##### Table of Contents



FORM 10-Q/A 
  [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 001-31251 BANKNORTH GROUP, INC.   Maine
    
    01-0437984(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 Two Portland Square, Portland, Maine
    
    04112(Address of principal executive offices)
    
    (Zip Code)
 (207) 761-8500   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.  Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  The number of shares outstanding of the Registrants common stock and related
stock purchase rights as of April 30, 2004 is: Common stock, par value $.01 per share
    
    172,279,203(Class)
    
    (Outstanding)
 Available on the Web @ www.banknorth.com




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##### Table of Contents



This amended Form 10-Q is being amended by the Company to modify certain statements in the paragraph preceding Table 13 which were inconsistent with such table.




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INDEX
BANKNORTH GROUP, INC. AND SUBSIDIARIES  
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Income
    
    
    4Consolidated Statements of Changes in Shareholders Equity
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 2. Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity Securities
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 5. Other Information
    
    
    42Item 6. Exhibits and Reports on Form 8-K
    
    
    42Signatures
    
    
    43Exhibits
    
    
    44EX-31.1 SECT. 302 CERTIFICATION OF C.E.O.EX-31.2 SECT. 302 CERTIFICATION OF C.F.O.EX-32.1 SECT. 906 CERTIFICATION OF C.E.O.EX-32.2 SEC. 906 CERTIFICATION OF C.F.O.
  2




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BANKNORTH GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data) (Unaudited)
 March 31, 2004
    
    December 31, 2003AssetsCash and due from banks
    
    $
    516,772
    
    
    $
    669,686Federal funds sold and other short term investments
    
    
    8,356
    
    
    
    4,645Securities available for sale, at market value
    
    
    7,389,833
    
    
    
    7,122,992Securities held to maturity (market value of $116,592 and $124,344 at
March 31, 2004 and December 31, 2003, respectively)
    
    
    115,442
    
    
    
    124,240Loans held for sale
    
    
    46,970
    
    
    
    41,696Loans and leases:Residential real estate mortgages
    
    
    2,647,540
    
    
    
    2,710,483Commercial real estate mortgages
    
    
    5,549,406
    
    
    
    5,528,862Commercial business loans and leases
    
    
    3,482,093
    
    
    
    3,287,094Consumer loans and leases
    
    
    4,944,573
    
    
    
    4,819,523Total loans and leases
    
    
    16,623,612
    
    
    
    16,345,962Less: Allowance for loan and lease losses
    
    
    233,297
    
    
    
    232,287Net loans and leases
    
    
    16,390,315
    
    
    
    16,113,675Premises and equipment, net
    
    
    260,302
    
    
    
    264,818Goodwill
    
    
    1,127,799
    
    
    
    1,126,639Identifiable intangible assets
    
    
    34,491
    
    
    
    36,415Bank-owned life insurance
    
    
    493,729
    
    
    
    488,756Other assets
    
    
    495,583
    
    
    
    460,173Total assets
    
    $
    26,879,592
    
    
    $
    26,453,735Liabilities and Shareholders EquityDeposits:Savings accounts
    
    $
    2,517,632
    
    
    $
    2,460,522Money market access and NOW accounts
    
    
    7,268,948
    
    
    
    7,130,534Certificates of deposit
    
    
    4,592,577
    
    
    
    4,733,104Noninterest-bearing deposits
    
    
    3,578,609
    
    
    
    3,577,025Total deposits
    
    
    17,957,766
    
    
    
    17,901,185Short-term borrowings
    
    
    1,635,160
    
    
    
    1,522,297Long-term debt
    
    
    4,403,218
    
    
    
    4,360,567Other liabilities
    
    
    231,537
    
    
    
    149,167Total liabilities
    
    
    24,227,681
    
    
    
    23,933,216Shareholders Equity:Preferred stock (par value $0.01 per share, 5,000,000 shares authorized,
none issued)
    
    
    
    
    
    
    Common stock (par value $0.01 per share, 400,000,000 shares authorized,
Issued - 182,292,973)
    
    
    1,823
    
    
    
    1,823Paid-in capital
    
    
    1,434,779
    
    
    
    1,435,005Retained earnings
    
    
    1,566,904
    
    
    
    1,508,292Treasury stock, at cost (19,247,306 shares in 2004 and 20,105,254 shares in
2003)
    
    
    (412,233
    )
    
    
    (430,608
    )Accumulated other comprehensive income
    
    
    60,638
    
    
    
    6,007Total shareholders equity
    
    
    2,651,911
    
    
    
    2,520,519Total liabilities and shareholders equity
    
    $
    26,879,592
    
    
    $
    26,453,735
 See accompanying Notes to unaudited Consolidated Financial Statements. 3




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BANKNORTH GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share data) (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003Interest and dividend income:Interest and fees on loans and leases
    
    $
    215,779
    
    
    
    220,285Interest and dividends on securities
    
    
    76,873
    
    
    
    89,042Total interest and dividend income
    
    
    292,652
    
    
    
    309,327Interest expense:Interest on deposits
    
    
    38,818
    
    
    
    51,391Interest on borrowed funds
    
    
    36,225
    
    
    
    51,799Total interest expense
    
    
    75,043
    
    
    
    103,190Net interest income
    
    
    217,609
    
    
    
    206,137Provision for loan and lease losses
    
    
    9,500
    
    
    
    10,901Net interest income after provision
for loan and lease losses
    
    
    208,109
    
    
    
    195,236Noninterest income:Deposit services
    
    
    26,153
    
    
    
    22,526Insurance brokerage commissions
    
    
    13,736
    
    
    
    12,357Merchant and electronic banking income, net
    
    
    10,404
    
    
    
    9,021Trust and investment management services
    
    
    9,149
    
    
    
    7,351Bank-owned life insurance
    
    
    5,496
    
    
    
    5,342Investment planning services
    
    
    4,839
    
    
    
    3,256Net securities gains
    
    
    3,581
    
    
    
    2,782Other noninterest income
    
    
    14,859
    
    
    
    15,60388,217
    
    
    
    78,238Noninterest expense:Compensation and employee benefits
    
    
    87,534
    
    
    
    80,693Occupancy
    
    
    15,709
    
    
    
    14,909Equipment
    
    
    11,890
    
    
    
    11,250Data processing
    
    
    10,436
    
    
    
    10,178Advertising and marketing
    
    
    7,523
    
    
    
    5,060Amortization of identifiable intangible assets
    
    
    1,904
    
    
    
    1,997Merger and consolidation costs
    
    
    1,614
    
    
    
    4,450Other noninterest expense
    
    
    23,109
    
    
    
    21,371159,719
    
    
    
    149,908Income before income tax expense
    
    
    136,607
    
    
    
    123,566Applicable income tax expense
    
    
    46,280
    
    
    
    42,173Net income
    
    $
    90,327
    
    
    $
    81,393Basic earnings per share
    
    $
    0.55
    
    
    $
    0.52Diluted earnings per share
    
    $
    0.54
    
    
    $
    0.51Weighted average shares outstanding:Basic
    
    
    162,965
    
    
    
    157,667Dilutive effect of stock options
    
    
    3,692
    
    
    
    1,661Diluted
    
    
    166,657
    
    
    
    159,328
 See accompanying Notes to unaudited Consolidated Financial Statements. 4




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BANKNORTH GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 (In thousands) (Unaudited)
 AccumulatedCommon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherShares
    
    Common
    
    Paid-in
    
    Retained
    
    Treasury
    
    ComprehensiveOutstanding
    
    Stock
    
    Capital
    
    Earnings
    
    Stock
    
    Income
    
    TotalBalances at December 31, 2003
    
    
    162,188
    
    
    $
    1,823
    
    
    $
    1,435,005
    
    
    $
    1,508,292
    
    
    ($
    430,608
    )
    
    $
    6,007
    
    
    $
    2,520,519Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,327
    
    
    
    
    
    
    
    
    
    
    
    90,327Unrealized gains on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,583
    
    
    
    54,583Unrealized gains on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    48Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,958Treasury stock issued for employee benefit
plans
    
    
    858
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    17,999
    
    
    
    
    
    
    
    17,979Distribution of restricted stock
    
    
    
    
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    376
    
    
    
    
    
    
    
    170Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,715
    )
    
    
    
    
    
    
    
    
    
    
    (31,715
    )Balances at March 31, 2004
    
    
    163,046
    
    
    $
    1,823
    
    
    $
    1,434,779
    
    
    $
    1,566,904
    
    
    ($
    412,233
    )
    
    $
    60,638
    
    
    $
    2,651,911Balances at December 31, 2002
    
    
    150,579
    
    
    $
    1,689
    
    
    $
    1,059,778
    
    
    $
    1,269,422
    
    
    ($
    382,350
    )
    
    $
    114,946
    
    
    $
    2,063,485Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,393
    
    
    
    
    
    
    
    
    
    
    
    81,393Unrealized gains on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    215Unrealized gains on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    927
    
    
    
    927Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,535Common stock issued for acquisitions
    
    
    13,401
    
    
    
    134
    
    
    
    382,669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382,803Treasury stock issued for employee benefit
plans
    
    
    601
    
    
    
    
    
    
    
    (2,788
    )
    
    
    
    
    
    
    11,548
    
    
    
    
    
    
    
    8,760Treasury stock purchased
    
    
    (700
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,524
    )
    
    
    
    
    
    
    (15,524
    )Distribution of restricted stock
    
    
    
    
    
    
    
    
    
    
    (746
    )
    
    
    
    
    
    
    1,040
    
    
    
    
    
    
    
    294Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,159
    )
    
    
    
    
    
    
    
    
    
    
    (24,159
    )Balances at March 31, 2003
    
    
    163,881
    
    

    $
    1,823
    
    
    $
    1,438,913
    
    
    $
    1,326,656
    
    
    ($
    385,286
    )
    
    $
    116,088
    
    
    $
    2,498,194
 See accompanying Notes to unaudited Consolidated Financial
Statements. 5




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##### Table of Contents



BANKNORTH GROUP, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Three Months Ended March 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    90,327
    
    
    $
    81,393Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan and lease losses
    
    
    9,500
    
    
    
    10,901Depreciation of banking premises and equipment
    
    
    10,762
    
    
    
    10,556Net amortization of premium and discounts
    
    
    7,204
    
    
    
    13,433Amortization of intangible assets
    
    
    1,904
    
    
    
    1,997Provision for deferred tax expense
    
    
    3,800
    
    
    
    6,984Distribution of restricted stock units
    
    
    170
    
    
    
    294Net (gains) realized from sales of securities and loans
    
    
    (5,092
    )
    
    
    (2,782
    )Net (gains) realized from sales of loans held for sale
    
    
    (1,289
    )
    
    
    (4,031
    )Increase in cash surrender value of bank owned life insurance
    
    
    (5,496
    )
    
    
    (5,342
    )Net decrease in mortgage servicing rights
    
    
    203
    
    
    
    450Proceeds from sales of loans held for sale
    
    
    94,688
    
    
    
    261,154Residential loans originated and purchased for sale
    
    
    (98,599
    )
    
    
    (214,470
    )Net (increase) decrease in other assets
    
    
    (55,428
    )
    
    
    (13,861
    )Net increase (decrease) in other liabilities
    
    
    92,686
    
    
    
    (44,608
    )Net cash provided by operating activities
    
    
    145,340
    
    
    
    102,068Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    984,631
    
    
    
    471,817Proceeds from maturities and principal repayments of securities available for sale
    
    
    308,779
    
    
    
    866,857Purchases of securities available for sale
    
    
    (1,473,468
    )
    
    
    (1,681,598
    )Proceeds from maturities and principal repayments of securities held to maturity
    
    
    8,798
    
    
    
    23,228Net increase in loans and leases
    
    
    (327,274
    )
    
    
    (83,789
    )Proceeds from sales of loans
    
    
    37,097
    
    
    
    Net additions to premises and equipment
    
    
    (6,246
    )
    
    
    (3,566
    )Cash paid for acquisitions, net of cash acquired
    
    
    
    
    
    
    48,354Net cash used in investing activities
    
    
    (467,683
    )
    
    
    (358,697
    )Cash flows from financing activities:Net increase (decrease) in deposits
    
    
    59,277
    
    
    
    (35,596
    )Net increase in securities sold under repurchase agreements
    
    
    16,402
    
    
    
    462,585Proceeds from Federal Home Loan Bank borrowings
    
    
    5,734
    
    
    
    Payments on Federal Home Loan Bank borrowings
    
    
    (15,840
    )
    
    
    (350,864
    )Net (decrease) increase in other borrowings
    
    
    (23,697
    )
    
    
    18,191Treasury stock issued for employee benefit plans
    
    
    17,979
    
    
    
    8,760Purchase of treasury stock
    
    
    
    
    
    
    (15,524
    )Cash dividends paid to shareholders
    
    
    (31,715
    )
    
    
    (24,159
    )Net cash provided by financing activities
    
    
    28,140
    
    
    
    63,393Decrease in cash and cash equivalents
    
    
    (294,203
    )
    
    
    (193,236
    )Cash and cash equivalents at beginning of period
    
    
    316,331
    
    
    
    717,003Cash and cash equivalents at end of period
    
    $
    22,128
    
    
    $
    523,767Interest paid
    
    $
    70,273
    
    
    $
    100,125Income taxes paid (received)
    
    
    (8,388
    )
    
    
    12,513
 See accompanying notes to unaudited Consolidated Financial Statements. 6




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BANKNORTH GROUP, INC. AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements
March 31, 2004
(In thousands, except per share data and as noted)
(Unaudited)
 Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America and predominant practices within the banking industry. We,
Banknorth Group, Inc., have not changed our significant accounting and
reporting policies from those disclosed in our 2003 Annual Report. There have
been no significant changes in the methods or assumptions used in the
accounting policies which require material estimates and assumptions. In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the unaudited consolidated
financial statements have been included herein. The results of operations for
the three months ended March 31, 2004 are not necessarily indicative of the
results that may be expected for any other interim period or the entire year
ending December 31, 2004. Certain amounts in the prior periods have been
reclassified to conform to the current presentation. All significant
intercompany balances and transactions have been eliminated in the accompanying
unaudited consolidated financial statements. Note 2  Acquisitions Acquisitions are an important part of our strategic plan. The following table
summarizes acquisitions completed since January 1, 2003. The acquisitions were
accounted for as purchases and, as such, were included in our results of
operations from the date of acquisition. Balance at
    
    Transaction-Related ItemsAcquisition
    
    Acquisition Date
    
    
    
    
    
    OtherIdentifiable
    
    Cash
    
    Shares
    
    TotalPurchase(Dollars and shares in millions)
    
    Date
    
    Assets
    
    Equity
    
    Goodwill
    
    Intangibles
    
    Paid
    
    Issued
    
    PriceFirst & Ocean Bancorp
    
    
    12/31/2003
    
    
    $
    274.4
    
    
    $
    15.6
    
    
    $
    35.3
    
    
    $
    1.8
    
    
    $
    49.7
    
    
    
    
    
    
    $
    49.7American Financial Holdings, Inc.
    
