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FORM 10-Q    [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 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.
Yes [ x ]  No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [x ]  No [   ] The number of shares outstanding of the Registrants common stock and related
stock purchase rights as of July 31, 2004 is: Common stock, par value $.01 per share
    
    172,903,080(Class)
    
    (Outstanding)
 Available on the Web @ www.banknorth.com




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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
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    42Item 4. Controls and Procedures
    
    
    42PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    43Item 4. Submission of Matters to a Vote of Security Holders
    
    
    43Item 5. Other Information
    
    
    43Item 6. Exhibits and Reports on Form 8-K
    
    
    43Signatures
    
    
    44Exhibits
    
    
    45EX-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 SECT. 906 CERTIFICATION OF C.F.O.
  2




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##### Table of Contents



BANKNORTH GROUP, INC. AND
SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)
 June 30, 2004
    
    December 31, 2003AssetsCash and due from banks
    
    $
    613,675
    
    
    $
    669,686Federal funds sold and other short term investments
    
    
    10,917
    
    
    
    4,645Securities available for sale, at market value
    
    
    7,888,172
    
    
    
    7,122,992Securities held to maturity (market value of $103,227 and $124,344 at
June 30, 2004 and December 31, 2003, respectively)
    
    
    103,792
    
    
    
    124,240Loans held for sale
    
    
    67,207
    
    
    
    41,696Loans and leases:Residential real estate mortgages
    
    
    3,092,269
    
    
    
    2,710,483Commercial real estate mortgages
    
    
    6,086,800
    
    
    
    5,528,862Commercial business loans and leases
    
    
    3,825,003
    
    
    
    3,287,094Consumer loans and leases
    
    
    5,106,240
    
    
    
    4,819,523Total loans and leases
    
    
    18,110,312
    
    
    
    16,345,962Less: Allowance for loan and lease losses
    
    
    247,620
    
    
    
    232,287Net loans and leases
    
    
    17,862,692
    
    
    
    16,113,675Premises and equipment, net
    
    
    288,362
    
    
    
    264,818Goodwill
    
    
    1,364,716
    
    
    
    1,126,639Identifiable intangible assets
    
    
    53,972
    
    
    
    36,415Bank-owned life insurance
    
    
    500,132
    
    
    
    488,756Other assets
    
    
    522,153
    
    
    
    460,173Total assets
    
    $
    29,275,790
    
    
    $
    26,453,735Liabilities and Shareholders EquityDeposits:Savings accounts
    
    $
    2,624,256
    
    
    $
    2,460,522Money market access and NOW accounts
    
    
    7,872,310
    
    
    
    7,130,534Certificates of deposit
    
    
    4,701,046
    
    
    
    4,733,104Noninterest-bearing deposits
    
    
    4,139,017
    
    
    
    3,577,025Total deposits
    
    
    19,336,629
    
    
    
    17,901,185Short-term borrowings
    
    
    3,475,805
    
    
    
    2,336,947Long-term debt
    
    
    3,435,620
    
    
    
    3,545,917Other liabilities
    
    
    161,044
    
    
    
    149,167Total liabilities
    
    
    26,409,098
    
    
    
    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 - 191,485,675 in 2004 and 182,292,973 in 2003)
    
    
    1,915
    
    
    
    1,823Paid-in capital
    
    
    1,733,306
    
    
    
    1,435,005Retained earnings
    
    
    1,629,153
    
    
    
    1,508,292Treasury stock, at cost (18,940,108 shares in 2004 and 20,105,254 shares in 2003)
    
    
    (405,632
    )
    
    
    (430,608
    )Accumulated other comprehensive income (loss)
    
    
    (92,050
    )
    
    
    6,007Total shareholders equity
    
    
    2,866,692
    
    
    
    2,520,519Total liabilities and shareholders equity
    
    $
    29,275,790
    
    
    $
    26,453,735
 See accompanying notes to unaudited Consolidated Financial Statements. 3




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##### Table of Contents



BANKNORTH GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME  (In thousands, except per share data) (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest and dividend income:Interest and fees on loans and leases
    
    $
    225,530
    
    
    $
    225,809
    
    
    $
    441,309
    
    
    $
    446,094Interest and dividends on securities
    
    
    83,616
    
    
    
    76,669
    
    
    
    160,489
    
    
    
    165,711Total interest and dividend income
    
    
    309,146
    
    
    
    302,478
    
    
    
    601,798
    
    
    
    611,805Interest expense:Interest on deposits
    
    
    39,514
    
    
    
    50,734
    
    
    
    78,332
    
    
    
    102,126Interest on borrowed funds
    
    
    39,582
    
    
    
    40,170
    
    
    
    75,807
    
    
    
    91,969Total interest expense
    
    
    79,096
    
    
    
    90,904
    
    
    
    154,139
    
    
    
    194,095Net interest income
    
    
    230,050
    
    
    
    211,574
    
    
    
    447,659
    
    
    
    417,710Provision for loan and lease losses
    
    
    9,500
    
    
    
    10,500
    
    
    
    19,000
    
    
    
    21,401Net interest income after provision
for loan and lease losses
    
    
    220,550
    
    
    
    201,074
    
    
    
    428,659
    
    
    
    396,309Noninterest income:Deposit services
    
    
    27,260
    
    
    
    23,747
    
    
    
    53,412
    
    
    
    46,273Insurance brokerage commissions
    
    
    12,278
    
    
    
    10,948
    
    
    
    26,014
    
    
    
    23,305Merchant and electronic banking income, net
    
    
    13,069
    
    
    
    11,098
    
    
    
    23,474
    
    
    
    20,118Trust and investment management services
    
    
    9,870
    
    
    
    7,957
    
    
    
    19,019
    
    
    
    15,309Bank-owned life insurance
    
    
    6,275
    
    
    
    5,826
    
    
    
    11,771
    
    
    
    11,168Investment planning services
    
    
    5,146
    
    
    
    3,911
    
    
    
    9,985
    
    
    
    7,167Net securities gains
    
    
    3,355
    
    
    
    33,423
    
    
    
    6,936
    
    
    
    36,206Other noninterest income
    
    
    12,223
    
    
    
    18,918
    
    
    
    27,083
    
    
    
    34,52189,476
    
    
    
    115,828
    
    
    
    177,694
    
    
    
    194,067Noninterest expense:Compensation and employee benefits
    
    
    87,005
    
    
    
    82,248
    
    
    
    174,538
    
    
    
    162,941Occupancy
    
    
    15,699
    
    
    
    15,154
    
    
    
    31,408
    
    
    
    30,063Equipment
    
    
    11,813
    
    
    
    12,425
    
    
    
    23,703
    
    
    
    23,676Data processing
    
    
    10,018
    
    
    
    10,415
    
    
    
    20,455
    
    
    
    20,593Advertising and marketing
    
    
    6,303
    
    
    
    5,957
    
    
    
    13,827
    
    
    
    11,017Amortization of identifiable intangible assets
    
    
    2,084
    
    
    
    2,306
    
    
    
    3,988
    
    
    
    4,302Merger and consolidation costs
    
    
    4,135
    
    
    
    1,530
    
    
    
    5,748
    
    
    
    5,981Prepayment penalties on borrowings
    
    
    
    
    
    
    30,490
    
    
    
    
    
    
    
    30,490Other noninterest expense
    
    
    26,769
    
    
    
    23,514
    
    
    
    49,877
    
    
    
    44,883163,826
    
    
    
    184,039
    
    
    
    323,544
    
    
    
    333,946Income before income tax expense
    
    
    146,200
    
    
    
    132,863
    
    
    
    282,809
    
    
    
    256,430Applicable income tax expense
    
    
    50,353
    
    
    
    45,338
    
    
    
    96,636
    
    
    
    87,511Net income
    
    $
    95,847
    
    
    $
    87,525
    
    
    $
    186,173
    
    
    $
    168,919Basic earnings per share
    
    $
    0.57
    
    
    $
    0.54
    
    
    $
    1.12
    
    
    $
    1.06Diluted earnings per share
    
    $
    0.55
    
    
    $
    0.53
    
    
    $
    1.10
    
    
    $
    1.04Weighted average shares outstanding:Basic
    
    
    169,637
    
    
    
    162,312
    
    
    
    166,318
    
    
    
    159,980Dilutive effect of stock options
    
    
    3,472
    
    
    
    2,247
    
    
    
    3,585
    
    
    
    1,918Diluted
    
    
    173,109
    
    
    
    164,559
    
    
    
    169,903
    
    
    
    161,898
 See accompanying notes to unaudited Consolidated Financial Statements. 4




