
    
    $
    249,485Ratio of net charge-offs to average loans and
leases outstanding during the period, annualized (4)
    
    
    0.21
    %
    
    
    0.22
    %
    
    
    0.19
    %
    
    
    0.20
    %
    
    
    0.21
    %Ratio of allowance for credit losses to total loans and leases
at end of period (2)
    
    
    1.20
    %
    
    
    1.34
    %
    
    
    1.36
    %
    
    
    1.37
    %
    
    
    1.40
    %Ratio of allowance for credit losses to nonperforming loans
and leases at end of period
    
    
    373
    %
    
    
    322
    %
    
    
    378
    %
    
    
    380
    %
    
    
    344
    %Ratio of net charge-offs (recoveries) as a percent of
average outstanding loans and leases, annualized (4):Residential real estate mortgages
    
    
    0.006
    %
    
    
    (0.001
    %)
    
    
    0.011
    %
    
    
    (0.006
    %)
    
    
    (0.011
    %)Commercial real estate mortgages
    
    
    0.254
    %
    
    
    (0.031
    %)
    
    
    (0.034
    %)
    
    
    (0.045
    %)
    
    
    (0.032
    %)Commercial business loans and leases
    
    
    0.055
    %
    
    
    0.576
    %
    
    
    0.305
    %
    
    
    0.370
    %
    
    
    0.211
    %Consumer loans and leases
    
    
    0.404
    %
    
    
    0.396
    %
    
    
    0.483
    %
    
    
    0.496
    %
    
    
    0.593
    %Total portfolio loans and leases at end of period (4)
    
    
    19,649,943
    
    
    
    18,592,994
    
    
    
    18,410,791
    
    
    
    18,110,312
    
    
    
    16,623,612Total nonperforming loans and leases at end of period
    
    
    62,916
    
    
    
    77,559
    
    
    
    65,923
    
    
    
    65,142
    
    
    
    67,854Average loans and leases outstanding
during the period (4)
    
    
    19,561,761
    
    
    
    18,515,595
    
    
    
    18,263,613
    
    
    
    17,484,997
    
    
    
    16,511,538
   (1)
    
    Residential real estate charge-offs include estimates of charge-offs and reversals of prior period estimates, which may result in
negative charge-offs.(2)
    
    During the third quarter of 2004, we reclassified the portion of our allowance for credit losses related to unfunded credit commitments
from the allowance for loan and lease losses to a separate liability account. The liability for unfunded credit commitments previously
included in the allowance for loan and and lease losses was $5.4 million and $5.1 million as of June 30, 2004
and March 31, 2004, respectively.(3)
    
    In connection with the TD transaction, $21.4 million of the allowance for loan and lease losses related to impaired commercial loans was transferred
in accordance with the implementation of American Institute of Certified Public Accountants Statement of Position 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer to reduce the carrying value of impaired commercial loans.(4)
    
    Excludes residential real estate loans held for sale. 39




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##### Table of Contents



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 $139 million
at March 31, 2005 and $138 million at December 31, 2004. These loans and related delinquency
trends are considered in the evaluation of the allowance for loan and lease losses and the
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 is maintained at a level determined to be adequate by
management to absorb probable losses inherent in the loan and lease portfolio. 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 exercise 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. The allowance for loan and lease losses amounted to $228.2 million at March 31, 2005 and $243.2
million at December 31, 2004. The $15.0 million decrease was attributable to (i) the transfer of
$21.4 million of specific reserves on impaired loans from the allowance for loan and lease losses
and applied to reduce the carrying amount of the impaired loans (in accordance with SOP 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer and as a result of the TD
transaction and related purchase accounting adjustments) and (ii) net charge-offs of $10.1 million
during the first quarter of 2005. These items were partially offset by $14.5 million of general
reserves which were acquired in connection with the acquisition of BostonFed and the provision of
$2.1 million for loan and lease losses in the first quarter of 2005. Net charge-offs represented
0.21% of average loans and leases outstanding for the quarters ended March 31, 2005 and 2004. The
ratio of the allowance for credit losses to nonperforming loans was 373% at March 31, 2005 and 322%
at December 31, 2004. The ratio of the allowance for credit losses to total portfolio loans and
leases was 1.20% at March 31, 2005 compared to 1.34% at December 31, 2004. ASSET-LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk, liquidity and
capital. Asset-liability management is governed by policies, goals, and objectives that are
adopted and reviewed by our board of directors and monitored periodically by the Board Risk
Management Committee. The board delegates responsibility for asset-liability management strategies
to achieve these goals and objectives to the Asset Liability Management Committee (ALCO), which
is comprised of members of senior management. Senior management determines the strategic
directives that guide the day-to-day management of our activities and interest rate risk exposure.
The ALCO also reviews and approves all major risk, liquidity and capital management programs,
except for product pricing. Product pricing is reviewed and approved by the Pricing Committee,
which is comprised of a subset of ALCO members and the state presidents of our banking subsidiary. Interest Rate Risk Interest rate risk is the risk of loss to future earnings or long-term value resulting from changes
in interest rates and is by far the most significant non-credit risk to which we are exposed. This
risk arises directly from our core lending and deposit gathering activities and is predominantly
concentrated in our mortgage-related assets, as well as in our non-maturity deposits. Residential
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 40