    
    2/14/2003
    
    
    
    2,690.3
    
    
    
    408.2
    
    
    
    426.0
    
    
    
    9.3
    
    
    
    328.5
    
    
    
    13.4
    
    
    
    711.4Insurance agency acquisitions
    
    
    2003
    
    
    
    1.2
    
    
    
    0.1
    
    
    
    2.4
    
    
    
    0.7
    
    
    
    3.2
    
    
    
    
    
    
    
    3.2
 Note 3  Stock Compensation Plans Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees,
whereby compensation cost is the excess, if any, of the quoted market price of
the underlying stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock upon exercise of the stock
option. We have elected to continue using the intrinsic value method in APB
Opinion No. 25 and, as a result, must make pro forma disclosures of net income
and earnings per share as if the fair value based method of accounting had been
applied. The pro forma disclosures include the effects of all awards granted
and the effects of our employee stock purchase plan. Had we determined
compensation cost based on the fair value at the grant date for all stock
options and recorded expense related to our employee stock purchase plan under
SFAS No. 123, our net income and earnings per share would have been reduced to
the pro forma amounts indicated in the table below: 7




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##### Table of Contents



Three Months Ended March 31,2004
    
    2003Net income, as reported
    
    $
    90,327
    
    
    $
    81,393Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects
    
    
    (3,407
    )
    
    
    (2,084
    )Pro forma net income
    
    $
    86,920
    
    
    $
    79,309Earnings per shareBasic -  As reported
    
    $
    0.55
    
    
    $
    0.52Pro forma
    
    
    0.53
    
    
    
    0.50Diluted - As reported
    
    
    0.54
    
    
    
    0.51Pro forma
    
    
    0.52
    
    
    
    0.50
 On March 31, 2004, the Financial Accounting Standards Board (FASB) issued the
exposure draft Share-Based Payment, an amendment of FASB Statements No. 123
and 95. The draft of the proposed statement concluded that all companies
should expense the fair value of employee stock options using the modified
prospective grant-date measurement approach as defined in SFAS 123.
Compensation cost would be recognized in the financial statements over the
requisite service period prospectively for fiscal years beginning after
December 15, 2004, as if all share-based compensation awards granted, modified,
or settled after December 15, 1994 had been accounted for using the fair-value
method of accounting. We are still assessing the impact of the proposed
statement on our financial statements Note 4  Securities Available for Sale The following table presents the fair value of investments with continuous
unrealized losses for less than 12 months and those that have been in a
continuous unrealized loss position for 12 months or longer as of March 31,
2004. Less than 1 year
    
    More than 1 year
    
    TotalNumber of
    
    Fair
    
    Unrealized
    
    Number of
    
    Fair
    
    Unrealized
    
    Number of
    
    Fair
    
    UnrealizedInvestments
    
    Value
    
    Losses
    
    Investments
    
    Value
    
    Losses
    
    Investments
    
    Value
    
    LossesU. S. Government obligations and obligations
of U.S.Government agencies and corporations
    
    
    5
    
    
    $
    1,035,894
    
    
    ($
    8,935
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    5
    
    
    $
    1,035,894
    
    
    ($
    8,935
    )Other bonds and notes
    
    
    5
    
    
    
    6,023
    
    
    
    (38
    )
    
    
    1
    
    
    
    512
    
    
    
    (83
    )
    
    
    6
    
    
    
    6,535
    
    
    
    (121
    )Mortgage-backed securities
    
    
    51
    
    
    
    1,093,908
    
    
    
    (3,833
    )
    
    
    5
    
    
    
    464
    
    
    
    (7
    )
    
    
    56
    
    
    
    1,094,372
    
    
    
    (3,840
    )Collateralized mortgage obligations
    
    
    8
    
    
    
    54,593
    
    
    
    (50
    )
    
    
    5
    
    
    
    955
    
    
    
    (3
    )
    
    
    13
    
    
    
    55,548
    
    
    
    (53
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    368
    
    
    
    (24
    )
    
    
    3
    
    
    
    368
    
    
    
    (24
    )69
    
    
    $
    2,190,418
    
    
    ($
    12,856
    )
    
    
    14
    
    
    $
    2,299
    
    
    ($
    117
    )
    
    
    83
    
    
    $
    2,192,717
    
    
    ($
    12,973
    )
 For securities exhibiting unrealized losses, the following information was
considered in determining that the impairments are not other-than-temporary.
U.S. Government securities are backed by the full faith and credit of the
United States and therefore bear no credit risk. U.S. Government agencies
securities have minimal credit risk as they play a vital role in the nations
financial markets. Other bonds and notes are generally comprised of corporate
securities which have a credit rating of at least investment grade by one of
the nationally-recognized rating agencies. Mortgage-backed securities or
collateralized mortgage obligations are either issued by federal government
agencies or by private issuers with minimum security ratings of AA. 8




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##### Table of Contents



Note 5  Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill and identifiable intangible
assets for the three months ended March 31, 2004 are summarized as follows: Indentifiable Intangible AssetsCore Deposit
    
    Other
    
    TotalIntangibles
    
    Identifiable
    
    IdentifiableGoodwill
    
    (CDI)
    
    Intangibles
    
    IntangiblesBalance, December 31, 2003
    
    $
    1,126,639
    
    
    $
    28,165
    
    
    $
    8,250
    
    
    $
    36,415Amortization expense
    
    
    
    
    
    
    (965
    )
    
    
    (939
    )
    
    
    (1,904
    )Reclassification
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Adjustments of purchase accounting estimates
    
    
    1,140
    
    
    
    
    
    
    
    
    
    
    
    Balance, March 31, 2004
    
    $
    1,127,799
    
    
    $
    27,180
    
    
    $
    7,311
    
    
    $
    34,491Estimated amortization expense for the year ending:Remaining 2004
    
    
    
    
    
    $
    2,896
    
    
    $
    1,689
    
    
    $
    4,5852005
    
    
    
    
    
    
    3,558
    
    
    
    1,471
    
    
    
    5,0292006
    
    
    
    
    
    
    3,365
    
    
    
    723
    
    

    
    4,0882007
    
    
    
    
    
    
    3,244
    
    
    
    723
    
    
    
    3,9672008
    
    
    
    
    
    
    3,239
    
    
    
    353
    
    
    
    3,592thereafter
    
    
    
    
    
    
    10,879
    
    
    
    621
    
    
    
    11,500
 The components of identifiable intangible assets are as follows: March 31, 2004Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    AmountIdentifiable intangible assets:Core deposit intangibles
    
    $
    55,145
    
    
    $
    27,964
    
    
    $
    27,181Other identifiable intangibles
    
    
    13,703
    
    
    
    6,393
    
    
    
    7,310Total
    
    $
    68,848
    
    
    $
    34,357
    
    
    $
    34,491
 Note 6  Short-term Borrowings A summary of short-term borrowings follows: March 31, 2004
    
    December 31, 2003Securities
sold under agreements to repurchase - retail
    
    $
    1,078,114
    
    
    $
    1,086,900Federal funds purchased
    
    
    503,000
    
    
    
    358,000Treasury, tax and loan notes
    
    
    54,046
    
    
    
    77,397$
    1,635,160
    
    
    $
    1,522,297
 9




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##### Table of Contents



Note 7  Long-term Debt A summary of long-term debt (debt with original maturities of more than one
year) follows: March 31, 2004
    
    December 31, 2003Federal Home Loan Bank advances
    
    $
    1,485,014
    
    
    $
    1,495,821Securities
sold under agreements to repurchase - wholesale
    
    
    2,242,338
    
    
    
    2,214,650Junior subordinated debentures issued to affiliated trusts
    
    
    305,591
    
    
    
    Capital trust securities
    
    
    
    
    
    
    295,275Subordinated debt 7.625%, due 2011
    
    
    200,000
    
    
    
    200,000Senior notes 3.75%, due 2008
    
    
    149,767
    
    
    
    149,753Hedge-related basis adjustments on long-term debt
    
    
    13,194
    
    
    
    (1,896
    )Other long-term debt
    
    
    7,314
    
    
    
    6,964Total
    
    $
    4,403,218
    
    
    $
    4,360,567
 Callable borrowings amounted to $1.1 billion and $1.8 billion at March 31, 2004
and December 31, 2003, respectively, the majority of which are long-term in
nature. Note
8 - Comprehensive Income The following table presents the reconciliation of transactions affecting
accumulated other comprehensive income included in shareholders equity for the
periods indicated. Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003Pre-tax
    
    Tax
    
    Net of
    
    Pre-tax
    
    Tax
    
    Net ofAmount
    
    Effect
    
    Tax
    
    Amount
    
    Effect
    
    TaxUnrealized gain (loss) on securities available for sale
    
    $
    87,555
    
    
    ($
    30,644
    )
    
    $
    56,911
    
    
    $
    3,363
    
    
    ($
    1,340
    )
    
    $
    2,023Unrealized (loss) on cash flow hedges
    
    
    (789
    )
    
    
    276
    
    
    
    (513
    )
    
    
    (3,102
    )
    
    
    1,085
    
    
    
    (2,017
    )Reclassification adjustment for (losses) gains realized
in net income
    
    
    (2,718
    )
    
    
    951
    
    
    
    (1,767
    )
    
    
    1,747
    
    
    
    (611
    )
    
    
    1,136Net change in unrealized gains
    
    $
    84,048
    
    
    ($
    29,417
    )
    
    $
    54,631
    
    
    $
    2,008
    
    
    ($
    866
    )
    
    $
    1,142
 Note
9 - Other Noninterest Income Other noninterest income consisted of the following for the periods indicated. Three Months EndedMarch 31,2004
    
    2003Covered call premiums
    
    $
    6,074
    
    
    $
    7,039Loan fee income
    
    
    5,170
    
    
    
    5,102Mortgage banking services income
    
    
    3,004
    
    
    
    3,172Venture capital write-downs
    
    
    (359
    )
    
    
    (517
    )Miscellaneous income
    
    
    970
    
    
    
    807Total
    
    $
    14,859
    
    
    $
    15,603
 10




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##### Table of Contents



Note 10  Pension and Other Postretirement Plans The following table presents the amount of net periodic benefit cost recognized
for the periods indicated. Three Months EndedMarch 31,Components of net periodic benefit
cost
    
    2004
    
    2003Qualified PensionService cost
    
    $
    2,784
    
    
    $
    2,313Interest cost
    
    
    3,331
    
    
    
    3,042Expected return on plan assets
    
    
    (4,828
    )
    
    
    (3,586
    )Amortization of prior service cost
    
    
    2
    
    
    
    2Amortization of transition obligation
    
    
    (64
    )
    
    
    (64
    )Amortization of net loss
    
    
    1,066
    
    
    
    966Net periodic benefit cost
    
    
    2,291
    
    
    
    2,673Nonqualified PensionService cost
    
    
    99
    
    
    
    78Interest cost
    
    
    405
    
    
    
    395Amortization of prior service cost
    
    
    43
    
    
    
    43Amortization of transition obligation
    
    
    3
    
    
    
    3Amortization of net loss
    
    
    50
    
    
    
    31Net periodic benefit cost
    
    
    600
    
    
    
    550Total net
periodic benefit cost - pensions plans
    
    $
    2,891
    
    
    $
    3,223Other Postretirement BenefitsService cost
    
    $
    40
    
    
    $
    31Interest cost
    
    
    353
    
    
    

    289Amortization of prior service cost
    
    
    35
    
    
    
    35Amortization of transition obligation
    
    
    98
    
    
    
    98Amortization of net loss
    
    
    99
    
    
    
    78Net
periodic benefit cost - other
postretirement benefit plans
    
    $
    625
    
    
    $
    531
 As previously disclosed, we expect to contribute between $15 and $20 million to
our pension plans in 2004, none of which is required to satisfy minimum funding
requirements. The discretionary contribution will be paid entirely in cash and,
as in prior years, the entire contribution is anticipated to be paid in
December after final review of the 2004 pension obligation. Note 11  Defined Contribution Plans We and our subsidiaries have 401(k) Plans covering substantially all permanent
employees. We match employee contributions based on a predetermined formula
and may make additional discretionary contributions. The total expense for
these plans for the three months ended March 31, 2004 and 2003 was $2.3 million
and $2.8 million, respectively. 11




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##### Table of Contents



Note
12 -  Accounting Changes The following information addresses new or proposed accounting pronouncements
related to our industry. Accounting for Variable Interest Entities In December 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46). FIN 46 establishes the criteria
used to identify variable interest entities and to determine whether or not to
consolidate a variable interest entity. At March 31, 2004, pursuant to the
criteria established by FIN 46, we deconsolidated four affiliated trusts which
we had formed for the purposes of issuing capital securities to unaffiliated
parties and investing the proceeds from the sale thereof and the common
securities of the trusts in junior subordinated debentures issued by us. The
result of the deconsolidation and the accounting for these entities was to
recognize investments in these entities of approximately $10.3 million in the
aggregate in other assets and to report the amount of junior subordinated
debentures issued by us to such entities, rather than the related capital
securities, in the long-term debt section of the consolidated balance sheet
which resulted in a $10.3 million increase in long-term borrowings. The
adoption of FIN 46 did not have a significant impact on our financial
condition, results of operations, earnings per share or cash flows. For information regarding the potential effect of FIN 46 on the treatment of
capital securities issued by affiliated trusts as capital for regulatory
purposes, see Capital under Item 2. Accounting for Certain Loan or Debt Securities Acquired in a Transfer In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 03-3. SOP 03-3 requires loans acquired through a
transfer, such as a business combination, where there are differences in
expected cash flows and contractual cash flows due in part to credit quality,
to be recognized at their fair value. This SOP provides that the original
excess of contractual cash flows over cash flows expected to be collected may
not be recognized as an adjustment of yield, loss accrual, or valuation
allowance. Any future excess of contractual cash flows over the original
expected cash flows is to be recognized as an adjustment of future yield.
Future decreases in actual cash flow over the original expected cash flow is
recognized as a valuation allowance and expensed immediately. Valuation
allowances can not be created or carried over in the initial accounting for
loans acquired. This SOP is effective for loans acquired in fiscal years
beginning after December 15, 2004. Note 13  Subsequent Events On April 30, 2004, Banknorth completed the acquisitions of Foxborough Savings
Bank (Foxborough) and CCBT Financial Companies, Inc. (CCBT). Foxborough
was acquired for $88.9 million in a cash transaction. Foxborough had $249.6
million of assets and $28.5 million of shareholders equity at March 31, 2004.
CCBT, the parent company of Cape Cod Bank and Trust Company NA, had $1.3
billion of assets and $117.3 million of shareholders equity at March 31, 2004
and 8.4 million common shares outstanding. Under terms of the agreement, each
outstanding share of CCBT was converted into 1.084 shares of Banknorth common
stock, plus cash in lieu of any fractional share interest. 12




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##### Table of Contents



BANKNORTH GROUP, INC. AND
SUBSIDIARIES 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In thousands, except per share data and as noted) EXECUTIVE OVERVIEW Our financial statements for the three months ended March 31, 2003 reflect the
acquisition of American Financial Holdings, Inc. (American) from the date of
acquisition on February 14, 2003. American had total assets of $2.7 billion at
the date of acquisition. Our financial statements for the three months ended
March 31, 2004 also reflect the acquisition of First & Ocean Bancorp (F&O)
from the date of acquisition on December 31, 2003. F&O had total assets of
$274 million at the date of acquisition. Our net income increased by $8.9 million in the first quarter ended March 31,
2004 compared to the first quarter last year, an increase of 11%. The following
were significant factors related to the results for the first quarter of 2004
compared to the first quarter of 2003.  
    
    Net interest income increased 6% over the first quarter of last
year due primarily to a $1.1 billion increase in average earning assets
from period to period. The net interest margin of 3.68% for the
quarter ended March 31, 2004 increased 2 basis points from the first
quarter of 2003.
    
    Our noninterest income, which is comprised primarily of fee income,
increased 13%, primarily due to growth in income from deposit services,
trust and investment management services and investment planning
services.
    
    Our noninterest expense increased by 7%, primarily due to a 8%
increase in compensation and employee benefits, reflecting our growth.
In addition, advertising and marketing expense increased $2.5 million,
or 48.7%, primarily to attract customers who are looking for new
banking opportunities following Bank of America Corporations
acquisition of FleetBoston Financial Corporation. Noninterest expense
was benefited by a $2.8 million or 64% decrease in merger and
consolidation costs.
    
    Total average loans and leases increased 11% during the first
quarter of 2004 compared to the first quarter of 2003. Excluding the
effects of acquisitions, total average loans and leases increased 5%,
as strong commercial and consumer loan growth was offset by residential
run-off.
    
    Total average deposits increased 9% during the first quarter of
2004 compared to the first quarter of 2003 primarily due to
acquisitions. Excluding the effects of acquisitions, total average
deposits increased $244 million, or 1%, as average checking deposits
increased 17% and savings and money market deposits increased 7%, while
certificates of deposit declined 16%.
    