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##### Table of Contents



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 (Loss)
    
    TotalBalances at December 31, 2003
    
    
    162,188
    
    
    $
    1,823
    
    
    $
    1,435,005
    
    
    $
    1,508,292
    
    
    ($
    430,608
    )
    
    $
    6,007
    
    
    $
    2,520,519Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186,173
    
    
    
    
    
    
    
    
    
    
    
    186,173Unrealized gains (losses) on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98,127
    )
    
    
    (98,127
    )Unrealized gains on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    70Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,116Common stock issued for acquisitions
    
    
    9,193
    
    
    
    92
    
    
    
    298,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    298,100Treasury stock issued for employee benefit plans
    
    
    1,165
    
    
    
    
    
    
    
    555
    
    
    
    
    
    
    
    24,457
    
    
    
    
    
    
    
    25,012Distribution of restricted stock
    
    
    
    
    
    
    
    
    
    
    (262
    )
    
    
    
    
    
    
    519
    
    
    
    
    
    
    
    257Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,312
    )
    
    
    
    
    
    
    
    
    
    
    (65,312
    )Balances at June 30, 2004
    
    
    172,546
    
    
    $
    1,915
    
    
    $
    1,733,306
    
    
    $
    1,629,153
    
    
    ($
    405,632
    )
    
    ($
    92,050
    )
    
    $
    2,866,692Balances at December 31, 2002
    
    
    150,579
    
    
    $
    1,689
    
    
    $
    1,059,778
    
    
    $
    1,269,422
    
    
    ($
    382,350
    )
    
    $
    114,946
    
    
    $
    2,063,485Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,919
    
    
    
    
    
    
    
    
    
    
    
    168,919Unrealized gains (losses) on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,176
    )
    
    
    (19,176
    )Unrealized gains on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,155
    
    
    
    1,155Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,898Common stock issued for acquisitions
    
    
    13,401
    
    
    
    134
    
    
    
    382,669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382,803Treasury stock issued for employee benefit plans
    
    
    1,279
    
    
    
    
    
    
    
    (5,508
    )
    
    
    
    
    
    
    25,634
    
    
    
    
    
    
    
    20,126Treasury stock purchased
    
    
    (4,416
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,663
    )
    
    
    
    
    
    
    (103,663
    )Distribution of restricted stock
    
    
    
    
    
    
    
    
    
    
    (923
    )
    
    
    
    
    
    
    1,318
    
    
    
    
    
    
    
    395Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,293
    )
    
    
    
    
    
    
    
    
    
    
    (50,293
    )Balances at June 30, 2003
    
    
    160,843
    
    
    $
    1,823
    
    
    $
    1,436,016
    
    
    $
    1,388,048
    
    
    ($
    459,061
    )
    
    $
    96,925
    
    
    $
    2,463,751
 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)
 Six Months Ended June 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    186,173
    
    
    $
    168,919Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan and lease losses
    
    
    19,000
    
    
    
    21,401Depreciation of banking premises and equipment
    
    
    21,749
    
    
    
    21,729Net amortization of premium and discounts
    
    
    13,963
    
    
    
    30,953Amortization of intangible assets
    
    
    3,988
    
    
    
    4,302Provision for deferred tax expense
    
    
    6,700
    
    
    
    3,700Distribution of restricted stock units
    
    
    257
    
    
    
    395Net (gains) realized from sales of securities and loans
    
    
    (8,447
    )
    
    
    (36,206
    )Prepayment penalties on borrowings
    
    
    
    
    
    
    30,490Net (gains) realized from sales of loans held for sale
    
    
    (1,345
    )
    
    
    (7,355
    )Increase in cash surrender value of bank owned life insurance
    
    
    (11,771
    )
    
    
    (11,168
    )Net decrease in mortgage servicing rights
    
    
    359
    
    
    
    1,097Proceeds from sales of loans held for sale
    
    
    237,696
    
    
    
    483,272Residential loans originated and purchased for sale
    
    
    (253,997
    )
    
    
    (438,313
    )Net (increase) decrease in other assets
    
    
    (4,805
    )
    
    
    22,283Net (decrease) in other liabilities
    
    
    (6,489
    )
    
    
    (56,364
    )Net cash provided by operating activities
    
    
    203,031
    
    
    
    239,135Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    1,427,594
    
    
    
    2,266,179Proceeds from maturities and principal repayments of securities available for sale
    
    
    724,848
    
    
    
    1,739,690Purchases of securities available for sale
    
    
    (2,736,856
    )
    
    
    (3,201,527
    )Proceeds from maturities and principal repayments of securities held to maturity
    
    
    20,448
    
    
    
    50,170Net increase in loans and leases
    
    
    (788,361
    )
    
    
    (257,110
    )Proceeds from sales of loans
    
    
    37,097
    
    
    
    Net additions to premises and equipment
    
    
    (13,940
    )
    
    
    (9,412
    )Cash paid for acquisitions, net of cash acquired
    
    
    48,681
    
    
    
    48,354Net cash (used in) provided by investing activities
    
    
    (1,280,489
    )
    
    
    636,344Cash flows from financing activities:Net increase in deposits
    
    
    252,601
    
    
    
    115,202Net increase in securities sold under repurchase agreements
    
    
    883,227
    
    
    
    37,416Proceeds from Federal Home Loan Bank borrowings
    
    
    9,058
    
    
    
    1,205Payments on Federal Home Loan Bank borrowings
    
    
    (206,343
    )
    
    
    (1,200,427
    )Net increase in other borrowings
    
    
    49,476
    
    
    
    330Issuance of senior notes, net
    
    
    
    
    
    
    148,693Treasury stock issued for employee benefit plans
    
    
    25,012
    
    
    
    20,126Purchase of treasury stock
    
    
    
    
    
    
    (103,663
    )Cash dividends paid to shareholders
    
    
    (65,312
    )
    
    
    (50,293
    )Net cash provided by (used in) financing activities
    
    
    947,719
    
    
    
    (1,031,411
    )Decrease in cash and cash equivalents
    
    
    (129,739
    )
    
    
    (155,932
    )Cash and cash equivalents at beginning of period
    
    
    316,331
    
    
    
    717,003Cash and cash equivalents at end of period
    
    $
    186,592
    
    
    $
    561,071In conjunction with the purchase
acquisitions detailed in Note 2
 to the Consolidated Financial Statements, assets were acquired
 and liabilities were assumed as follows:Fair value of gross assets acquired
    
    $
    1,804,566
    
    
    $
    3,036,872Fair value of liabilities assumed
    
    
    1,417,562
    
    
    
    2,325,526Interest paid
    
    $
    153,902
    
    
    $
    199,373Income taxes paid
    
    
    65,126
    
    
    
    45,053
 See accompanying notes to unaudited Consolidated Financial Statements. 6




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##### Table of Contents



BANKNORTH GROUP, INC. AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements
June 30, 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 and six months ended June 30, 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
    
    
    
    
    

Identifiable
Intangible
    
    Cash
    
    Shares
    

Total
Purchase(Dollars and shares in millions)
    
    Date
    
    Assets
    
    Equity
    
    Goodwill
    
    Assets
    
    Paid
    
    Issued
    
    PriceCCBT Financial Companies, Inc.
    
    
    4/30/2004
    
    
    $
    1,292.9
    
    
    $
    108.5
    
    
    $
    178.0
    
    
    $
    19.4
    
    
    $
    
    
    
    
    9.2
    
    
    $
    298.1Foxborough Savings Bank
    
    
    4/30/2004
    
    
    
    241.8
    
    
    
    22.8
    
    
    
    62.2
    
    
    
    2.2
    
    
    
    88.9
    
    
    
    
    
    
    
    88.9First & 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
    
    
    
    425.1
    
    
    
    9.3
    
    
    
    328.5
    
    
    
    13.4
    
    
    
    711.4Insurance agency acquisitions
    
    
    2003
    
    
    
    1.2
    
    
    
    0.1
    
    
    
    2.4
    
    
    
    0.7
    
    
    
    3.2
    
    
    
    
    
    
    
    3.2
 7




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##### Table of Contents



On April 30, 2004, Banknorth acquired CCBT Financial Companies, Inc. (CCBT)
and Foxborough Savings Bank (Foxborough). The following table summarizes the
estimated fair value of the assets acquired and liabilities assumed for CCBT
and Foxborough at the date of acquisition. Banknorth expects that some
adjustments of the estimated fair values assigned to the assets acquired and
liabilities assumed will be recorded in periods after June 30, 2004, although such adjustments are not
expected to be significant. It is estimated that none of the goodwill will be
deductible for income tax purposes. Assets:Investments
    
