<PAGE>   1
                                    FORM 10-Q
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

             [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 2001

                                       OR

             [   ]  TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                       OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number: 0-16947

                              BANKNORTH GROUP, INC.
             (Exact name of Registrant as specified in its charter)

                          MAINE                               01-0437984
               (State or other jurisdiction of            (I.R.S. Employer
               incorporation or organization)             Identification No.)

               TWO PORTLAND SQUARE, PORTLAND, MAINE              04112
               (Address of principal executive offices)        (Zip Code)

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

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 [ x ]    No  [   ]

The number of shares outstanding of the Registrant's common stock and related
stock purchase rights as of July 31, 2001 is:

Common stock, par value $.01 per share                         137,100,669
             (Class)                                          (Outstanding)
<PAGE>   2
                                      INDEX

                     BANKNORTH GROUP, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
PART I.        FINANCIAL INFORMATION                                                     PAGE
<S>            <C>                                                                       <C>
               Item 1.   Financial Statements (unaudited)

                         Consolidated Balance Sheets
                         June 30, 2001 and December 31, 2000                               3

                         Consolidated Statements of Income -
                         Three and six months months ended
                         June 30, 2001 and 2000                                            4

                         Consolidated Statements of Changes in Shareholders' Equity -
                         Six months ended June 30, 2001 and 2000                           5

                         Consolidated Statements of Cash Flows -
                         Six months ended June 30, 2001 and 2000                           6

                         Notes to Consolidated Financial Statements                        7

               Item 2.     Management's Discussion and Analysis of Financial
                             Condition and Results of Operations                           9

               Item 3.     Quantitative and Qualitative Disclosures about Market Risk     32

PART II.       OTHER INFORMATION

               Item 1.   Legal proceedings                                                32

               Item 2.   Changes in securities and use of proceeds                        32

               Item 3.   Defaults upon senior securities                                  32

               Item 4.   Submission of matters to a vote of security holders              32

               Item 5    Other information                                                32

               Item 6    Exhibits and reports on Form 8-K                                 33

               Signatures                                                                 33

</TABLE>


                                       2
<PAGE>   3
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                          June 30, 2001      December 31, 2000
                                                                                        ----------------     -----------------
ASSETS                                                                                     (Unaudited)
<S>                                                                                      <C>                  <C>
Cash and due from banks                                                                  $    480,760         $    515,934
Federal funds sold and other short term investments                                            15,472               29,058
Securities available for sale, at market value                                              5,437,061            5,425,111
Securities held to maturity (fair value of $409,939 and $457,110 at June 30, 2001
   and December 31, 2000, respectively)                                                       405,946              455,547
Loans held for sale                                                                            75,179               51,131
Loans and leases:
   Residential real estate mortgages                                                        2,081,644            2,248,714
   Commercial real estate mortgages                                                         3,083,216            2,955,163
   Commercial business loans and leases                                                     2,395,084            2,308,904
   Consumer loans and leases                                                                3,322,514            3,332,881
                                                                                         ------------         ------------
                                                                                           10,882,458           10,845,662
   Less:  Allowance for loan and lease losses                                                 155,303              153,550
                                                                                         ------------         ------------
              Net loans and leases                                                         10,727,155           10,692,112
                                                                                         ------------         ------------
Premises and equipment                                                                        203,055              201,192
Goodwill and other intangibles                                                                174,888              185,520
Mortgage servicing rights                                                                         495               23,225
Bank-owned life insurance                                                                     311,919              306,411
Other assets                                                                                  310,595              348,569
                                                                                         ------------         ------------
                                                                                         $ 18,142,525         $ 18,233,810
                                                                                         ============         ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
   Savings accounts                                                                      $  1,405,620         $  1,386,286
   Money market access and NOW accounts                                                     4,106,389            3,975,318
   Certificates of deposit                                                                  4,454,210            4,461,983
   Brokered deposits                                                                          167,847              169,069
   Noninterest-bearing deposits                                                             2,293,453            2,114,600
                                                                                         ------------         ------------
        Total deposits                                                                     12,427,519           12,107,256
Federal funds purchased and securities sold under repurchase agreements                     1,207,043            1,138,629
Borrowings from the Federal Home Loan Bank                                                  2,416,674            3,348,242
Other borrowings                                                                              240,140               73,744
Subordinated long-term debt                                                                   200,000                 --
Other liabilities                                                                             191,712              136,307
                                                                                         ------------         ------------
        Total liabilities                                                                  16,683,088           16,804,178
                                                                                         ------------         ------------

Company obligated, mandatory redeemable securities of subsidiary trusts
        holding solely parent junior subordinated debentures                                   98,775               98,775

Shareholders' 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
       149,584,005 shares issued in 2001 and 149,584,159 shares issued in 2000)                 1,496                1,496
Paid-in capital                                                                               618,307              617,234
Retained earnings                                                                             973,957              897,214
Unearned compensation                                                                          (1,186)              (1,354)
Accumulated other comprehensive income (loss)                                                    (190)             (34,487)
Treasury stock, at cost (12,442,912 shares in 2001 and 8,339,556 shares in 2000)             (231,722)            (149,246)
                                                                                         ------------         ------------
      Total shareholders' equity                                                            1,360,662            1,330,857
                                                                                         ------------         ------------
                                                                                         $ 18,142,525         $ 18,233,810
                                                                                         ============         ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements



                                       3
<PAGE>   4
   BANKNORTH GROUP, INC. AND SUBSIDIARIES
   CONSOLIDATED STATEMENTS OF INCOME
   (In thousands, except per share data) (Unaudited)

<TABLE>
<CAPTION>
                                                               Three Months Ended                     Six Months Ended
                                                                    June 30,                              June 30,
                                                            --------------------------         --------------------------
                                                              2001             2000              2001               2000
                                                            ---------        ---------         ---------         ---------
Interest and dividend income:
<S>                                                         <C>              <C>               <C>               <C>
   Interest on loans and leases                             $ 221,507        $ 220,383         $ 450,330         $ 430,964
   Interest and dividends on securities                        95,128          110,671           192,849           225,483
                                                            ---------        ---------         ---------         ---------
      Total interest and dividend income                      316,635          331,054           643,179           656,447

Interest expense:
   Interest on deposits                                        95,989          101,122           200,227           195,859
   Interest on borrowed funds                                  52,581           76,767           116,573           152,250
                                                            ---------        ---------         ---------         ---------
      Total interest expense                                  148,570          177,889           316,800           348,109

      Net interest income                                     168,065          153,165           326,379           308,338
Provision for loan and lease losses                             9,311            5,849            16,450            10,917
                                                            ---------        ---------         ---------         ---------
      Net interest income after provision
              for loan and lease losses                       158,754          147,316           309,929           297,421

Noninterest income:
   Deposit services                                            18,401           16,781            35,947            32,336
   Mortgage banking services                                    1,776            4,984             5,010             8,641
   Insurance commissions                                        9,241            4,694            19,209             9,973
   Trust services                                               8,703            8,767            17,490            17,427
   Investment advisory services                                 1,760            1,618             3,458             3,436
   Bank-owned life insurance income                             4,891            4,165             9,198             9,265
   Merchant and electronic banking income, net                  7,971            7,879            14,462            14,284
   Net securities gains                                            45               38               803                25
   Losses on securities restructuring                            --            (15,895)             --             (15,895)
   Other noninterest income                                     4,809            7,856            10,777            11,563
                                                            ---------        ---------         ---------         ---------
                                                               57,597           40,887           116,354            91,055
Noninterest expenses:
   Salaries and employee benefits                              62,856           57,425           124,550           117,286
   Data processing                                              8,917            9,269            17,878            18,036
   Occupancy                                                   11,070            9,928            22,882            21,032
   Equipment                                                    8,746            7,791            16,907            15,566
   Distributions on securities of subsidiary trusts             2,347            2,347             4,694             4,694
   Amortization of goodwill and other intangibles               5,392            5,200            10,816            10,401
   Special charges                                               --             37,271             5,608            42,608
   Other noninterest expenses                                  24,864           25,770            48,063            50,725
                                                            ---------        ---------         ---------         ---------
                                                              124,192          155,001           251,398           280,348

Income before income tax expense                               92,159           33,202           174,885           108,128
Applicable income tax expense                                  32,266           14,323            59,608            39,349
                                                            ---------        ---------         ---------         ---------
      Net income before cumulative effect of
          change in accounting principle                       59,893           18,879           115,277            68,779

Cumulative effect of change in accounting principle,
          net of tax                                             --               --                (290)             --
                                                            ---------        ---------         ---------         ---------
      Net income                                            $  59,893        $  18,879         $ 114,987         $  68,779
                                                            =========        =========         =========         =========


Weighted average shares outstanding:
      Basic                                                   137,659          144,280           139,236           144,363
      Diluted                                                 138,901          145,167           140,461           145,212
Earnings per share:
      Basic                                                 $    0.44        $    0.13         $    0.83         $    0.48
      Diluted                                                    0.43             0.13              0.82              0.47
</TABLE>



See accompanying Notes to Consolidated Financial Statements.


                                       4
<PAGE>   5
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>

                                                                                                               Unearned
                                                           Par           Paid-in           Retained            Compen-
                                                          Value          Capital           Earnings            sation
                                                    ------------------------------------------------------------------
<S>                                                 <C>               <C>               <C>               <C>
Balances at December 31, 2000                       $     1,496       $   617,234       $   897,214       ($    1,354)

Net income                                                   --                --           114,987                --
Unrealized gain on securities, net of
   reclassification adjustment                               --                --                --                --
Unrealized gain on cash flow hedges                          --                --                --                --

        Comprehensive income


Common stock issued for employee benefit plans               --               297            (2,156)               --

Treasury stock purchased                                     --                --                --                --

Decrease in unearned compensation                            --               790                --               168

Issuance and distribution of restricted stock                --               (12)              (48)               --

Payment of fractional shares                                 --                (2)               --                --

Cash dividends                                               --                --           (36,040)               --
                                                    -----------------------------------------------------------------


Balances at June 30, 2001                           $     1,496       $   618,307       $   973,957       ($    1,186)
                                                    =================================================================


Balances at December 31, 1999                       $     1,496       $   617,523       $   787,238       ($    2,751)

Net income                                                   --                --            68,779                --
Unrealized losses on securities, net of
   reclassification adjustment                               --                --                --                --

        Comprehensive income


Common stock issued for employee benefit plans               --                --            (3,397)               --

Cancellation of treasury shares at acquisition               (1)           (2,206)               --                --

Treasury stock purchased                                     --                --                --                --

Decrease in unearned compensation                            --               472                --               237

Issuance and distribution of restricted stock                --                71                --                --

Amortization of restricted stock awards                      --              (390)               --               992

Cash dividends                                               --                --           (34,627)               --
                                                    -----------------------------------------------------------------


Balances at June 30, 2000                           $     1,495       $   615,470       $   817,993       ($    1,522)
                                                    =================================================================
</TABLE>



<TABLE>
<CAPTION>
                                                    Accumulated
                                                       Other
                                                    Comprehensive         Treasury
                                                    Income (Loss)           Stock                 Total
                                                    ---------------------------------------------------
<S>                                                 <C>               <C>               <C>
Balances at December 31, 2000                       ($   34,487)      ($  149,246)      $ 1,330,857

Net income                                                   --                --           114,987
Unrealized gain on securities, net of
   reclassification adjustment                           33,978                --            33,978
Unrealized gain on cash flow hedges                         319                --               319
                                                                                         ----------
        Comprehensive income                                                                149,284
                                                                                         ----------

Common stock issued for employee benefit plans               --            12,302            10,443

Treasury stock purchased                                     --           (94,938)           (94,938)

Decrease in unearned compensation                            --                --               958

Issuance and distribution of restricted stock                --               160               100

Payment of fractional shares                                 --                --                (2)

Cash dividends                                               --                --           (36,040)
                                                    -----------------------------------------------


Balances at June 30, 2001                           ($      190)      ($  231,722)      $ 1,360,662
                                                    ===============================================


Balances at December 31, 1999                       ($  125,394)      ($   85,838)      $ 1,192,274

Net income                                                   --                --            68,779
Unrealized losses on securities, net of
   reclassification adjustment                              788                --               788
                                                                                        -----------
        Comprehensive income                                                                 69,567
                                                                                        -----------
Common stock issued for employee benefit plans               --             7,231             3,834

Cancellation of treasury shares at acquisition               --             2,207                --

Treasury stock purchased                                     --           (12,343)          (12,343)

Decrease in unearned compensation                            --                --               709

Issuance and distribution of restricted stock                --                --                71

Amortization of restricted stock awards                      --                --               602

Cash dividends                                               --                --           (34,627)
                                                    -----------------------------------------------

Balances at June 30, 2000                           ($  124,606)      ($   88,743)      $ 1,220,087
                                                    ===============================================
</TABLE>




See accompanying Notes to Consolidated Financial Statements.