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##### Table of Contents



fall, borrowers are more likely to pay off their existing mortgages, which results in higher
cash flows that we must in turn reinvest. Replacing these higher-rate mortgage assets with
lower-rate mortgage assets has the potential to reduce our net interest income unless we can also
reduce either our wholesale or retail funding costs. In the low interest rate environment, bank
deposits can increase, especially if the market risk premium is not sufficient to adequately
compensate investors. Consequently, under such circumstances, we can have even more cash to
reinvest in low yielding assets. Conversely, rising rates tend to have the opposite effect on
both mortgage assets and non-maturity deposits. Higher rates make borrowers less likely to
refinance existing debt, resulting in lower cash flows for us to reinvest. And if the market risk
premium is sufficiently high, depositors could be enticed to take additional investment risk and
move deposits from banks into riskier assets, such as equity securities. This in turn could result
in less cash to invest or even require us to use wholesale funding market sources more actively.
In the case of higher interest rates, our funding sources could reprice faster than our assets and
at higher rates, thereby reducing our interest rate spread and net interest margin. The degree to
which future earnings or long-term value is subject to interest rate risk depends on how closely
the characteristics of our interest-earning assets match those of our interest-bearing liabilities. 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 on
the sale of such securities and (vii) per SFAS Nos. 133 and 138, the fair value of derivatives
carried on our balance sheet, derivative hedge effectiveness testing and the amount of
ineffectiveness recognized in earnings. Assessment and Measurement The overall objective of interest rate risk management is to deliver consistent net interest
income growth and returns on equity over a wide range of possible interest rate environments. To
that end, management focuses on (i) key interest rate risk metrics and assessment of our exposure
to this risk, (ii) a careful review and consideration of modeling assumptions and (iii) asset and
liability management strategies that help attain the corporate goals and objectives adopted by our
board of directors. The primary objective of interest rate risk management is to control our estimated exposure to
interest rate risk within limits and guidelines established by the ALCO and approved by our board
of directors. These limits and guidelines reflect our tolerance for interest rate risk over a wide
range of both short-term and long-term measurements. In addition, we evaluate interest rate risk
based on ongoing business risk measures, liquidation or run-off measures of assets and liabilities
on our balance sheet and stress test measures. Ongoing measurements and runoff analysis provide
management with information concerning day-to-day operations. Stress testing shows the impact of
very extreme but lower probability events. The combination of these measures gives management a
comprehensive view of possible risks to future earnings and long-term equity value. We attempt to
control interest rate risk by identifying, quantifying and, where appropriate, hedging our exposure
to these risks. Net Interest Income Sensitivity Net interest income is our largest source of revenue. Net interest income sensitivity is our
primary short-term measurement used to assess the interest rate risk of our ongoing business.
Management believes that net interest income sensitivity gives us the best perspective on how
day-to-day decisions affect our interest rate risk profile. We subject estimated net interest
income over a 12-month period to various rate movements using a simulation model for various
specified interest rate scenarios. Simulations are run monthly and include scenarios where market
rates are shocked up and down, scenarios where market rates gradually change or ramp up and
down and scenarios where the slope of the market yield curve changes. Our base simulation assumes
that rates do not change for the next 12 months. The sensitivity measurement is calculated as the
percentage variance of the net interest income 41




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##### Table of Contents



simulations to the base simulation results. Results for the gradual ramps are compared to
policy guidelines and are disclosed in the interest rate risk results below. As indicated in Table 14, assuming a gradual 100 and 200 basis point increase in interest rates
starting on March 31, 2005, we estimate that our net interest income in the following 12 months
would decrease by 0.64% and 1.90%, respectively. This is because in the event of an upward shift
in rates, the simulated increase in interest income would be less than the simulated increase in
interest expense because total adjustable rate interest-earning assets generally will reprice less
quickly than will total interest-bearing liabilities. Also as indicated in Table 14, assuming a
gradual 100 and 200 basis point decrease in interest rates starting on the same date, we estimate
that our net interest income in the following 12 months would increase by 0.48% and decrease by
0.19%, respectively. These results are dependent on material assumptions such as interest rate
movements, product pricing and customer behavior. Table 14  Sensitivity of Net Interest Income 200 Basis Point
    
    
    100 Basis Point
    
    
    100 Basis Point
    
    
    200 Basis PointRate Increase
    
    
    Rate Increase
    
    
    Rate Decrease
    
    
    Rate DecreaseMarch 31, 2005
    
    
    (1.90
    %)
    
    
    (0.64
    %)
    
    
    0.48
    %
    
    
    (0.19
    %)December 31, 2004
    
    
    (2.13
    %)
    
    
    (0.68
    %)
    
    
    0.20
    %
    
    
    (1.51
    %)
 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%. All interest rate risk measures were within compliance guidelines at March 31, 2005 and
December 31, 2004. 2005 Asset-Liability Management Actions The most significant factors affecting market risk exposure of net interest income during the
quarter ended March 31, 2005 were (i) changes in the shape of the U.S. Government securities and
interest rate swap yield curves, (ii) changes in the prepayment speeds of mortgage assets, (iii)
the addition of $2.2 billion of interest rate swap agreements
fixing the cash flows of certain variable-rate loans tied to LIBOR or
Prime, (iv) the approximately $3.4 billion deleveraging program implemented in
the first quarter of 2005, which included the designation of $521 million of single-family
residential loans as held for sale and the sale of $2.4 billion of mortgage-backed securities and
$500 million of securities of US federal agencies, and (v) the repurchase of 15.3 million shares of
our common stock through March 31, 2005. The Federal Reserve Board continued to raise short-term interest rates by increasing the federal
funds target 0.50% to 2.75% at the end of the first quarter. Year-end federal funds forecasts
currently range from 4.00% to 4.50%. The 10-year U. S. Treasury yield was up approximately 21
basis points for the quarter ended March 31, 2005, as compared to the quarter ended December 31,
2004, and up approximately 64 basis points from March 31, 2004. Mortgage rates increased in line
with the 10-year U.S. Treasury yield, with our 30-year conforming single-family residential
mortgage rate up about 0.25%. As a result, the yield curve used to measure interest income
sensitivity has flattened considerably. Table 14 incorporates the estimated net impact of these
changes, as well as planned 2005 activity, the deleveraging program in the first quarter of 2005
and the acquisition of BostonFed on our net interest income assuming various changes in interest
rates. 42