    $
    319,403Loans held for sale
    
    
    7,758Loans and leases, net
    
    
    1,026,915Premises and equipment
    
    
    31,353Goodwill
    
    
    240,166Identifiable intangible assets
    
    
    21,565Other assets
    
    
    157,406Total assets acquired
    
    
    1,804,566Liabilities:Deposits
    
    
    1,188,294Borrowings
    
    
    210,903Other liabilities
    
    
    18,365Total liabilities assumed
    
    
    1,417,562Net assets acquired
    
    $
    387,004
 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 proforma disclosures
of net income and earnings per share as if the fair value based method of
accounting had been applied. The proforma disclosures include the effects of
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 proforma amounts indicated in the table below: 8




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    95,847
    
    
    $
    87,525
    
    
    $
    186,173
    
    
    $
    168,919Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects
    
    
    (4,513
    )
    
    
    (3,227
    )
    
    
    (8,555
    )
    
    
    (5,794
    )Proforma net income
    
    $
    91,334
    
    
    $
    84,298
    
    
    $
    177,618
    
    
    $
    163,125Earnings per shareBasic  As reported
    
    $
    0.57
    
    
    $
    0.54
    
    
    $
    1.12
    
    
    $
    1.06Proforma
    
    $
    0.54
    
    
    $
    0.52
    
    
    $
    1.07
    
    
    $
    1.02Diluted  As reported
    
    $
    0.55
    
    
    $
    0.53
    
    
    $
    1.10
    
    
    $
    1.04Proforma
    
    $
    0.53
    
    
    $
    0.52
    
    
    $
    1.04
    
    
    $
    1.01
 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 one year and those that have been in a
continuous unrealized loss position for more than one year as of June 30, 2004. Less than one year
    
    More than one year
    
    TotalNumber of
    
    Fair
    
    Unrealized
    
    Number of
    
    Fair
    
    Unrealized
    
    Number of
    
    Fair
    
    UnrealizedInvestments
    
    Value
    
    Losses
    
    Investments
    
    Value
    
    Losses
    
    Investments
    
    Value
    
    LossesU. S. Government obligations and
obligations of U.S.Government
agencies and corporations
    
    
    10
    
    
    $
    733,678
    
    
    ($
    23,400
    )
    
    
    3
    
    
    $
    874,300
    
    
    ($
    45,331
    )
    
    
    13
    
    
    $
    1,607,978
    
    
    ($
    68,731
    )Tax exempt bonds and notes
    
    
    41
    
    
    
    36,357
    
    
    
    (307
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    36,357
    
    
    
    (307
    )Other bonds and notes
    
    
    10
    
    
    
    21,802
    
    
    
    (973
    )
    
    
    4
    
    
    
    4,894
    
    
    
    (76
    )
    
    
    14
    
    
    
    26,696
    
    
    
    (1,049
    )Mortgage-backed securities
    
    
    160
    
    
    
    3,794,001
    
    
    
    (85,717
    )
    
    
    38
    
    
    
    494,214
    
    
    
    (18,976
    )
    
    
    198
    
    
    
    4,288,215
    
    
    
    (104,693
    )Collateralized mortgage obligations
    
    
    23
    
    
    
    245,519
    
    
    
    (5,503
    )
    
    
    2
    
    
    
    622
    
    
    
    (1
    )
    
    
    25
    
    
    
    246,141
    
    
    
    (5,504
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    100
    
    
    
    (8
    )
    
    
    2
    
    
    
    100
    
    
    
    (8
    )244
    
    
    $
    4,831,357
    
    
    ($
    115,900
    )
    
    
    49
    
    
    $
    1,374,130
    
    
    ($
    64,392
    )
    
    
    293
    
    
    $
    6,205,487
    
    
    ($
    180,292
    )
 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 nominal credit risk. U.S. Government agencies
securities are believed by management to have minimal credit risk as they play
a vital role in the nations financial markets. Other bonds and notes are
generally comprised of corporate securities which have a credit rating of at
least investment grade by one of the nationally-recognized rating agencies.
Mortgage-backed securities or collateralized mortgage obligations are either
issued by federal government agencies or by private issuers with minimum
security ratings of AA. 9




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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 six months ended June 30, 2004 are summarized as follows: Indentifiable Intangible AssetsOther
    
    TotalCore Deposit
    
    Identifiable
    
    IdentifiableIntangibles
    
    Intangible
    
    IntangibleGoodwill
    
    (CDI)
    
    Assets
    
    AssetsBalance, December 31, 2003
    
    $
    1,126,639
    
    
    $
    28,165
    
    
    $
    8,250
    
    
    $
    36,415Recorded during the year
    
    
    240,166
    
    
    
    21,565
    
    
    
    
    
    
    
    21,565Amortization expense
    
    
    
    
    
    
    (2,461
    )
    
    
    (1,527
    )
    
    
    (3,988
    )Reclassification
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Adjustments of purchase accounting estimates
    
    
    (2,109
    )
    
    
    
    
    
    
    
    
    
    
    Balance, June 30, 2004
    
    $
    1,364,716
    
    
    $
    47,249
    
    
    $
    6,723
    
    
    $
    53,972Estimated amortization expense for the year ending:Remaining 2004
    
    
    
    
    
    $
    3,525
    
    
    $
    1,103
    
    
    $
    4,6282005
    
    
    
    
    
    
    6,352
    
    
    
    1,471
    
    
    
    7,8232006
    
    
    
    
    
    
    5,680
    
    
    
    723
    
    
    
    6,4032007
    
    
    
    
    
    
    5,213
    
    
    
    723
    
    
    
    5,9362008
    
    
    
    
    
    
    5,192
    
    
    
    354
    
    
    
    5,546thereafter
    
    
    
    
    
    
    21,287
    
    
    
    621
    
    
    
    21,908
 The components of identifiable intangible assets are as follows: June 30, 2004Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    AmountIdentifiable intangible assets:Core deposit intangibles
    
    $
    76,218
    
    
    $
    28,969
    
    
    $
    47,249Other identifiable intangible assets
    
    
    13,703
    
    
    
    6,980
    
    
    
    6,723Total
    
    $
    89,921
    
    
    $
    35,949
    
    
    $
    53,972
 Note 6  Short-term Borrowings A summary of short-term borrowings follows: June 30, 2004
    
    December 31, 2003Securities sold under agreements to repurchase  retail
    
    $
    1,122,547
    
    
    $
    1,086,900Securities sold under agreements to repurchase -
wholesale
    
    
    1,764,729
    
    
    
    814,650Federal funds purchased
    
    
    438,000
    
    
    
    358,000Treasury, tax and loan notes
    
    
    150,529
    
    
    
    77,397$
    3,475,805
    
    
    $
    2,336,947
 10




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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: June 30, 2004
    
    December 31, 2003Federal Home Loan Bank advances
    
    $
    1,478,288
    
    
    $
    1,495,821Securities sold under agreements to repurchase - wholesale
    
    
    1,300,000
    
    
    
    1,400,000Junior subordinated debentures issued to affiliated trusts
    
    
    310,746
    
    
    
    Capital trust securities
    
    
    
    
    
    
    295,275Subordinated debt 7.625%, due 2011
    
    
    200,000
    
    
    
    200,000Senior notes 3.75%, due 2008
    
    
    149,781
    
    
    
    149,753Hedge-related basis adjustments on long-term debt
    
    
    (11,441
    )
    
    
    (1,896
    )Other long-term debt
    
    
    8,246
    
    
    
    6,964Total
    
    $
    3,435,620
    
    
    $
    3,545,917
 Callable borrowings amounted to $1.1 billion and $1.8 billion at June 30, 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 EndedJune 30, 2004
    
    June 30, 2003Pre-tax
    
    Tax
    
    Net of
    
    Pre-tax
    
    Tax
    
    Net ofAmount
    
    Effect
    
    Tax
    
    Amount
    
    Effect
    
    TaxUnrealized gain (loss) on securities available for sale
    
    ($
    231,586
    )
    
    $
    81,058
    
    
    ($
    150,528
    )
    
    $
    3,590
    
    
    ($
    1,256
    )
    
    $
    2,334Unrealized gain (loss) on cash flow hedges
    
    
    881
    
    
    
    (309
    )
    
    
    572
    
    
    
    (3,710
    )
    
    
    1,299
    
    
    
    (2,411
    )Reclassification adjustment for (losses) gains realized
in net income
    
    
    (4,203
    )
    
    
    1,471
    
    
    
    (2,732
    )
    
    
    (29,363
    )
    
    
    10,277
    
    
    
    (19,086
    )Net change in unrealized gains (losses)
    