                                       5
<PAGE>   6
     BANKNORTH GROUP, INC. AND SUBSIDIARIES
     CONSOLIDATED STATEMENTS OF CASH FLOWS
     (In thousands)
     (Unaudited)

<TABLE>
<CAPTION>
                                                                                                  Six Months Ended June 30,
                                                                                                  -------------------------
                                                                                                     2001              2000
                                                                                                     ----              ----
<S>                                                                                            <C>               <C>
Cash flows from operating activities:
   Net income                                                                                  $   114,987       $    68,779
   Adjustments to reconcile net income to net cash provided by operating activities:
           Provision for loan and lease losses                                                      16,450            10,917
           Depreciation                                                                             14,669            13,646
           Amortization of goodwill and other intangibles                                           10,816            10,401
           Provision for deferred tax expense                                                          363           (11,374)
           ESOP and restricted stock expense                                                           958               709
           Issuance of restricted stock units                                                          100               673
           Net (gains) losses realized from sales of securities and consumer loans                  (1,571)           11,135
           Net (gains) losses realized from sales of loans held for sale (a component  of
                 mortgage banking services)                                                         (3,602)              192
           Earnings from bank owned life insurance                                                  (9,198)           (9,265)
           Net decrease in mortgage servicing rights                                                22,730             8,589
           Proceeds from sales of loans held for sale                                              437,241            71,499
           Residential loans originated for sale                                                  (457,687)           (5,914)
           Net decrease (increase) in interest and dividends receivable and other assets            19,449            (6,329)
           Net increase (decrease) in other liabilities                                             55,405              (386)
                                                                                               -----------       -----------
Net cash provided by operating activities                                                          221,110           160,130
                                                                                               -----------       -----------

Cash flows from investing activities:
   Proceeds from sales of securities available for sale                                            280,742           106,469
   Proceeds from maturities and principal repayments of securities available for sale              922,121           473,417
   Purchases of securities available for sale                                                   (1,161,735)         (185,832)
   Proceeds from maturities and principal repayments of securities held to maturity                 49,601            55,500
   Net (increase) decrease in loans and leases                                                     (90,028)         (708,531)
   Proceeds from sale of loans                                                                      39,303            34,234
   Net additions to premises and equipment                                                         (16,532)           (9,536)
   Proceeds from death claim on bank owned life insurance                                            3,690             1,571
                                                                                               -----------       -----------
Net cash provided (used) by investing activities                                                    27,162          (232,708)
                                                                                               -----------       -----------

Cash flows from financing activities:
   Net (decrease) increase in deposits                                                             320,263           234,043
   Net increase (decrease) in securities sold under repurchase agreements                          132,417          (308,682)
   Proceeds from Federal Home Loan Bank borrowings                                               5,152,421         6,799,300
   Payments on Federal Home Loan Bank borrowings                                                (6,083,989)       (6,835,766)
   Net increase (decrease) in other borrowings                                                     166,396            69,040
   Issuance of subordinated long-term debt                                                         200,000                --
   Issuance of stock                                                                                10,441             3,834
   Purchase of treasury stock                                                                      (94,938)          (12,343)
   Dividends paid                                                                                  (36,040)          (34,627)
                                                                                               -----------       -----------
Net cash provided (used) by financing activities                                                  (233,029)          (85,201)
                                                                                               -----------       -----------

Increase (decrease) in cash and cash equivalents                                                    15,243          (157,779)
   Cash and cash equivalents at beginning of period                                                392,989           776,395
                                                                                               -----------       -----------
   Cash and cash equivalents at end of period                                                  $   408,232       $   618,616
                                                                                               ===========       ===========
</TABLE>


For the six months ended June 30, 2001 and 2000, interest of $324,930 and
     $349,239 and income taxes of $41,299 and $54,249 were paid, respectively.

See accompanying Notes to Consolidated Financial Statements.





                                       6
<PAGE>   7
                     BANKNORTH GROUP, INC. AND SUBSIDIARIES
                                  June 30, 2001
                      (In thousands, except per share data)
                                   (Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and predominant
practices within the banking industry. The Company has not changed its
accounting and reporting policies from those disclosed in its 2000 Annual
Report, except for the adoption of Statement of Accounting Standards No. 133, as
discussed in Note 4.

In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations and other data for the
three months and six months ended June 30, 2001 are not necessarily indicative
of the results that may be expected for any other interim period or the entire
year ending December 31, 2001. Certain amounts in the prior periods have been
reclassified to conform to the current presentation.

NOTE 2 - OTHER COMPREHENSIVE INCOME (LOSS)

The components of total comprehensive income for the Company are net income,
unrealized gains (losses) on securities available for sale and losses on hedges,
net of tax. The following is a reconciliation of comprehensive income for the
six months ended June 30, 2001 and 2000.


<TABLE>
<CAPTION>
                                                                                         Six Months Ended
                                                                                             June 30,
                                                                                    ------------------------
                                                                                       2001            2000
                                                                                    ---------       ---------


<S>                                                                                 <C>             <C>
Net income                                                                          $ 114,987       $  68,779
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities:
               Unrealized holding gains (losses) arising during the period             34,500          (9,528)
  Less:  reclassification adjustment for gains (losses) included in net income            522         (10,316)
                                                                                    ---------       ---------
                                                                                       33,978             788
                                                                                    ---------       ---------
Unrealized gains (losses) on cash flow hedges, net of tax
               Unrealized holding losses arising during the period                       (224)             --
  Less:  reclassification adjustment for losses included in net income                   (543)             --
                                                                                    ---------       ---------
                                                                                          319              --
                                                                                    ---------       ---------

Other comprehensive income, net                                                        34,297             788
                                                                                    ---------       ---------
Comprehensive income                                                                $ 149,284       $  69,567
                                                                                    =========       =========
</TABLE>


NOTE 3 - EARNINGS PER SHARE

The computations of basic and diluted net income per share and weighted average
shares outstanding follow:

<TABLE>
<CAPTION>
                                          Three Months Ended           Six Months Ended
                                                June 30,                    June 30,
                                         -----------------------      --------------------
                                           2001          2000          2001          2000
                                         --------      --------      --------      --------
<S>                                      <C>           <C>           <C>           <C>
Net income                               $ 59,893      $ 18,879      $114,987      $ 68,779
                                         ========      ========      ========      ========
Weighted average shares outstanding
  Basic                                   137,659       144,280       139,236       144,363
  Effect of dilutive stock options          1,242           887         1,225           849
                                         --------      --------      --------      --------
  Diluted                                 138,901       145,167       140,461       145,212
                                         ========      ========      ========      ========
Net income per share:
  Basic                                  $   0.44      $   0.13      $   0.83      $   0.48
  Diluted                                    0.43          0.13          0.82          0.47
</TABLE>


                                       7
<PAGE>   8
NOTE 4 -  ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which sets accounting and reporting
standards for derivative instruments and hedging activities. The Statement, as
amended by SFAS No. 138, requires the Company to recognize all derivatives on
the balance sheet at fair value. The Company adopted the Statement effective
January 1, 2001 and recognized an after-tax loss from cumulative effect of
adoption of $290 thousand.

Starting January 1, 2001, the Company recognizes all derivatives on the balance
sheet at fair value. On the date the derivative is entered into, the Company
designates the derivative as either a hedge of a forecasted transaction or of
the variability of cash flows to be received or paid related to a recognized
asset or liability ("cash flow hedge"), a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment ("fair value
hedge") or a "held for trading" ("trading instrument") instrument. The Company
formally documents relationships between hedging instruments and hedged items,
as well as its risk management objective and strategy for undertaking various
hedge transactions. The Company also assesses, both at the hedge's inception and
on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows or fair
values of hedged items.

Changes in fair value of a derivative that is highly effective and that
qualifies as a cash flow hedge are recorded in other comprehensive income and
are reclassified into earnings when the forecasted transaction affects earnings.
Changes in fair value of a derivative that is highly effective and that
qualifies as a fair value hedge are recognized in earnings in the period of the
change along with the gain or loss on the hedged asset attributable to the risk
being hedged. Changes in fair value of derivative trading instruments are
reported in current-period earnings. The Company discontinues hedge accounting
when it is determined that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of the hedge item, because it is
unlikely that the forecasted transaction will occur, or management determines
that the designation of the derivative as a hedging instrument is no longer
appropriate.

NOTE 5  PENDING ACQUISITIONS

On June 11, 2001, the Company entered into agreements to acquire Andover
Bancorp, Inc. ("Andover"), a multi-bank holding company headquartered in
Andover, Massachusetts, and MetroWest Bank ("MetroWest"), a
Massachusetts-chartered savings bank headquartered in Framingham, Massachusetts.
Andover had total assets of $1.8 billion and total shareholders' equity of
$163.3 million at June 30, 2001. Under terms of the agreement with Andover,
shareholders of Andover will receive 2.27 shares of the Company's common stock
(subject to adjustment as provided in the agreement) for each share of Banknorth
common stock, plus cash in lieu of any fractional share interests. Based on the
exchange ratio, the Company will issue a maximum of approximately 16.7 million
shares of Company common stock in connection with the acquisition of Andover
(inclusive of shares which are issuable upon exercise or conversion of
outstanding Andover derivative securities). In conjuction with this transaction,
the Company announced its intention to repurchase approximately one-half of the
shares to be issued during the next year. MetroWest had total assets of $935.8
million and total shareholders' equity of $64.0 million at June 30, 2001. The
agreement provides, among other things, that as a result of the acquisition,
each outstanding share of common stock of MetroWest (subject to certain
exceptions) will be converted into the right to receive $11.50, without
interest. The aggregate purchase price for this acquisition is approximately
$166 million. Each agreement is subject to the approval of the acquired
company's shareholders, the receipt of regulatory approvals and other customary
closing conditions. The acquisitions will be accounted for as purchases in
accordance with Financial Accounting Standards Board No. 141, "Business
Combinations" and are expected to be completed in the fourth quarter of 2001.



                                       8
<PAGE>   9
BANKNORTH GROUP, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS

SUMMARY

Banknorth Group, Inc. (the "Company") reported consolidated net income of $59.9
million, or $0.43 per diluted share, for the second quarter of 2001 as compared
with $18.9 million, or $0.13 per diluted share, for the second quarter of 2000.
On an operating basis, which excludes special items (which consist of merger and
other special charges and losses on securities restructuring), the Company
earned $59.9 million and $57.7 million or $0.43 and $0.40 per diluted share for
the quarters ended June 30, 2001 and 2000, respectively. Operating cash diluted
earnings per share, which excludes special items and amortization of goodwill
and other intangible assets, was $0.46 and $0.43 for the quarters ended June 30,
2001 and 2000, respectively.

The Company's operating return on average equity ("ROE") and operating return on
average assets ("ROA"), were 17.85% and 1.32%, respectively, for the second
quarter ended June 30, 2001. Operating ROE and operating ROA were 19.82% and
1.27%, respectively, for the quarter ended June 30, 2000.

Operating results for the second quarter of 2001 improved over the second
quarter of 2000 due to a 10% increase in net interest income, which was
partially offset by expense growth of 5% and increased provisions for loan and
lease losses. Net interest income increased $14.9 million and the net interest
margin increased by 36 basis points. This was due largely to a decline in the
rates paid on interest-bearing liabilities, as well as a change in the mix in
earning assets, as loan growth replaced investment securities. Noninterest
income increased by $815 thousand, excluding losses on securities restructuring,
primarily due to a $1.6 million increase in deposit services income and a $4.5
million increase in insurance commissions, which were partially offset by a
decrease in mortgage banking income of $3.2 million. The increase in noninterest
expenses for the second quarter of 2001 was primarily due to an increase in
salaries and benefits expense of $5.4 million or 9% and an increase in occupancy
expense of $1.1 million or 12%, which were partially offset by a decrease of
$906 thousand in other noninterest expense. The efficiency ratio (noninterest
expense excluding distributions on securities of subsidiary trusts and special
charges, as a percentage of net interest income and noninterest income,
excluding net securities gains and losses) was 54.01% in the second quarter of
2001 compared to 54.97% in the comparable period last year. Selected quarterly
data, ratios and per share data, both as reported and on an operating basis, are
provided in Table 1.

The Company reported consolidated net income of $115.0 million, or $0.82 per
diluted share, for the six months ended June 30, 2001, as compared with $68.8
million, or $0.47 per diluted share, for the six months ended June 30, 2000.
Operating income for the first six months of 2001 was $118.9 million, or $0.85
per diluted share, and operating ROE and operating ROA for this period were
17.81% and 1.32%, respectively. The Company's operating income for the first six
months of 2000 was $111.2 million, or $0.77 per diluted share, and operating ROE
and operating ROA were 18.97% and 1.22%, respectively. The six months ended June
30, 2001 and 2000 included $5.6 million ($3.9 million net of tax) and $58.5
million ($42.4 million net of tax) of non-operating items (consisting of special
charges and losses on restructuring the investment portfolio), respectively.
(See Table 5 for more information related to special charges.) Operating results
for the first six months of 2001 represent a 10% increase in diluted earnings
per share from the comparable period last year. Net interest income for the six
months ended June 30, 2001 increased 6% from the same period last year primarily
due to a 27 basis point increase in net interest margin. Net interest income
also benefited from accelerated accretion of discounts on certain U. S.
Government Agency callable securities that were called prior to maturity.
Noninterest income, excluding losses on securities restructuring, for the six
months ended June 30, 2001 increased 9% compared to the first six months last
year. Noninterest expense, excluding special charges, increased 3% for the six
months ended June 30, 2001 compared to the same period last year primarily due
to increases in salaries and benefits and occupancy expenses.