    Our issuer rating was upgraded by Moodys Investor Services to A3
on March 31, 2004. RESULTS OF OPERATIONS SUMMARY Consolidated net income was $90.3 million, or $0.54 per diluted share, for the
first quarter of 2004 as compared with $81.4 million, or $0.51 per diluted
share, for the first quarter of 2003, a per share increase of 6%. Our growth
in net income for the quarter ended March 31, 2004 over the same quarter last
year was due in part to acquisitions completed in 2003 and organic growth.
Results were diminished by the effect of merger and consolidation costs of $1.6
million and $4.5 million for the three months ended March 31, 2004 and 2003,
respectively. 13




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##### Table of Contents



Annualized return on average equity (ROE) and return on average assets
(ROA) were 14.13% and 1.37%, respectively, for the quarter ended March 31,
2004 and were 14.26% and 1.32%, respectively, for the comparable quarter last
year. Results for the first quarter of 2004 improved over the first quarter of 2003
due primarily to an increase in average earning assets and strong fee income.
Net interest income increased by 6% over the first quarter of last year due
primarily to increased earning asset levels (from organic growth and our 2003
acquisitions). Noninterest income amounted to $88.2 million and $78.2 million
for the quarters ended March 31, 2004 and 2003, respectively, a 13% increase.
This increase was primarily attributable to increases in income from deposit
services, trust and investment management services and investment planning
services. Noninterest expense totaled $159.7 million and $149.9 million for
the quarters ended March 31, 2004 and 2003, respectively, an increase of 7%.
Acquisitions in 2003 were factors in the increased noninterest income and
noninterest expense. The efficiency ratio was 52.23% in the first quarter of
2004 compared to 52.71% in the comparable period last year. For a description
of the methodology we use to calculate the efficiency ratio, see Note 5 to
Table 1. Selected quarterly data, ratios and per share data are provided in Table 1. 14




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##### Table of Contents



TABLE 1 - Selected Quarterly Data 2004
    
    2003First
    
    Fourth
    
    Third
    
    Second
    
    FirstInterest income
    
    
    $
    292,652
    
    
    $
    290,414
    
    
    $
    290,750
    
    
    $
    302,478
    
    
    $
    309,327Interest expense
    
    
    
    75,043
    
    
    
    77,126
    
    
    
    80,918
    
    
    
    90,904
    
    
    
    103,190Net interest income
    (A)
    
    
    217,609
    
    
    
    213,288
    
    
    
    209,832
    
    
    
    211,574
    
    
    
    206,137Provision for loan and lease losses
    
    
    
    9,500
    
    
    
    10,400
    
    
    
    10,500
    
    
    
    10,500
    
    
    
    10,901Net interest income after provision for loan and
lease losses
    
    
    
    208,109
    
    
    
    202,888
    
    
    
    199,332
    
    
    
    201,074
    
    
    
    195,236Noninterest income (1)
    (B)
    
    
    88,217
    
    
    
    84,435
    
    
    
    88,656
    
    
    
    115,828
    
    
    
    78,238Noninterest expense (2)
    (C)
    
    
    159,719
    
    
    
    155,676
    
    
    
    151,647
    
    
    
    184,039
    
    
    
    149,908Income before income taxes
    
    
    
    136,607
    
    
    
    131,647
    
    
    
    136,341
    
    
    
    132,863
    
    
    
    123,566Income tax expense
    
    
    
    46,280
    
    
    
    40,085
    
    
    
    46,063
    
    
    
    45,338
    
    
    
    42,173Net income
    
    
    $
    90,327
    
    
    $
    91,562
    
    
    $
    90,278
    
    
    $
    87,525
    
    
    $
    81,393Weighted average shares outstanding:Basic
    
    
    
    162,965
    
    
    
    162,149
    
    
    
    161,517
    
    
    
    162,312
    
    
    
    157,667Diluted
    
    
    
    166,657
    
    
    
    165,685
    
    
    
    164,446
    
    
    
    164,559
    
    
    
    159,328Basic earnings per share:
    
    
    $
    0.55
    
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    0.54
    
    
    $
    0.52Diluted earnings per share:
    
    
    $
    0.54
    
    
    $
    0.55
    
    
    $
    0.55
    
    
    $
    0.53
    
    
    $
    0.51Return on average assets (3)
    
    
    
    1.37
    %
    
    
    1.39
    %
    
    
    1.39
    %
    
    
    1.38
    %
    
    
    1.32
    %Return on average equity (3)
    
    
    
    14.13
    %
    
    
    14.72
    %
    
    
    14.85
    %
    
    
    14.24
    %
    
    
    14.26
    %Net interest margin (fully-taxable equivalent) (3)
    
    
    
    3.68
    %
    
    
    3.65
    %
    
    
    3.63
    %
    
    
    3.71
    %
    
    
    3.66
    %Noninterest income as a percent of total income (4)
    
    
    
    28.85
    %
    
    
    28.36
    %
    
    
    29.70
    %
    
    
    35.38
    %
    
    
    27.51
    %Efficiency ratio (5)
    
    
    
    52.23
    %
    
    
    52.29
    %
    
    
    50.81
    %
    
    
    56.21
    %
    
    
    52.71
    %
   (1)
    
    In the second quarter of 2003, noninterest income included $29.2
million of net securities gains incurred as part of a deleveraging program
implemented by us in the second quarter of 2003, as discussed under
Financial Condition - Securities below.(2)
    
    In the second quarter of 2003, noninterest expense
included $28.5 million of prepayment penalties on
borrowings incurred as part of the deleveraging
program.(3)
    
    Annualized.(4)
    
    Represents noninterest income as a percentage of net interest income plus
noninterest income.
Noninterest income as a percent of total
income is calculated as (B) divided by (A+B).(5)
    
    Represents noninterest expense as a percentage of
net interest income and noninterest income.
Efficiency ratio is calculated as (C) divided by (A+B). Net Interest Income Net interest income is the difference between interest income on earning assets
such as loans, leases and securities, and interest expense paid on liabilities
such as deposits and borrowings, and continues to be our largest revenue
source. Net interest income is affected by the level of interest rates,
changes in interest rates and by changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. Fully-taxable equivalent net interest income for the first quarter of 2004
increased $11.7 million, or 6%, compared to the first quarter of 2003. This
increase was primarily attributable to an increase in net earning assets and,
to a lesser extent, noninterest-bearing deposits comprising a larger share of
the funding base, which more than offset the effects of lower interest rates. Fully-taxable equivalent interest income decreased by $16.4 million in the
first quarter of 2004, as compared to the first quarter of 2003, as a result of
a decrease in the weighted average yield on earning assets from 5.50% to 4.94%
during the three months ended March 31, 2003 and 2004, respectively, which
reflected declining interest rates during 2003. This decrease more than offset
a $1.1 billion or 4.8% increase in average earning assets from period to period
as a result of increases in the average balances of commercial real estate
loans, commercial business loans and leases and consumer loans and leases. Interest expense decreased by $28.1 million in the first quarter of 2004, as
compared to the first quarter of 2003, primarily as a result of a decrease in
the weighted average rate on interest-bearing liabilities from 2.13% to 1.48%
during the three months ended March 31, 2003 and 2004, respectively. This
decrease more that offset a $619 million, or 3%, increase in the average
balance of interest-bearing liabilities during the first quarter of 2004, as 15




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compared to 2003. Average interest-bearing deposits increased by $843 million,
or 6%, in the first quarter of 2004, as compared to the first quarter of 2003.
Excluding acquisitions, average deposits increased by $244 million, or 1.4%, as
strong growth in demand and money market accounts was offset by declines in
higher-costing certificates of deposit. Average borrowings decreased $224
million, or 4%, in the first quarter of 2004 compared to the first quarter of
2003, primarily due to the reduction of Federal Home Loan Bank borrowings. Net interest margin, which represents fully-taxable equivalent net interest
income as a percentage of average interest-earning assets, increased from 3.66%
to 3.68% during the three months ended March 31, 2003 and 2004, respectively.
The slight improvement in the margin was due to a balance sheet deleveraging
program implemented and interest rate swap agreements entered into in the
second quarter of 2003. The combined effect of the interest rate swaps was to
lower interest expense by $2.6 million. There were no swaps in the first
quarter of 2003. See Other Funding Sources for more detailed discussion. Interest rate spread, which represents the difference between the yield earned
on our interest-earning assets and the rate paid on our interest-bearing
liabilities, increased from 3.37% to 3.46% on a fully-taxable equivalent basis
during the three months ended March 31, 2003 and 2004, respectively, as the 65
basis point decrease in the weighted average rate paid on interest-bearing
liabilities exceeded the 56 basis point decrease in the weighted average yield
on interest-earning assets. See Asset-Liability Management below. 16




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##### Table of Contents



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 above discussion, (i) income from
interest-earning assets and net interest income is presented on a fully-taxable
equivalent basis primarily by adjusting income and yields earned on tax-exempt
interest received on loans to qualifying borrowers and on certain of our
securities to make them equivalent to income and yields earned on fully-taxable
investments, assuming a federal income tax rate of 35%, and (ii) nonaccrual
loans have been included in the appropriate average balance loan category, but
unpaid interest on nonaccrual loans has not been included for purposes of
determining interest income. Average balances are based on average daily
balances during the indicated periods. TABLE 2 - Average Balances, Yields and Rates 2004 First Quarter
    
    2003 First QuarterYield/
    
    
    
    
    
    
    
    
    
    Yield/Average Balance
    
    Interest
    
    Rate (1)
    
    Average Balance
    
    Interest
    
    Rate (1)Loans and leases (2):Residential real estate mortgages
    
    $
    2,725,221
    
    
    $
    35,376
    
    
    
    5.19
    %
    
    $
    2,792,615
    
    
    $
    41,652
    
    
    
    5.97
    %Commercial real estate mortgages
    
    
    5,540,489
    
    
    
    78,614
    
    
    
    5.71
    
    
    
    4,913,188
    
    
    
    77,810
    
    
    
    6.42Commercial business loans and leases
    
    
    3,387,309
    
    
    
    40,579
    
    
    
    4.82
    
    
    
    3,006,370
    
    
    
    39,475
    
    
    
    5.32Consumer loans and leases
    
    
    4,883,031
    
    
    
    62,206
    
    
    
    5.12
    
    
    
    4,186,917
    
    
    
    62,178
    
    
    
    6.02Total loans and leases
    
    
    16,536,050
    
    
    
    216,775
    
    
    
    5.27
    
    
    
    14,899,090
    
    
    
    221,115
    
    
    
    6.00Investment securities (3)
    
    
    7,339,247
    
    
    
    77,352
    
    
    
    4.22
    
    
    
    7,879,925
    
    
    
    89,449
    
    
    
    4.54Federal funds sold and other short-term investments
    
    
    7,624
    
    
    
    15
    
    
    
    0.80
    
    
    
    4,535
    
    
    
    25
    
    
    
    2.21Total earning assets
    
    
    23,882,921
    
    
    
    294,142
    
    
    
    4.94
    
    
    
    22,783,550
    
    
    
    310,589
    
    
    
    5.50Bank owned life insurance
    
    
    490,428
    
    
    
    
    
    
    
    
    
    
    
    425,136Noninterest-earning assets
    
    
    2,153,678
    
    
    
    
    
    
    
    
    
    
    
    1,858,791Total assets
    
    $
    26,527,027
    
    
    
    
    
    
    
    
    
    
    $
    25,067,477Interest-bearing deposits:Regular savings
    
    $
    2,468,416
    
    
    
    1,838
    
    
    
    0.30
    
    
    $
    2,173,771
    
    
    
    3,075
    
    
    
    0.57NOW and money market accounts
    
    
    7,118,939
    
    
    
    14,160
    
    
    
    0.80
    
    
    
    6,217,880
    
    
    
    15,707
    
    
    
    1.02Certificates of deposit
    
    
    4,660,009
    
    
    
    22,820
    
    
    
    1.97
    
    
    
    5,012,351
    
    
    
    32,609
    
    
    
    2.64Brokered deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing deposits
    
    
    14,247,364
    
    
    
    38,818
    
    
    
    1.10
    
    
    
    13,404,002
    
    
    
    51,391
    
    
    
    1.55Borrowed funds
    
    
    6,048,457
    
    
    
    36,225
    
    
    
    2.41
    
    
    
    6,272,657
    
    
    
    51,799
    
    
    
    3.34Total interest-bearing liabilities
    
    
    20,295,821
    
    
    
    75,043
    
    
    
    1.48
    
    
    
    19,676,659
    
    
    
    103,190
    
    
    
    2.13Non-interest bearing deposits
    
    
    3,487,716
    
    
    
    
    
    
    
    
    
    
    
    2,905,737Other liabilities
    
    
    171,584
    
    
    
    
    
    
    
    
    
    
    
    170,732Shareholders equity
    
    
    2,571,906
    
    
    
    
    
    
    
    
    
    
    
    2,314,349Total liabilities and shareholders equity
    
    $
    26,527,027
    
    
    
    
    
    
    
    
    
    
    $
    25,067,477Net earning assets
    
    $
    3,587,100
    
    
    
    
    
    
    
    
    
    
    $
    3,106,891Net interest income (fully-taxable equivalent)
    
    
    
    
    
    
    219,099
    
    
    
    
    
    
    
    
    
    
    
    207,399Less: fully-taxable equivalent adjustments
    
    
    
    
    
    
    (1,490
    )
    
    
    
    
    
    
    
    
    
    
    (1,262
    )Net interest income
    
    
    
    
    
    $
    217,609
    
    
    
    
    
    
    
    
    
    
    $
    206,137Net interest rate spread (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.46
    %
    
    
    
    
    
    
    
    
    
    
    3.37
    %Net interest margin (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.68
    %
    
    
    
    
    
    
    
    
    
    
    3.66
    %
   (1)
    
    Annualized.(2)
    
    Loans and leases include loans held for sale.(3)
    
    Includes securities available for sale and held to maturity 17




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##### Table of Contents



The following table presents certain information on a fully-taxable equivalent
basis regarding changes in our interest income and interest expense for the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided with respect to changes
attributable to (i) changes in volume (change in volume multiplied by old
rate), (ii) changes in rate (change in rate multiplied by old volume) and (iii)
changes in rate/volume (change in rate multiplied by change in volume). TABLE 3 - Rate /Volume Analysis Three Months Ended
March 31, 2004 vs. March 31, 2003
Increase (decrease) due toRate and
    
    TotalVolume (1)
    
    Rate
    
    Volume (2)
    
    ChangeInterest income:Loans and leases
    
    $
    24,420
    
    
    ($
    27,042
    )
    
    ($
    1,718
    )
    
    ($
    4,340
    )Investment securities
    
    
    (6,103
    )
    
    
    (6,269
    )
    
    
    275
    
    
    
    (12,097
    )Federal funds sold and other short-term
investements
    
    
    17
    
    
    
    (16
    )
    
    
    (11
    )
    
    
    (10
    )Total interest income
    
    
    18,334
    
    
    
    (33,327
    )
    
    
    (1,454
    )
    
    
    (16,447
    )Interest expense:Interest-bearing deposits:Regular savings
    
    
    418
    
    
    
    (1,459
    )
    
    
    (196
    )
    
    
    (1,237
    )NOW and money market accounts
    
    
    2,285
    
    
    
    (3,401
    )
    
    
    (431
    )
    
    
    (1,547
    )Certificates of deposit
    
    
    (2,313
    )
    
    
    (8,350
    )
    
    
    874
    
    
    
    (9,789
    )Total interest-bearing deposits
    
    
    390
    
    
    
    (13,210
    )
    
    
    247
    
    
    
    (12,573
    )Borrowed funds
    
    
    (1,862
    )
    
    
    (14,504
    )
    
    
    792
    
    
    
    (15,574
    )Total interest expense
    
    
    (1,472
    )
    
    
    (27,714
    )
    
    
    1,039
    
    
    
    (28,147
    )Net interest income (fully taxable equivalent)
    
    $
    19,806
    
    
    ($
    5,613
    )
    
    ($
    2,493
    )
    
    $
    11,700
   (1)
    
    Volume increases include the effects of acquisitions,
including the acquisition of American on February 14, 2003 and
First and Ocean on December 31, 2003.(2)
    
    Includes changes in interest income and expense not due solely to volume or
rate changes. Provision and Allowance for Loan and Lease Losses The provision for loan and lease losses is recorded to bring the allowance for
loan and lease losses to a level deemed appropriate by management based on
factors discussed in the Analysis and Determination of the Allowance for Loan
and Lease Losses in the Risk Management section. Although we utilize
judgment in providing for losses, for the reasons discussed under the Risk
Management section, there can be no assurance that we will not have to
increase the amount of our provision for loans and lease losses in future
periods. We provided $9.5 million and $10.9 million for loan and lease losses in the
quarters ended March 31, 2004 and 2003, respectively. The lower provision in
the first quarter of 2004 was due to lower net charge-offs during the
three months ended March 31, 2004
compared to the three months ended December 31, 2003 and March 31, 2003. At March 31, 2004, the
allowance for loan and lease losses amounted to $233.3 million, or 1.40% of
total portfolio loans and leases, as compared to $232.3 million, or 1.42%, at
December 31, 2003. The ratio of the allowance for loan and lease losses to
nonperforming loans was 344% at March 31, 2004, as compared to 389% at December
31, 2003 and 288% at March 31, 2003. See Risk Management below for further
information on the provision for loan and lease losses, net charge-offs,
nonperforming assets and other factors we consider in assessing the credit
quality of the loan portfolio and establishing the allowance for loan and lease
losses. 18




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##### Table of Contents



Noninterest Income The following table presents noninterest income for the periods indicated. Table 4 - Noninterest Income Three Months EndedMarch 31,
    