    ($
    234,908
    )
    
    $
    82,220
    
    
    ($
    152,688
    )
    
    ($
    29,483
    )
    
    $
    10,320
    
    
    ($
    19,163
    )
 Six Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003Pre-tax
    
    Tax
    
    Net of
    
    Pre-tax
    
    Tax
    
    Net ofAmount
    
    Effect
    
    Tax
    
    Amount
    
    Effect
    
    TaxUnrealized gain (loss) on securities available for sale
    
    ($
    144,028
    )
    
    $
    50,412
    
    
    ($
    93,616
    )
    
    $
    6,954
    
    
    ($
    2,596
    )
    
    $
    4,358Unrealized gain (loss) on cash flow hedges
    
    
    7
    
    
    
    (3
    )
    
    
    4
    
    
    
    (7,391
    )
    
    
    2,587
    
    
    
    (4,804
    )Reclassification adjustment for gains (losses) realized
in net income
    
    
    (6,839
    )
    
    
    2,394
    
    
    
    (4,445
    )
    
    
    (27,038
    )
    
    
    9,463
    
    
    
    (17,575
    )Net change in unrealized gains (losses)
    
    ($
    150,860
    )
    
    $
    52,803
    
    
    ($
    98,057
    )
    
    ($
    27,475
    )
    
    $
    9,454
    
    
    ($
    18,021
    )
 11




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##### Table of Contents



Note 9   Other Noninterest Income Other noninterest income consisted of the following for the periods indicated. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Covered call premiums
    
    $
    2,305
    
    
    $
    7,199
    
    
    $
    8,379
    
    
    $
    14,238Loan fee income
    
    
    8,516
    
    
    
    6,978
    
    
    
    13,686
    
    
    
    12,080Mortgage banking services income
    
    
    332
    
    
    
    3,069
    
    
    
    3,337
    
    
    
    6,241Venture capital write-downs
    
    
    (166
    )
    
    
    (98
    )
    
    
    (524
    )
    
    
    (615
    )Miscellaneous income
    
    
    1,236
    
    
    
    1,770
    
    
    
    2,205
    
    
    
    2,577Total
    
    $
    12,223
    
    
    $
    18,918
    
    
    $
    27,083
    
    
    $
    34,521
 Note 10  Pension and Other Postretirement Plans The following table presents the amount of net periodic benefit cost recognized
for the periods indicated. Components of net periodic benefit cost Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Qualified PensionService cost
    
    $
    2,784
    
    
    $
    2,313
    
    
    $
    5,568
    
    
    $
    4,626Interest cost
    
    
    3,331
    
    
    
    3,042
    
    
    
    6,662
    
    
    
    6,084Expected return on plan assets
    
    
    (4,828
    )
    
    
    (3,586
    )
    
    
    (9,656
    )
    
    
    (7,172
    )Amortization of prior service cost
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    4Amortization of transition obligation
    
    
    (64
    )
    
    
    (64
    )
    
    
    (128
    )
    
    
    (128
    )Amortization of net loss
    
    
    1,066
    
    
    
    966
    
    
    
    2,132
    
    
    
    1,932Net periodic benefit cost
    
    
    2,291
    
    
    
    2,673
    
    
    
    4,582
    
    
    
    5,346Nonqualified PensionService cost
    
    
    99
    
    
    
    78
    
    
    $
    198
    
    
    $
    156Interest cost
    
    
    405
    
    
    
    395
    
    
    
    810
    
    
    
    790Amortization of prior service cost
    
    
    43
    
    
    
    43
    
    
    
    86
    
    
    
    86Amortization of transition obligation
    
    
    3
    
    
    
    3
    
    
    
    6
    
    
    
    6Amortization of net loss
    
    
    50
    
    
    
    31
    
    
    
    100
    
    
    
    62Net periodic benefit cost
    
    
    600
    
    
    
    550
    
    
    
    1,200
    
    
    
    1,100Total net periodic benefit cost -
pensions plans
    
    $
    2,891
    
    
    $
    3,223
    
    
    $
    5,782
    
    
    $
    6,446Other Postretirement BenefitsService cost
    
    $
    40
    
    
    $
    31
    
    
    $
    80
    
    
    $
    62Interest cost
    
    
    353
    
    
    
    289
    
    
    
    706
    
    
    
    578Amortization of prior service cost
    
    
    35
    
    
    
    35
    
    
    
    70
    
    
    
    70Amortization of transition obligation
    
    
    98
    
    
    
    98
    
    
    
    196
    
    
    
    196Amortization of net loss
    
    
    99
    
    
    
    78
    
    
    
    198
    
    
    
    156Net periodic benefit cost - other
postretirement benefit plans
    
    $
    625
    
    
    $
    531
    
    
    $
    1,250
    
    
    $
    1,062
 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 12




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##### Table of Contents



cash and, as in prior
years, the entire contribution is anticipated to be paid in December after
final review of the 2004 pension obligation. In December 2003, the Medicare Prescription Drugs, Improvement and
Modernization Act (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. FASB Staff Position 106-2,
Accounting and Disclosure Requirement Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (FSP FAS 106-2), permits
deferring the accounting for the effects of the Act until authoritative
guidance on accounting for the federal subsidy is issued. We have elected to
defer accounting for the effects of this new law until the specific
authoritative guidance is issued. Therefore, we have not reflected the impact
of FSP 106-2 in our net periodic postretirement cost or in the accumulated
postretirement benefit obligation. The implementation
of FSP FAS 106-2 will not have a material impact on our financial condition,
results of operations, earning per share or cash flows. Note 11   Accounting Changes The following information addresses new or proposed accounting pronouncements
related to our industry. Accounting for Variable Interest Entities FASB Interpretation No. 46 (R), Consolidation of Variable Interest Entities
(FIN 46R) establishes the criteria used to identify variable interest
entities and to determine whether or not to consolidate a variable interest
entity. Pursuant to the criteria established by FIN 46R in 2004, we
deconsolidated five affiliated trusts which had been formed for the purposes of
issuing capital securities to unaffiliated parties and investing the proceeds
in junior subordinated debentures issued by us. Our investment in these
affiliated trusts totaled $10 million at June 30, 2004, which funds were also
used by the trusts to invest in junior subordinated debentures issued by us.
The result of the deconsolidation and the accounting for these entities was to
recognize our equity investments in these entities of approximately $10 million
in the aggregate as securities available for sale and to increase long-term
debt by $10 million. The adoption of FIN 46R did not have a material impact on
our financial condition, results of operations, earnings per share or cash
flows. For information regarding the potential effect of FIN 46R on the regulatory
capital treatment of capital securities issued by affiliated trusts, 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 cash flows over the original expected cash
flows is to be recognized as an adjustment of future yield. Future decreases
in actual cash flow compared to the original expected cash flow is recognized
as a valuation allowance and expensed immediately. Valuation allowances cannot
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. 13




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##### Table of Contents



Note 12  Subsequent Events On June 21, 2004, Banknorth entered into a definitive agreement to acquire
BostonFed Bancorp, Inc. (BostonFed), the parent company of Boston Federal
Savings Bank. BostonFed had $1.7 billion of assets and $93.5 million of
shareholders equity at June 30, 2004. Under terms of the agreement, each
outstanding share of BostonFed will be converted into the right to receive
1.241 shares of Banknorth common stock or, at the election of the holder of
BostonFed common stock, 1.055 shares of Banknorth common stock and $6.12 in
cash, plus, in each case, cash in lieu of any fractional share interest. As a
result of this election option, up to 15% (based on a $32.00 per share market
price for the Banknorth common stock) of the aggregate merger consideration may
be comprised of cash. The definitive agreement has been approved by the
directors of both Banknorth and BostonFed. The transaction is subject to all
required regulatory approvals, approval of the shareholders of BostonFed and
other customary conditions. The transaction is expected to close in the first
quarter of 2005 with operational integration to follow soon thereafter. On July 1, 2004, Banknorth completed the acquisition of Drake, Swan & Crocker
Insurance Agency located in Orleans, Massachusetts for shares of Banknorth
common stock. 14




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##### Table of Contents



BANKNORTH GROUP, INC. AND SUBSIDIARIES 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS  EXECUTIVE OVERVIEW Our financial statements for the three and six months ended June 30, 2004 and 2003
reflect the acquisitions of CCBT Financial Companies, Inc. (CCBT) and
Foxborough Savings Bank (Foxborough) from the date of acquisition on April
30, 2004 and American Financial Holdings, Inc. (American) from the date of
acquisition on February 14, 2003. CCBT and Foxborough had total combined
assets of $1.5 billion and American had total assets of $2.7 billion at the
date of acquisition. Our financial statements for the three and six months
ended June 30, 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. Fully diluted earnings per share were $0.55 and $1.10 for the three and six
months ended June 30, 2004, compared to $0.53 and $1.04 for the comparable
periods last year. Compared to 2003, 2004 was adversely impacted by higher merger and consolidation costs, increased
advertising spending and continued pressure on net interest margins. Annualized return on average equity (ROE) and annualized return on average
assets (ROA) were 13.54% and 1.36%, respectively, for the quarter ended June
30, 2004 and were 14.24% and 1.38%, respectively, for the comparable quarter
last year. ROE and ROA were 13.82% and 1.36%, respectively, for the six months
ended June 30, 2004, and 14.25% and 1.35%, respectively, for the six months
ended June 30, 2003. The decline in ROE related primarily to the intangible
equity created in the April 2004 acquisition of CCBT. Our net income increased by $8.3 million in the second quarter ended June 30,
2004 compared to the second quarter last year, an increase of 10%. The
following were significant factors related to the results for the second
quarter of 2004 compared to the second quarter of 2003.  
    