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##### Table of Contents



Derivative Instruments Purpose and Benefits Derivative financial instruments are important tools that we use to manage our interest rate risk
and help our customers manage theirs. When appropriate, we use derivatives such as interest-rate
swaps, interest rate floors, interest rate caps, interest rate corridor agreements and forward
security sales, among other instruments. The following table summarizes our derivative positions at March 31, 2005. Table 15  Derivative Positions Asset-Liability Management Positions Notional Amount Maturing
    
    
    
    
    
    
    FairSuccessor - March 31, 2005
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    Total
    
    
    ValueInterest rate contractsPay variable, receive fixed  borrowings
    
    $
    191,500
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    200,000
    
    
    $
    541,500
    
    
    $
    (12,368
    )Pay variable, receive fixed  loans
    
    
    206,250
    
    
    
    275,000
    
    
    
    275,000
    
    
    
    275,000
    
    
    
    1,168,750
    
    
    
    2,200,000
    
    
    

    (14,215
    )Forward commitments to sell loans
    
    
    76,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,000
    
    
    
    (539
    )
 Customer-related Positions Notional Amount Maturing
    
    
    
    
    
    
    FairSuccessor - March 31, 2005
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    Total
    
    
    ValueInterest rate contractsReceive fixed, pay variable
    
    $
    2,000
    
    
    $
    13,250
    
    
    $
    19,450
    
    
    $
    55,622
    
    
    $
    739,081
    
    
    $
    829,403
    
    
    $
    3,021Pay fixed, receive variable
    
    
    2,000
    
    
    
    13,250
    
    
    
    19,450
    
    
    
    55,622
    
    
    
    739,081
    
    
    
    829,403
    
    
    
    (3,021
    )Foreign currency rate contractsForward contracts with customers
    
    
    33,485
    
    
    
    6,815
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,300
    
    
    
    (1,923
    )Forward contracts with dealers
    
    
    33,632
    
    
    
    6,834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,466
    
    
    
    1,759Foreign exchange options to purchase
    
    
    27,751
    
    
    
    14,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,303
    
    
    
    1,083Foreign exchange options to sell
    
    
    27,751
    
    
    
    14,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,303
    
    
    
    (1,083
    )Rate-locked loan commitments (1)
    
    
    45,097
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,097
    
    
    
    40
   (1)
    
    No value has been assigned to potential mortgage servicing rights related to rate-locked loan commitments. Asset-Liability Management Positions At March 31, 2005, a total of $541.5 million notional amount of interest-rate swap contracts to
hedge the fair value of certain fixed-rate borrowings were outstanding. The effect of these
interest-rate swaps is to synthetically convert
fixed-rate borrowings to variable rates over the life of the interest-rate swap contract. Interest
expense on borrowings was reduced by $0.7 million and $2.6 million during the three months ended
March 31, 2005 and 2004, respectively, as a result of these interest-rate swap agreements. Through
February 28, 2005, the interest-rate swap contracts were designated as hedges of the fair value of
$200 million of subordinated debt (7.625% due 2011), $150.0 million of senior notes (3.75% due
2008) and $191.5 million of FHLB advances (weighted average rate of 5.26% maturing through
September 2005). Effective March 1, 2005, and as a result of the TD transaction and related
purchase accounting adjustments, these swaps no longer qualified for fair value hedge accounting. 43




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##### Table of Contents



At March 31, 2005, a total of $2.2 billion of interest-rate swap contracts to hedge the cash flows
of certain variable-rate loans were outstanding. The effect of these interest rate-swap contracts
is to synthetically convert variable rate loans to fixed rates over the 8-year life of the
interest-rate swap contract. Interest income on loans increased by $2.7 million during the three
months ended March 31, 2005 as a result of these interest-rate swap contracts. Through February
28, 2005, $1.2 billion of these interest-rate swap contracts were designated as hedges of the cash
flows of commercial loans tied to one-month LIBOR. In March 2005, we entered into $1.0 billion
notional amount of interest rate swap contracts related to prime-based home equity lines of
credit. Effective March 1, 2005, and as a result of the TD transaction and related purchase
accounting adjustments, the $1.2 billion of swaps related to LIBOR-based commercial loans no longer
qualified for fair value hedge accounting. There were no interest-rate swap agreements related to
variable rate loans accounted for as cash flow hedges in the prior year. 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. The following table summarizes the average balances of residential mortgage loans held for sale and
related hedge positions during the periods indicated. Table 16  Average Balances of Loans Held for Sale and Related Hedges Combined
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004Residential mortgage loans held for sale
    
    $
    40,177
    
    
    $
    37,858Rate-locked loan commitments
    
    
    43,454
    
    
    
    48,961Forward sales contracts
    
    
    69,933
    
    
    