    Change2004
    
    2003
    
    Amount
    
    PercentNoninterest income:Deposit services
    
    $
    26,153
    
    
    $
    22,526
    
    
    $
    3,627
    
    
    
    16
    %Insurance brokerage commissions
    
    
    13,736
    
    
    
    12,357
    
    
    
    1,379
    
    
    
    11
    %Merchant and electronic banking income, net
    
    
    10,404
    
    
    
    9,021
    
    
    
    1,383
    
    
    
    15
    %Trust and investment management services
    
    
    9,149
    
    
    
    7,351
    
    
    
    1,798
    
    
    
    24
    %Bank-owned life insurance
    
    
    5,496
    
    
    
    5,342
    
    
    
    154
    
    
    
    3
    %Investment planning services
    
    
    4,839
    
    
    
    3,256
    
    
    
    1,583
    
    
    
    49
    %Net securities gains
    
    
    3,581
    
    
    
    2,782
    
    
    
    799
    
    
    
    29
    %Other noninterest income:Covered call premiums
    
    
    6,074
    
    
    
    7,039
    
    
    
    (965
    )
    
    
    (14
    %)Loan fee income
    
    
    5,170
    
    
    
    5,102
    
    
    
    68
    
    
    
    1
    %Mortgage banking services income
    
    
    3,004
    
    
    
    3,172
    
    
    
    (168
    )
    
    
    (5
    %)Venture capital write-downs
    
    
    (359
    )
    
    
    (517
    )
    
    
    158
    
    
    
    31
    %Miscellaneous income
    
    
    970
    
    
    
    807
    
    
    
    163
    
    
    
    20
    %Total other noninterest income
    
    
    14,859
    
    
    
    15,603
    
    
    
    (744
    )
    
    
    (5
    %)Total
    
    $
    88,217
    
    
    $
    78,238
    
    
    $
    9,979
    
    
    
    13
    %
 Deposit services income increased $3.6 million, or 16%, primarily as a result
of an increased number of deposit accounts and an increase in cash management
and overdraft fees. Acquisitions during 2003 comprised a significant portion
of the increased number of deposit accounts and increased overdraft fees. Insurance brokerage commissions increased $1.4 million, or 11%, primarily as a
result of increases in renewal and new business in 2004. Merchant and electronic banking income increased $1.4 million, or 15%,
primarily due to increases in the volume of transactions processed and
increased market share from acquisitions. This increase was net of the impact
of decreased debit card fee revenue due to the reductions in interchange rates
resulting from the settlement of antitrust litigation brought against VISA and
MasterCard by Wal-Mart, Sears and other retailers in August 2003. Merchant and
electronic banking income represents fees and interchange income generated by
the use of our ATMs and debit cards issued by us, along with charges to
merchants for credit card transactions processed, net of third-party costs
directly attributable to handling these transactions. Trust and investment management services income increased $1.8 million, or 24%,
primarily due to an increase in fees which are based on the market value of
trust assets under management. Assets under management increased to $8.9
billion at March 31, 2004 from $8.2 billion at March 31, 2003, an increase of
$685 million. This increase was primarily due to improvements in the financial
markets as well as new accounts. Income from bank-owned life insurance (BOLI) increased $154 thousand, or 3%.
Income from BOLI represents the increase in the cash surrender value of life
insurance policies on the lives of certain employees who have consented to
allowing Banknorth, NA, our wholly-owned banking subsidiary, to be the
beneficiary of such policies. The cash surrender value of our BOLI was $493.7
million at March 31, 2004 compared to $488.8 million at December 31, 2003.
Most of our BOLI is invested in the general account of quality insurance
companies. Standard and Poors rated all such general account carriers AA- or
better at March 31, 2004. The BOLI investment 19




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##### Table of Contents



provides a means to mitigate
increasing employee benefit costs. For the first quarter of 2004, the average
carrying value of BOLI was $490 million compared to $425 million for the first
quarter of 2003. Investment planning services income increased $1.6 million, or 49%, primarily
due to an increase in commissions earned from increased sales of third party
mutual funds and annuities resulting from improved market conditions. Net securities gains increased $799 thousand, or 29%. Gains from the sale of
securities are subject to market and economic conditions and, as a result,
there can be no assurance that gains reported in prior periods will be achieved
in the future. Other noninterest income decreased by $744 thousand, or 5%, primarily as a
result of lower premiums received on covered call options. Noninterest Expense The following table presents noninterest expense during the periods indicated. Table 5 - Noninterest Expense Three Months EndedMarch 31,
    
    Change2004
    
    2003
    
    Amount
    
    PercentNoninterest expense:Compensation and employee benefits
    
    $
    87,534
    
    
    $
    80,693
    
    
    $
    6,841
    
    
    
    8
    %Occupancy
    
    
    15,709
    
    
    
    14,909
    
    
    
    800
    
    
    
    5
    %Equipment
    
    
    11,890
    
    
    
    11,250
    
    
    
    640
    
    
    
    6
    %Data processing
    
    
    10,436
    
    
    
    10,178
    
    
    
    258
    
    
    
    3
    %Advertising and marketing
    
    
    7,523
    
    
    
    5,060
    
    
    
    2,463
    
    
    
    49
    %Amortization of identifiable
intangible assets
    
    
    1,904
    
    
    
    1,997
    
    
    
    (93
    )
    
    
    (5
    %)Merger and consolidation costs
    
    
    1,614
    
    
    
    4,450
    
    
    
    (2,836
    )
    
    
    (64
    %)Other noninterest expense:Telephone
    
    
    3,370
    
    
    
    3,468
    
    
    
    (98
    )
    
    
    (3
    %)Office supplies
    
    
    2,438
    
    
    
    2,794
    
    
    
    (356
    )
    
    
    (13
    %)Postage and freight
    
    
    2,401
    
    
    
    3,074
    
    
    
    (673
    )
    
    
    (22
    %)Miscellaneous loan costs
    
    
    514
    
    
    
    948
    
    
    
    (434
    )
    
    
    (46
    %)Deposits and other assessments
    
    
    908
    
    
    
    899
    
    
    
    9
    
    
    
    1
    %Collection and carrying costs
of non-performing assets
    
    
    725
    
    
    
    308
    
    
    
    417
    
    
    
    135
    %Miscellaneous
    
    
    12,753
    
    
    
    9,880
    
    
    
    2,873
    
    
    
    29
    %Total other noninterest expense
    
    
    23,109
    
    
    
    21,371
    
    
    
    1,738
    
    
    
    8
    %Total
    
    $
    159,719
    
    
    $
    149,908
    
    
    $
    9,811
    
    
    
    7
    %
 Noninterest expense increased $9.8 million, or 7%, in the first quarter of 2004
compared to the same period last year. This increase was primarily due to a
higher compensation and employee benefits expense, advertising and marketing
expense and miscellaneous expense, which were offset in part by reduced merger
and consolidation costs. Compensation and employee benefits expense increased 8% in the first quarter of
2004 compared to the same period last year primarily due to increased salaries
and benefit costs primarily from acquisitions and merit increases. These
increases were partially offset by decreased pension expense. Pension expense
under the defined benefit pension plan was $2.9 million and $3.1 million for
the three months ended March 31, 2004 and 2003, respectively.
The fair value of plan assets as of March 31, 2004 was $240.6 million as
compared to $158.1 million at March 31, 2003. 20




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##### Table of Contents



Advertising and marketing expense increased $2.5 million in the first quarter
of 2004 compared to the same period last year primarily to attract customers
who are looking for new banking opportunities following Bank of America
Corporations acquisition of FleetBoston Financial Corporation. The increase
in expense included new advertising promotions and corporate sponsorships (such
as for the Boston Bruins, Win a day with Ray promotions and Tobin Bridge
sponsorships) and expenses for the new comprehensive product catalogue for use
in all of our branches. The 64% decrease in merger and consolidation costs was due to the completion of
the system conversions of the acquisitions of American and Warren Bancorp, Inc.
in the first quarter of 2003. The following table summarizes merger and
consolidation costs for the three months ended March 31, 2004 and 2003. Table 6 - Merger and consolidation costs Three Months EndedMarch 31,2004
    
    2003Foxborough Saving Bank Merger ChargesSystems conversion and integration/customer communications
    
    $
    130
    
    
    $
    Other costs
    
    
    27
    
    
    
    157
    
    
    
    CCBT Financial Companies, Inc. Merger ChargesSystems conversion and integration/customer communications
    
    
    535
    
    
    
    Other costs
    
    
    153
    
    
    
    688
    
    
    
    F&O Merger ChargesPersonnel costs
    
    
    285
    
    
    
    Systems conversion and integration/customer communications
    
    
    648
    
    
    
    Other costs
    
    
    107
    
    
    
    1,040
    
    
    
    American Merger ChargesPersonnel costs
    
    
    104
    
    
    
    915Systems conversion and integration/customer communications
    
    
    6
    
    
    
    1,221Other costs
    
    
    59
    
    
    
    1,114169
    
    
    
    3,250Warren Bancorp, Inc. Merger ChargesPersonnel costs
    
    
    
    
    
    
    623Systems conversion and integration/customer communications
    
    
    
    
    
    
    505Other costs
    
    
    24
    
    
    
    10024
    
    
    
    1,228Andover Bancorp, Inc./MetroWest Bank Merger ChargesPersonnel costs
    
    
    
    
    
    
    1Other costs
    
    
    
    
    
    
    (24
    )
    
    
    
    (23
    )Other CostsBancorp Connecticut and Ipswich Bancshares, Inc. merger
charges
    
    
    6
    
    
    
    38Branch decommissioning costs
    
    
    
    
    
    
    (43
    )Reverse auto
lease reserves (Banknorth - Vermont)
    
    
    (470
    )
    
    
    (464
    )
    
    
    (5
    )Total Merger and Consolidation Costs
    
    $
    1,614
    
    
    $
    4,450
 21




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##### Table of Contents



The following table summarizes activity in the accrual account for merger and
consolidation costs from December 31, 2003 through March 31, 2004. TABLE 7 - Merger and Consolidation Costs - Activity in the Accrual Account Non-cash WriteBalance
    
    Other
    
    
    
    
    
    Cash
    
    Downs and Other
    
    Balance12/31/03
    
    Reclassification
    
    Charges
    
    Payments
    
    Adjustments
    
    3/31/04Foxborough Merger
    
    $
    0
    
    
    $
    0
    
    
    $
    157
    
    
    ($
    157
    )
    
    $
    0
    
    
    $
    0Cape Cod Merger
    
    
    
    
    
    
    
    
    
    
    688
    
    
    
    (688
    )
    
    
    
    
    
    
    First & Ocean
    
    
    250
    
    
    
    1,715
    
    
    
    1,040
    
    
    
    (2,314
    )
    
    
    
    
    
    
    691American Merger
    
    
    266
    
    
    
    
    
    
    
    169
    
    
    
    (169
    )
    
    
    (266
    )
    
    
    Warren Merger
    
    
    27
    
    
    
    
    
    
    
    24
    
    
    
    (24
    )
    
    
    (27
    )
    
    
    Bancorp Connecticut Merger
    
    
    466
    
    
    
    
    
    
    
    6
    
    
    
    (157
    )
    
    
    
    
    
    
    315Andover / MetroWest Mergers
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    82Other Merger and Consolidation Costs
    
    
    4
    
    
    
    
    
    
    
    (470
    )
    
    
    (4
    )
    
    
    470
    
    
    
    Total
    
    $
    1,097
    
    
    $
    1,715
    
    
    $
    1,614
    
    
    ($
    3,515
    )
    
    $
    177
    
    
    $
    1,088
 Other noninterest expense increased $1.7 million, or 8%, in the first quarter
of 2004 compared to the same period last year largely due to increased
professional and consulting fees. Taxes The effective tax rate was 34% for each of the three months ended March 31,
2004 and 2003. We are subject to examinations by various federal and state governmental tax
authorities from time to time regarding tax returns we have filed. Currently,
federal and certain state income tax returns filed by us in recent years are
under examination or scheduled to be examined in the near future. Examinations
by tax authorities may result in challenges to the tax positions taken and
judgments made by us. We believe that the positions taken and judgments made
by us and amounts accrued for income taxes are adequate. Should tax laws
change or tax authorities determine that our judgments were inappropriate,
however, the result and adjustments required could have an adverse effect on
our operations. Comprehensive Income Our comprehensive income amounted to $145.0 million and $82.5 million during
the first quarters of 2004 and 2003, respectively. Comprehensive income
differed from our net income in 2004 primarily due to a $54.6 million net
unrealized gain on securities. For additional information, see the
Consolidated Statements of Changes in Shareholders Equity in the unaudited
Consolidated Financial Statements. Our available for sale investment portfolio had net unrealized gains of $96.1
million, $11.8 million and $181.7 million ($62.5 million, $7.7 million and
$118.1 million net of applicable income tax effects, respectively) at March 31,
2004, December 31, 2003 and March 31, 2003, respectively. The changes from
period to period are due mainly to changes in prevailing interest rates and, to
a lesser degree, the size of the available for sale investment portfolio. The
change in fair value of our interest-bearing liabilities, which would tend to
offset the change in fair value of available for sale securities, is not
included in other comprehensive income. FINANCIAL CONDITION Our consolidated total assets increased by $426 million, or 2%, from $26.5
billion at December 31, 2003 to $26.9 billion at March 31, 2004. Total average
assets were $26.5 billion and $25.1 billion for the three months ended March
31, 2004 and 2003, respectively. The increase in total average assets was
largely due to the acquisitions in 2003, which increased average assets by
approximately $1.9 billion. Total liabilities increased by $294 million 22




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##### Table of Contents



since
year-end 2003, primarily due to increases in borrowings. Shareholders equity
totaled $2.7 billion at March 31, 2004 and $2.5 billion at December 31, 2003. Securities The securities portfolio is utilized for several purposes. It serves as a
vehicle to manage interest rate and prepayment risk, generates interest and
dividend income from the investment of excess funds, provides liquidity to meet
liquidity requirements and is used as collateral for public deposits and
wholesale funding sources. The securities portfolio (including securities classified as held to maturity)
averaged $7.3 billion during the first quarter of 2004, as compared to $7.9
billion in the first quarter of 2003. The net decrease in the securities
portfolio resulted from the deleveraging program implemented by us in the
second quarter of 2003, pursuant to which we sold $901 million of investments
securities and used the proceeds to prepay $853 million of borrowings. The
securities
portfolio is held in and managed by Northgroup Asset Management
Company, a wholly-owned subsidiary of the Company, and consists primarily of mortgage-backed securities and U.S. Government
and agency securities. Other securities in the portfolio are collateralized
mortgage obligations, which included securitized residential real estate loans
held in a REMIC, and asset-backed securities. The majority of securities
available for sale were rated AAA or equivalently rated at March 31, 2004. The
average yield on securities was 4.22% for the quarter ended March 31, 2004 and
4.54% for the quarter ended March 31, 2003. With the exception of securitized
residential real estate loans held in a REMIC that were classified as held to
maturity and carried at cost, all of our securities are classified as available
for sale and carried at market value. Securities available for sale had an
after-tax unrealized gain of $62.5 million and $7.7 million at March 31, 2004
and December 31, 2003, respectively. These unrealized gains do not impact net
income or regulatory capital but are recorded as adjustments to shareholders
equity, net of related deferred income taxes. Unrealized gains, net of related
deferred income taxes, are a component of Accumulated Other Comprehensive
Income contained in the unaudited Consolidated Statement of Changes in
Shareholders Equity. Loans and Leases Total loans and leases (including loans held for sale) averaged $16.5 billion
during the first quarter of 2004, an increase of $1.6 billion, or 11%, from the
first quarter of 2003. This increase was primarily attributable to growth in
consumer loans and leases, commercial real estate loans and, to a lesser
extent, commercial business loans and leases. Average loans and leases as a
percent of average earning assets was 69% during the quarter ended March 31,
2004 compared to 65% during the quarter ended March 31, 2003. Average residential real estate loans (which include mortgage loans held for
sale) of $2.7 billion during the first quarter of 2004 decreased $67 million
from the average amount of such loans during the first quarter of last year.
Excluding acquisitions, average residential loans decreased approximately $502
million, or 16%, as a result of increased refinancing activity and prepayments
in a lower interest rate environment. Mortgage loans held for sale amounted to
$47.0 million and $41.7 million at March 31, 2004 and December 31, 2003,
respectively. We are currently selling substantially all of the conforming
30-year fixed-rate loans we originate. Average commercial real estate loans of $5.5 billion increased $627 million, or
13%, from the first quarter of last year. Excluding acquisitions, average
commercial real estate loans increased $524 million, or 10%. While most of our
markets reflected increases, the largest increases were in Massachusetts and
Connecticut. The average yield on commercial real estate loans during the first
quarter of 2004 was 5.71%, as compared to 6.42% in the first quarter of 2003, a
decrease of 71 basis points. The lower yield reflects the effect of the
downward repricing of variable-rate loans, the refinancing of fixed-rate loans
at lower rates and the origination of new loans at the lower prevailing rates. Commercial business loans and leases averaged $3.4 billion during the first
quarter of 2004, an increase of $380 million, or 13%, over the first quarter of
2003. Excluding acquisitions, average commercial business loans and leases
increased $327 million, or 11%. Massachusetts reflected the greatest amount of
growth. The yield on commercial business loans and leases decreased to 4.82%
in the first quarter of 2004 from 5.32% in the first quarter 23