    Net interest income increased 9% over the second quarter of last
year due primarily to a $2.4 billion increase in average earning assets
from period to period as well as an $11.2 million decrease in interest
expense on deposits. The net interest margin of 3.66% for the quarter
ended June 30, 2004 decreased 5 basis points from the second quarter of
2003.
    
    Noninterest income from deposit services, insurance brokerage
commissions, merchant and electronic banking services, trust and
investment management services and investment planning services
increased by 17% in the aggregate, which more than offset decreases in
gains on sales of securities and other noninterest income due to a
decline in mortgage banking income and covered call premium income.
    
    Noninterest expense decreased by 11% due to a decrease in
prepayment penalties on borrowings. The other components of
noninterest expense, including salary and employee benefits expense,
occupancy and equipment expense, advertising and marketing expense and
miscellaneous noninterest expense, increased by 7% in the aggregate,
reflecting our growth. Merger and consolidation costs increased $2.6
million due to our acquisitions of CCBT and Foxborough.
    
    Total average loans and leases increased 12% during the second
quarter of 2004 compared to the second quarter of 2003. Excluding the
effects of acquisitions, total average loans and leases increased 6%,
as strong commercial and consumer loan growth was offset by residential
loan run-off. 15




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##### Table of Contents




    
    Total average deposits increased 9% during the second quarter of
2004 compared to the second quarter of 2003 primarily due to
acquisitions. Excluding the effects of acquisitions, total average
deposits increased $490 million, or 3%, as average checking deposits
increased 19% and savings and money market deposits increased 7%, while
certificates of deposit declined 14%. Selected quarterly data, ratios and per share data are provided in Table 1. TABLE 1  Selected Quarterly Data 2004
    
    2003Second
    
    First
    
    Fourth
    
    Third
    
    Second
    
    FirstInterest income
    
    
    
    
    
    $
    309,146
    
    
    $
    292,652
    
    
    $
    290,414
    
    
    $
    290,750
    
    
    $
    302,478
    
    
    $
    309,327Interest expense
    
    
    
    
    
    
    79,096
    
    
    
    75,043
    
    
    
    77,126
    
    
    
    80,918
    
    
    
    90,904
    
    
    
    103,190Net interest income
    
    
    (A
    )
    
    
    230,050
    
    
    
    217,609
    
    
    
    213,288
    
    
    
    209,832
    
    
    
    211,574
    
    
    
    206,137Provision for loan and lease losses
    
    
    
    
    
    
    9,500
    
    
    
    9,500
    
    
    
    10,400
    
    
    
    10,500
    
    
    
    10,500
    
    
    
    10,901Net interest income after provision
for loan and lease losses
    
    
    
    
    
    
    220,550
    
    
    
    208,109
    
    
    
    202,888
    
    
    
    199,332
    
    
    
    201,074
    
    
    
    195,236Noninterest income (1)
    
    
    (B
    )
    
    
    89,476
    
    
    
    88,217
    
    
    
    84,435
    
    
    
    88,656
    
    
    
    115,828
    
    
    
    78,238Noninterest expense (2)
    
    
    (C
    )
    
    
    163,826
    
    
    
    159,719
    
    
    
    155,676
    
    
    
    151,647
    
    
    
    184,039
    
    
    
    149,908Income before income taxes
    
    
    
    
    
    
    146,200
    
    
    
    136,607
    
    
    
    131,647
    
    
    
    136,341
    
    
    
    132,863
    
    
    
    123,566Income tax expense
    
    
    
    
    
    
    50,353
    
    
    
    46,280
    
    
    
    40,085
    
    
    
    46,063
    
    
    
    45,338
    
    
    
    42,173Net income
    
    
    
    
    
    $
    95,847
    
    
    $
    90,327
    
    
    $
    91,562
    
    
    $
    90,278
    
    
    $
    87,525
    
    
    $
    81,393Weighted average shares outstanding:Basic
    
    
    
    
    
    
    169,637
    
    
    
    162,965
    
    
    
    162,149
    
    
    
    161,517
    
    
    
    162,312
    
    
    
    157,667Diluted
    
    
    
    
    
    
    173,109
    
    
    
    166,657
    
    
    
    165,685
    
    
    
    164,446
    
    
    
    164,559
    
    
    
    159,328Basic earnings per share
    
    
    
    
    
    $
    0.57
    
    
    $
    0.55
    
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    0.54
    
    
    $
    0.52Diluted earnings per share
    
    
    
    
    
    $
    0.55
    
    
    $
    0.54
    
    
    $
    0.55
    
    
    $
    0.55
    
    
    $
    0.53
    
    
    $
    0.51Return on average assets (3)
    
    
    
    
    
    
    1.36
    %
    
    
    1.37
    %
    
    
    1.39
    %
    
    
    1.39
    %
    
    
    1.38
    %
    
    
    1.32
    %Return on average equity (3)
    
    
    
    
    
    
    13.54
    %
    
    
    14.13
    %
    
    
    14.72
    %
    
    
    14.85
    %
    
    
    14.24
    %
    
    
    14.26
    %Net interest margin (fully-taxable equivalent) (3)
    
    
    
    
    
    
    3.66
    %
    
    
    3.68
    %
    
    
    3.65
    %
    
    
    3.63
    %
    
    
    3.71
    %
    
    
    3.66
    %Noninterest income as a percent of total income (4)
    
    
    
    
    
    
    28.00
    %
    
    
    28.85
    %
    
    
    28.36
    %
    
    
    29.70
    %
    
    
    35.38
    %
    
    
    27.51
    %Efficiency ratio (5)
    
    
    
    
    
    
    51.27
    %
    
    
    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). 16




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##### Table of Contents



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 second quarter of 2004
increased $18.5 million, or 9%, compared to the second 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 together more than offset the effects of lower interest
rates. Fully-taxable equivalent interest income increased by $6.7 million in the
second quarter of 2004, as compared to the second quarter of 2003, as a result
of a $2.4 billion increase in total earning assets. This increase was offset
in part by a decrease in the weighted average yield on earning assets from
5.30% to 4.91% during the three months ended June 30, 2003 and 2004,
respectively, which reflected the effects of declining interest rates. The
increases in earning assets, primarily average balances of commercial real
estate loans, commercial business loans and leases and consumer loans and
leases, resulted from acquisitions and, to a lesser extent, internal growth. Interest expense decreased by $11.8 million in the second quarter of 2004, as
compared to the second quarter of 2003, primarily as a result of a decrease in
the weighted average rate on interest-bearing liabilities from 1.85% to 1.48%
during the three months ended June 30, 2003 and 2004, respectively, a decline
of 20%. This decrease more than offset a $1.7 billion, or 9%, increase in the
average balance of interest-bearing liabilities during the second quarter of
2004, as compared to 2003 resulting from acquisitions and, to a lesser extent,
internal growth. Average deposits increased by $1.5 billion, of which
approximately $1.0 billion came from acquisitions. Excluding acquisitions,
average deposits increased by $490 million, or 2.7%, as strong growth in demand
and money market accounts more than offset a decline in higher-costing
certificates of deposit. Average borrowings increased $1.0 billion, or 18%, in
the second quarter of 2004 compared to the second quarter of 2003 due, in part,
to acquisitions. Net interest margin, which represents fully-taxable equivalent net interest
income as a percentage of average interest-earning assets, decreased from 3.71%
in the second quarter of 2003 to 3.66% in the current quarter primarily due to
the effects of the prepayment of certain assets and replacement with lower
yielding assets. Interest rate spread, which represents the difference between the yield earned
on our interest-earning assets and the rate paid on our interest-bearing
liabilities, decreased from 3.45% to 3.43% on a fully-taxable equivalent basis
during the three months ended June 30, 2003 and 2004, respectively, as the 37
basis point decrease in the weighted average rate paid on interest-bearing
liabilities was more than offset by the 39 basis point decrease in the weighted
average yield on interest-earning assets. See Asset-Liability Management
below. Our fully-taxable equivalent net interest income for the six months ended June
30, 2004 increased $30.2 million compared to the six months ended June 30,
2003. The net interest margin decreased from 3.69% for the six months ended
June 30, 2003 to 3.67% for the six months ended June 30, 2004, and the
fully-taxable equivalent interest rate spread increased from 3.41% to 3.44%
during the same period because a 48 basis point decrease in the
weighted average yield on interest-earning assets was more than offset by a 51
basis point decrease in the weighted average rate paid on interest-bearing
liabilities. Average net earning assets increased $1.8 billion in the six
months ended June 30, 2004 as compared to the same period last year as a result
of acquisitions and, to a lesser extent, internal growth. Table 2 shows average balances, net interest income by category and rates for
the quarters ended June 30, 2004 and 2003 and for the six months ended June 30,
2004 and 2003. Table 3 shows the changes in fully-taxable equivalent net
interest income by category due to changes in rate and volume. See also
Asset-Liability Management below. 17