    75,600
 Customer-related Positions Interest rate derivatives,
primarily interest-rate swaps, offered to commercial borrowers through
our hedging program are designated as speculative under SFAS 133. However, we believe that our
exposure to commercial customer derivatives is limited because these contracts are simultaneously
matched at inception with an identical dealer transaction. The commercial customer hedging program
allows us to retain variable-rate commercial loans
while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed
interest rate swap. For the three months ended March 31, 2005, we recorded a total notional amount
of $133.1 million of interest rate swap agreements 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 Table 16 include both
the customer and offsetting dealer transactions. Foreign Exchange or Market Risk Our earnings are not directly and materially impacted by movements in foreign currency rates or
commodity prices. Virtually all transactions are denominated in the U.S. dollar. Movements in
equity prices may have an indirect but modest impact on earnings by affecting the volume of
activity or the amount of fees from investment-related businesses. 44




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##### Table of Contents



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 credit-worthy customers, we set aside a percentage of the
customers available line of credit until the foreign currency contract is settled. Foreign
exchange and trade services are provided under a private label arrangement with a correspondent
bank. Risks arise from the possible inability of the seller and/or our customer to perform and
from any resultant exposure to movement in foreign currency exchange rates, limiting our exposure
to the replacement value of the contracts rather than the notional principal or contract amounts. LIQUIDITY Our Board Risk Management Committee establishes policies and analyzes and manages liquidity to
ensure that adequate funds are available to meet normal operating requirements in addition to
unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand,
in a timely and cost-effective manner. The most important factor in the preservation of liquidity
is maintaining public confidence that facilitates the retention and growth of a large, stable
supply of core deposits and wholesale funds. Ultimately, public confidence is generated through
profitable operations, sound credit quality and a strong capital position. Liquidity management is
viewed from a long-term and a short-term perspective, as well as from an asset and liability
perspective. We monitor liquidity through a regular review of loan and deposit maturities, yield
and rate scenarios and loan and deposit forecasts to minimize funding risk. Other factors
affecting our ability to meet liquidity needs include variations in the markets served and general
economic conditions. We have various funding sources available to us on a parent-only basis as well
as through our banking subsidiary, as outlined below. Parent Company On a parent-only basis at March 31, 2005, our debt service requirements consisted primarily of
$374.5 million junior subordinated debentures issued by us to affiliated trusts and $150 million of
3.75% senior notes due May 1, 2008. The junior subordinated debentures were issued by us or
acquired entities to seven affiliated trusts in connection with their issuance of capital
securities to unaffiliated parties. These obligations mature starting in 2027 and had coupon
interest rates ranging from 5.74% to 11.30% at March 31, 2005. At the same date, annual debt
service payments on these borrowings amounted to approximately $35.5 million. 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, including draws on a $110 million unsecured line of credit which is renewable every
364 days and, if used, carries interest at LIBOR plus a maximum of 0.60%. At March 31, 2005, our
subsidiary bank had $263 million available for dividends that could be paid without prior
regulatory approval, which would be reduced in the event of
application of push-down accounting, as discussed under
Executive Overview  Method of Accounting. In addition, the parent company had $85.8 million in cash or cash equivalents
at March 31, 2005. Banking Subsidiary For our banking subsidiary, Banknorth, NA, liquidity represents the ability to fund asset growth
and accommodate deposit withdrawals and meet other funding requirements. Liquidity risk is the
risk that Banknorth, NA cannot meet anticipated or unexpected funding requirements or can meet them
only at excessive cost. Liquidity is measured by the ability to raise cash when needed at a
reasonable cost. Many factors affect a banks ability to meet 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, Banknorth, NA 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. 45




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##### Table of Contents



We continually monitor and forecast our liquidity position. There are several interdependent
methods which we use for this purpose, including daily review of federal funds positions, monthly
review of balance sheet changes, monthly review of liquidity ratios, periodic liquidity forecasts
and periodic review of contingency funding plans. At March 31, 2005, Banknorth, NA had in the aggregate $4.0 billion of immediately accessible
liquidity, defined as cash that could be raised within 1-3 days through collateralized borrowings
or sales of securities. This represented 20% of retail deposits, as compared to a current policy
minimum of 10% of deposits. Also at March 31, 2005, Banknorth, NA had in the aggregate potentially volatile funds of $3.3
billion. These are funds that might flow out of the bank over a 90-day period in an adverse
environment. Management estimates this figure by applying adverse probabilities to its various
credit-sensitive and economically-sensitive funding sources. At March 31, 2005, the ratio of immediately accessible liquidity to potentially volatile funds
was 121%, which exceeded our 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 our liquidity is
sufficient to meet current and future funding requirements. CAPITAL At March 31, 2005, shareholders equity amounted to $6.3 billion, or 19.8% of total assets,
compared to $3.2 billion, or 11.1% of total assets at December 31, 2004. This $3.1 billion
increase was primarily attributable to the purchase accounting adjustments recorded in connection
with the TD transaction that resulted in a $3.4 billion increase to shareholders equity on March
1, 2005, the date of the transaction, as well as a $3.0 billion increase to goodwill, a $696
million increase to identifiable intangible assets, and a $246 million increase in deferred tax
liabilities related to identifiable intangible assets, which more than offset a $70 million
decrease in other net assets. The goodwill and identifiable intangible assets (net of related
deferred taxes) are not includable in capital for the calculation of regulatory capital ratios.
Other changes in capital during the three months ended March 31, 2005 were due to the share
repurchase program, unrealized losses on securities available-for-sale, earnings and proceeds from
the exercise of stock options. We paid a cash dividend of $0.20 per share on our common stock during the first quarter of 2005
compared to $0.195 per share in the first quarter last year. We repurchased 15.3 million shares of our common stock at an aggregate cost of $486.4 million, or
an average of $31.79 per share, during the first quarter of 2005. This completed our share
repurchase program. 46