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##### Table of Contents



of 2003. The
decrease in the yield was primarily due to lower rates on new loans and the
repricing of variable-rate loans. Consumer loans and leases averaged $4.9 billion during the first quarter of
2004, an increase of $696 million, or 17%, from the first quarter of 2003.
Excluding acquisitions, average consumer loans and leases increased $410
million or 9%. The growth in consumer loans was primarily in home equity loans
and indirect automobile loans. The average yield on consumer loans and leases
decreased to 5.12% in the first quarter of 2004 from 6.02% in the first quarter
of 2003. For a description of the types of loans and leases in our loan and
lease portfolio and a breakdown of our consumer loans, see Credit Risk. Deposits Total deposits averaged $17.7 billion during the first quarter of 2004, an
increase of $1.4 billion from the first quarter of 2003 due primarily to an
increase in noninterest-bearing and money market and NOW accounts. The ratio
of loans to deposits was 93% at March 31, 2004 and 91% at December 31, 2003. Average noninterest-bearing deposits totaled $3.5 billion during the first
quarter of 2004, an increase of $582 million, or 20%, from the first quarter of
2003. Excluding acquisitions, average noninterest-bearing deposits increased
$509 million, or 17%. Average interest-bearing deposits of $14.2 billion during the first quarter of
2004 increased $843 million from the first quarter of 2003. Excluding
acquisitions, average savings, money market and NOW accounts increased $620
million, or 7%, while certificates of deposits declined by 16%. The decline in
certificates of deposits resulted from our decision to allow deposits priced
above alternate funding costs to run off. The average rates paid on NOW and
money market accounts decreased 22 basis points from 1.02% in the first quarter
of 2003 to 0.80% in the first quarter of 2004 due largely to lower prevailing
interest rates. The average rates paid on all deposit types decreased by 45
basis points from 1.55% in the first quarter of 2003 to 1.10% in the
first quarter of 2004, reflecting the decline in prevailing interest rates. Included within the deposit categories above are government banking deposits,
which averaged $1.5 billion in the first quarter of 2004 and $1.1 billion in
the first quarter of 2003. Government banking deposits include deposits
received from state and local governments, school districts,
colleges/universities, utility districts, public housing authorities and court
systems in our market area. Many of these deposits exceed the FDIC insurance
coverage amounts and require us to pledge specific collateral or maintain
private insurance. Other Funding Sources We use both short-term and long-term borrowings to balance earning assets
growth. Short-term borrowings, which include federal funds purchased, retail
securities sold under agreements to repurchase and other short-term borrowings,
amounted to $1.6 billion and $1.5 billion at March 31, 2004 and December 31,
2003, respectively, a decrease of $113 million, or 7%. At March 31, 2004, we also had a $110 million unsecured line of credit. The
line is renewable every 364 days and, if used, carries interest at LIBOR plus
0.625%. There were no drawdowns on this line in either the first quarter of
2004 or 2003. We also have additional borrowing capacity as more fully
described under Liquidity below. Long-term debt includes FHLB advances, senior notes, subordinated notes, junior
subordinated debentures, wholesale securities sold under agreements to
repurchase, capital lease obligations and other debt with original maturities
greater than one year. Long-term debt amounted to $4.4 billion at March 31,
2004 and December 31, 2003. At March 31, 2004 and December 31, 2003, FHLB borrowings amounted to $1.5
billion. FHLB collateral consists primarily of first mortgage loans secured by
single-family properties. These borrowings had an average cost of 24




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##### Table of Contents



4.25% during
the three months ended March 31, 2004 as compared to 4.52% during the three
months ended March 31, 2003. At March 31, 2004 and December 31, 2003, we had $150 million of 5-year senior
notes carrying a fixed rate of 3.75%. These securities, which were issued in
April 2003, are rated A3 by Moodys Investor Services. At March 31, 2004 and December 31, 2003, subordinated debt consisted of $200
million of 7.625% subordinated notes due 2011 issued by our banking subsidiary
in 2001. The notes qualify as Tier 2 capital for regulatory purposes. At March 31, 2004 and December 31, 2003, we had outstanding $305.6 million of
junior subordinated debentures issued by us to affiliated trusts. See
Capital below. At March 31, 2004 and December 31, 2003, wholesale securities sold under
repurchase agreements amounted to $2.2 billion and were collateralized by
mortgage-backed securities and U.S. Government obligations. CONTRACTUAL OBLIGATIONS The following tables summarize our contractual cash obligations, other
commitments and derivative financial instruments at March 31, 2004. Table 8 - Contractual obligations and other commitments
Contractual Obligations (1) Payments Due By PeriodLess than
    
    1 - 3
    
    4 - 5
    
    After 5Total
    
    1 Year
    
    Years
    
    Years
    
    YearsLong-term debt
    
    $
    2,154,856
    
    
    $
    104,346
    
    
    $
    728,827
    
    
    $
    311,204
    
    
    $
    1,010,479Capital lease obligations
    
    
    6,024
    
    
    
    62
    
    
    
    213
    
    
    
    995
    
    
    
    4,754Repurchase
agreements - wholesale
    
    
    2,242,338
    
    
    
    1,042,338
    
    
    
    1,100,000
    
    
    
    
    
    
    
    100,000Total long-term debt
    
    
    4,403,218
    
    
    
    1,146,746
    
    
    
    1,829,040
    
    
    
    312,199
    
    
    
    1,115,233Operating lease obligations
    
    
    128,245
    
    
    
    25,477
    
    
    
    39,877
    
    
    
    26,324
    
    
    
    36,567Pension plan contribution
    
    
    20,000
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    Other benefit plan payments
    
    
    35,022
    
    
    
    3,130
    
    
    
    6,196
    
    
    
    5,955
    
    
    
    19,741Other vendor obligations
    
    
    32,900
    
    
    
    10,123
    
    
    
    20,246
    
    
    
    2,531
    
    
    
    Total contractual obligations
    
    $
    4,619,385
    
    
    $
    1,205,476
    
    
    $
    1,895,359
    
    
    $
    347,009
    
    
    $
    1,171,541
 (1) Other liabilities are short term in nature, except for liabilities related
to employee benefit plans. 25




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##### Table of Contents



Other Commitments Total
    
    Amount of Commitment Expiration - Per PeriodAmounts
    
    Less than
    
    1 - 3
    
    4 - 5
    
    After 5Committed
    
    1 Year
    
    Years
    
    Years
    
    YearsUnused portions on lines of credit
    
    $
    4,320,681
    
    
    $
    287,906
    
    
    $
    261,970
    
    
    $
    31,808
    
    
    $
    3,738,997Standby letters of credit
    
    
    441,304
    
    
    
    115,103
    
    
    
    60,788
    
    
    
    117,147
    
    
    
    148,266Commercial letters of credit
    
    
    14,740
    
    
    
    7,051
    
    
    
    6,407
    
    
    
    1
    
    
    
    1,281Commitments to originate loans
    
    
    1,840,128
    
    
    
    1,279,534
    
    
    
    302,603
    
    
    
    45,851
    
    
    
    212,140Other commitments
    
    
    46,640
    
    
    
    13,239
    
    
    
    5,834
    
    
    
    1,451
    
    
    
    26,116Total commitments
    
    $
    6,663,493
    
    
    $
    1,702,833
    
    
    $
    637,602
    
    
    $
    196,258
    
    
    $
    4,126,800
 Derivative Financial Instruments Total
    
    Amount of Commitment Expiration - Per PeriodAmounts
    
    Less than
    
    1 - 3
    
    4 - 5
    
    After 5Committed
    
    1 Year
    
    Years
    
    Years
    
    YearsInterest rate swaps (notional amount):Commercial loan swap program:Interest rate swaps with commercial borrowers (1)
    
    $
    370,564
    
    
    $
    23,176
    
    
    $
    
    
    
    $
    67,085
    
    
    $
    280,303Interest rate swaps with dealers (2)
    
    
    370,564
    
    
    
    23,176
    
    
    
    
    
    
    
    67,085
    
    
    
    280,303Interest rate swaps on borrowings (3)
    
    
    566,500
    
    
    
    25,000
    
    
    
    191,500
    
    
    
    150,000
    
    
    
    200,000Forward commitments to sell loans
    
    
    106,957
    
    
    
    106,957
    
    
    
    
    
    
    
    
    
    
    
    Foreign
currency forward contracts: (4)Forward contracts with customers
    
    
    39,545
    
    
    
    27,940
    
    
    
    11,605
    
    
    
    
    
    
    
    Forward contracts with dealers
    
    
    39,382
    
    
    
    27,867
    
    
    
    11,515
    
    
    
    
    
    
    
    Rate-locked loan commitments
    
    
    73,243
    
    
    
    73,243
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    Swaps with commercial loan customers (Banknorth receives fixed, pays
variable).(2)
    
    Swaps with dealers (Banknorth pays fixed, receives variable) which offset
the interest rate swaps with commercial borrowers.(3)
    
    Swaps on borrowings (Banknorth pays
variable, receives fixed).(4)
    
    Forward contracts for customer
accommodations. RISK MANAGEMENT The primary goal of our risk management program is to determine how certain
existing or emerging issues in the financial services industry affect the
nature and extent of the risks faced by us. Based on a periodic
self-evaluation, we determine key issues and develop plans and/or objectives to
address risk. Our board of directors and management believe that there are
seven applicable risk categories, consisting of credit, interest rate,
liquidity, transaction, compliance, strategic and reputation risk. Each risk
category is viewed from a quantity of risk perspective (high, medium or low)
coupled with a quality of risk management perspective. In addition, an
aggregate level of risk is assigned as a whole as well as the direction of risk
(stable, increasing or decreasing). Each risk category and the overall risk
level is compared to regulatory views on a regular basis and then reported to
the board with an accompanying explanation as to the existence of any
differences. The risk program includes risk identification, measurement,
control and monitoring. Our board of directors has established the overall strategic direction for
Banknorth and approves our overall risk policies and oversees our overall risk
management process. The board has established two board committees, consisting
of Audit and Board Risk Management, and has charged each committee with
overseeing key risks. In addition, there is a management Operational Risk
Committee, which is comprised of senior officers in key business lines, which
identifies and monitors key operational risks. The Operational Risk Committee
reports to the Board Risk Management Committee on a regular basis. 26




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##### Table of Contents



CREDIT RISK MANAGEMENT General The Board Risk Management Committee monitors our credit risk management. Our
strategy for credit risk management includes centralized policies and uniform
underwriting criteria for all loans. The strategy also includes
diversification on a geographic, industry and customer level, regular credit
examinations and quarterly management review of large loans and loans with a
deterioration of credit quality. We maintain an internal rating system that
provides a mechanism to regularly monitor the credit quality of our loan
portfolio. The rating system is intended to identify and measure the credit
quality of lending relationships. For consumer loans, we utilize standard
credit scoring systems to assess consumer credit risks and to price consumer
products accordingly. We strive to identify potential problem loans early,
take any necessary charge-offs promptly and maintain adequate reserve levels.
See Results of Operations -  Provision and Allowance for Loan and Lease
Losses. Our residential loan portfolio accounted for 16% of the total loan portfolio at
March 31, 2004 and 17% at December 31, 2003. Our residential loans are
generally secured by single-family homes (one-to-four units) and have a maximum
loan to value ratio of 80%, unless the excess is protected by mortgage
insurance. At March 31, 2004, 0.30% of our residential loans were
nonperforming, as compared to 0.26% at December 31, 2003 and 0.32% at March 31,
2003. Our commercial real estate loan portfolio accounted for 33% of the total loan
portfolio at March 31, 2004 and 34% at December 31, 2003. This portfolio
consists primarily of loans secured by income-producing commercial real estate
(including office and industrial buildings), service industry real estate
(including hotels and health care
facilities), multi-family (over four units) residential properties and retail
trade real estate. These loans generally are secured by properties located in
the New England states and upstate New York. At March 31, 2004, 0.44% of our
commercial real estate loans were nonperforming, as compared to 0.36% at
December 31, 2003 and 0.46% at March 31, 2003. Our commercial business loan and lease portfolio accounted for 21% of the total
loan portfolio at March 31, 2004 and December 31, 2003. Commercial business
loans and leases are generally made to small to medium size businesses located
within our market areas. These loans are not concentrated in any particular
industry, but reflect the broad-based economy of New England and upstate New
York. Commercial loans consist primarily of loans secured by various
equipment, machinery and other corporate assets, as well as loans to provide
working capital to businesses in the form of lines of credit. Through a
subsidiary, we also offer direct equipment leases, which amounted to $96.8
million at March 31, 2004. We do not emphasize the purchase of participations
in syndicated commercial loans. At March 31, 2004, we had $389.7 million of
outstanding participations in syndicated commercial loans and had an additional
$338 million of unfunded commitments related to these participations. At March
31, 2004, 0.83% of our commercial business loans were nonperforming, as
compared to 0.74% at December 31, 2003 and 1.25% at March 31, 2003. The following table presents the geographic distribution of our commercial
loans and leases at March 31, 2004 and December 31, 2003. Table 9 - Commercial Loans and Leases by State Commercial Real Estate Loans
    
    Commercial Business Loans and LeasesMarch 31,
    
    December 31,
    
    Change
    
    March 31,
    
    December 31,
    
    Change2004
    
    2003
    
    Amount
    
    Percent
    
    2004
    
    2003
    
    Amount
    
    PercentMassachusetts
    
    $
    2,540,855
    
    
    $
    2,565,064
    
    
    ($
    24,209
    )
    
    
    (0.94
    %)
    
    $
    1,254,668
    
    
    $
    1,173,803
    
    
    $
    80,865
    
    
    
    6.89
    %Maine
    
    
    880,383
    
    
    
    885,791
    
    
    
    (5,408
    )
    
    
    (0.61
    %)
    
    
    708,129
    
    
    
    658,902
    
    
    
    49,227
    
    
    
    7.47
    %New Hampshire
    
    
    751,034
    
    
    
    732,249
    
    
    
    18,785
    
    
    
    2.57
    %
    
    
    494,683
    
    
    
    494,811
    
    
    
    (128
    )
    
    
    (0.03
    %)Vermont
    
    
    647,735
    
    
    
    645,608
    
    
    
    2,127
    
    
    
    0.33
    %
    
    
    461,226
    
    
    
    438,483
    
    
    
    22,743
    
    
    
    5.19
    %Connecticut
    
    
    529,768
    
    
    
    504,624
    
    
    
    25,144
    
    
    
    4.98
    %
    
    
    371,139
    
    
    
    332,749
    
    
    
    38,390
    
    
    
    11.54
    %New York
    
    
    199,631
    
    
    
    195,526
    
    
    
    4,105
    
    
    
    2.10
    %
    
    
    192,248
    
    
    
    188,346
    
    
    
    3,902
    
    
    
    2.07
    %Total
    
    $
    5,549,406
    
    
    $
    5,528,862
    
    
    $
    20,544
    
    
    
    0.37
    %
    
    $
    3,482,093
    
    
    $
    3,287,094
    
    
    $
    194,999
    
    
    
    5.93
    %
 27




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##### Table of Contents



Consumer loans and leases accounted for 30% of our total loan portfolio at
March 31, 2004 and 29% at December 31, 2003. In the fourth quarter of 2003, we
ceased originating vision, dental and orthodontia fee plan loans and mobile
home loans. The decrease in this loan type reflects the run-off of those
loans. At March 31, 2004, 0.13% of our consumer loans were nonperforming, as
compared to 0.18% at December 31, 2003 and 0.17% at March 31, 2003. The following table lists our consumer loans and leases by type as of March 31,
2004 and December 31, 2003: Table 10 - Composition of Consumer Loans and Leases March 31,
    