                                       9
<PAGE>   10
TABLE 1 - SELECTED QUARTERLY DATA
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                        2001             2001               2000
                                                                       Second            First             Fourth
                                                                       ------            -----             ------
<S>                                                                  <C>               <C>              <C>
Net interest income                                                  $   168,065       $ 158,314        $ 153,960
Provision for loan and lease losses                                        9,311           7,138            6,651
                                                                     -----------       ---------        ---------
Net interest income after loan and lease loss provision                  158,754         151,176          147,309

Noninterest income (1)                                                    57,552          57,997           63,630
Net securities gains (losses)                                                 45             759              437
Noninterest expenses (excluding special charges) (2)                     124,192         121,598          119,473
Special charges (2)                                                           --           5,608              (15)
                                                                     -----------       ---------        ---------
Income before income taxes                                                92,159          82,726           91,918
Income tax expense                                                        32,266          27,343           29,554
                                                                     -----------       ---------        ---------
Net income before cumulative effect of
   change in accounting principle                                         59,893          55,383           62,364
Cumulative effect of change in accounting principle, net of tax               --            (290)              --
                                                                     -----------       ---------        ---------
Net income                                                           $    59,893       $  55,093        $  62,364
                                                                     ===========       =========        =========

Earnings per share:
Basic                                                                $      0.44       $    0.39        $    0.43
Diluted                                                                     0.43            0.39             0.43

Operating earnings per share (excluding special items) (2):
Basic                                                                $      0.44       $    0.42        $    0.43
Diluted                                                                     0.43            0.42             0.43

Return on average assets (3)                                                1.32%           1.24%            1.36%
Return on average equity (3)                                               17.85%          16.59%           19.16%

Operating ratios:
Return on average assets (excluding special items) (3) (4)                  1.32%           1.32%            1.35%
Return on average equity (excluding special items) (3) (4)                 17.85%          17.78%           19.15%
Net interest margin                                                         4.03%           3.84%            3.70%
Noninterest income as a percent of total income (1)                        25.51%          26.81%           29.24%
Efficiency ratio (5)                                                       54.01%          55.13%           53.83%

Special items, net of related income tax effect (4)                  $         0       $   3,941        ($     38)
</TABLE>

<TABLE>
<CAPTION>
                                                                       2000             2000             2000
                                                                       Third           Second            First
                                                                       -----           ------            -----
<S>                                                                  <C>              <C>              <C>
Net interest income                                                  $ 150,713        $ 153,165        $ 155,173
Provision for loan and lease losses                                      6,250            5,849            5,068
                                                                     ---------        ---------        ---------
Net interest income after loan and lease loss provision                144,463          147,316          150,105

Noninterest income (1)                                                  56,090           56,744           50,181
Net securities gains (losses)                                              (23)         (15,857)             (13)
Noninterest expenses (excluding special charges) (2)                   111,635          117,730          120,010
Special charges (2)                                                        414           37,271            5,337
                                                                     ---------        ---------        ---------
Income before income taxes                                              88,481           33,202           74,926
Income tax expense                                                      27,890           14,323           25,026
                                                                     ---------        ---------        ---------
Net income before cumulative effect of
   change in accounting principle                                       60,591           18,879           49,900
Cumulative effect of change in accounting principle, net of tax             --               --               --
                                                                     ---------        ---------        ---------
Net income                                                           $  60,591        $  18,879        $  49,900
                                                                     =========        =========        =========

Earnings per share:
Basic                                                                $    0.42        $    0.13        $    0.35
Diluted                                                                   0.42             0.13             0.34


Operating earnings per share (excluding special items) (2):
Basic                                                                $    0.42        $    0.40        $    0.37
Diluted                                                                   0.42             0.40             0.37


Return on average assets (3)                                              1.31%            0.41%            1.10%
Return on average equity (3)                                             19.31%            6.48%           16.75%


Operating ratios:
Return on average assets (excluding special items) (3) (4)                1.32%            1.27%            1.17%
Return on average equity (excluding special items) (3) (4)               19.49%           19.82%           17.96%
Net interest margin                                                       3.57%            3.67%            3.70%
Noninterest income as a percent of total income (1)                      27.12%           27.03%           24.44%
Efficiency ratio (5)                                                     52.85%           54.97%           57.30%


Special items, net of related income tax effect (4)                  $     545        $  38,870        $   3,577
</TABLE>

-------------------------------------------------------

(1)      Excludes securities transactions.
(2)      Special charges consist of merger charges, asset write-downs and branch
         closing costs.
(3)      Annualized.
(4)      Special items consists of (i) special charges and (ii) losses on
         restructuring the investment portfolio.
(5)      Represents noninterest expenses, excluding distributions on securities
         of subsidiary trusts and special items, as a percentage of net interest
         income and noninterest income, excluding net securities gains and
         losses.


                                       10
<PAGE>   11
RESULTS OF OPERATIONS

NET INTEREST INCOME

The Company's fully-taxable equivalent net interest income for the second
quarter of 2001 increased $15.0 million compared to the second quarter of 2000
while the net interest margin increased from 3.67% to 4.03% in the comparable
periods. These increases were primarily due to decreases in the volume of and
rate paid on interest-bearing liabilities and, to a lesser extent, an increase
in the average amount of loans outstanding. Also benefiting net interest margin
was a $226 million increase in noninterest-bearing deposits. Average loans as a
percent of average earning assets increased to 65% at June 30, 2001, as compared
to 61% at June 30, 2000. Growth in average commercial business loans (9%),
average consumer loans (8%) and average commercial real estate mortgages (8%)
contributed to this increase. Average securities decreased for the three months
ended June 30, 2001, as compared to the comparable period in the prior year, due
primarily to the repositioning of the securities portfolio in the second quarter
of 2000 and continued runoff of mortgage-backed securities.


The Company's fully-taxable equivalent net interest income for the six months
ended June 30, 2001 increased $18.3 million compared to the six months ended
June 30, 2000 primarily for the same reasons as the increase during the three
months ended June 30, 2001, as discussed above. The net interest margin
increased from 3.67% for the six months ended June 30, 2000 to 3.94% for the six
months ended June 30, 2001 primarily due to a 24 basis point decrease in rates
paid on interest-bearing liabilities. Average net earning assets increased
$499.2 million for the six months ended June 30, 2001 compared to the six months
ended June 30, 2000 primarily due to an increase in non-interest-bearing
deposits and equity. Table 2 shows quarterly average balances, net interest
income by category and rates for each of the quarters in 2001 and 2000 and for
the six months periods ended June 30, 2001 and 2000. Table 3 shows the changes
in fully-taxable equivalent net interest income by category due to changes in
rate and volume. See also "Interest Rate Risk and Asset Liability Management"
below.

The following table 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 (net
interest income divided by average interest-earning assets). For purposes of the
tables and the following discussion, (i) income from interest-earning assets and
net interest income is presented on a fully-taxable equivalent basis primarily
by adjusting income and yields earned on tax-exempt interest received on loans
to qualifying borrowers and on certain of the Company's 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.



                                       11
<PAGE>   12
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                         2001 Second Quarter                        2001 First Quarter
                                                         -------------------                        ------------------
                                                                                Yield/                                  Yield/
                                                Average Balance     Interest    Rate (1)  Average Balance   Interest    Rate (1)
                                                ---------------     --------    --------  ---------------   --------    --------
<S>                                             <C>                 <C>        <C>        <C>              <C>          <C>
Loans and leases (2):
  Residential real estate mortgages                  $2,206,518      $40,866   7.41%       $2,285,219      $43,118      7.55%
  Commercial real estate mortgages                    3,036,744       64,949    8.58        2,964,053       64,658       8.85
  Commercial business loans and leases                2,322,572       46,509    8.03        2,304,625       49,439       8.70
  Consumer loans and leases                           3,342,216       70,166    8.42        3,373,971       72,604       8.73
                                                     ----------      -------               ----------      -------
     Total loans and leases                          10,908,050      222,490    8.18       10,927,868      229,819       8.51
Securities                                            5,931,974       95,241    6.42        5,819,082       97,939       6.74
Federal funds sold and other
short-term investments                                   48,148          476    3.97           20,946          296       5.73
                                                     ----------      -------               ----------      -------
   Total earning assets                              16,888,172      318,207    7.55       16,767,896      328,054       7.89
                                                                     -------                               -------
Noninterest-earning assets                            1,264,302                             1,307,350
                                                    -----------                           -----------
   Total assets                                     $18,152,474                           $18,075,246
                                                    ===========                           ===========

Interest-bearing deposits:
  Regular savings                                    $1,405,540       $4,898    1.40       $1,390,834       $5,561       1.62
  NOW and money market accounts                       4,059,390       28,525    2.82        3,969,403       32,539       3.32
  Certificates of deposit                             4,484,684       60,086    5.37        4,513,295       63,502       5.71
  Brokered deposits                                     167,419        2,480    5.94          165,065        2,637       6.48
                                                     ----------      -------               ----------      -------
    Total interest-bearing deposits                  10,117,033       95,989    3.81       10,038,597      104,239       4.21
Borrowed funds                                        4,329,605       52,581    4.82        4,474,160       63,992       5.74
                                                     ----------      -------               ----------      -------
    Total interest-bearing liabilities               14,446,638      148,570    4.11       14,512,757      168,231       4.68
                                                                     -------                               -------
Non-interest bearing deposits                         2,101,326                             1,966,919
Other liabilities                                       159,955                               150,037
Securities of subsidiary trusts                          98,775                                98,775
Shareholders' equity                                  1,345,780                             1,346,758
                                                    -----------                           -----------
   Total liabilities and shareholders' equity       $18,152,474                           $18,075,246
                                                    ===========                           ===========

Net earning assets                                   $2,441,534                            $2,255,139
                                                    ===========                           ===========

Net interest income (fully-taxable equivalent)                       169,637                               159,823
Less: fully-taxable equivalent adjustments                            (1,572)                               (1,509)
                                                                    --------                               -------
   Net interest income                                              $168,065                              $158,314
                                                                    ========                              ========
Net interest rate spread (fully-taxable equivalent)                               3.44%                                    3.21%
Net interest margin (fully-taxable equivalent)                                    4.03%                                    3.84%
</TABLE>


------------------------------------------------
(1)      Annualized.
(2)      Loans and leases include loans held for sale.





                                       12
<PAGE>   13
TABLE 2 - Average Balances, Yields and Rates

(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                 2000 Fourth Quarter                       2000 Third Quarter
                                                                 -------------------                       ------------------
                                                                                     Yield/                                 Yield/
                                                      Average Balance     Interest  Rate (1)  Average Balance   Interest    Rate (1)
                                                      ---------------     --------  --------  ---------------   --------   --------
<S>                                                    <C>                <C>       <C>         <C>             <C>        <C>
Loans and leases (2):
  Residential real estate mortgages                    $2,304,500         $43,340   7.52%       $2,340,950      $43,370     7.41%
  Commercial real estate mortgages                      2,947,644          66,428    8.97        2,935,280       65,740      8.91
  Commercial business loans and leases                  2,263,301          52,852    9.29        2,205,430       51,110      9.22
  Consumer loans and leases                             3,305,342          73,282    8.82        3,193,830       69,489      8.65
                                                       ----------         -------               ----------      -------
     Total loans and leases                            10,820,787         235,902    8.68       10,675,490      229,709      8.57
Securities                                              6,065,801         102,787    6.77        6,298,451      107,303      6.81
Federal funds sold and other short-term investments        33,591             362    4.28           63,155          958      6.04
                                                       ----------         -------               ----------      -------
   Total earning assets                                16,920,179         339,051    7.99       17,037,096      337,970      7.91
                                                                          -------                               -------
Noninterest-earning assets                              1,379,667                                1,408,636
                                                       ----------                               ----------
   Total assets                                       $18,299,846                              $18,445,732
                                                      ===========                              ===========

Interest-bearing deposits:
  Regular savings                                      $1,416,785           5,922    1.66       $1,469,374       $7,643      2.07
  NOW and money market accounts                         3,933,748          35,034    3.54        3,898,780       34,877      3.56
  Certificates of deposit                               4,522,791          65,289    5.74        4,529,819       63,160      5.55
  Brokered deposits                                       120,020           2,027    6.72           86,953        1,439      6.58
                                                       ----------          ------              -----------       ------
    Total interest-bearing deposits                     9,993,344         108,272    4.31        9,984,926      107,119      4.27
Borrowed funds                                          4,720,402          75,049    6.24        4,962,974       78,727      6.31
                                                       ----------          ------              -----------       ------
    Total interest-bearing liabilities                 14,713,746         183,321    4.93       14,947,900      185,846      4.95
                                                                         --------                               -------
Non-interest bearing deposits                           2,046,837                                2,046,112
Other liabilities                                         145,722                                  104,804
Securities of subsidiary trusts                            98,775                                   98,775
Shareholders' equity                                    1,294,766                                1,248,141
                                                      -----------                              -----------
   Total liabilities and shareholders' equity         $18,299,846                              $18,445,732
                                                      ===========                              ===========

Net earning assets                                     $2,206,433                               $2,089,196
                                                       ==========                               ==========

Net interest income (fully-taxable equivalent)                              155,730                               152,124
Less: fully-taxable equivalent adjustments                                   (1,770)                               (1,411)
                                                                           --------                               -------
   Net interest income                                                     $153,960                              $150,713
                                                                           ========                              ========
Net interest rate spread (fully-taxable equivalent)                                   3.06%                                  2.96%
Net interest margin (fully-taxable equivalent)                                        3.70%                                  3.57%
</TABLE>


----------------------------------------------------------

(1)      Annualized.