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##### Table of Contents



Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of the
Currency of the United States (OCC) respectively require us and our banking subsidiary to
maintain certain capital ratios, set forth below. At March 31, 2005, TD Banknorth Inc. and
Banknorth, NA were deemed to be well capitalized under the regulations of the Federal Reserve
Board and the OCC, respectively, and in compliance with applicable capital requirements. Table 17  Capital Ratios Actual
    
    
    Capital Requirements
    
    
    ExcessAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioMarch 31, 2005TD Banknorth Inc.  SuccessorTotal capital (to risk-weighted assets)
    
    $
    2,171,441
    
    
    
    10.13
    %
    
    $
    1,715,156
    
    
    
    8.00
    %
    
    $
    456,285
    
    
    
    2.13
    %Tier 1
capital (to risk-weighted assets)
    
    
    1,707,719
    
    
    
    7.97
    %
    
    
    857,578
    
    
    
    4.00
    %
    
    
    850,141
    
    
    
    3.97
    %Tier 1 leverage capital ratio (to average assets) (1)
    
    
    1,707,719
    
    
    
    6.29
    %
    
    
    1,085,193
    
    
    
    4.00
    %
    
    
    622,526
    
    
    
    2.29
    %Banknorth, NATotal capital (to risk-weighted assets)
    
    $
    2,220,677
    
    
    
    10.38
    %
    
    
    1,710,853
    
    
    
    8.00
    %
    
    
    509,824
    
    
    
    2.38
    %Tier 1 capital (to risk-weighted assets)
    
    
    1,761,722
    
    
    
    8.24
    %
    
    
    855,426
    
    
    
    4.00
    %
    
    
    906,296
    
    
    
    4.24
    %Tier 1 leverage capital ratio (to average assets) (1)
    
    
    1,761,722
    
    
    
    6.51
    %
    
    
    1,083,156
    
    
    
    4.00
    %
    
    
    678,566
    
    
    
    2.51
    %December 31, 2004Banknorth Group, Inc.  PredecessorTotal capital (to risk-weighted assets)
    
    $
    2,510,570
    
    
    
    12.13
    %
    
    $
    1,655,428
    
    
    
    8.00
    %
    
    $
    855,142
    
    
    
    4.13
    %Tier 1 capital (to risk-weighted assets)
    
    
    2,060,335
    
    
    
    9.96
    %
    
    
    827,714
    
    
    
    4.00
    %
    
    
    1,232,621
    
    
    
    5.96
    %Tier 1 leverage capital ratio (to average assets)
    
    
    2,060,335
    
    
    
    7.58
    %
    
    
    1,087,190
    
    
    
    4.00
    %
    
    
    973,145
    
    
    
    3.58
    %Banknorth, NATotal capital (to risk-weighted assets)
    
    
    2,387,678
    
    
    
    11.57
    %
    
    
    1,650,894
    
    
    
    8.00
    %
    
    
    736,784
    
    
    
    3.57
    %Tier 1 capital (to risk-weighted assets)
    
    
    1,941,151
    
    
    
    9.41
    %
    
    
    825,447
    
    
    
    4.00
    %
    
    
    1,115,704
    
    
    
    5.41
    %Tier 1 leverage capital ratio (to average assets)
    
    
    1,941,151
    
    
    
    7.16
    %
    
    
    1,084,507
    
    
    
    4.00
    %
    
    
    856,644
    
    
    
    3.16
    %
   (1)
    
    The Tier 1 leverage capital ratio at March 31, 2005 is estimated. Net risk-weighted assets were $21.4 billion for each of TD Banknorth Inc. and Banknorth NA at March
31, 2005 and $21.3 billion and $20.6 billion for each of TD Banknorth Inc. and Banknorth, NA at
December 31, 2004. At March 31, 2005, we operated seven affiliated trusts which have sold capital securities to
unaffiliated parties and invested the proceeds from the sale thereof in junior subordinated
debentures issued by us or a company acquired by us. All of the proceeds from the issuance of the
capital securities and the common securities issued by the trusts are invested in our junior
subordinated debentures, which represent the sole assets of the trusts. The capital securities pay
cumulative cash distributions quarterly at the same rate as the junior subordinated debentures held
by the trusts. We own all of the outstanding common securities of the trusts and effectively are
the guarantor of the obligations of the trusts. The following table provides information on each of our affiliated trusts and the outstanding
capital securities of such trusts and the related junior subordinated debentures issued by us at
March 31, 2005. 47




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Table 18  Affiliated Trusts JuniorIssuance
    
    
    Capital
    
    
    Common
    
    
    Subordinated
    
    
    Stated
    
    
    Maturity
    
    
    Call
    
    
    CallName
    
    Date
    
    
    Securities
    
    
    Securities
    
    
    Debentures (1)
    
    
    Rate
    
    
    Date
    
    
    Date
    
    
    PricePeoples Heritage Capital Trust I
    
    
    1/31/1997
    
    
    $
    61,775
    
    
    $
    3,093
    
    
    $
    64,868
    
    
    
    9.06
    %
    
    
    2/1/2027
    
    
    
    2/1/2007
    
    
    
    104.53
    %Banknorth Capital Trust I
    
    
    5/1/1997
    
    
    
    30,000
    
    
    
    928
    
    
    
    30,928
    
    
    
    10.52
    %
    
    
    5/1/2027
    
    
    
    5/1/2007
    
    
    
    105.26
    %Ipswich Statutory Trust I
    
    
    2/22/2001
    
    
    
    3,500
    
    
    
    109
    
    
    
    3,609
    
    
    
    10.20
    %
    
    
    2/22/2031
    
    
    
    2/22/2011
    
    
    
    105.10
    %CCBT Statutory Trust I
    
    
    7/31/2001
    
    
    