    December 31,
    
    Change2004
    
    2003
    
    2004-2003% of
    
    
    
    
    
    % ofAmount
    
    Total
    
    Amount
    
    Total
    
    Amount
    
    PercentHome equity
    
    $
    2,351,463
    
    
    
    47.56
    %
    
    $
    2,274,793
    
    
    
    47.20
    %
    
    $
    76,670
    
    
    
    3.37
    %Automobile
    
    
    1,654,744
    
    
    
    33.47
    %
    
    
    1,596,504
    
    
    
    33.13
    %
    
    
    58,240
    
    
    
    3.65
    %Mobile home
    
    
    133,566
    
    
    
    2.70
    %
    
    
    141,407
    
    
    
    2.93
    %
    
    
    (7,841
    )
    
    
    (5.54
    %)Vision, dental, and orthodontia fee plan
    
    
    97,490
    
    
    
    1.97
    %
    
    
    120,694
    
    
    
    2.50
    %
    
    
    (23,204
    )
    
    
    (19.23
    %)Education
    
    
    269,220
    
    
    
    5.44
    %
    
    
    234,226
    
    
    
    4.86
    %
    
    
    34,994
    
    
    
    14.94
    %Other
    
    
    438,090
    
    
    
    8.86
    %
    
    
    451,899
    
    
    
    9.38
    %
    
    
    (13,809
    )
    
    
    (3.06
    %)Total
    
    $
    4,944,573
    
    
    
    100.00
    %
    
    $
    4,819,523
    
    
    
    100.00
    %
    
    $
    125,050
    
    
    
    2.59
    %
 Nonperforming Assets Nonperforming assets consist of nonperforming loans (which do not include
accruing loans 90 days or more overdue), other real estate owned, repossessed
assets and certain securities available for sale. Total nonperforming assets
as a percentage of total assets were 0.26% at March 31, 2004, 0.24% at December
31, 2003 and 0.31% at March 31, 2003. Total nonperforming assets as a
percentage of total loans and total other nonperforming assets was 0.42% at
March 31, 2004, 0.39% at December 31, 2003 and 0.53% at March 31, 2003. See
Table 11 for a summary of nonperforming assets for the last five quarters. On
a dollar basis, our nonperforming assets decreased from $82.7 million at March
31, 2003 to $63.1 million at December 31, 2003, due primarily to a $14.2
million decrease in nonperforming commercial business loans and leases, and
increased to $70.6 million at March 31, 2004, due to a $4.9 million increase in
nonperforming commercial real estate loans and a $4.6 million increase in
nonperforming commercial business loans and leases. We continue to focus on asset quality issues and to allocate significant
resources to the key asset quality control functions of credit policy and
administration and loan review. The collection, workout and asset management
functions focus on the reduction of nonperforming assets. Despite the ongoing
focus on asset quality and relatively low levels of nonperforming assets, there
can be no assurance that adverse changes in the real estate markets and
economic conditions in our primary market areas will not result in higher
nonperforming asset levels in the future and negatively impact our operations
through higher provisions for loan losses, net loan charge-offs, decreased
accrual of interest income and increased noninterest expenses as a result of
the allocation of resources to the collection and workout of nonperforming
assets. 28




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##### Table of Contents



The following table presents nonperforming assets for the last five quarters. TABLE 11  Nonperforming assets 2004
    
    2003March 31
    
    December 31
    
    September 30
    
    June 30
    
    March 31Nonaccrual loans and leases:Residential real estate loans
    
    $
    7,990
    
    
    $
    7,157
    
    
    $
    9,135
    
    
    $
    9,827
    
    
    $
    9,828Commercial real estate loans
    
    
    24,619
    
    
    
    19,700
    
    
    
    27,069
    
    
    
    19,139
    
    
    
    22,990Commercial business loans and leases
    
    
    28,978
    
    
    
    24,412
    
    
    
    22,857
    
    
    
    24,577
    
    
    
    38,562Consumer loans and leases
    
    
    6,267
    
    
    
    8,493
    
    
    
    7,664
    
    
    
    7,192
    
    
    
    7,457Total nonaccrual loans and leases
    
    
    67,854
    
    
    
    59,762
    
    
    
    66,725
    
    
    
    60,735
    
    
    
    78,837Other nonperforming assets:Other real estate owned, net of related reserves
    
    
    389
    
    
    
    529
    
    
    
    921
    
    
    
    814
    
    
    
    541Repossessions, net of related reserves
    
    
    2,311
    
    
    
    2,812
    
    
    
    2,711
    
    
    
    2,911
    
    
    
    3,276Securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other nonperforming assets
    
    
    2,700
    
    
    
    3,341
    
    
    
    3,632
    
    
    
    3,725
    
    
    
    3,817Total nonperforming assets
    
    $
    70,554
    
    
    $
    63,103
    
    
    $
    70,357
    
    
    $
    64,460
    
    
    $
    82,654Accruing loans and leases which are 90 days or more overdue
    
    $
    7,929
    
    
    $
    4,915
    
    
    $
    3,163
    
    
    $
    2,995
    
    
    $
    3,349Total nonperforming loans as a percentage of total
loans and leases(1)
    
    
    0.41
    %
    
    
    0.37
    %
    
    
    0.42
    %
    
    
    0.39
    %
    
    
    0.51
    %Total nonperforming assets as a percentage of total assets
    
    
    0.26
    %
    
    
    0.24
    %
    
    
    0.27
    %
    
    
    0.25
    %
    
    
    0.31
    %Total nonperforming assets as a percentage of total loans
and leases (1) and total other nonperforming assets
    
    
    0.42
    %
    
    
    0.39
    %
    
    
    0.44
    %
    
    
    0.41
    %
    
    
    0.53
    %
   (1)
    
    Total loans and leases exclude residential real estate loans held for sale. Residential real estate loans are generally placed on nonaccrual when they
become 120 days past due or are in the process of foreclosure. All closed-end
consumer loans 90 days or more past due, unless well secured and in the process
of collection, and any equity lines of credit in the process of foreclosure are
placed on nonaccrual status. Consumer loans are charged-off upon reaching 120
or 180 days past due depending on the type of loan. We generally place all
commercial real estate loans and commercial business loans and leases which are
90 days or more past due on nonaccrual status, unless secured by sufficient
cash or other assets immediately convertible to cash. At March 31, 2004, we
had $7.9 million of accruing loans which were 90 days or more delinquent, as
compared to $4.9 million at December 31, 2003 and $3.3 million at March 31,
2003. The $3.0 million increase in accruing loans which were 90 days or more
delinquent was primarily related to guaranteed student loans. We may also
place loans which are less than 90 days past due on nonaccrual (and, therefore,
nonperforming) status when in our judgment these loans are likely to present
future principal and/or interest repayment problems and ultimately would be
classified as nonperforming. Net Charge-offs Net charge-offs amounted to $8.5 million for the three months ended March 31,
2004, as compared to $8.8 million for the three months ended March 31, 2003.
Net charge-offs represented 0.21% and 0.24% of average loans and leases
outstanding for the quarters ended March 31, 2004 and 2003, respectively. 29




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##### Table of Contents



The following table presents net charge-offs by loan type and the activity in
the allowance for loan and lease losses during the period indicated. TABLE 12  Allowance for Loan and Lease Losses 2004 First
    
    2003 Fourth
    
    2003 Third
    
    2003 Second
    
    2003 FirstQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterAllowance at beginning of period
    
    $
    232,287
    
    
    $
    229,581
    
    
    $
    227,240
    
    
    $
    226,677
    
    
    $
    208,273Additions due to acquisitions
    
    
    
    
    
    
    2,661
    
    
    
    
    
    
    
    
    
    
    
    16,346Charge-offs:Residential real estate mortgages (1)
    
    
    (55
    )
    
    
    25
    
    
    
    63
    
    
    
    53
    
    
    
    55Commercial real estate mortgages
    
    
    221
    
    
    
    87
    
    
    
    27
    
    
    
    202
    
    
    
    262Commercial business loans and leases
    
    
    2,711
    
    
    
    4,302
    
    
    
    3,011
    
    
    
    5,754
    
    
    
    3,205Consumer loans and leases
    
    
    8,405
    
    
    
    9,212
    
    
    
    8,782
    
    
    
    6,959
    
    
    
    7,609Total loans and leases charged off
    
    
    11,282
    
    
    
    13,626
    
    
    
    11,883
    
    
    
    12,968
    
    
    
    11,131Recoveries:Residential real estate mortgages
    
    
    17
    
    
    
    15
    
    
    
    5
    
    
    
    22
    
    
    
    22Commercial real estate mortgages
    
    
    667
    
    
    
    255
    
    
    
    296
    
    
    
    676
    
    
    
    534Commercial business loans and leases
    
    
    926
    
    
    
    1,900
    
    
    
    2,493
    
    
    
    1,286
    
    
    
    689Consumer loans and leases
    
    
    1,182
    
    
    
    1,101
    
    
    
    930
    
    
    
    1,047
    
    
    
    1,043Total loans and leases recovered
    
    
    2,792
    
    
    
    3,271
    
    
    
    3,724
    
    
    
    3,031
    
    
    
    2,288Net charge-offs
    
    
    8,490
    
    
    
    10,355
    
    
    
    8,159
    
    
    
    9,937
    
    
    
    8,843Provision for loan and lease losses
    
    
    9,500
    
    
    
    10,400
    
    
    
    10,500
    
    
    
    10,500
    
    
    
    10,901Allowance at end of period
    
    $
    233,297
    
    
    $
    232,287
    
    
    $
    229,581
    
    
    $
    227,240
    
    
    $
    226,677Ratio of net charge-offs to average loans and
leases outstanding during the period, annualized (2)
    
    
    0.21
    %
    
    
    0.26
    %
    
    
    0.20
    %
    
    
    0.25
    %
    
    
    0.24
    %Ratio of allowance to total loans and leases
at end of period (2)
    
    
    1.40
    %
    
    
    1.42
    %
    
    
    1.44
    %
    
    
    1.44
    %
    
    
    1.46
    %Ratio of allowance to nonperforming loans
and leases at end of period
    
    
    344
    %
    
    
    389
    %
    
    
    344
    %
    
    
    374
    %
    
    
    288
    %Ratio of net charge-offs (recoveries) as a percent of
average outstanding loans and leases, annualized
(2):Residential real estate mortgages
    
    
    (0.011
    %)
    
    
    0.001
    %
    
    
    0.008
    %
    
    
    0.004
    %
    
    
    0.005
    %Commercial real estate mortgages
    
    
    (0.032
    %)
    
    
    (0.012
    %)
    
    
    (0.020
    %)
    
    
    (0.037
    %)
    
    
    (0.022
    %)Commercial business loans and leases
    
    
    0.211
    %
    
    
    0.295
    %
    
    
    0.064
    %
    
    
    0.568
    %
    
    
    0.339
    %Consumer loans and leases
    
    
    0.593
    %
    
    
    0.688
    %
    
    
    0.681
    %
    
    
    0.531
    %
    
    
    0.636
    %Total portfolio loans and leases at end of period
    
    
    16,623,612
    
    
    
    16,345,962
    
    
    
    15,925,852
    
    
    
    15,733,312
    
    
    
    15,579,173Total
nonperforming loans and leases at end of period
    
    
    67,854
    
    
    
    59,762
    
    
    
    66,725
    
    
    
    60,735
    
    
    
    78,837Average loans and leases outstanding
during the period (2)
    
    
    16,511,538
    
    
    
    15,976,068
    
    
    
    15,841,521
    
    
    
    15,634,071
    
    
    
    14,829,108
   (1)
    
    Residential real estate charge-offs include estimates of charge-offs and reversals of prior period estimates which may result in a negative charge-offs.(2)
    
    Excludes residential real estate loans held for sale. Potential Problem Loans In addition to the nonperforming loans discussed under Credit Risk Management
above, we also have loans that are 30 to 89 days delinquent and still accruing.
These loans amounted to $142 million at March 31, 2004 and December 31, 2003.
These loans and related delinquency trends are considered in the evaluation of
the allowance for loan and lease losses and the determination of the provision
for loan and lease losses. 30




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##### Table of Contents



Analysis and Determination of the Allowance for Loan and Lease Losses The allowance for loan and lease losses amounted to $233.3 million at March 31,
2004 and $232.3 million at December 31, 2003. The $1.0 million increase was
due to the provision for loan and lease losses exceeding net charge-offs during
the first quarter of 2004. The ratio of the allowance to total portfolio loans
and leases at March 31, 2004 was 1.40% compared to 1.42% at December 31, 2003.
The ratio of the allowance for loan and lease losses to nonperforming loans was
344% at March 31, 2004 and 389% at December 31, 2003. The allowance for loan and lease losses is maintained at a level determined to
be adequate by management to absorb future charge-offs of loans and leases
deemed uncollectable. This allowance is increased by provisions charged to
income and by recoveries on loans previously charged off. Arriving at an
appropriate level of allowance for loan and lease losses necessarily involves a
high degree of judgment and is determined based on managements ongoing
evaluation. As discussed under Critical Accounting Policies, we believe that
the methods used by us in determining the allowance for loan and lease losses
constitute a critical accounting policy. Although we exercise judgment in
providing for losses, for the reasons discussed under Critical Accounting
Policies and Credit Risk Management - Nonperforming Assets, there can be no
assurance that we will not have to increase the amount of our provision for
loan and lease losses in future periods. Management determined that the
allowance for loan and lease losses was adequate at March 31, 2004. ASSET-LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk,
liquidity and capital. Asset-liability management is governed by policies,
goals, and objectives that are adopted and reviewed by our board of directors
and monitored periodically by the Board Risk Management Committee. The board
delegates responsibility for asset-liability management strategies to achieve
these goals and objectives to the Asset Liability Management Committee
(ALCO), which is comprised of members of senior management. Senior
management determines the strategic directives that guide the day-to-day
management of our activities and interest rate risk exposure. The ALCO also
reviews and approves all major risk, liquidity and capital management programs,
except for product pricing. Product pricing is reviewed and approved by the
Pricing Committee, which is comprised of a subset of ALCO members and the
regional presidents of our banking subsidiary. Interest Rate Risk Interest rate risk is the risk of loss to future earnings or long-term value
resulting from changes in interest rates and is by far the most significant
non-credit risk to which we are exposed. This risk arises directly from our
core lending and deposit gathering activities and is predominantly concentrated
in our mortgage-related assets as well as our non-maturity deposits. Mortgage
related assets typically give borrowers the option to prepay at any time
without penalty. Principal cash flows that come from these assets are highly
interest rate sensitive. As interest rates fall, borrowers are more likely to
pay off their existing mortgages, which results in higher cash flows that we
must in turn reinvest. Replacing these higher-rate mortgage assets with
lower-rate mortgage assets has the potential to reduce our net interest income
unless we can also reduce either our wholesale or retail funding costs. In the
low interest rate environment, bank deposits can increase, especially if the
market risk premium is not sufficient to adequately compensate investors.
Consequently, under such circumstances, we can have even more cash to reinvest
in low yielding assets. Conversely, rising rates tend to have the opposite
effect on both mortgage assets and non-maturity deposits. Higher rates make
borrowers less likely to refinance existing debt, resulting in lower cash flows
for us to reinvest. And, if the market risk premium is sufficiently high,
depositors could be enticed to take additional investment risk and move
deposits from banks into riskier assets, such as equities. This in turn could
result in less cash to invest or even require us to use wholesale funding
market sources more actively. In the case of higher interest rates, our
funding sources could reprice faster than our assets and at higher rates,
thereby reducing our interest rate spread and net interest margin. The degree
to which future earnings or long-term value is subject to interest rate risk
depends on how closely the characteristics of our interest-earning assets match
those of our interest-bearing liabilities. 31