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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. 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 Second Quarter
    
    2003 Second QuarterYield/
    
    
    
    
    
    
    
    
    
    Yield/Average Balance
    
    Interest
    
    Rate (1)
    
    Average Balance
    
    Interest
    
    Rate (1)Loans and leases (2):Residential real estate mortgages
    
    $
    2,987,625
    
    
    $
    37,368
    
    
    
    5.00
    %
    
    $
    2,996,485
    
    
    $
    43,147
    
    
    
    5.76
    %Commercial real estate mortgages
    
    
    5,883,659
    
    
    
    83,959
    
    
    
    5.74
    
    
    
    5,074,540
    
    
    
    78,342
    
    
    
    6.19Commercial business loans and leases
    
    
    3,675,217
    
    
    
    43,015
    
    
    
    4.71
    
    
    
    3,154,085
    
    
    
    41,105
    
    
    
    5.23Consumer loans and leases
    
    
    4,981,924
    
    
    
    62,222
    
    
    
    5.02
    
    
    
    4,463,057
    
    
    
    64,145
    
    
    
    5.76Total loans and leases
    
    
    17,528,425
    
    
    
    226,564
    
    
    
    5.19
    
    
    
    15,688,167
    
    
    
    226,739
    
    
    
    5.79Investment securities (3)
    
    
    7,875,274
    
    
    
    84,110
    
    
    
    4.27
    
    
    
    7,280,880
    
    
    
    77,177
    
    
    
    4.24Federal funds sold and other short-term investments
    
    
    3,683
    
    
    
    16
    
    
    
    1.74
    
    
    
    18,077
    
    
    
    54
    
    
    
    1.20Total earning assets
    
    
    25,407,382
    
    
    
    310,690
    
    
    
    4.91
    
    
    
    22,987,124
    
    
    
    303,970
    
    
    
    5.30Bank-owned life insurance
    
    
    497,250
    
    
    
    
    
    
    
    
    
    
    
    472,853Noninterest-earning assets
    
    
    2,478,117
    
    
    
    
    
    
    
    
    
    
    
    2,040,703Total assets
    
    $
    28,382,749
    
    
    
    
    
    
    
    
    
    
    $
    25,500,680Interest-bearing deposits:Regular savings
    
    $
    2,614,679
    
    
    
    1,931
    
    
    
    0.30
    
    
    $
    2,468,244
    
    
    
    3,089
    
    
    
    0.50NOW and money market accounts
    
    
    7,646,403
    
    
    
    14,959
    
    
    
    0.79
    
    
    
    6,582,004
    
    
    
    15,908
    
    
    
    0.97Certificates of deposit
    
    
    4,719,524
    
    
    
    22,624
    
    
    
    1.93
    
    
    
    5,243,908
    
    
    
    31,737
    
    
    
    2.43Brokered deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing deposits
    
    
    14,980,606
    
    
    
    39,514
    
    
    
    1.06
    
    
    
    14,294,156
    
    
    
    50,734
    
    
    
    1.42Borrowed funds
    
    
    6,467,964
    
    
    
    39,582
    
    
    
    2.46
    
    
    
    5,459,725
    
    
    
    40,170
    
    
    
    2.95Total interest-bearing liabilities
    
    
    21,448,570
    
    
    
    79,096
    
    
    
    1.48
    
    
    
    19,753,881
    
    
    
    90,904
    
    
    
    1.85Non-interest bearing deposits
    
    
    3,898,967
    
    
    
    
    
    
    
    
    
    
    
    3,099,420Other liabilities
    
    
    188,596
    
    
    
    
    
    
    
    
    
    
    
    181,765Shareholders equity
    
    
    2,846,616
    
    
    
    
    
    
    
    
    
    
    
    2,465,614Total liabilities and shareholders equity
    
    $
    28,382,749
    
    
    
    
    
    
    
    
    
    
    $
    25,500,680Net earning assets
    
    $
    3,958,812
    
    
    
    
    
    
    
    
    
    
    $
    3,233,243Net interest income (fully-taxable equivalent)
    
    
    
    
    
    
    231,594
    
    
    
    
    
    
    
    
    
    
    
    213,066Less: fully-taxable equivalent adjustments
    
    
    
    
    
    
    (1,544
    )
    
    
    
    
    
    
    
    
    
    
    (1,492
    )Net interest income
    
    
    
    
    
    $
    230,050
    
    
    
    
    
    
    
    
    
    
    $
    211,574Net interest rate spread (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.43
    %
    
    
    
    
    
    
    
    
    
    
    3.45
    %Net interest margin (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.66
    %
    
    
    
    
    
    
    
    
    
    
    3.71
    %
   (1)
    
    Annualized.(2)
    
    Loans and leases include loans held for sale.(3)
    
    Includes securities available for sale and held to maturity. 18




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##### Table of Contents



TABLE 2  Average Balances, Yields and Rates Six Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003Yield/
    
    
    
    
    
    
    
    
    
    Yield/Average Balance
    
    Interest
    
    Rate (1)
    
    Average Balance
    
    Interest
    
    Rate (1)Loans and leases (2):Residential real estate mortgages
    
    $
    2,856,423
    
    
    $
    72,744
    
    
    
    5.09
    %
    
    $
    2,895,113
    
    
    $
    84,798
    
    
    
    5.86
    %Commercial real estate mortgages
    
    
    5,712,075
    
    
    
    162,573
    
    
    
    5.72
    
    
    
    4,994,310
    
    
    
    156,153
    
    
    
    6.31Commercial business loans and leases
    
    
    3,531,263
    
    
    
    83,593
    
    
    
    4.76
    
    
    
    3,080,635
    
    
    
    80,579
    
    
    
    5.27Consumer loans and leases
    
    
    4,932,477
    
    
    
    124,428
    
    
    
    5.07
    
    
    
    4,325,750
    
    
    
    126,323
    
    
    
    5.89Total loans and leases
    
    
    17,032,238
    
    
    
    443,338
    
    
    
    5.23
    
    
    
    15,295,808
    
    
    
    447,853
    
    
    
    5.89Investment securities (3)
    
    
    7,607,260
    
    
    
    161,464
    
    
    
    4.25
    
    
    
    7,578,748
    
    
    
    166,627
    
    
    
    4.40Federal funds sold and other short-term investments
    
    
    5,605
    
    
    
    31
    
    
    
    1.12
    
    
    
    11,346
    
    
    
    79
    
    
    
    1.40Total earning assets
    
    
    24,645,103
    
    
    
    604,833
    
    
    
    4.92
    
    
    
    22,885,902
    
    
    
    614,559
    
    
    
    5.40Bank-owned life insurance
    
    
    493,839
    
    
    
    
    
    
    
    
    
    
    
    449,126Noninterest-earning assets
    
    
    2,315,929
    
    
    
    
    
    
    
    
    
    
    
    1,949,017Total assets
    
    $
    27,454,871
    
    
    
    
    
    
    
    
    
    
    $
    25,284,045Interest-bearing deposits:Regular savings
    
    $
    2,541,547
    
    
    
    3,769
    
    
    
    0.30
    
    
    $
    2,321,821
    
    
    
    6,165
    
    
    