    5,000
    
    
    
    155
    
    
    
    5,155
    
    
    
    5.74
    %
    
    
    7/31/2031
    
    
    
    7/31/2006
    
    
    
    107.50
    %Banknorth Capital Trust II
    
    
    2/22/2002
    
    
    
    200,000
    
    
    
    6,186
    
    
    
    206,186
    
    
    
    8.00
    %
    
    
    4/1/2032
    
    
    
    4/1/2007
    
    
    
    100.00
    %BFD Preferred Capital Trust I
    
    
    7/12/2000
    
    
    
    10,000
    
    
    
    309
    
    
    
    10,309
    
    
    
    11.30
    %
    
    
    7/19/2030
    
    
    
    7/19/2010
    
    
    
    105.65
    %BFD Preferred Capital Trust II
    
    
    9/19/2000
    
    
    
    22,000
    
    
    
    681
    
    
    
    22,681
    
    
    
    10.88
    %
    
    
    10/1/2030
    
    
    
    10/1/2010
    
    
    
    100.00
    %343,736Remaining fair value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,963$
    332,275
    
    
    $
    11,461
    
    
    $
    374,699
   (1)
    
    Amounts include junior subordinated debentures acquired by affiliated trusts from us
with the capital contributed by us in exchange for the common securities of such trusts.
Junior subordinated debentures are equal to capital securities plus common securities. At March 31, 2005, trust preferred securities amounted to 21.2% of TD Banknorth Inc.s Tier 1
capital. Pursuant to FIN 46 ®, the trusts which issued capital securities are no longer
consolidated with TD Banknorth and these securities therefore are no longer considered a minority
interest in a consolidated subsidiary for accounting purposes. However, pursuant to a supervisory
letter sent by the Federal Reserve Board to all bank holding companies in July 2003, TD Banknorth
has continued to include trust preferred securities in its Tier 1 capital. Effective April 11,
2005, the Federal Reserve Board adopted a final regulation which permits bank holding companies to
continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative
and qualitative standards. Under the final regulation, commencing on March 31, 2009, the aggregate
amount of restricted core capital elements (which include qualifying trust preferred securities, as
well as qualifying cumulative perpetual preferred stock and Class B and Class C minority interests
in consolidated subsidiaries, as defined) may not exceed 25% (15% for internationally active bank
holding companies) of a bank holding companys core capital elements (which consist of qualifying
common stockholders equity, qualifying non-cumulative preferred stock and Class A minority
interests in subsidiaries, as defined), net of goodwill less any associated deferred tax liability.
The new test is more restrictive than the current limit for trust preferred securities, which does
not deduct goodwill prior to calculating the 25% limit, and is likely to reduce the ability of some
bank holding companies, particularly those that have completed significant purchase acquisitions,
to include trust preferred securities in Tier 1 capital. In addition, effective March 31, 2009,
the final rule limits the amount of qualifying trust preferred securities and Class C minority
interests in excess of the restricted core capital limit that can be included in Tier 2 capital by
providing that the amount of such elements, together with subordinated debt (other than mandatory
convertible debt) and limited life preferred stock, that may be included in Tier 2 capital is
limited to 50% of Tier 1 capital. The final rule also provides that during the last five years
prior to maturity of the underlying subordinated note or debentures, trust preferred securities
must be treated as limited-life preferred stock, excluded from Tier 1 capital and amortized it out
of Tier 2 capital at the rate of 20% per year. Under the new regulation, until March 31, 2009, the
aggregate amount of trust preferred securities and qualifying cumulative perpetual preferred stock
that a bank holding company may include in Tier 1 capital is limited to 25% of the sum of the
following core capital elements: qualifying common stockholders equity, qualifying noncumulative
and cumulative perpetual preferred stock, qualifying minority interests in the equity accounts of
consolidated subsidiaries and qualifying trust preferred securities. Until the same
date, amounts of qualifying trust preferred securities and qualifying cumulative perpetual
preferred stock in excess of this limit may be included in Tier 2 capital. We believe that the
final regulation will not affect our ability to continue to qualify as well capitalized under
Federal Reserve Board regulations. At March 31, 2005 and December 31, 2004, our consolidated borrowings included $228.8 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 48




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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 28.64% at March 31, 2005 compared to 22.6% at December 31, 2004
and 25.1% at March 31, 2004. The increase from December 31, 2004 was largely due to the effects of
the share buyback program in 2005 and we expect the ratio to drop back below 25% within 12 to 18
months. CRITICAL ACCOUNTING POLICIES Our accounting and reporting policies comply with accounting principles generally accepted in the
United States of America and conform to general practices within the banking industry. The
preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions. The financial position and results of
operations can be affected by these estimates and assumptions, which are integral to understanding
reported results. Management has discussed the development and the selection of critical accounting
policies with the Audit Committee of our board of directors. As discussed in our 2004 Annual
Report on Form 10-K, we have identified the following critical accounting policies: allowance for
loan and lease losses, accounting for acquisitions and review of related goodwill and other
intangible assets, accounting for pension plans and accrued income taxes. We consider these
policies as 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. During the quarter
ended March 31, 2005, we entered into interest rate swaps with a notional amount of $2.2 billion.
Due to the increased levels of derivatives we have entered into and the complex nature of
derivative financial instruments, we have identified accounting for derivatives and hedging
activities as a critical accounting policy, as described below. Accounting for Derivatives and Hedging Activities We use various derivative financial instruments to assist in managing our interest-rate risk and
help our customers manage theirs. These derivative financial instruments are accounted for at fair
value in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. We formally document relationships between hedging instruments and hedged
items, as well as our risk management objective and strategy for undertaking hedge transactions.
We also assess, both at the hedges inception and on an ongoing basis, whether the derivatives used
in hedging transactions are highly effective in offsetting the changes in cash flows or fair value
of hedged items. For both fair value and cash flow hedges, certain assumptions and forecasts
related to the impact of changes in interest rates on the fair value of the derivative and the item
being hedged must be documented at the inception of the hedging relationship to demonstrate that
the derivative instrument will be effective in hedging the designated risk. If these assumptions
or forecasts do not accurately reflect subsequent changes in the fair value of the derivative
instrument or the designated item being hedged, we might be required to discontinue the use of
hedge accounting for that derivative instrument. Once hedge accounting is terminated, all
subsequent changes in the fair value of the derivative instrument must flow through the
consolidated statements of income in other noninterest income, which would result in greater
volatility in our earnings. IMPACT OF NEW ACCOUNTING STANDARDS For information on the impact of new accounting standards, see Note 16 to the unaudited
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 Section 21A of the Securities Exchange Act of 1934, as amended.
Forward-looking statements, which are based on various assumptions (some of which are beyond our
control), may be identified by reference to a future 49