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##### Table of Contents



In addition to directly impacting mortgage asset and deposit cash flows,
interest rate changes affect (i) the amount of loans originated and sold by us,
(ii) the level and composition of deposits, (iii) the ability of borrowers to
repay adjustable or variable rate loans, (iv) the average maturity of loans and
investments, (v) the rate of amortization of premiums paid on securities,
capitalized mortgage servicing rights, deferred fees and purchase accounting
adjustments, (vi) the fair value of our saleable assets, the amount of
unrealized gains and losses on securities available for sale per SFAS No. 115,
and the resultant ability to realize gains and (vii) per SFAS Nos. 133 and 138,
the fair value of derivatives carried on our balance sheet, derivative hedge
effectiveness testing and the amount of ineffectiveness recognized in earnings. Assessment and Measurement The overall objective of interest rate risk management is to deliver consistent
net interest income growth and returns on equity over a wide range of possible
interest rate environments. To that end, management focuses on (i) key
interest rate risk metrics and assessment of our exposure to this
risk, (ii) a
careful review and consideration of modeling assumptions and (iii) asset and
liability management strategies that help attain the corporate goals and
objectives adopted by our board of directors. The primary objective of interest rate risk management is to control our
measured exposure to interest rate risk both within limits and guidelines
established by the ALCO and approved by our board. These limits and guidelines
reflect our tolerance for interest rate risk over a wide range of both
short-term and long-term measurements. In addition, we evaluate interest rate
risk based on ongoing business risk measures, liquidation or run-off measures
of the existing balance sheet and stress test measures. Ongoing measurements
and runoff analysis provide management with information concerning day-to-day
operations. Stress testing shows the impact of very extreme but lower
probability events. The combination of these measures gives management a
comprehensive view of possible risks to future earnings and long-term equity
value. We attempt to control interest rate risk by identifying, quantifying
and, where appropriate, hedging our exposure. Net Interest Income Sensitivity Net interest income is our largest source of revenue. Net interest income
sensitivity is our primary short-term measurement used to assess risk to our
ongoing business. Management believes that net interest income sensitivity
gives us the best perspective of how day-to-day decisions affect our interest
rate risk profile. We subject forward 12-month net interest income projections
to various rate movements using a simulation model for various specified
interest rate scenarios. Simulations are run monthly and include scenarios
where market rates are shocked up and down, scenarios where market rates
gradually change or ramp up and down and scenarios where the slope of the
market yield curve changes. Our base simulation assumes that rates do not
change for the next 12 months. The sensitivity measurement is calculated as
the percentage variance of the net interest income simulations to the base
simulation results. Results for the gradual ramps are compared to policy
guidelines and are disclosed in the interest rate risk results below. Economic Value of Equity Economic value of equity is a theoretical long-term liquidation measure of
interest rate risk. It is a useful measure because it attempts to capture all
cash flow optionality on the balance sheet at a particular point in time.
Using this analysis, we can compute additional interest rate measures, such as
effective duration and convexity, for internal asset or liability
classifications. While these measurements are an integral part of our risk
management process, they are not based on on-going measurements of interest
rate risk because they do not consider the effects of future business activity.
For this reason, management believes that net interest income sensitivity is a
more appropriate measurement when making day-to-day interest rate risk
management decisions. To calculate the theoretical economic value of equity,
we subtract the calculated value of liabilities from the calculated value of
assets at a particular point in time, usually month end. Where observable
market prices are available, market values are used. For financial assets or
liabilities with no or few observable market prices, we compute a net present
value of cash 32




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##### Table of Contents



flows using an assigned risk premium. However, in the case of certain assets
or liabilities, cash flows or risk premiums may not be known with certainty.
This requires us to use material modeling assumptions. Review of Modeling Assumptions Key assumptions related to the above measurements include interest rate
movements, product pricing and customer behavior. In the case of mortgage
asset cash flows, the majority of our assumptions are derived from a vendor
supported prepayment model that is periodically tested using actual loan
portfolio behavior. Both ALCO and the Pricing Committee carefully monitor
deposit retention, pricing and product behavior. Interest Rates The net interest income simulation and economic value of equity model use the
same parallel interest rate shocks of 1%. We consider these scenarios to be
stress tests that measure the impact of sudden and severe market rate movements
on our short and long term interest rate risk measures. Another stress test
periodically performed is asymmetric interest rate behavior that measures the
impact of yield curve slope changes on interest rate risk measures. Not all interest rates are modeled to move with the market. Because we control
the extent and timing of rates paid on non-maturity deposits, certain
assumptions regarding rate changes are built into the model. Many of these
non-maturity interest-bearing deposit products (e.g. interest checking, savings
and money market deposits) are modeled to have only a limited sensitivity to
market rate movements based on historical experience. These product rates
change with only a small fraction of market rate movements and are assumed to
have pricing floors. Other accounts, such as home equity lines of credit,
price off the prime rate applied on a lagged basis. New commercial business
and commercial real estate loans generally price off average spreads to LIBOR
and the swap curve. Most new fixed rate commercial loans have standard yield
maintenance language, which reduces the likelihood of prepayments in portfolios
that typically have higher turnover rates due to business activity. More and
more large commercial customers are opting to hedge LIBOR and prime loan rates
using interest rate derivatives, including interest rate swaps, which allows us
to reduce our interest rate risk. In turn, this affects the mix of new loans
as more of the commercial portfolio becomes variable. Borrower Cash Flows One of the most material assumptions relates to varying cash flows and
prepayment risk. Assets that have prepayment risk include mortgage and home
equity loans and lines of credit, mortgage-backed securities, collateralized
mortgage obligations and mortgage servicing rights. The likelihood for a
borrower to prepay usually increases when interest rates fall. Since the
future prepayment behavior of borrowers is uncertain, the resulting loan cash
flows cannot be determined exactly. Complicating our efforts to measure
interest rate risk is the uncertainty of the maturity, repricing and/or runoff
of some of our assets and liabilities. Future Business Activity Future business activity is projected in the net interest income sensitivity
analysis and includes new loan originations, deposit growth, planned investment
transactions, funding actions, and non-interest income and expense projections.
The basis for future business activity combines budget projections, current
balance sheet and income statement run rates, as well as business forecasts to
simulate balance sheet and income statement growth over the next 12 months.
Because future business activity forecasts are uncertain, assumptions are more
likely to impact the net interest income results. Therefore, the net interest
income simulation is thought to contain more assumption risk than the economic
value of equity liquidation analysis. 33




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##### Table of Contents



Asset Liability Management and Strategies We manage the interest rate risk inherent in our core banking operations using
both cash based investments and wholesale funding sources, as well as interest
rate derivatives. For example, the types of investments available for sale or
wholesale borrowings can have widely varying interest rate risk
characteristics. Either of these instruments might also contain embedded
options, such as calls, caps, floors and collars. Depending on our overall
risk position, these investment or funding transactions can be used to further
change our overall interest rate risk profile. Our asset-liability management policy on interest rate risk simulation
specifies that if market interest rates were to shift gradually up or down 2%,
estimated net interest income for the subsequent 12 months should decline by
less than 5%. All interest rate risk measures were within compliance guidelines
at March 31, 2004. The ALCO currently is more focused on strategies that prove
beneficial to income should rates rise and the yield curve flattens, as well as
on the gradual decreasing 1% rate scenario. The table below sets forth information regarding estimated changes in net
interest income for the 12 months following the indicated dates, assuming a
gradual shift up or down in market rates of 100 and 200 basis points across the
entire yield curve. Assuming a downward shift in rates, because most deposit
accounts have implied interest rate floors, it is assumed that the related
interest expense on these accounts will not decrease in proportion to the
downward shift in rates. Assuming an upward shift in rates of 200 basis
points, the simulated increase in interest income would be less than the
simulated increase in interest expense because total adjustable
interest-earning assets will reprice less quickly than will total adjustable
interest-bearing liabilities. These results are dependent on material
assumptions such as those discussed above. Table 13 - Sensitivity of Net Interest Income 200 Basis Point
    
    100 Basis Point
    
    100 Basis PointRate Increase
    
    Rate Increase
    
    Rate DecreaseMarch 31, 2004
    
    
    (0.78
    %)
    
    
    (0.13
    %)
    
    
    (0.52
    %)December 31, 2003
    
    
    (0.26
    %)
    
    
    0.24
    %
    
    
    (0.71
    %)
 Derivative Instruments Purpose and Benefits Derivative financial instruments are important tools that we use to manage
interest rate risk. When appropriate, we use derivatives such as interest-rate
swaps, interest rate floors, interest rate caps and interest rate corridor
agreements and forward security sales, among other instruments. Certain derivatives are used to hedge certain wholesale funding activities and
the mortgage origination pipeline. These instruments are designated as hedges
at inception in accordance with SFAS No. 133. At March 31, 2004, our designated
hedging activities consisted of forward commitments related to hedging our
mortgage banking operations and interest-rate swaps on fixed-rate borrowings.
See Table 15 below. We manage the interest rate risk inherent in our mortgage banking operations by
entering into forward sales contracts and, to a lesser extent, by purchasing
mortgage-backed security options. An increase in market interest rates between
the time we commit to terms on a loan and the time we ultimately sell the loan
in the secondary market generally will have the effect of reducing the gain (or
increasing the loss) we record on the sale. We attempt to mitigate this risk by
entering into forward sales commitments in amounts sufficient to cover 70% to
90% of 30-year fixed-rate loans which are currently closed or are anticipated
to close. Purchased mortgage-backed security options are also used to hedge
rate-locked loans. 34




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##### Table of Contents



The decrease in residential mortgage loan originations in the first quarter of
2004 resulted in a decrease in average residential mortgages held for sale and
average rate-locked commitments in the first quarter of 2004 compared to the
first quarter of 2003. The following table summarizes the average balances of
residential mortgage loans held for sale and related hedge positions during the
periods indicated. Table 14 - Average Balances of Loans Held for Sale and Related Hedges Three Months EndedMarch 31,2004
    
    2003Residential mortgage loans held for sale
    
    $
    37,858
    
    
    $
    86,893Rate-locked loan commitments
    
    
    48,961
    
    
    
    94,513Forward sales contracts
    
    
    75,600
    
    
    
    170,075
 Interest rate derivatives, primarily interest rate swaps, offered to commercial
borrowers through our hedging program are designated as speculative under SFAS
133. However, we believe that our exposure to commercial customer derivatives
is limited because these contracts are simultaneously matched at inception with
an identical dealer transaction. The commercial customer hedging program
allows us to retain variable-rate commercial loans while allowing the customer
to synthetically fix the loan rate by entering into a variable-to-fixed
interest rate swap. In the first quarter of 2004, we recorded a total notional
amount of $51.8 million of interest rate swaps with commercial borrowers and an
equal notional amount of dealer transactions. It is anticipated that over
time, customer interest rate derivatives will reduce the interest rate risk
inherent in our longer-term, fixed-rate commercial business and real estate
loans. The customer-related positions summarized in the table below includes
both the customer and offsetting dealer transactions. Foreign Exchange or Market Risk Our earnings are not materially impacted by movements in foreign currency rates
or commodity prices. Virtually all transactions are denominated in the U.S.
dollar. Movements in equity prices may have an indirect but modest impact on
earnings by affecting the volume of activity or the amount of fees from
investment-related businesses. Foreign currency forward contracts are contracts that we enter into as an
accommodation for customers involved in international trade for the future
delivery or purchase of foreign currency at a specified price. For these
customers, we set aside a percentage of the customers available line of credit
until the foreign currency contract is settled. Foreign exchange and trade
services are provided under a private label arrangement with a correspondent
bank. Risks arise from the possible inability of the seller and/or our
customer to perform and from any resultant exposure to movement in foreign
currency exchange rates, limiting our exposure to the replacement value of the
contracts rather than the notional principal or contract amounts. To date, all
customers and correspondents have performed in accordance with contractual
terms. 35




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##### Table of Contents



The following table summarizes our derivative positions at March 31, 2004. Table 15 - Derivative Positions Asset-Liability Management Positions Notional Amount Maturing
    
    
    
    
    
    FairMarch 31, 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    Total
    
    ValueInterest rate contractsPay variable, receive fixed
    
    $
    
    
    
    $
    216,500
    
    
    $
    
    
    
    $
    
    
    
    $
    350,000
    
    
    $
    566,500
    
    
    $
    13,800Forward commitments to sell loans
    
    
    106,957
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,957
    
    
    
    (33
    )
 Customer-related Positions Notional Amount Maturing
    
    
    
    
    
    FairMarch 31, 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    Total
    
    ValueInterest rate contractsReceive fixed, pay variable
    
    $
    23,176
    
    
    $
    
    
    
    $
    
    
    
    $
    12,846
    
    
    $
    334,542
    
    
    $
    370,564
    
    
    $
    13,263Pay fixed, receive variable
    
    
    23,176
    
    
    
    
    
    
    
    
    
    
    
    12,846
    
    
    
    334,542
    
    
    
    370,564
    
    
    
    (13,263
    )Foreign currency forward contractsForward contracts with customers
    
    
    27,940
    
    
    
    11,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,545
    
    
    
    (2,806
    )Forward contracts with dealers
    
    
    27,867
    
    
    
    11,515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,382
    
    
    
    2,993Rate-locked loan commitments
    
    
    73,243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,243
    
    
    
    202
    (1)
   (1)
    
    No value has been assigned to potential mortagage servicing rights related to rate-locked loan commitments. 2004 Asset Liability Management Actions The most significant factors affecting market risk exposure of net interest
income in the first quarter of 2004 were (i) changes in the shape of the U.S.
Government securities and interest rate swap yield curves, (ii) changes in the
composition of the investment portfolio, (iii) changes in the composition of
mortgage assets and prepayment speeds of mortgage assets, (iv) reduction of
deposit interest expense and (v) changes in the wholesale funding structure,
including $500 million of fixed-rate repurchase agreements maturing in February
2006 to an average of 3 month LIBOR plus 0.48%. Interest rates in the first quarter of 2004 fell, with 10-year Treasury yields
falling to end the first quarter approximately 41 basis points lower than
year-end. Falling mortgage rates resulted in a pick up of mortgage loan
activity and projected mortgage loan prepayments are forecasted to be slightly
higher to start the second quarter. Asset and liability management actions
taken in the first quarter of 2004 reduced simulated asset sensitivity. These
actions included the purchase of securities less susceptible to prepayments in
a rising rate environment. The above net interest income table reflects the
net impact of these changes. The falling interest rate scenarios remain asset
sensitive, albeit to a lesser degree than year-end and our rising rate
scenarios are now slightly liability sensitive. Without further actions, net
interest income is projected to remain stable if short and long interest rates
move symmetrically higher and increase if the yield curve becomes steeper. 36




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##### Table of Contents



LIQUIDITY Our Board Risk Management Committee establishes policies and analyzes and
manages liquidity to ensure that adequate funds are available to meet normal
operating requirements in addition to unexpected customer demands for funds,
such as high levels of deposit withdrawals or loan demand, in a timely and
cost-effective manner. The most important factor in the preservation of
liquidity is maintaining public confidence that facilitates the retention and
growth of a large, stable supply of core deposits and wholesale funds.
Ultimately, public confidence is generated through profitable operations, sound
credit quality and a strong capital position. Liquidity management is viewed
from a long-term and a short-term perspective, as well as from an asset and
liability perspective. We monitor liquidity through a regular review of loan
and deposit maturities, yield and rate scenarios and loan and deposit forecasts
to minimize funding risk. Other factors affecting our ability to meet
liquidity needs include variations in the markets served and general economic
conditions. We have various funding sources available to us on a parent-only
basis as well as through our banking subsidiary, as outlined below. Parent Company On a parent-only basis at March 31, 2004, our debt service requirements
consisted primarily of $305.6 million junior subordinated debentures issued by
us to affiliated trusts and $150 million of 3.75% senior notes due May 1, 2008.
The junior subordinated debentures were issued to four affiliated trusts in
connection with their issuance of capital securities to unaffiliated parties.
These obligations mature starting in 2027, have interest rates ranging from 8%
to 10.52% and annual debt service payments of $26.0 million. The senior notes
have annual debt service payments of $5.6 million. The principal sources of funds for us to meet parent-only obligations are
dividends from our banking subsidiary, which are subject to regulatory
limitations, income from investment securities and borrowings, including draws
on a $110 million unsecured line of credit which is renewable every 364 days
and, if used, carries interest at LIBOR plus 0.625%. At March 31, 2004, our
subsidiary bank had $590.0 million available for dividends that could be paid
without prior regulatory approval. In addition, the parent company had $225.3
million in cash or cash equivalents at March 31, 2004. Banking Subsidiary For our banking subsidiary, Banknorth, NA, liquidity represents the ability to
fund asset growth and accommodate deposit withdrawals and meet other funding
requirements. Liquidity risk is the danger that Banknorth, NA cannot meet
anticipated or unexpected funding requirements or can meet them only at
excessive cost. Liquidity is measured by the ability to raise cash when needed
at a reasonable cost. Many factors affect a banks ability to meet liquidity
needs, including variations in the markets served, its asset-liability mix, its
reputation and credit standing in the market and general economic conditions. In addition to traditional retail deposits, Banknorth, NA has various other
liquidity sources, including proceeds from maturing securities and loans, the
sale of securities, asset securitizations and borrowed funds such as FHLB
advances, reverse repurchase agreements and brokered deposits. We continually monitor and forecast our liquidity position. There are several
interdependent methods which we use for this purpose, including daily review of
federal funds positions, monthly review of balance sheet changes, monthly
review of liquidity ratios, periodic liquidity forecasts and periodic review of
contingency funding plans. As of March 31, 2004, Banknorth, NA had in the aggregate $4.0 billion of
immediately accessible liquidity, defined as cash that could be raised within
1-3 days through collateralized borrowings or sales of securities. This
represented 22% of retail deposits, as compared to a current policy minimum of
10% of deposits. Also as of March 31, 2004, Banknorth, NA had in the aggregate potentially
volatile funds of $2.4 billion. These are funds that might flow out of the
bank over a 90-day period in an adverse environment. Management estimates 37