(2)      Loans and leases include loans held for sale.




                                       13
<PAGE>   14
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                   2000 Second Quarter                    2000 First Quarter
                                                                   -------------------                    ------------------
                                                                                        Yield/                              Yield/
                                                       Average Balance     Interest   Rate (1)   Average Balance  Interest  Rate (1)
                                                       ---------------     --------   --------   ---------------  --------  --------
<S>                                                    <C>                <C>        <C>         <C>              <C>       <C>
Loans and leases (2):
  Residential real estate mortgages                        $2,336,378     $44,190     7.57%      $2,337,127       $43,536    7.45%
  Commercial real estate mortgages                          2,819,294      62,581      8.93       2,731,631        60,698     8.94
  Commercial business loans and leases                      2,132,627      48,021      9.06       1,952,209        43,019     8.86
  Consumer loans and leases                                 3,101,735      66,598      8.64       3,036,234        64,193     8.50
                                                           ----------     -------                ----------       -------
     Total loans and leases                                10,390,034     221,390      8.56      10,057,201       211,446     8.45
Securities                                                  6,478,785     109,892      6.79       6,783,530       114,163     6.74
Federal funds sold and other short-term investments            80,250       1,266      6.34          79,032         1,091     5.55
                                                           ----------     -------                ----------       -------
   Total earning assets                                    16,949,069     332,548      7.87      16,919,763       326,700     7.75
                                                                          -------                                 -------
Noninterest-earning assets                                  1,398,125                             1,393,153
                                                          -----------                           -----------
   Total assets                                           $18,347,194                           $18,312,916
                                                          ===========                           ===========

Interest-bearing deposits:
  Regular savings                                          $1,545,893       8,037      2.09      $1,561,943         8,176     2.11
  NOW and money market accounts                             3,770,025      31,269      3.34       3,639,746        27,701     3.06
  Certificates of deposit                                   4,540,737      59,822      5.30       4,505,049        56,716     5.06
  Brokered deposits                                           123,670       1,994      6.49         131,218         2,144     6.57
                                                           ----------     -------                ----------       -------
    Total interest-bearing deposits                         9,980,325     101,122      4.08       9,837,956        94,737     3.87
Borrowed funds                                              5,086,715      76,767      6.07       5,262,911        75,483     5.77
                                                           ----------     -------                ----------       -------
    Total interest-bearing liabilities                     15,067,040     177,889      4.75      15,100,867       170,220     4.53
                                                                          -------                                 -------
Non-interest bearing deposits                               1,875,798                             1,798,107
Other liabilities                                             133,627                               117,311
Securities of subsidiary trusts                                98,775                                98,775
Shareholders' equity                                        1,171,954                             1,197,856
                                                          -----------                           -----------
   Total liabilities and shareholders' equity             $18,347,194                           $18,312,916
                                                          ===========                           ===========

Net earning assets                                         $1,882,029                            $1,818,896
                                                           ==========                            ==========

Net interest income (fully-taxable equivalent)                            154,659                                 156,480
Less: fully-taxable equivalent adjustments                                 (1,494)                                 (1,307)
                                                                           ------                                  ------
   Net interest income                                                   $153,165                                $155,173
                                                                         ========                                ========
Net interest rate spread (fully-taxable equivalent)                                   3.12%                                   3.22%
Net interest margin (fully-taxable equivalent)                                        3.67%                                   3.70%
</TABLE>

-----------------------------------------------------------------

(1)      Annualized.
(2)      Loans and leases include loans held for sale.



                                       14
<PAGE>   15
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                  Six Months Ended                         Six Months Ended
                                                                    June 30, 2001                            June 30, 2000
                                                                    -------------                            -------------
                                                                                     Yield/                                  Yield/
                                                    Average Balance   Interest     Rate (1)  Average Balance   Interest    Rate (1)
                                                    ---------------   --------     --------  ---------------   --------    --------
<S>                                                 <C>               <C>          <C>       <C>               <C>         <C>
Loans and leases (2):
  Residential real estate mortgages                    $2,245,651     $83,984      7.48%         $2,327,753    $87,726     7.54%
  Commercial real estate mortgages                      3,000,600     129,607       8.71          2,784,556    123,279      8.90
  Commercial business loans and leases                  2,313,648      95,950       8.36          2,053,878     91,040      8.91
  Consumer loans and leases                             3,358,006     142,770       8.57          3,068,985    130,791      8.57
                                                       ----------     -------                    ----------    -------


     Total loans and leases                            10,917,905     452,311       8.34         10,235,172    432,836      8.49
Securities                                              5,875,840     193,180       6.58          6,631,157    224,055      6.76
Federal funds sold and other
 short-term investments                                    34,622         772       4.50             80,278      2,357      5.90
                                                       ----------     -------                    ----------    -------
   Total earning assets                                16,828,367     646,263       7.72         16,946,607    659,248      7.81
                                                                      -------                                  -------
Noninterest earning assets                              1,284,891                                 1,390,848
                                                      -----------                               -----------
   Total assets                                       $18,113,258                               $18,337,455
                                                      ===========                               ===========

Interest-bearing deposits:
  Regular savings                                      $1,398,228      10,459       1.51         $1,553,918     16,213      2.10
  NOW and money market accounts                         4,014,645      61,064       3.07          3,704,890     58,970      3.20
  Certificates of deposit                               4,498,911     123,588       5.54          4,516,074    116,538      5.19
  Brokered deposits                                       166,248       5,117       6.21            134,264      4,138      6.20
                                                       ----------     -------                    ----------    -------
    Total interest-bearing deposits                    10,078,032     200,228       4.01          9,909,146    195,859      3.97
Borrowed funds                                          4,401,513     116,573       5.29          5,187,878    152,250      5.90
                                                       ----------     -------                    ----------    -------
    Total interest-bearing liabilities                 14,479,545     316,801       4.40         15,097,024    348,109      4.64
                                                                      -------                                  -------
Non-interest bearing deposits                           2,034,494                                 1,837,464
Other liabilities                                         153,906                                   125,231
Securities of subsidiary trust                             98,775                                    98,775
Shareholders' equity                                    1,346,538                                 1,178,961
                                                      -----------                               -----------
   Total liabilities and shareholders' equity         $18,113,258                               $18,337,455
                                                      ===========                               ===========

Net earning assets                                     $2,348,822                                $1,849,583
                                                       ==========                                ==========

Net interest income (fully-taxable equivalent)                        329,462                                  311,139
Less: fully-taxable equivalent adjustments                             (3,083)                                  (2,801)
                                                                       ------                                   ------
   Net interest income                                               $326,379                                 $308,338
                                                                     ========                                 ========

Net interest rate spread (fully-taxable equivalent)                                3.32%                                   3.17%
Net interest margin (fully-taxable equivalent)                                     3.94%                                   3.67%
</TABLE>


----------------------------------------------------

(1) Annualized.
(2) Loans and leases include loans held for sale.



                                       15
<PAGE>   16
The following table presents certain information on a fully-taxable equivalent
basis regarding changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old volume),
(2) changes in volume (change in volume multiplied by old rate) and (3) changes
in rate/volume (change in rate multiplied by change in volume).

<TABLE>
<CAPTION>
                                                                 Three Months Ended June 30, 2001 vs. 2000
                                                                          Increase (decrease) due to
                                                         ------------------------------------------------------
                                                                                        Rate and        Total
                                                           Volume         Rate          Volume (1)      Change
                                                          -----------------------------------------------------
<S>                                                       <C>            <C>            <C>            <C>
Interest income:
Loans and leases                                          $ 11,055       ($ 9,843)      ($   112)      $  1,100
Securities                                                  (9,257)        (5,976)           582        (14,651)
Federal funds sold and other short-term investments           (507)          (474)           191           (790)
                                                          ------------------------------------------------------
Total interest income                                        1,291        (16,293)           661        (14,341)
                                                          ------------------------------------------------------

Interest expense:
Interest-bearing deposits
   Regular savings                                            (731)        (2,659)           251         (3,139)
   NOW and money market accounts                             2,410         (4,888)          (266)        (2,744)
   Certificates of deposit                                    (741)           792            213            264
   Brokered deposits                                           708           (170)           (52)           486
                                                          -----------------------------------------------------
Total interest-bearing deposits                              1,646         (6,925)           146         (5,133)
Borrowed funds                                             (11,458)       (15,852)         3,124        (24,186)
                                                          -----------------------------------------------------
Total interest expense                                      (9,812)       (22,777)         3,270        (29,319)

Net interest income (fully taxable equivalent)            $ 11,103       $  6,484       ($ 2,609)      $ 14,978
                                                          ========       ========       ========       ========
</TABLE>




<TABLE>
<CAPTION>
                                                                       Six Months Ended June 30, 2001 vs. 2000
                                                                             Increase (decrease) due to
                                                         -------------------------------------------------------------
                                                                                                  Rate and       Total
                                                           Volume                    Rate         Volume (1)    Change
                                                          -------------------------------------------------------------
<S>                                                       <C>                    <C>            <C>            <C>
Interest income:
Loans and leases                                          $ 28,744               ($ 7,613)      ($ 1,671)      $ 19,460
Securities                                                 (25,320)                (5,919)           364        (30,875)
Federal funds sold and other short-term investments         (1,336)                  (557)           323         (1,570)
                                                          -------------------------------------------------------------
Total interest income                                        2,088                (14,089)          (984)       (12,985)
                                                          -------------------------------------------------------------


Interest expense:
Interest-bearing deposits
   Regular savings                                          (1,621)                (4,546)           442         (5,725)
   NOW and money market accounts                             4,915                 (2,388)          (462)         2,065
   Certificates of deposit                                    (442)                 7,838           (346)         7,050
   Brokered deposits                                           983                      7            (11)           979
                                                          -------------------------------------------------------------
Total interest-bearing deposits                              3,835                    911           (377)         4,369
Borrowed funds                                             (23,007)               (15,693)         3,023        (35,677)
                                                          -------------------------------------------------------------
Total interest expense                                     (19,172)               (14,782)         2,646        (31,308)

Net interest income (fully taxable equivalent)            $ 21,260               $    693       ($ 3,630)      $ 18,323
                                                          =============================================================
</TABLE>




-----------------------------------------------------

(1)      Includes changes in interest income and expense not due solely to
         volume or rate changes.



                                       16
<PAGE>   17
NONINTEREST INCOME

Second quarter noninterest income totaled $57.6 million, an increase of $815
thousand from the second quarter of 2000, excluding losses on securities
restructuring. This increase was primarily due to insurance commissions income
(up $4.5 million or 97%), deposit services income (up $1.6 million or 10%) and
bank-owned life insurance income (up $726 thousand or 17%). Excluding a $4.7
million gain on the sale of a $29 million credit card portfolio in June 2000,
other noninterest income increased $1.7 million for the quarter ended June 30,
2001 primarily due to premiums received on covered call options related to
mortgage backed securities. Noninterest income, excluding securities gains and
losses, as a percent of total revenues was 26% and 27% for the quarters ended
June 30, 2001 and 2000, respectively. For the six months ended June 30, 2001 and
2000, noninterest income amounted to $116.4 million and $107.0 million,
respectively. The 9% increase was primarily due to increases in deposit services
income and insurance commissions.

Deposit services income increased by $1.6 million or 10% during the three months
ended June 30, 2001, as compared to the same period in the prior year, and by
$3.6 million or 11% during the six months ended June 30, 2001, as compared to
the same period in the prior year. For the six months ended June 30, 2001 and
2000, deposit services income amounted to $18.4 million and $16.8 million.
These increases were primarily attributable to volume driven increases in
checking accounts and collection of overdraft fees.