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period or periods, or by the use of
forward-looking terminology, such as may, will, believe, expect, estimate, anticipate,
continue or similar terms or variations on those terms or the negative of those terms.
Forward-looking statements are subject to various factors which could cause actual results to
differ materially from these estimates. These factors include, but are not limited to, changes in
general economic conditions, interest rates, deposit flows, loan demand, competition, legislation
or regulation and accounting principles, policies or guidelines, as well as other economic,
competitive, governmental, regulatory and technological factors affecting our operations. In
addition, 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. We do not undertake, and specifically disclaim any
obligation, to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of events or circumstances after the date of
such statements. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk The information contained in the section captioned Managements Discussion and Analysis 
Asset-Liability Management is incorporated herein by reference. 
 Item 4. Controls and Procedures Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by
this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and regulations and are operating in an effective manner. No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and
15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 
 Part II  Other Information 
 Item 1. Legal Proceedings In the ordinary course of business, TD Banknorth Inc. and its subsidiaries are routinely defendants
in or parties to a number of pending and threatened legal actions, including actions brought on
behalf of various putative classes of claimants. Certain of these actions assert claims for
substantial monetary damages against TD Banknorth Inc. and its subsidiaries. Based on currently
available information, advice of counsel, available insurance coverage and established reserves,
management does not believe that the eventual outcome of pending litigation against TD Banknorth
Inc. and its subsidiaries will have a material adverse effect on the consolidated financial
position, liquidity or results of operations of TD Banknorth Inc. In view of the inherent
difficulty of predicting such matters,
however, there can be no assurance that the outcome of any such action will not have a material
adverse effect on Banknorths consolidated results of operations in any future reporting period. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a)  (b) Not applicable. 50




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(c) The following table sets forth information with respect to any purchase made by or on
behalf of TD Banknorth or any affiliated purchaser, as defined in §240.10b-18(a)(3) under the
Securities Exchange Act of 1934, of shares of TD Banknorth common stock during the indicated
periods. Total Number ofShares Purchased as
    
    
    
    Maximum Number ofTotal Number
    
    
    
    Average
    
    
    
    Part of Publicly
    
    
    
    Shares that May Yet Beof Shares
    
    
    
    Price Paid
    
    
    
    Announced Plans or
    
    
    
    Purchased Under thePeriod
    
    
    Purchased
    
    
    
    Per Share
    
    
    
    Programs
    
    
    
    Plans or Programs (1)January 1-31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,853,200February 1-28, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,300,000March 1-31, 2005
    
    
    
    15,300,000
    
    
    
    $
    31.79
    
    
    
    
    15,300,000
    
    
    
    
    
   (1)
    
    In February 2005, our board of directors approved a program to repurchase up to
15,300,000 shares of TD Banknorth common stock (inclusive of the amount which remained from
previously-authorized share repurchases). 
 Item 3. Defaults Upon Senior Securities  not applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders -  (a)
    A special meeting of shareholders of Banknorth Group, Inc. was held on
February 18, 2005 (Special Meeting).(b)
    Not applicable.(c)
    There were 178,559,086 shares of common stock eligible to be voted in the
Special Meeting and 128,676,825 shares were represented in the meeting by the holders
thereof, which constituted a quorum. There were no broker non-votes for any of the
proposals. The items voted upon at the Special Meeting and vote for each proposal
were as follows:  1. Proposal to approve an Amended and Restated Agreement and Plan of Merger, dated
as of August 25, 2004, among The Toronto-Dominion Bank, Berlin Merger Co., a
wholly-owned subsidiary of The Toronto-Dominion Bank, Banknorth Group, Inc. and
Banknorth Delaware Inc., a wholly-owned subsidiary of Banknorth, and the
transactions contemplated thereby. FOR
    
    
    AGAINST
    
    
    ABSTAIN114,247,422
    
    
    
    13,356,451
    
    
    
    
    1,072,952
  2. Proposal to approve the reincorporation of Banknorth Group, Inc. from Maine to
Delaware as provided by the merger agreement, which, among other things, will result
in the inapplicability of Sections 1109 and 1110 of the Maine Business Corporation
Act, antitakeover provisions which restrict business combinations between Banknorth
Group, Inc. and a significant shareholder and which give Banknorth Group, Inc.s
shareholders the right to demand payment of the fair value of their shares from a
person or entity which becomes a significant shareholder. FOR
    