    0.54NOW and money market accounts
    
    
    7,382,671
    
    
    
    29,119
    
    
    
    0.79
    
    
    
    6,400,948
    
    
    
    31,615
    
    
    
    1.00Certificates of deposit
    
    
    4,689,767
    
    
    
    45,444
    
    
    
    1.95
    
    
    
    5,128,769
    
    
    
    64,346
    
    
    
    2.53Brokered deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing deposits
    
    
    14,613,985
    
    
    
    78,332
    
    
    
    1.08
    
    
    
    13,851,538
    
    
    
    102,126
    
    
    
    1.49Borrowed funds
    
    
    6,257,627
    
    
    
    75,807
    
    
    
    2.43
    
    
    
    5,863,321
    
    
    
    91,969
    
    
    
    3.16Total interest-bearing liabilities
    
    
    20,871,612
    
    
    
    154,139
    
    
    
    1.48
    
    
    
    19,714,859
    
    
    
    194,095
    
    
    
    1.99Non-interest bearing deposits
    
    
    3,693,342
    
    
    
    
    
    
    
    
    
    
    
    3,003,113Other liabilities
    
    
    179,954
    
    
    
    
    
    
    
    
    
    
    
    175,298Shareholders equity
    
    
    2,709,963
    
    
    
    
    
    
    
    
    
    
    
    2,390,775Total liabilities and shareholders equity
    
    $
    27,454,871
    
    
    
    
    
    
    
    
    
    
    $
    25,284,045Net earning assets
    
    $
    3,773,491
    
    
    
    
    
    
    
    
    
    
    $
    3,171,043Net interest income (fully-taxable equivalent)
    
    
    
    
    
    
    450,694
    
    
    
    
    
    
    
    
    
    
    
    420,464Less: fully-taxable equivalent adjustments
    
    
    
    
    
    
    (3,035
    )
    
    
    
    
    
    
    
    
    
    
    (2,754
    )Net interest income
    
    
    
    
    
    $
    447,659
    
    
    
    
    
    
    
    
    
    
    $
    417,710Net interest rate spread (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.44
    %
    
    
    
    
    
    
    
    
    
    
    3.41
    %Net interest margin (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.67
    %
    
    
    
    
    
    
    
    
    
    
    3.69
    %
   (1)
    
    Annualized.(2)
    
    Loans and leases include loans held for sale.(3)
    
    Includes securities available for sale and held to maturity. 19




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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
    
    Six Months EndedJune 30, 2004 vs. June 30, 2003
    
    June 30, 2004 vs. June 30, 2003Increase (decrease) due to
    
    Increase (decrease) due toRate and
    
    Total
    
    
    
    
    
    
    
    
    
    Rate and
    
    TotalVolume (1)
    
    Rate
    
    Volume (2)
    
    Change
    
    Volume (1)
    
    Rate
    
    Volume (2)
    
    ChangeInterest income:Loans and leases
    
    $
    26,492
    
    
    ($
    23,404
    )
    
    ($
    3,263
    )
    
    ($
    175
    )
    
    $
    50,858
    
    
    ($
    50,200
    )
    
    ($
    5,173
    )
    
    ($
    4,515
    )Investment securities
    
    
    6,266
    
    
    
    543
    
    
    
    124
    
    
    
    6,933
    
    
    
    624
    
    
    
    (5,653
    )
    
    
    (134
    )
    
    
    (5,163
    )Federal funds sold and
other short-term investements
    
    
    (43
    )
    
    
    24
    
    
    
    (19
    )
    
    
    (38
    )
    
    
    (40
    )
    
    
    (16
    )
    
    
    8
    
    
    
    (48
    )Total interest income
    
    
    32,715
    
    
    
    (22,837
    )
    
    
    (3,158
    )
    
    
    6,720
    
    
    
    51,442
    
    
    
    (55,869
    )
    
    
    (5,299
    )
    
    
    (9,726
    )Interest expense:Interest-bearing deposits:Regular savings
    
    
    182
    
    
    
    (1,227
    )
    
    
    (113
    )
    
    
    (1,158
    )
    
    
    590
    
    
    
    (2,771
    )
    
    
    (215
    )
    
    
    (2,396
    )NOW and money market accounts
    
    
    2,567
    
    
    
    (2,946
    )
    
    
    (570
    )
    
    
    (949
    )
    
    
    4,882
    
    
    
    (6,684
    )
    
    
    (694
    )
    
    
    (2,496
    )Certificates of deposit
    
    
    (3,168
    )
    
    
    (6,519
    )
    
    
    574
    
    
    
    (9,113
    )
    
    
    (5,523
    )
    
    
    (14,792
    )
    
    
    1,413
    
    
    
    (18,902
    )Total interest-bearing deposits
    
    
    (419
    )
    
    
    (10,692
    )
    
    
    (109
    )
    
    
    (11,220
    )
    
    
    (51
    )
    
    
    (24,247
    )
    
    
    504
    
    
    
    (23,794
    )Borrowed funds
    
    
    7,395
    
    
    
    (6,652
    )
    
    
    (1,331
    )
    
    
    (588
    )
    
    
    6,196
    
    
    
    (21,284
    )
    
    
    (1,074
    )
    
    
    (16,162
    )Total interest expense
    
    
    6,976
    
    
    
    (17,344
    )
    
    
    (1,440
    )
    
    
    (11,808
    )
    
    
    6,145
    
    
    
    (45,531
    )
    
    
    (570
    )
    
    
    (39,956
    )Net interest income (fully
taxable equivalent)
    
    $
    25,739
    
    
    ($
    5,493
    )
    
    ($
    1,718
    )
    
    $
    18,528
    
    
    $
    45,297
    
    
    ($
    10,338
    )
    
    ($
    4,729
    )
    
    $
    30,230
   (1)
    
    Volume increases include the effects of acquisitions, including the acquisition of Foxborough and
CCBT on April 30, 2004, F & O on December 31, 2003 and American on February 14, 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. Because we utilize
judgment in providing for estimated losses and the other reasons discussed
under the Risk Management section, there can be no assurance that we will not
have to increase the amount of our provision for loans and lease losses in
future periods. We provided $9.5 million and $10.5 million for loan and lease losses in the
quarters ended June 30, 2004 and 2003, respectively, and $19.0 million and
$21.4 million for the six months ended June 30, 2004 and 2003, respectively.
The lower provisions were due to lower net charge-offs as well as a higher
coverage ratio at June 30, 2004 compared to June 30, 2003. Net charge-offs
totaled $8.8 million in the current quarter compared to $9.9 million in the
second quarter of 2003. The coverage ratio (ratio of the allowance for loan
and lease losses to nonperforming loans) was 380% at June 30, 2004, as compared
to 389% at December 31, 2003 and 374% at June 30, 2003. At June 30, 2004, the
allowance for loan and lease losses amounted to $247.6 million, or 1.37% of
total portfolio loans and leases, as compared to $232.3 million, or 1.42%, at
December 31, 2003 and $227.2 million, or 1.44% at June 30, 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 our loan and lease portfolio and establishing
the allowance for loan and lease losses. 20




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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 Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    Change
    
    June 30,
    
    Change2004
    
    2003
    
    Amount
    
    Percent
    
    2004
    
    2003
    
    Amount
    PercentNoninterest income:Deposit services
    
    $
    27,260
    
    
    $
    23,747
    
    
    $
    3,513
    
    
    
    15
    %
    
    $
    53,412
    
    
    $
    46,273
    
    
    $
    7,139
    
    
    
    15
    %Insurance brokerage commissions
    
    
    12,278
    
    
    
    10,948
    
    
    
    1,330
    
    
    
    12
    %
    
    
    26,014
    
    
    
    23,305
    
    
    
    2,709
    
    
    
    12
    %Merchant and electronic banking income,
net
    
    
    13,069
    
    
    
    11,098
    
    
    
    1,971
    
    
    
    18
    %
    
    
    23,474
    
    
    
    20,118
    
    
    
    3,356
    
    
    
    17
    %Trust and investment management services
    
    
    9,870
    
    
    
    7,957
    
    
    
    1,913
    
    
    
    24
    %
    
    
    19,019
    
    
    
    15,309
    
    
    
    3,710
    
    
    
    24
    %Bank-owned life insurance
    
    
    6,275
    
    
    
    5,826
    
    
    
    449
    
    
    
    8
    %
    
    
    11,771
    
    
    
    11,168
    
    
    
    603
    
    
    
    5
    %Investment planning services
    
    
    5,146
    
    
    
    3,911
    
    
    
    1,235
    
    
    
    32
    %
    
    
    9,985
    
    
    
    7,167
    
    
    