Mortgage banking income was $1.8 million and $5.0 million for the quarters ended
June 30, 2001 and 2000, respectively. The decrease from the same quarter of last
year was primarily due to lower servicing income as a result of the sale of
virtually all mortgage servicing rights in the fourth quarter of 2000 and the
first quarter of 2001. The amount of loans serviced for others was $303.6
million and $3.8 billion at June 30, 2001 and 2000, respectively. The Company
sold $1.8 billion of loans serviced for others in the fourth quarter of 2000 and
$1.6 billion in the first quarter of 2001. For the six months ended June 30,
2001 and 2000, mortgage banking income amounted to $5.0 million and $8.6
million, respectively. The $3.6 million decrease for the six months ended June
30, 2001 was primarily due to a $3.8 million decrease in mortgage servicing
revenue and $2.7 million of impairment reserves recorded in the first six months
of 2000, which were partially offset by a $3.3 million increase in mortgage
sales income. See Table 4 for a summary of mortgage banking services income by
quarter for 2001 and 2000.

Capitalized mortgage servicing rights amounted to $495 thousand at June 30,
2001, compared to $23.2 million at December 31, 2000. The decrease was due
largely to the sale of mortgage servicing rights with a carrying value of $22.6
million in the first quarter of 2001. In the fourth quarter of 2000, after a
comprehensive review of its mortgage banking operations, the Company decided to
sell virtually all of its mortgage servicing rights and to sell mortgage
servicing rights on new loan originations on a flow basis in the future. The
Company began sales of this asset after it determined that it could no longer
meet its internal investment targets because of the relatively small size of its
loans serviced for others portfolio, the increasing level of sophistication of
the national competitors and the volatility due to changes in interest rates
inherent in the mortgage servicing rights asset. The Company is continuing to
sell mortgage servicing rights on new loan originations on a flow basis. See
Table 4 for details.


                                       17
<PAGE>   18
TABLE 4 - MORTGAGE BANKING SERVICES
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                          At or for the Three Months Ended
                                                ----------------------------------------------
                                                    6/30/01         3/31/01        12/31/00
                                                ----------------------------------------------
<S>                                              <C>            <C>             <C>
RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS     $   303,590    $   294,898     $ 1,618,610
                                                 ==========================================

MORTGAGE SERVICING RIGHTS:

  Balance at beginning of period                 $       491    $    23,225     $    41,029
  Mortgage servicing rights capitalized                   --            382           1,845
  Amortization charged against
     mortgage servicing fee income                         4           (500)           (500)
  Change in impairment reserve                            --             --              --
  Mortgage servicing rights sold                          --        (22,616)        (19,149)
                                                 ------------------------------------------
  Balance at end of period                       $       495    $       491     $    23,225
                                                 ==========================================


MORTGAGE BANKING SERVICES INCOME:
  Sales income:
  Residential mortgage sales income              $     1,510    $     2,236     $       478
  Lower of cost or market adjustment -
           Loans held for sale                            52            (52)             73
                                                 ------------------------------------------

           Total sales income                          1,562          2,184             551
                                                 ------------------------------------------

  Servicing income:
  Residential mortgage servicing income, net             214            344           2,430
  Change in impairment reserve on mortgage
            servicing rights                              --             --              --
  Valuation adjustments - interest rate floor             --             --              (6)
  Gain on sale of capitalized mortgage
           servicing rights                               --            706           4,176
                                                 ------------------------------------------

           Total servicing income                        214          1,050           6,600
                                                 ------------------------------------------


  Total                                          $     1,776    $     3,234     $     7,151
                                                 ==========================================
</TABLE>



<TABLE>
<CAPTION>
                                                 ------------------------------------------
                                                    9/30/00         6/30/00        3/31/00
                                                 ------------------------------------------
<S>                                              <C>             <C>             <C>

RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS     $ 3,332,529     $ 3,832,996     $ 3,993,680


MORTGAGE SERVICING RIGHTS:

  Balance at beginning of period                 $    44,135     $    44,780     $    52,724
  Mortgage servicing rights capitalized                1,657              69             406
  Amortization charged against
     mortgage servicing fee income                    (2,344)         (2,442)         (3,020)
  Change in impairment reserve                           162           1,728           1,005
  Mortgage servicing rights sold                      (2,581)             --          (6,335)
                                                 -------------------------------------------

  Balance at end of period                       $    41,029     $    44,135     $    44,780
                                                 ===========================================



MORTGAGE BANKING SERVICES INCOME:
  Sales income:
  Residential mortgage sales income              $     1,671     $       318     $       169
  Lower of cost or market adjustment -
           Loans held for sale                           108             (36)             30
                                                 -------------------------------------------
           Total sales income                          1,779             282             199
                                                 -------------------------------------------

  Servicing income:
  Residential mortgage servicing income, net           1,590           2,956           1,439
  Change in impairment reserve on mortgage
            servicing rights                             162           1,728           1,005
  Valuation adjustments - interest rate floor            460            (106)           (545)
  Gain on sale of capitalized mortgage
           servicing rights                            2,181             124           1,559
                                                 -------------------------------------------

           Total servicing income                      4,393           4,702           3,458
                                                 -------------------------------------------


  Total                                          $     6,172     $     4,984     $     3,657
                                                 ===========================================
</TABLE>

<TABLE>
<CAPTION>
                                                    Six Months Ended
                                                 -------------------
MORTGAGE BANKING SERVICES INCOME:                 6/30/01     6/30/00
                                                 --------------------
<S>                                              <C>          <C>
  Sales income:
  Residential mortgage sales income              $ 3,746      $   487
  Lower of cost or market adjustment -
           Loans held for sale                        --           (6)
                                                 --------------------
           Total sales income                      3,746          481
                                                 --------------------

Servicing income:
Residential mortgage servicing income, net           558        4,395
Change in impairment reserve on mortgage
          servicing rights                            --        2,733
Valuation adjustments - interest rate floor           --         (651)
Gain (loss) on sale of capitalized mortgage
         servicing rights                            706        1,683
                                                 --------------------
         Total servicing income                    1,264        8,160
                                                 --------------------

Total                                            $ 5,010      $ 8,641
                                                 ====================
</TABLE>

Insurance commissions income was $9.2 million for the second quarter of 2001
compared to $4.7 million for the same period in 2000, an increase of 97%. For
the six months ended June 30, 2001 and 2000, insurance commissions amounted to
$19.2 million and $10.0 million, respectively, representing an increase of 93%.
The increases in 2001 were primarily attributable to two insurance agency
purchase acquisitions in the third quarter of 2000.


                                       18
<PAGE>   19
Trust services income amounted to $8.7 million for the quarter ended June 30,
2001 compared to $8.8 million for the second quarter of 2000. For the six months
ended June 30, 2001 and 2000, trust services income amounted to $17.5 and $17.4
million, respectively. Assets under management increased to $8.6 billion at June
30, 2001 from $7.7 billion at June 30, 2000 primarily reflecting a $1 billion
increase in custodial accounts which generate lower fees than investment
management accounts.

Investment advisory services income increased $142 thousand or 9% in the second
quarter of 2001 compared to the second quarter of 2000. For the six months ended
June 30, 2001 and 2000, investment advisory services income amounted to $3.5 and
$3.4 million, respectively, representing an increase of 1%. Investment advisory
services revenues are commissions earned from the sale of third party mutual
funds, annuities and bonds.

Bank-owned life insurance ("BOLI") income was $4.9 million for the second
quarter of 2001, compared to $4.2 million for the same period in 2000, an
increase of 17%. There was a $1.2 million death benefit recorded in the first
quarter of 2000 and a $616 thousand death benefit in the second quarter of 2001.
Excluding the death benefits, BOLI income increased $19 thousand due to higher
average levels of BOLI in 2001. For the second quarter of 2001, the average
carrying value of BOLI was $310 million compared to $297 million for the second
quarter of 2000. For the six months ended June 30, 2001 and 2000, BOLI income
amounted to $9.2 million and $9.3 million, respectively. BOLI covers certain
employees of the Company's bank subsidiaries. Most of the Company's BOLI is
invested in the "general account" of quality insurance companies. Standard and
Poors rated all such companies A+ or better at June 30, 2001.

Merchant and electronic banking income was $8.0 million for the second quarter
of 2001 compared to $7.9 million for the second quarter of 2000. For the six
months ended June 30, 2001 and 2000 merchant and electronic banking income
amounted to $14.5 million and $14.3 million, respectively. This income
represents fees and interchange income generated by the use of Company-issued
debit cards and charges to merchants for processing credit card transactions.

Excluding a $4.7 million gain on the sale of a credit card portfolio in June
2000, other noninterest income increased by $1.7 million or 52% for the quarter
ended June 30, 2001 compared to the same quarter last year. The increase in the
second quarter of 2001 was primarily due to higher loan fees and included $959
thousand of premium income recognized on covered call options related to
mortgage backed securities in 2001. For the six months ended June 30, 2001 and
2000, other income, excluding the $4.7 million gain on the sale of the credit
card portfolio in the second quarter of 2000, amounted to $10.8 million and $9.4
million, respectively and included $1.9 million of premiums on covered call
options in 2001. No covered call options were outstanding as of June 30, 2001.

NONINTEREST EXPENSE

Noninterest expense, excluding special charges, was $124.2 million and $117.7
million for the quarters ended June 30, 2001 and 2000, respectively,
representing an increase of $6.5 million, or 5%. The increase was primarily due
to salaries and employee benefits expense resulting from the two insurance
agency purchase acquisitions in the third quarter of 2000 and increased
incentive compensation. The efficiency ratio was 54.01% and 54.97% for the
quarters ended June 30, 2001 and 2000, respectively. For the six months ended
June 30, 2001 and 2000, noninterest expense, excluding special charges, amounted
to $245.8 million and $237.7 million, a 3% increase. The efficiency ratio was
54.56% and 56.12% for the six months ended June 30, 2001 and 2000, respectively.
For a description of the methodology used by the Company to calculate the
efficiency ratio, see Note 5 to Table 1.

Salaries and benefits expense of $62.9 million for the quarter ended June 30,
2001 increased $5.4 million or 9% from the same quarter of last year. Salaries
and benefits expense amounted to $124.6 million and $117.3 million during the
six months ended June 30, 2001 and 2000, respectively, representing a $7.3
million increase or 6%. The increase was primarily due to additional employees
from two insurance agency purchase acquisitions during the third quarter of 2000
and increased incentive compensation.

Data processing expense of $8.9 million for the quarter ended June 30, 2001
decreased $352 thousand or 4% from the same quarter a year ago. For the six
months ended June 30, 2001 and 2000, data processing expense amounted to $17.9
million and $18.0 million, respectively, a $158 thousand or 1% decrease.

Occupancy expense of $11.1 million during the three months ended June 30, 2001
increased $1.1 million or 12% from the same quarter in 2000 due to additional
utility and snow plowing expenses and expenses for new facilities. For the six
months ended June 30, 2001 and 2000, occupancy expense amounted to $22.9 million
and $21.0 million, respectively, a $1.9 million or 9% increase, largely for the
same reasons as the increase in the last quarter.


                                       19
<PAGE>   20
Equipment expense of $8.7 million during the three months ended June 30, 2001
increased $955 thousand or 12% from the second quarter of last year. For the six
months ended June 30, 2001 and 2000, equipment expense amounted to $16.9 million
and $15.6 million, respectively, a $1.3 million or 9% increase. These increases
were primarily due to depreciation relating to new technology equipment and
software.

Amortization of goodwill and other intangibles was $5.4 million and $5.2 million
for the quarters ended June 30, 2001 and 2000, respectively. For the six months
ended June 30, 2001 and 2000, amortization of goodwill and other intangibles
amounted to $10.8 million and $10.4 million, respectively. The slight increases
were related to amortization of goodwill recorded in connection with the
acquisition of two insurance agencies during the third quarter of 2000.

During the six months ended June 30, 2001 and 2000, special charges amounted to
$5.6 million ($3.9 million after tax) and $42.6 million ($32.1 million after
tax), respectively. The special charges recorded in 2001 related to severance
packages for executives whose employment was terminated in connection with the
acquisition of Banknorth, costs to close 10 branches and write-downs on auto
lease residuals (the Company ceased originating automobile leases in June 2000).
Included in 2000 special charges were $41.0 million of merger-related expenses
and $1.6 million of branch closing expenses related to the closing of 11
branches.

The following table summarizes activity related to special charges from December
31, 2000 through June 30, 2001.