    
    AGAINST
    
    
    ABSTAIN111,689,496
    
    
    
    16,093,780
    
    
    
    
    893,548
 51




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3. Proposal to approve the governance and other provisions of the post-transaction
certificate of incorporation of Banknorth Delaware Inc. (which will be the successor
to Banknorth Group, Inc. following the completion of the transaction), and the
result of the vote taken was as follows:  A.
    Proposal to approve provisions authorizing the Class B common
stock, which will be held by TD and will facilitate its exercise of control of
the board of directors as majority shareholder of Banknorth Delaware Inc. FOR
    
    
    AGAINST
    
    
    ABSTAIN111,016,695
    
    
    
    16,800,982
    
    
    
    
    859,150
  B.
    Proposal to approve provisions relating to the composition and
powers of the board of directors of Banknorth Delaware Inc. and its committees,
which will facilitate TDs ability to control the board and its committees. FOR
    
    
    AGAINST
    
    
    ABSTAIN108,530,953
    
    
    
    19,338,181
    
    
    
    
    807,691
  C.
    Proposal to approve a provision which permits action by less
than unanimous written consent of shareholders in some circumstances. FOR
    
    
    AGAINST
    
    
    ABSTAIN110,013,291
    
    
    
    17,749,113
    
    
    
    
    914,419
  D.
    Proposal to approve a provision which increases the ownership
threshold required for shareholders to call a special meeting of shareholders. FOR
    
    
    AGAINST
    
    
    ABSTAIN106,824,576
    
    
    
    20,813,907
    
    
    
    
    1,038,341
  E.
    Proposal to approve the elimination of Banknorth Group, Incs
classified board and elect all directors annually. FOR
    
    
    AGAINST
    
    
    ABSTAIN116,038,436
    
    
    
    11,811,463
    
    
    
    
    826,928
  F.
    Proposal to approve the elimination of the fair price
provision in Banknorth Group, Inc.s articles of incorporation. FOR
    
    
    AGAINST
    
    
    ABSTAIN111,391,322
    
    
    
    16,050,650
    
    
    
    
    1,237,223
  G.
    Proposal to approve the elimination of the super-majority
voting requirements in Banknorth Group, Inc.s articles of incorporation
relating to charter amendments. FOR
    
    
    AGAINST
    
    
    ABSTAIN113,318,467
    
    
    
    14,150,430
    
    
    
    
    1,208,724
  H.
    Proposal to approve the elimination of the provision in
Banknorth Group, Inc.s articles of incorporation requiring the board of
directors to consider the interests of non-shareholder constituencies. 52




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FOR
    
    
    AGAINST
    
    
    ABSTAIN113,346,328
    
    
    
    14,218,087
    
    
    
    
    1,112,411
  I.
    Proposal to include a provision in the post-transaction
certificate of incorporation which limits the ability of Banknorth Delaware
Inc. to adopt antitakeover provisions that are inconsistent with TDs rights
under the stockholders agreement. FOR
    
    
    AGAINST
    
    
    ABSTAIN113,196,309
    
    
    
    14,277,325
    
    
    
    
    1,203,303
  J.
    Proposal to include a provision in the post-transaction
certificate of incorporation by which Banknorth Delaware Inc. opts out of
coverage under Section 203 of the Delaware General Corporation Law, a statute
which restricts business combinations between corporations and their
significant shareholders. FOR
    
    
    AGAINST
    
    
    ABSTAIN113,584,507
    
    
    
    13,854,620
    
    
    
    
    1,237,694
  K.
    Proposal to approve the grant to TD, under the stockholders
agreement, of the right to subscribe for additional securities of Banknorth
Delaware Inc. in order to maintain its ownership percentage, in lieu of
providing TD preemptive rights in the post-transaction certificate of
incorporation as permitted by the Delaware General Corporation Law, and the
right to contribute additional capital in return for additional shares of
Banknorth Delaware Inc. common stock. FOR
    
    
    AGAINST
    
    
    ABSTAIN113,100,267
    
    
    
    14,469,578
    
    
    
    
    1,107,080
  L.
    Proposal to approve a provision which allocates corporate
opportunities between Banknorth Delaware Inc. and TD. FOR
    
    
    AGAINST
    
    
    ABSTAIN113,775,704
    
    
    
    13,754,226
    
    
    
    
    1,147,170
 
 Item 5. Other Information  not applicable. 
 Item 6. Exhibits. The following exhibits are filed as part of this report.  Exhibit 31.1 Certification of Chief Executive Officer under Rules 13a-14 and 15d-14.Exhibit 31.2 Certification of Chief Financial Officer under Rules 13a-14 and 15d-14.Exhibit 32.1 Certification of Chief Executive Officer under 18 U.S.C. § 1350.Exhibit 32.2 Certification of Chief Financial Officer under 18 U.S.C. § 1350. 53




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TD BANKNORTH INC.Date: May 16, 2005
    
    By:
    
    /s/ William J. RyanWilliam J. RyanChairman, President andChief Executive OfficerDate: May 16, 2005
    
    By:
    
    /s/ Stephen J. BoyleStephen J. BoyleExecutive Vice President andChief Financial Officer(principal financial and accounting officer)
 54




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##### Table of Contents



EXHIBIT INDEX Exhibit 31.1 Certification of Chief Executive Officer under Rules 13a-14 and 15d-14. Exhibit 31.2 Certification of Chief Financial Officer under Rules 13a-14 and 15d-14. Exhibit 32.1 Certification of Chief Executive Officer under 18 U.S.C. § 1350. Exhibit 32.2 Certification of Chief Financial Officer under 18 U.S.C. § 1350. 55