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##### Table of Contents



this figure by applying adverse probabilities to its various credit-sensitive
and economically-sensitive funding sources. As of March 31, 2004, the ratio of immediately accessible liquidity to
potentially volatile funds was 163%, versus a policy minimum of 100%. In addition to the liquidity sources discussed above, we believe that our
residential and consumer loan portfolios provide a significant amount of
contingent liquidity that could be accessed in a reasonable time period through
sales or securitizations. We believe we also have significant untapped access
to the national brokered deposit market. These sources are contemplated as
secondary liquidity in our contingent funding plan. We believe that the level
of our liquidity is sufficient to meet current and future funding requirements. We have a shelf registration on file with the Securities and Exchange
Commission which allows us to sell up to $1.0 billion of debt securities,
preferred stock, depository shares, common stock and warrants and which allows
affiliated trusts to sell capital securities. We had $650 million of remaining
authority under this shelf registration statement at March 31, 2004. CAPITAL At March 31, 2004, shareholders equity amounted to $2.7 billion, or 9.87% of
total assets. At December 31, 2003, shareholders equity amounted to $2.5
billion, or 9.53% of total assets. We paid a cash dividend of $0.195 per share on our common stock during the
first quarter of 2004 compared to $0.16 per share in the first quarter of 2003. We have a stock repurchase program that was approved by the Board in 2002 and
has a total of 2.9 million shares available for repurchase at March 31, 2004.
There were no repurchases in the first quarter of 2004. Capital guidelines issued by the Federal Reserve Board and the Office of the
Comptroller of Currency of the United States (OCC) respectively require us
and our banking subsidiary to maintain certain ratios, set forth below. At
March 31, 2004, Banknorth Group, Inc. and Banknorth, NA were deemed to be well
capitalized under the regulations of the Federal Reserve Board and the OCC,
respectively, and in compliance with applicable capital requirements. Table 16 - Capital Ratios Actual
    
    Capital Requirements
    
    ExcessAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of March 31, 2004Banknorth Group, Inc.Total capital (to risk-weighted assets)
    
    $
    2,167,587
    
    
    
    11.47
    %
    
    $
    1,511,723
    
    
    
    8.00
    %
    
    $
    655,864
    
    
    
    3.47
    %Tier 1 capital (to risk weighted assets)
    
    
    1,734,290
    
    
    
    9.18
    %
    
    
    755,861
    
    
    
    4.00
    %
    
    
    978,429
    
    
    
    5.18
    %Tier 1 leverage capital ratio (to average assets)
    
    
    1,734,290
    
    
    
    6.84
    %
    
    
    1,013,951
    
    
    
    4.00
    %
    
    
    720,339
    
    
    
    2.84
    %Banknorth NATotal capital (to risk-weighted assets)
    
    
    2,073,285
    
    
    
    10.99
    %
    
    
    1,508,869
    
    
    
    8.00
    %
    
    
    564,416
    
    
    
    2.99
    %Tier 1 capital (to risk-weighted assets)
    
    
    1,639,988
    
    
    
    8.70
    %
    
    
    754,435
    
    
    
    4.00
    %
    
    
    885,553
    
    
    
    4.70
    %Tier 1 leverage capital ratio (to average assets)
    
    
    1,639,988
    
    
    
    6.48
    %
    
    
    1,013,029
    
    
    
    4.00
    %
    
    
    626,959
    
    
    
    2.48
    %As of December 31, 2003Banknorth Group, Inc.Total capital (to risk-weighted assets)
    
    $
    2,088,061
    
    
    
    11.29
    %
    
    $
    1,479,352
    
    
    
    8.00
    %
    
    $
    608,709
    
    
    
    3.29
    %Tier 1 capital (to risk-weighted assets)
    
    
    1,656,848
    
    
    
    8.96
    %
    
    
    739,676
    
    
    
    4.00
    %
    
    
    917,172
    
    
    
    4.96
    %Tier 1 leverage capital ratio (to average assets)
    
    
    1,656,848
    
    
    
    6.65
    %
    
    
    996,777
    
    
    
    4.00
    %
    
    
    660,071
    
    
    
    2.65
    %Banknorth NATotal capital (to risk-weighted assets)
    
    
    1,970,705
    
    
    
    10.67
    %
    
    
    1,477,591
    
    
    
    8.00
    %
    
    
    493,114
    
    
    
    2.67
    %Tier 1 capital (to risk-weighted assets)
    
    
    1,539,814
    
    
    
    8.34
    %
    
    
    738,796
    
    
    
    4.00
    %
    
    
    801,018
    
    
    
    4.34
    %Tier 1 leverage capital ratio (to average assets)
    
    
    1,539,814
    
    
    
    6.18
    %
    
    
    995,893
    
    
    
    4.00
    %
    
    
    543,921
    
    
    
    2.18
    %
 38




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##### Table of Contents



Net risk-weighted assets were $18.8 billion and $18.5 billion at March 31, 2004
and December 31, 2003, respectively, for Banknorth Group, Inc. and Banknorth,
NA. At March 31, 2004 and December 31, 2003, we operated four affiliated trusts for
the purpose of issuing to unaffiliated parties capital securities and investing
the proceeds from the sale thereof in junior subordinated debentures issued by
us. All of the proceeds from the issuance of the capital securities and the
common securities issued by the trusts are invested in our junior subordinated
debentures, which represent the sole assets of the trusts. The capital
securities pay cumulative cash distributions quarterly at the same rate as the
junior subordinated debentures held by the trusts. We own all of the
outstanding common securities of the trusts and effectively are the guarantor
of the obligations of the trusts. The following table provides information on each of our affiliated trusts and
the outstanding capital securities of such trusts and the related junior
subordinated debentures issued by us at December 31, 2003 and March 31, 2004. Table 17 - Affiliated Trusts JuniorIssuance
    
    Capital
    
    Common
    
    Subordinated
    
    Stated
    
    MaturityName
    
    Date
    
    Securities
    
    Securities
    
    Debentures (1)
    
    Rate
    
    DatePeoples Heritage Capital Trust I
    
    
    1/31/1997
    
    
    $
    61,775
    
    
    $
    3,093
    
    
    $
    64,868
    
    
    
    9.06
    %
    
    
    2/1/2027Banknorth Capital Trust I
    
    
    5/1/1997
    
    
    
    30,000
    
    
    
    928
    
    
    
    30,928
    
    
    
    10.52
    %
    
    
    5/1/2027Ipswich Statutory Trust I
    
    
    2/22/2001
    
    
    
    3,500
    
    
    
    109
    
    
    
    3,609
    
    
    
    10.20
    %
    
    
    2/22/2031Banknorth Capital Trust II
    
    
    2/22/2002
    
    
    
    200,000
    
    
    
    6,186
    
    
    
    206,186
    
    
    
    8.00
    %
    
    
    4/1/2032$
    295,275
    
    
    $
    10,316
    
    
    $
    305,591
   (1)
    
    Amounts include junior subordinated debentures acquired by affiliated trusts from us
with the capital contributed by us in exchange for the common securities of such trusts.
Junior subordinated debentures are equal to capital securities plus common securities. The regulatory capital treatment of capital securities issued by subsidiary
trusts of bank holding companies is currently under review by the banking
regulators in light of the issuance by the Financial Accounting Standards Board
of Interpretation No. 46R, Consolidation of Variable Interest Entities  An
Interpretation of ARB No. 51 (FIN 46). See Note 12 to the unaudited
Consolidated Financial Statements. Our capital securities are currently
included in the Tier 1 capital of Banknorth and, at March 31, 2004, amounted to
17.0% of its Tier 1 capital. Depending on the future determination of banking
regulators, capital securities issued by affiliated trusts which are not
consolidated under FIN 46 may no longer qualify for Tier 1 capital treatment,
but instead they or the related junior subordinated debentures may qualify for
Tier 2 capital treatment. Outstanding capital securities may or may not be
grandfathered by the Federal Reserve Board for treatment as Tier 1 capital for
regulatory purposes. On July 2, 2003, the Federal Reserve Board issued a
Supervision and Regulation Letter requiring that bank holding companies
continue to follow the current instructions for reporting capital securities in
their regulatory reports. The effect of the letter is that we will continue to
report our capital securities in Tier 1 capital until further notice from the
Federal Reserve Board. As noted above, at March 31, 2004, we were classified
as well capitalized for regulatory purposes, the highest classification. We
believe that our classification would have remained well-capitalized were the
capital securities issued by subsidiary trusts included in our Tier 2 capital
and not in Tier 1 capital. If our trust capital securities were no longer
allowed to be included in Tier 1 capital as a result of accounting and
regulatory developments, we would be permitted to redeem the capital securities
without penalty. If capital securities issued by affiliated trusts or the
related junior subordinated debentures were not granted Tier 2 status, we
believe that we would remain in compliance with existing minimum capital
requirements. At March 31, 2004 and December 31, 2003, we also had $200 million of 7.625%
subordinated notes due in 2011 issued by our banking subsidiary, which qualify
as Tier 2 capital for regulatory purposes. Banking regulators have also established guidelines as to the level of
investments in BOLI. These guidelines are expressed in terms of a percentage
of Tier 1 capital plus loan loss reserves. Our guideline (which is consistent
with 39




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##### Table of Contents



regulatory guidelines) is that BOLI should not exceed 25% of our Tier 1
capital plus loan loss reserves, which we monitor monthly. The ratio of BOLI
to Tier 1 capital plus loan loss reserves was 25.1% at March 31, 2004 and 25.9%
at December 31, 2003. We currently do not anticipate any additional purchases
or sales of BOLI. CRITICAL ACCOUNTING POLICIES Our accounting and reporting policies comply with accounting principles
generally accepted in the United States of America and conform to general
practices within the banking industry. The preparation of financials
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. The financial position and
results of operations can be affected by these estimates and assumptions, which
are integral to understanding reported results. Management has discussed the
development and the selection of critical accounting policies with the Audit
Committee of our board of directors. As discussed in our 2003 Annual Report on
Form 10-K, we have identified the following critical accounting policies:
allowance for loan and lease losses, accounting for acquisitions and review of
related goodwill and other intangible assets, accounting for pension plans and
accrued income taxes. We consider these policies as our critical accounting
policies due to the potential impact on our results of operations and the
carrying value of certain of our assets based on any changes in judgments and
assumptions required to be made by us in the application of these policies.
Our critical accounting policies have not changed since December 31, 2003. IMPACT OF NEW ACCOUNTING STANDARDS For information on the impact of new accounting standards, see Note 12 to the
unaudited Consolidated Financial Statements. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are
forward-looking statements within the meaning of Section 21A of the
Securities Exchange Act of 1934. Forward-looking statements, which are based
on various assumptions (some of which are beyond our 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. Forward-looking statements are subject to
various factors which could cause actual results to differ materially from
these estimates. These factors include, but are not limited to, changes in
general economic conditions, interest rates, deposit flows, loan demand,
competition, legislation or regulation and accounting principles, policies or
guidelines, as well as other economic, competitive, governmental, regulatory
and technological factors affecting our operations. In addition, acquisitions
may result in large one-time charges to income, may not produce revenue
enhancements or cost savings at levels or within time frames originally
anticipated and may result in unforeseen integration difficulties. We do not
undertake, and specifically disclaim any obligation, to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect the occurrence of events or circumstances after the date of such
statements. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk The information contained in the section captioned Managements Discussion and
Analysis  Asset-Liability Management is incorporated herein by reference. 
 Item 4. Controls and Procedures Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report.
Based on such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are 40




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##### Table of Contents



designed
to ensure that information required to be disclosed by us in the reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and regulations and are operating in an effective manner. No change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. 
 Part II - Other Information 
 Item 1. Legal Proceedings In the ordinary course of business, Banknorth and its subsidiaries are
routinely defendants in or parties to a number of pending and threatened legal
actions, including actions brought on behalf of various classes of claimants.
Certain of these actions assert claims for substantial monetary damages against
Banknorth and its subsidiaries. Based on currently available information,
advice of counsel, available insurance coverage and established reserves,
management does not believe that the eventual outcome of pending litigation
against Banknorth and its subsidiaries will have a material adverse effect on
the consolidated financial position, liquidity or results of operations of
Banknorth. In view of the inherent difficulty of predicting such matters,
however, there can be no assurance that the outcome of any such action will not
have a material adverse effect on Banknorths consolidated results of
operations in any future reporting period. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table sets forth information with respect to any purchase
made by or on behalf of Banknorth or any affiliated purchaser, as defined in
§240.10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of
Banknorth common stock during the indicated periods. Total Number ofShares Purchased as
    
    Maximum Number ofTotal Number
    
    Average
    
    Part of Publicly
    
    Shares that May Yet Beof Shares
    
    Price Paid
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased
    
    per Share
    
    Programs
    
    Plans or Programs (1)January 1-31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 1-29, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 1-31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,853,200
   (1)
    
    In February 2002, the Board of Directors approved a program to repurchase up to
8,000,000 shares of Banknorth common stock. The program does not have an expiration date. 
 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 Banknorth was held on
April 27, 2004 (Annual Meeting).(b)
    
    Not applicable. 41




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##### Table of Contents



(c)
    
    There were 162,912,877 shares of Common Stock eligible to
be voted at the Annual Meeting and 141,272,347 shares were
represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual Meeting
and vote for each proposal were as follows:  1.
    
    Election of directors for Three-Year Terms and one
for One-Year Term.  Director Nominees Elected for Three-Year Terms: FOR
    
    AGAINSTDana S. Levenson
    
    
    140,161,297
    
    
    
    1,111,042John M. Naughton
    
    
    138,378,878
    
    
    
    2,893,462Angelo P. Pizzagalli
    
    
    140,078,775
    
    
    
    1,193,563
  2.
    
    Proposal to ratify the appointment of KPMG LLP as our
independent auditor for the year ending
December 31, 2004. FOR
    
    AGAINST
    
    ABSTAIN137,880,076
    
    
    
    3,126,472
    
    
    
    265,788
 
 Item 5. Other Information  not applicable. 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    The following exhibits are filed as part of this report.  Exhibit 31.1 Certification of Chief Executive Officer under Rules
13a-14 and 15d-14.
Exhibit 31.2 Certification of Chief Financial Officer under Rules
13a-14 and 15d-14.
Exhibit 32.1 Certification of Chief Executive Officer under 18 U.S.C. §
1350.
Exhibit 32.2 Certification of Chief Financial Officer under 18 U.S.C. §
1350.  (b)
    
    During the quarter ended March 31, 2004, we filed the
following Current Reports on Form 8-K or 8-K/A:  January 2, 2004, relating to the completion of the First & Ocean
BanCorp acquisition;
January 20, 2004, relating to our fourth quarter and year-ended
2003 financial results;
February 26, 2004, relating to our chairmans presentation at a KBW
conference;
March 3, 2004 relating to our chief operating officers
presentation at a Sandler conference and
March 15, 2004 relating to the announcement of the conference call
for the first quarter of 2004 financial results. 42




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. BANKNORTH GROUP, INC.Date:May 6, 2004
    
    By:
    
    /s/ William J. RyanWilliam J. RyanChairman, President andChief Executive OfficerDate: May 6, 2004
    
    By:
    
    /s/ Stephen J. BoyleStephen J. BoyleExecutive Vice President andChief Financial Officer(principal financial and accounting officer)
 43




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##### Table of Contents



EXHIBIT INDEX Exhibit 31.1 Certification of Chief Executive Officer under Rules 13a-14 and
15d-14. Exhibit 31.2 Certification of Chief Financial Officer under Rules 13a-14 and
15d-14. Exhibit 32.1 Certification of Chief Executive Officer under 18 U.S.C. § 1350. Exhibit 32.2 Certification of Chief Financial Officer under 18 U.S.C. § 1350. 44