    TABLE 5 - SPECIAL CHARGES
    (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                          Other
                                                           Amount                          Cash          Amounts
                                          Balance at      Included                        Payments      Applied to     Balance at
                                          12/31/2000     in Expense      Reallocations   (Receipts)      Reserve       6/30/2001
                                          ----------     ----------      -------------   ----------      -------       ---------

    MERGER CHARGES
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>
Severance costs                              $  679         $2,329         $    0         $2,380         $    0         $  628
Data processing/systems integration             100             --             79            173             --              6
Asset write-downs/facility costs              2,119             --           (700)            556             --            863
Other costs                                     217             --            621            838             --             --
                                             ------         ------         ------         ------         ------         ------
                                             $3,115         $2,329         $    0         $3,947         $    0         $1,497
                                             ======         ======         ======         ======         ======         ======

BRANCH CLOSINGS

Severance and salary costs                   $    0         $   47         $    0         $    0         $    0         $   47
Asset write-downs/lease terminations             --          1,585             --             --             --          1,585
Branch decommissioning costs                    170            755             --            100             --            825
                                             ------         ------         ------         ------         ------         ------
                                             $  170         $2,387         $    0         $  100         $    0         $2,457
                                             ======         ======         ======         ======         ======         ======

OTHER SPECIAL CHARGES

Write-down of auto lease residuals           $    0         $  892         $    0         $    0         $  892         $    0
                                             ======         ======         ======         ======         ======         ======
</TABLE>


Other non-interest expenses decreased by $906 thousand or 4% during the three
months ended June 30, 2001 as compared to the comparable period in the prior
year. Through the six months ended June 30, 2001 and 2000, other noninterest
expenses amounted to $48.1 million and $50.7 million, respectively, a $2.7
million or 5% decrease. The following table summarizes the principal components
of other noninterest expenses for the periods indicated.


                                       20
<PAGE>   21
    TABLE 6 - OTHER NONINTEREST EXPENSES
    (Dollars in thousands)

<TABLE>
<CAPTION>
                                      2001            2001          2000               2000             2000            2000
                                     Second           First        Fourth              Third           Second           First
                                     Quarter         Quarter       Quarter            Quarter          Quarter         Quarter
                                     -------         -------       -------            -------          -------         -------
<S>                                 <C>              <C>           <C>               <C>              <C>              <C>
Advertising and marketing           $  3,324         $  2,387      $  2,647          $  2,772         $  3,606         $  2,985
Telephone                              2,853            3,007         3,709             3,473            3,134            2,945
Office supplies                        2,506            2,320         2,603             2,436            2,673            2,166
Postage and freight                    2,448            2,478         2,252             2,267            2,376            2,470
Miscellaneous loan costs               1,699            1,737         1,530             1,545            1,717            2,203
Deposits and other assessments           837              835         1,045             1,110            1,002              961
Collection and carrying costs
    of non-performing assets             482              610          (814)              618              590              746
Other                                 10,715            9,825        11,492            10,304           10,672           10,479
                                    --------         --------      --------          --------         --------         --------
Total                               $ 24,864         $ 23,199      $ 24,464          $ 24,525         $ 25,770         $ 24,955
                                    ========         ========      ========          ========         ========         ========
</TABLE>


<TABLE>
<CAPTION>
                                    Six Months Ended
                                   --------------------
                                    6/30/01    6/30/00
                                   ---------   --------
<S>                                  <C>        <C>
Advertising and marketing            $5,711     $6,591
Telephone                             5,860      6,079
Office supplies                       4,826      4,839
Postage and freight                   4,926      4,846
Miscellaneous loan costs              3,436      3,920
Deposits and other assessments        1,672      1,963
Collection and carrying costs
    of non-performing assets          1,092      1,336
Other                                20,540     21,151
                                   --------    -------
Total                               $48,063    $50,725
                                   ========    =======
</TABLE>


TAXES

The effective tax rate, excluding special charges and losses on securities
restructuring, was 35% and 33% for the quarters ended June 30, 2001 and 2000,
respectively and 34% and 32% for the six months ended June 30, 2001, and 2000,
respectively. The increase is due primarily to the inclusion of amortization
on investments in low income housing tax credit limited partnerships.

COMPREHENSIVE INCOME

Comprehensive income amounted to $149.3 million and $69.6 million during the six
months ended June 30, 2001 and 2000, respectively, which were different from the
Company's reported net income during the respective periods as a result of
changes in the amount of unrealized gains and losses on the Company's portfolio
of securities available for sale and, in 2001, unrealized losses on cash flow
hedges. For additional information, see Note 2 to the Consolidated Financial
Statements included herein.

The Company's available for sale investment portfolio had unrealized losses, net
of applicable income tax effects, of $510 thousand, $34.5 million and $124.6
million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. The
improvement over this 18-month period related to lower prevailing interest
rates, scheduled amortization and prepayments of principal, and sales of
investments. Although each contributed to the improvement, lower prevailing
interest rates was the primary factor. At June 30, 2001, the net unrealized loss
of $784 thousand, before related tax effect, represented less than 1% of
securities available for sale. The Company attempts to balance the interest rate
risk of its assets with its liabilities (see "Interest Rate Risk and Asset
Liability Management"). However, the change in value of its liabilities, which
tend to fall in rising interest rate environments and rise in falling interest
rate environments, is not included in "other comprehensive income."



                                       21
<PAGE>   22
FINANCIAL CONDITION

LOANS AND LEASES

Total loans and leases (including loans held for sale) averaged $10.9 billion
during the second quarter of 2001, an increase of $518 million or 5% from the
second quarter of 2000. All loan categories increased except for residential
real estate loans. It is currently the Company's policy to sell most of the
residential real estate loans it originates into the secondary market. Average
loans as a percent of average earning assets were 65% during the quarter ended
June 30, 2001 compared to 61% during the quarter ended June 30, 2000. This
change in balance sheet mix relates both to loan growth and reductions in the
investment portfolio.

Average residential real estate loans (which include mortgage loans held for
sale) of $2.2 billion during the second quarter of 2001 declined $129.9 million
from the second quarter of last year due to portfolio runoff. Mortgage loans
held for sale amounted to $75.2 million and $16.5 million at June 30, 2001 and
2000, respectively, and $51.1 million at December 31, 2000. The increase in
loans held for sale compared to last year was due primarily to higher
origination volumes resulting from declining interest rates.

Average commercial real estate loans of $3.0 billion increased $218 million, or
8%, from the second quarter of last year. The majority of the increase was in
the Massachusetts market. The average yield on commercial real estate loans
during the second quarter of 2001 was 8.58%, as compared to 8.93% in the second
quarter of 2000.

Commercial business loans and leases averaged $2.3 billion during the second
quarter of 2001, an increase of $190 million, or 9%, over the second quarter of
2000. The largest increases were in Maine and Massachusetts. The yield on
commercial business loans and leases decreased to 8.03% in the second quarter of
2001 from 9.06% in the second quarter of 2000.

Average consumer loans and leases of $3.3 billion during the second quarter of
2001 increased $240 million, or 8%, from the second quarter of 2000. The
increase was primarily in indirect automobile and home equity loans and lines of
credit. The largest increases were in Maine and Massachusetts. The average yield
on consumer loans and leases decreased to 8.42% in the second quarter of 2001
from 8.64% in the second quarter of 2000.

SECURITIES AND OTHER EARNING ASSETS

The Company's securities portfolio averaged $5.9 billion during the second
quarter of 2001, as compared to $6.5 billion in the second quarter of 2000. The
securities portfolio consisted primarily of mortgage-backed securities, most of
which are seasoned 15-year federal agency securities and U.S. Treasury
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. The majority of securities available for
sale are rated AAA or equivalently rated. The decrease in the Company's average
securities portfolio during 2001 was partially due to the sale of $104 million
of securities to restructure the securities portfolio in the second quarter of
2000 and continued run-off of the mortgage-backed securities. The average yield
on securities was 6.42% for the quarter ended June 30, 2001 and 6.79% for the
quarter ended June 30, 2000. With the exception of the securitized residential
real estate loans held in a REMIC that are classified as held to maturity and
carried at cost, all of the Company's securities are classified as available for
sale and carried at market value. Securities available for sale had an after-tax
unrealized loss of $510 thousand at June 30, 2001 and $34.5 million at December
31, 2000.

ASSET QUALITY

As shown in Table 7, nonperforming assets were $73.3 million at June 30, 2001,
or 0.40% of total assets, compared to $60.6 million or 0.33% of total assets at
June 30, 2000. All types of loans, except commercial real estate loans,
experienced increases at June 30, 2001. Total nonperforming loans (excluding
residential real estate loans held for sale) as a percentage of total loans was
0.62%, 0.57% and 0.48% at June 30, 2001, December 31, 2000 and at June 30, 2000,
respectively. The increase in the quarter ended June 30, 2001 was primarily in
commercial loans and leases, which is reflective of the slower economy affecting
various industries. The Company continues to monitor asset quality with regular
reviews of its portfolio in accordance with its lending and credit policies.


                                       22
<PAGE>   23
The Company's residential loan portfolio accounted for 19% of the total loan
portfolio at June 30, 2001, as compared with 21% at December 31, 2000. The
decrease was due to increased refinancing activity and prepayments in a lower
interest rate environment. The Company's residential loans are generally secured
by single-family homes (one to four units) and have a maximum loan to value
ratio of 80%, unless they are protected by mortgage insurance. At June 30, 2001,
0.46% of the Company's residential loans were nonperforming, as compared with
0.44% at December 31, 2000 and 0.41% at June 30, 2000.

The Company's commercial real estate loan portfolio accounted for 28% of the
total loan portfolio at June 30, 2001, as compared with 27% at December 31,
2000. Commercial real estate loans consist 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 (including food stores). These loans generally are secured by
properties located in the New England states and New York, particularly Maine,
Massachusetts, New Hampshire and Vermont. At June 30, 2001, 0.41% of the
Company's commercial real estate loans were nonperforming, as compared with
0.41% at December 31, 2000 and 0.63% at June 30, 2000.

The Company's commercial business loan and lease portfolio accounted for 22% of
the total loan portfolio at June 30, 2001, as compared to 21% at December 31,
2000. Commercial business loans and leases are not concentrated in any
particular industry, but reflect the broad-based economies of Maine, New
Hampshire, Massachusetts and, to a lesser extent, Vermont, New York and
Connecticut. The Company's commercial business loans and leases are generally to
small and medium size businesses located within its geographic market area. The
Company generally does not emphasize the purchase of participations in
syndicated commercial loans. At June 30, 2001, the Company had $176 million of
participations in syndicated commercial loans and commitments to purchase an
additional $155 million of such participations. At June 30, 2001, 1.64% of the
Company's commercial business loans and leases were non-performing, as compared
with 1.41% at December 31, 2000 and 0.76% at June 30, 2000.

The Company's consumer loan and lease portfolio accounted for 31% of the total
loan portfolio at June 30, 2001 and December 31, 2000. The Company has a
diversified consumer loan and lease portfolio consisting of home equity,
automobile, mobile home, boat and recreational vehicles and education loans, as
well as loans to finance certain medical /dental procedures (vision, dental and
orthodontia fee plan loans). Mobile home loans decreased to $158.9 million at
June 30, 2001 from $161.3 million at December 31, 2000, reflecting the Company's
strategy to emphasize other types of lending. In June 2000, the Company ceased
originating automobile leases and, as a result, the auto lease portfolio
continues to decline. Automobile lease receivables totaled $56.3 million, $81.6
million and $114.4 million at June 30, 2001, December 31, 2000 and June 30,
2000, respectively. At June 30, 2001, 0.17% of the Company's consumer loans and
leases were nonperforming, as compared with 0.19% at December 31, 2000 and 0.16%
at June 30, 2000.

At June 30, 2001, the Company had $5.8 million of accruing loans which were 90
days or more delinquent, as compared to $6.0 million of such loans at December
31, 2000 and $7.2 million at June 30, 2000. The increase from December 31, 2000
was primarily attributable to one commercial customer lease and an increase in
residential real estate loans over 90 days delinquent, which the Company
believes are well secured and in the process of collection.


                                       23
<PAGE>   24
TABLE 7 - NONPERFORMING ASSETS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                  6/30/01  3/31/01   12/31/00     9/30/00      6/30/00    3/31/00
                                                                  ---------------------------------------------------------------
<S>                                                              <C>       <C>       <C>          <C>          <C>         <C>
Nonaccrual loans:
Residential real estate loans                                    $ 9,590   $10,575   $ 9,894      $ 8,258      $ 9,405     $14,204
Commercial real estate loans                                      12,550    13,205    12,155       17,212       18,270      15,621
Commercial business loans and leases                              39,208    32,233    32,583       17,396       16,570      19,818
Consumer loans and leases                                          5,795     5,611     6,329        5,650        5,110       4,861
                                                                 -----------------------------------------------------------------


Total nonaccrual loans                                            67,143    61,624    60,961       48,516       49,355      54,504
                                                                 -----------------------------------------------------------------
Total troubled debt restructurings                                    --        --       673          704          731       1,027

  Total nonperforming loans                                       67,143    61,624    61,634       49,220       50,086      55,531
                                                                 -----------------------------------------------------------------

Other nonperforming assets:
Other real estate owned, net of related reserves                   4,508     4,310     4,074        6,432        8,419       9,027
Repossessions, net of related reserves                             1,618     1,935     1,424        1,246        2,125       2,792
                                                                 -----------------------------------------------------------------


  Total other nonperforming assets                                 6,126     6,245     5,498        7,678       10,544      11,819
                                                                 -----------------------------------------------------------------


Total nonperforming assets                                       $73,269   $67,869   $67,132      $56,898      $60,630     $67,350
                                                                 =================================================================


Accruing loans which are 90 days overdue                         $ 5,799   $ 7,664   $ 5,973      $ 8,195      $ 7,211     $ 7,914
                                                                 =================================================================


Total nonperforming loans as a percentage of total loans (1)        0.62%     0.57%     0.57%        0.46%        0.48%       0.54%
Total nonperforming assets as a percentage of total assets          0.40%     0.37%     0.37%        0.31%        0.33%       0.37%
Total nonperforming assets as a percentage of  total loans
   (1) and total other nonperforming assets                         0.67%     0.63%     0.62%        0.53%        0.58%       0.66%
</TABLE>


------------------------------------------------------
(1) Total loans excludes residential real estate loans held for sale.

PROVISION/ALLOWANCE FOR LOAN LOSSES

The Company provided $9.3 million and $5.8 million for loan and lease losses in
the quarters ended June 30, 2001 and 2000, respectively, and $16.5 million and
$10.9 million for the six months ended June 30, 2001 and 2000, respectively. As
shown in Table 8, net charge-offs for the second quarter of 2001 were $7.6
million, or 0.28% of average loans outstanding, compared to $4.5 million, or
0.17% of average loans outstanding, for the second quarter of 2000. The
increases in the provision for loan and lease losses for the three and six
months ended June 30, 2001 reflect higher levels of net charge-offs,
nonperforming loans and classified loans. At June 30, 2001, the allowance for
loan and lease losses amounted to $155.3 million or 1.43% of total portfolio
loans and leases, as compared to $156.5 million or 1.49% at June 30, 2000. The
ratio of the allowance for loan and lease losses to nonperforming loans was 231%
at June 30, 2001 and 312% at June 30, 2000.

Provisions are made to the allowance for loan and lease losses in order to
maintain the allowance at a level which management believes is reasonable and
reflective of the overall risk of loss inherent in the loan portfolio.
Management considers the allowance appropriate and adequate to cover probable
losses inherent in the loan portfolio based on the current economic environment.

Provisions for loan losses are attributable to management's ongoing evaluation
of the adequacy of the allowance for loan and lease losses, which includes,
among other factors, consideration of the character and size of the loan and
lease portfolio, such as internal risk ratings and credit concentrations, trends
in nonperforming loans, delinquency trends and charge-off experience, portfolio
migration data, the volume of new loan originations and other asset quality
factors. Although management utilizes its judgment in providing for probable
losses, there can be no assurance that the Company will not have to change its
provisions for loan and lease losses in subsequent periods. Changing economic
and business conditions in the Company's market areas, particularly northern New
England, fluctuations in local markets for real estate, future changes in
nonperforming asset trends, large movements in market-based interest rates or
other reasons could affect the Company's future provisions for loan and lease
losses.


                                       24
<PAGE>   25
TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                               2001 SECOND      2001 FIRST        2000 FOURTH
                                                                QUARTER           QUARTER            QUARTER
                                                         ----------------------------------------------------
<S>                                                      <C>                   <C>               <C>
Allowance at beginning of period                             $   153,621       $   153,550       $   156,867

Charge-offs:
Real estate mortgages                                                724               790               963
Commercial business loans and leases                               4,864             3,774             4,639
Consumer loans and leases                                          4,706             4,463             6,312
                                                             -----------------------------------------------
  Total loans charged off                                         10,294             9,027            11,914
                                                             -----------------------------------------------

Recoveries:
Real estate mortgages                                                349               138               324
Commercial business loans and leases                               1,524               890               576
Consumer loans and leases                                            792               932             1,046
                                                             -----------------------------------------------
  Total loans recovered                                            2,665             1,960             1,946
                                                             -----------------------------------------------
Net charge-offs                                                    7,629             7,067             9,968

Additions charged to operating expenses                            9,311             7,138             6,651
                                                             -----------------------------------------------
Allowance at end of period                                   $   155,303       $   153,621       $   153,550
                                                             ===============================================


Average loans and leases outstanding
   during the period (1)                                     $10,816,524       $10,880,534       $10,771,843
                                                             ===============================================

Ratio of net charge-offs to average loans and
   leases outstanding during the period, annualized (1)             0.28%             0.26%             0.37%
Ratio of allowance to total loans and leases
   at end of period (1)                                             1.43%             1.43%             1.42%
Ratio of allowance to nonperforming loans
   at end of period                                                  231%              249%              249%
Ratio of net charge-offs as a percent of
    average outstanding loans, annualized (1):
             Real estate mortgages                                 0.029%            0.051%            0.049%
             Commercial business loans and leases                  0.577%            0.508%            0.714%
             Consumer loans and leases                             0.470%            0.424%            0.634%
</TABLE>

<TABLE>
<CAPTION>
                                                              2000 THIRD      2000 SECOND         2000 FIRST
                                                                QUARTER         QUARTER            QUARTER
                                                                --------------------------------------------
<S>                                                          <C>               <C>               <C>
Allowance at beginning of period                             $   156,464       $   155,078       $   155,048

Charge-offs:
Real estate mortgages                                              1,989               894             1,425
Commercial business loans and leases                                 807             1,519               759
Consumer loans and leases                                          5,046             4,382             5,956
                                                             -----------------------------------------------
  Total loans charged off                                          7,842             6,795             8,140
                                                             -----------------------------------------------

Recoveries:
Real estate mortgages                                                707               409               983
Commercial business loans and leases                                 440               619               667
Consumer loans and leases                                            848             1,304             1,452
                                                             -----------------------------------------------
  Total loans recovered                                            1,995             2,332             3,102
                                                             -----------------------------------------------
Net charge-offs                                                    5,847             4,463             5,038

Additions charged to operating expenses                            6,250             5,849             5,068
                                                             -----------------------------------------------
Allowance at end of period                                   $   156,867       $   156,464       $   155,078
                                                             ===============================================

Average loans and leases outstanding
   during the period (1)                                     $10,648,267       $10,371,568       $10,010,690
                                                             ===============================================
Ratio of net charge-offs to average loans and
   leases outstanding during the period, annualized (1)             0.22%             0.17%             0.20%
Ratio of allowance to total loans and leases
   at end of period (1)                                             1.46%             1.49%             1.52%
Ratio of allowance to nonperforming loans
   at end of period                                                  319%              312%              279%
Ratio of net charge-offs as a percent of
    average outstanding loans, annualized (1):
             Real estate mortgages                                 0.097%            0.038%            0.035%
             Commercial business loans and leases                  0.066%            0.170%            0.019%
             Consumer loans and leases                             0.523%            0.399%            0.596%
</TABLE>



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




                                       25
<PAGE>   26
DEPOSITS

Total deposits averaged $12.2 billion during the second quarter of 2001, an
increase of $362 million from the second quarter of 2000. The increases in
deposits were partially due to new commercial loan relationships. The ratio of
loans to deposits was 88% and 90% at June 30, 2001 and December 31, 2000,
respectively.

Average non-interest bearing deposits of $2.1 billion during the second quarter
of 2001 increased $225.5 million or 12% from the second quarter of 2000. The
increase in non-interest bearing deposits reflect strong growth in commercial,
government and personal accounts.

Average interest-bearing deposits, excluding brokered deposits, of $9.9 billion
during the second quarter of 2001 increased $93.0 million from the second
quarter of 2000 primarily due to increases in NOW and money market accounts. The
average rates paid on NOW and money market accounts decreased 52 basis points
from 3.34% in the second quarter of 2000 to 2.82% in the second quarter of 2001
due largely to lower prevailing interest rates. The average rates paid on all
deposit types decreased by 27 basis points from 4.08% in the second quarter of
2000 to 3.81% in the second quarter of 2001, reflecting a continuation of the
decline in prevailing interest rates since the fourth quarter of 2000.

OTHER FUNDING SOURCES

The Company's primary sources of funding, other than deposits, are advances from
Federal Home Loan Banks ("FHLB") and securities sold under repurchase
agreements. The Company also borrows funds under the U.S. Treasury's Note Option
Treasury, tax and loan program and by overnight borrowings from other banks as
needed. Average borrowed funds for the second quarter of 2001 were $4.3 billion,
a decrease of $757.1 million from the second quarter of 2000. Borrowing needs
declined as a result of increased average deposit levels and a reduction in the
securities portfolio.

Average FHLB borrowings for the second quarter of 2001 were $3.0 billion, which
decreased $993.3 million or 25% from the second quarter of 2000. Collateral for
FHLB borrowings consists primarily of first mortgage loans secured by 1 - 4
family properties, certain unencumbered securities and other qualified assets.
At June 30, 2001, the Company's FHLB borrowings amounted to $2.4 billion and its
additional borrowing capacity from the FHLB was $1.8 billion.

Average balances for securities sold under repurchase agreements were $1.1
billion and $997.7 million for the quarters ended June 30, 2001 and 2000,
respectively, an increase of $130.5 million. These borrowings, with a cost of
4.14% for the quarter ended June 30, 2001, are secured by mortgage-backed
securities and U.S. Government obligations.

On June 22, 2001, one of the Company's wholly-owned subsidiaries, First
Massachusetts Bank, NA, issued $200 million of 7.625% subordinated notes due in
2011. The proceeds were used to reduce other short-term indebtedness. The notes
qualify as Tier 2 capital of this banking subsidiary.

RISK MANAGEMENT

   The primary goal of the Company's risk management program is to determine how
certain existing or emerging issues facing the Company or the financial services
industry affect the nature and extent of the risks faced by the Company. Based
on a periodic self-evaluation, the Company determines key issues and develops
plans and/or objectives to address risk. The Board of Directors (the "Board")
and management believe that there are seven applicable "risk categories,"
consisting of credit risk, interest rate risk, liquidity risk, transaction risk,
compliance risk, strategic risk and reputation risk. Each risk category is
viewed from a quantity of risk perspective (high, medium or low) coupled with a
quality of risk perspective. In addition, an aggregate level of risk is assigned
to the Company 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.

   The Board has established the overall strategic direction of the Company. It
approves the overall risk policies of the Company and oversees the overall risk
management process for the Company. The Board has delegated authority to three
Board Committees, consisting of Audit, Board Risk Management and Asset Review
Committees, and has charged each Committee with overseeing key risks that are
relative to their committees. The Board Risk Management Committee has the
ultimate oversight of the seven applicable risks for the Company.



                                       26
<PAGE>   27
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
reviewed and approved annually by the Company's Board of Directors (the "Board")
and monitored periodically by a committee of the Board. The Board delegates
responsibility for asset-liability management to the Asset Liability Management
Committee ("ALCO"), which is comprised of members of senior management who set
strategic directives that guide the day-to-day asset-liability management
activities of the Company. The ALCO also reviews and approves all major risk
relating to 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.

Market Risk

   Market risk is the sensitivity of income to changes in interest rates,
foreign exchange rates, commodity prices and other market-driven rates or
prices. The Company has no trading operations and thus is only exposed to
non-trading market risk.

   Interest-rate risk, including mortgage prepayment risk, is by far the most
significant non-credit risk to which the Company is exposed. Interest-rate risk
is the sensitivity of income to changes in interest rates. Changes in interest
rates, as well as fluctuations in the level and duration of assets and
liabilities, affect net interest income, the Company's primary source of
revenue. This risk arises directly from the Company's core banking activities -
lending and deposit gathering. In addition to directly impacting net interest
income, changes in the level of interest rates can also affect (i) the amount of
loans originated and sold by the institution, (ii) the ability of borrowers to
repay adjustable or variable rate loans, (iii) the average maturity of loans,
(iv) the rate of amortization of premiums paid on securities, (v) the amount of
unrealized gains and losses on securities available for sale and (vi) the fair
value of the Company's saleable assets and derivatives and the resultant ability
to realize gains.

   The primary objective of interest-rate risk management is to control the
Company's exposure to interest-rate risk both within limits approved by the
Board of Directors and guidelines established by the ALCO. These limits and
guidelines reflect the Company's tolerance for interest-rate risk over both
short-term and long-term horizons. The Company attempts to control interest-rate
risk by identifying, quantifying and, where appropriate, hedging its exposure.

   The Company quantifies and measures interest-rate exposure using a model to
dynamically simulate net interest income under various interest rate scenarios
over a 12-month period. Simulated scenarios include deliberately extreme
interest rate "shocks" and more gradual interest rate "ramps." Key assumptions
in these simulation analyses relate to behavior of interest rates and spreads,
increases or decreases of product balances and the behavior of the Company's
deposit and loan customers. The most material assumption relates to the
prepayment of mortgage assets (including mortgage loans and mortgage-backed
securities). The risk of prepayment tends to increase when interest rates fall.
Since future prepayment behavior of loan customers is uncertain, the resultant
interest rate sensitivity of loan assets cannot be determined exactly.
Complicating management's efforts to measure interest rate risk is the
uncertainty of the maturity, repricing and/or runoff of some of the Company's
assets and liabilities.

   To cope with these uncertainties, management gives careful attention to its
assumptions. For example, many of the Company's interest-bearing deposit
products (e.g. interest checking, savings and money market deposits) have no
contractual maturity and based on historical experience have only a limited
sensitivity to movements in market rates. Because management believes it has
some control with respect to the extent and timing of rates paid on non-maturity
deposits, certain assumptions regarding rate changes are built into the model.
In the case of prepayment of mortgage loans, assumptions are derived from
published dealer median prepayment estimates for comparable mortgage loans.

        The Company manages the interest-rate risk inherent in its core banking
operations primarily using on-balance sheet instruments that sometimes contain
embedded options, mainly fixed-rate portfolio securities and borrowed fund
maturities. From time to time the Company may use certain hedging strategies
which include the use of derivative financial instruments. The primary objective
of the Company's hedging strategies is to reduce net interest rate exposure
arising from the Company's asset and liability structure. As of January 1, 2001,
the Company recognizes all derivatives on the balance sheet at fair value. The
Company may use a variety of derivatives as part of its interest rate risk
management strategy. The Company's primary use of derivatives is to hedge the
sale of mortgage loans held for sale.


                                       27
<PAGE>   28
The Company typically uses Treasury options and mortgage-backed securities
options to modify its forward mortgage commitments.

   The Company's policy on interest-rate risk simulation specifies that if
interest rates were to shift gradually up or down 200 basis points, estimated
net interest income for the subsequent 12 months should decline by less than 5%.
As shown in the following table, the Company was in compliance with this limit
at March 31, 2001 and December 31, 2000.

<TABLE>
<CAPTION>
                    200 Basis Point   100 Basis Point    100 Basis Point  200 Basis Point
                    Rate Decrease     Rate Decrease      Rate Increase    Rate Increase
                    --------------    --------------     -------------    --------------
<S>                 <C>               <C>                <C>              <C>
June 30, 2001          (2.87%)           (0.90%)            0.03%            (0.83%)
                       -----             -----              ----             -----

December 31, 2000       0.70%             0.51%            (1.46%)           (3.18%)
                       -----             -----              ----             -----
</TABLE>

The results implied in the above table indicate estimated changes in simulated
net interest income for the subsequent 12 months assuming a gradual shift up or
down in market rates of 100 and 200 basis points across the entire yield curve.
Assuming a downward shift in rates, savings, money market and NOW accounts have
implied interest rate floors and it is assumed that the related interest expense
on these accounts will not decrease in proportion to the downward shift in
rates. Assuming an upward shift in rates of 200 basis points, the simulated
increase in interest income would be less than the simulated increase in
interest expense as the Company's fixed-rate earning assets exceed its
fixed-cost paying liabilities. It should be emphasized, however, that the
results are dependent on material assumptions such as those discussed above.

   Substantially all of the Company's remaining mortgage servicing rights were
sold in January 2001. Future mortgage servicing rights originated will be sold
on a flow basis shortly after the mortgages are sold. As a result, future
earnings exposure to the value of mortgage servicing rights is not expected to
be material.

   The most significant factors affecting market risk exposure of net interest
income during the six months ended June 30, 2001 has been (i) the direction of
interest rates, (ii) changes in the shape of the U.S. Government securities and
interest rate swap yield curves, (iii) changes in the composition of mortgage
assets (iv) changes in the borrowings portfolio structure, and (v) reduction of
deposit interest expense.

   The Company's earnings are not directly and materially impacted by movements
in foreign currency rate 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.



                                       28
<PAGE>   29
LIQUIDITY

Parent Company

On a parent-only basis at June 30, 2001, the Company's debt service requirements
consisted primarily of junior subordinated debentures issued to two
subsidiaries, $68.8 million to Peoples Heritage Capital Trust I and $30 million
to Banknorth Capital Trust I, in connection with the issuance of 9.06% Capital
Securities due 2027 and 10.52% Capital Securities due 2027, respectively. The
principal sources of funds for the Company to meet parent-only obligations are
dividends from its banking subsidiaries, which are subject to regulatory
limitations, and borrowings, including draws on a $60 million unsecured line of
credit which is renewable every 364 days and, if used, carries interest at 3
month LIBOR plus 0.75%. There was no outstanding balance on the line at June 30,
2001.

Banking Subsidiaries

For banking subsidiaries of the Company, liquidity represents the ability to
fund asset growth or accommodate deposit withdrawals. Liquidity risk is the
danger that the banks 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, the banks have 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

The Company continually monitors and forecasts its liquidity position. There are
several interdependent methods used by the Company for this purpose, including
daily review of fed funds positions, monthly review of balance sheet changes,
monthly review of liquidity ratios, periodic liquidity forecasts and periodic
review of contingent funding plans.

As of June 30, 2001, the banks had in the aggregate $2.5 billion of "immediately
accessible liquidity," defined as cash that could be raised within 1-3 days
through collateralized borrowings or security sales. This represents 21% of
deposits. The Company's current policy minimum is 10% of deposits.

Also as of June 30, 2001, the banks had in the aggregate "potentially volatile
funds" of $1.4 billion. These are funds that might flow out of the banks over a
90-day period in an adverse environment. Management estimates this figure by
applying adverse probabilities to its various credit-sensitive and
economically-sensitive funding sources.

As of June 30, 2001, the ratio of "immediately accessible liquidity" to
"potentially volatile funds" was 180%, versus a policy minimum of 100%.

In addition to the liquidity sources discussed above, management believes that
its consumer loan portfolio provides a significant amount of contingent
liquidity that could be accessed in a reasonable time period through sale or
securitization. The banks also have significant untapped access to the national
brokered deposit market. Both of these sources are contemplated as secondary
liquidity in the Company's contingent funding plan. Management believes that the
level of liquidity is sufficient to meet current and future funding
requirements.


CAPITAL

At June 30, 2001, shareholders' equity amounted to $1.4 billion. In addition,
through subsidiary trusts, the Company had outstanding at such date $98.8
million of capital securities which mature in 2027 and qualify as Tier 1
Capital. In June, 2001, one of the Company's wholly-owned subsidiaries, First
Massachusetts Bank, NA, issued $200 million of 7.625% subordinated notes due in
2011 which qualify as Tier 2 capital of this banking subsidiary.

The Company paid a $0.13 per share dividend on its Common Stock during the first
and second quarters of 2001. In January 2001, the Company authorized an
8,000,000 share repurchase program to be purchased from time to time in


                                       29
<PAGE>   30
open market transactions as market conditions warrant. The Company purchased
approximately 5 million shares through June 30, 2001 at an average price of
$19.85 per share or a total $94.9 million.

Capital guidelines issued by the Federal Reserve Board require the Company to
maintain certain ratios, set forth in Table 9. As indicated in such table, the
Company's regulatory capital currently substantially exceeds all applicable
requirements.


   TABLE 9 - REGULATORY CAPITAL REQUIREMENTS
   (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                          For Capital Adequacy
                                                                  Actual                   Purposes                 Excess
                                                                  ------                   --------                 ------
                                                         Amount          Ratio        Amount        Ratio     Amount       Ratio
                                                         ------          -----        ------        -----     ------       -----

<S>                                                    <C>              <C>            <C>           <C>    <C>              <C>
As of June 30, 2001:
Total capital (to risk weighted assets)                $1,638,699       13.15%         996,804       8.00%  $  641,895       5.15%
Tier 1 capital (to risk weighted assets)                1,283,396       10.30%         498,402       4.00%     784,994       6.30%
Tier 1 leverage capital ratio (to average assets)       1,283,396        7.15%         718,138       4.00%     565,258       3.15%

As of December 31, 2000:

Total capital (to risk weighted assets)                 1,428,814       11.81%         967,752       8.00%     461,062       3.81%
Tier 1 capital (to risk weighted assets)                1,277,574       10.56%         483,876       4.00%     793,698       6.56%
Tier 1 leverage capital  (to average assets)            1,277,574        7.02%         727,852       4.00%     549,722       3.02%
</TABLE>

Net risk weighted assets were $12.5 billion and $12.1 billion at June 30, 2001
and December 31, 2000, respectively.

The Company's banking subsidiaries are also subject to federal regulatory
capital requirements. At June 30, 2001, each of the Company's depository
institutions was deemed to be "well capitalized" under the regulations of the
applicable federal banking agency and in compliance with applicable capital
requirements.




                                       30
<PAGE>   31
IMPACT OF NEW ACCOUNTING STANDARDS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of
purchase method of accounting for all business combinations initiated after June
30, 2001, thereby eliminating the use of the pooling-of-interests method. It
also provides new criteria that determine whether an acquired intangible asset
should be recognized separately from goodwill. SFAS No. 142 provides guidance on
the accounting for goodwill, specifically goodwill will no longer be amortized,
but will instead be tested for impairment periodically or upon the occurrence of
certain triggering events. This statement is effective for fiscal years
beginning after December 15, 2001. At June 30, 2001, the Company had $167.7
million of goodwill; goodwill amortization expense was $9.0 million for the six
months ended June 30, 2001.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," a replacement
of SFAS No. 125. SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of SFAS
No. 125. SFAS No. 140 is effective for transactions occurring after March 31,
2001 and for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The Company does not expect the impact of adopting this
standard to be material to its 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. Forward-looking statements, which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future 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. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.

The Company does not undertake, and specifically disclaims 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.



                                       31
<PAGE>   32
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.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings
         The Company is involved in routine legal proceedings occurring in the
         ordinary course of business which in the aggregate are believed by
         management to be immaterial to the financial condition and results of
         operations of the Company.

Item 2.  Changes in Securities and use of proceeds - not applicable.

Item 3.  Defaults Upon Senior Securities - not applicable.

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

(a)      An annual meeting of shareholders of the Company was held on April 24,
         2001 ("Annual Meeting").

(b)      Not applicable.

(c)      There were 140,788,877 shares of Common Stock of the Company eligible
         to be voted at the Annual Meeting and 117,956,414 shares were
         represented at the meeting by the holders thereof, which constituted a
         quorum. The items voted upon at the Annual Meeting and the vote for
         each proposal were as follows:

1.      Election of directors for a three-year term:
                      Director Nominees Elected for Three Year Terms:

<TABLE>
<CAPTION>
                                                                       FOR                AGAINST
<S>                                                                 <C>                  <C>
                           George W. Dougan                         115,905,933          2,050,474
                           Dana S. Levenson                         116,798,449          1,157,957
                           John M. Naughton                         116,789,652          1,166,755
                           Angelo P. Pizzagalli                     116,658,082          1,298,326
        Election of directors for a two-year term:
                      Director Nominee Elected for Two Year Term:
                           Patrick W. Welch                         116,690,874          1,265,532
        Election of directors for a one-year term:
                      Director Nominees Elected for One Year Term:
                           Luther F. Hackett                        116,647,452          1,308,956
                           Pamela P. Plumb                          116,786,714          1,169,692
</TABLE>

2.       Proposal to amend the Banknorth Group, Inc. 1996 Equity Incentive Plan
         to authorize issuance of up to an additional 7,000,000 shares of
         Company Common Stock.

<TABLE>
<CAPTION>
                             FOR            AGAINST       ABSTAIN
<S>                                        <C>                  <C>
                             97,930,409     18,869,000           1,156,987
</TABLE>


3.       Proposal to ratify the appointment of KPMG LLP as the Company's
         independent auditors for the year ending December 31, 2001.

<TABLE>
<CAPTION>
                             FOR            AGAINST       ABSTAIN
<S>                                         <C>                  <C>
                             116,953,633    731,198              271,572
</TABLE>



Item 5.        Other Information - not applicable.


                                       32
<PAGE>   33
Item 6.  Exhibits and Reports on Form 8-K.

(a)     The following exhibits are filed herewith:

         (i)      Banknorth Group, Inc. Executive Incentive Plan; and

         (ii)     Form of First Amendment to Severance Agreement between the
                  Company and its executive officers.




(b)      The Company filed a Current Report on Form 8-K on June 11, 2001 and a
         Form 8-K/A on June 13, 2001.



                                   SIGNATURES



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


                                          BANKNORTH GROUP, INC.

Date:    August 14, 2001                  By:    /s/ William J. Ryan
                                                 --------------------------
                                                 William J. Ryan
                                                 Chairman, President and
                                                 Chief Executive Officer


Date:    August 14, 2001                  By:    /s/ Peter J. Verrill
                                                 ---------------------------
                                                 Peter J. Verrill
                                                 Executive Vice President,
                                                 Chief Operating Officer and
                                                 Chief Financial Officer


Date:    August 14, 2001                  By:    /s/ Stephen J. Boyle
                                                 ----------------------------
                                                 Stephen J. Boyle
                                                 Executive Vice President and
                                                 Controller
                                                 (principal accounting officer)



                                       33