    2,818
    
    
    
    39
    %Net securities gains
    
    
    3,355
    
    
    
    33,423
    
    
    
    (30,068
    )
    
    
    (90
    %)
    
    
    6,936
    
    
    
    36,206
    
    
    
    (29,270
    )
    
    
    (81
    %)Other noninterest incomeCovered call premiums
    
    
    2,305
    
    
    
    7,199
    
    
    
    (4,894
    )
    
    
    (68
    %)
    
    
    8,379
    
    
    
    14,238
    
    
    
    (5,859
    )
    
    
    (41
    %)Loan fee income
    
    
    8,516
    
    
    
    6,978
    
    
    
    1,538
    
    
    
    22
    %
    
    
    13,686
    
    
    
    12,080
    
    
    
    1,606
    
    
    
    13
    %Mortgage banking services income
    
    
    332
    
    
    
    3,069
    
    
    
    (2,737
    )
    
    
    (89
    %)
    
    
    3,337
    
    
    
    6,241
    
    
    
    (2,904
    )
    
    
    (47
    %)Venture capital write-downs
    
    
    (166
    )
    
    
    (98
    )
    
    
    (68
    )
    
    
    (69
    %)
    
    
    (524
    )
    
    
    (615
    )
    
    
    91
    
    
    
    15
    %Miscellaneous income
    
    
    1,236
    
    
    
    1,770
    
    
    
    (534
    )
    
    
    (30
    %)
    
    
    2,205
    
    
    
    2,577
    
    
    
    (372
    )
    
    
    (14
    %)Total other noninterest income
    
    
    12,223
    
    
    
    18,918
    
    
    
    (6,695
    )
    
    
    (35
    %)
    
    
    27,083
    
    
    
    34,521
    
    
    
    (7,438
    )
    
    
    (22
    %)Total noninterest income
    
    $
    89,476
    
    
    $
    115,828
    
    
    ($
    26,352
    )
    
    
    (23
    %)
    
    $
    177,694
    
    
    $
    194,067
    
    
    ($
    16,373
    )
    
    
    (8
    %)
 Deposit services income for the three months ended June 30, 2004 increased $3.5
million, or 15%, compared to the same period last year, primarily as a result
of an increased number of deposit accounts and an increase in overdraft fees.
For the six months ended June 30, 2004, deposit services income increased $7.1
million, or 15%, compared to the same period last year, primarily due to volume
and fee increases on deposit accounts and overdraft fees. Acquisitions
comprised a portion of the increased number of deposit accounts and increased
overdraft fees. Insurance brokerage commissions in the three months ended June 30, 2004
increased $1.3 million, or 12%, compared to the same period last year. In the
six months ended June 30, 2004, insurance brokerage commissions increased $2.7
million, or 12%, compared to the same period last year. These increases were
primarily as a result of increases in renewals and new business in 2004. Merchant and electronic banking income represents fees and interchange income
generated by the use of our ATMs and debit cards issued by us, along with
charges to merchants for credit card transactions processed, net of third-party
costs directly attributable to handling these transactions. Merchant and
electronic banking income in the three months ended June 30, 2004 increased
$2.0 million, or 18%, compared to the same period last year and increased $3.4
million, or 17%, in the six months ended June 30, 2004 compared to the same
period last year. These increases were 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. Trust and investment management services income increased $1.9 million, or 24%,
in the three months ended June 30, 2004 and $3.7 million, or 24%, in the six
months ended June 30, 2004 compared to the same respective periods last year.
These increases were primarily due to increases in fees which are based on the
increased market value of assets under management. Assets under management
increased to $9.5 billion at June 30, 2004 from $8.1 billion at June 30, 2003,
an increase of $1.4 billion, of which $773 million was due to the acquisition
of CCBT in April 2004. Improvements in the financial markets also increased
the value of assets under management at June 30, 2004 compared to June 30,
2003. 21




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##### Table of Contents



Income from bank-owned life insurance (BOLI) increased $449 thousand, or 8%,
for the three months ended June 30, 2004 and $603 thousand, or 5%, for the six
months ended June 30, 2004 compared to the same periods last year. Income from
BOLI represents the increase in the cash surrender value of life insurance
policies on the lives of certain employees who have consented to allowing
Banknorth, NA, our wholly-owned banking subsidiary, to be the beneficiary of
such policies. The cash surrender value of our BOLI was $500.1 million at June
30, 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 June 30, 2004.
Investment in BOLI provides us a means to mitigate increasing employee benefit
costs. For the second quarter of 2004, the average carrying value of BOLI was
$497 million compared to $473 million for the second quarter of 2003. Investment planning services income increased $1.2 million, or 32%, in the
three months ended June 30, 2004 and $2.8 million, or 39%, in the six months
ended June 30, 2004 compared to the same respective periods last year. These
increases were primarily due to increases in commissions earned from increased
sales of third party fixed annuities. Net securities gains decreased $30.1 million, or 90%, in the three months ended
June 30, 2004 and $29.3 million, or 81%, in the six months ended June 30, 2004
compared to the same respective periods last year. The 2003 results included
$29.2 million recorded as part of the deleveraging program related to the sale
of $901 million in securities in the second quarter of 2003. 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 $6.7 million, or 35%, in the three months
ended June 30, 2004 and $7.4 million, or 22%, in the six months ended June 30,
2004 compared to the same respective periods last year. These decreases were
primarily due to a $4.9 million and $5.9 million decrease in premiums received
on covered call options during
the three and six months ended June 30, 2004, respectively. The covered call
option program is managed in conjunction with the fixed income securities
portfolio to provide revenue opportunities in addition to the interest income
earned on the securities. Covered call activity will vary from quarter to
quarter as interest rates, levels of market volatility and our strategic
objectives of the fixed income securities portfolio change. Reduced market
volatility in the six months ended June 30, 2004 compared to the same period
last year reduced the income opportunities related to covered call options.
The decreases in other noninterest income during the three and six months ended
June 30, 2004 also were attributable to a $2.7 million and $2.9 million
decrease in mortgage banking services income during the respective periods, as
compared to the same periods last year, due to the recognition of $3.3 million
and $7.4 million of gains on the sale of loans held for sale in the three and
six months ended June 30, 2003, respectively. 22




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##### Table of Contents



Noninterest Expense The following table presents noninterest expense during the periods indicated. Table 5  Noninterest Expense Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    Change
    
    June 30,
    
    Change2004
    
    2003
    
    Amount
    
    Percent
    
    2004
    
    2003
    
    Amount
    
    PercentNoninterest expense:Compensation and employee benefits
    
    $
    87,005
    
    
    $
    82,248
    
    
    $
    4,757
    
    
    
    6
    %
    
    $
    174,538
    
    
    $
    162,941
    
    
    $
    11,597
    
    
    
    7
    %Occupancy
    
    
    15,699
    
    
    
    15,154
    
    
    
    545
    
    
    
    4
    %
    
    
    31,408
    
    
    
    30,063
    
    
    
    1,345
    
    
    
    4
    %Equipment
    
    
    11,813
    
    
    
    12,425
    
    
    
    (612
    )
    
    
    (5
    %)
    
    
    23,703
    
    
    
    23,676
    
    
    
    27
    
    
    
    0
    %Data processing
    
    
    10,018
    
    
    
    10,415
    
    
    
    (397
    )
    
    
    (4
    %)
    
    
    20,455
    
    
    
    20,593
    
    
    
    (138
    )
    
    
    (1
    %)Advertising and marketing
    
    
    6,303
    
    
    
    5,957
    
    
    
    346
    
    
    
    6
    %
    
    
    13,827
    
    
    
    11,017
    
    
    
    2,810
    
    
    
    26
    %Amortization of identifiable
intangible assets
    
    
    2,084
    
    
    
    2,306
    
    
    
    (222
    )
    
    
    (10
    %)
    
    
    3,988
    
    
    
    4,302
    
    
    
    (314
    )
    
    
    (7
    %)Merger and consolidation costs
    
    
    4,135
    
    
    
    1,530
    
    
    
    2,605
    
    
    
    170
    %
    
    
    5,748
    
    
    
    5,981
    
    
    
    (233
    )
    
    
    (4
    %)Prepayment penalties on borrowings
    
    
    
    
    
    
    30,490
    
    
    
    (30,490
    )
    
    
    (100
    %)
    
    
    
    
    
    
    30,490
    
    
    
    (30,490
    )
    
    
    (100
    %)Other noninterest expense:Telephone
    
    
    3,694
    
    
    
    2,595
    
    
    
    1,099
    
    
    
    42
    %
    
    
    7,064
    
    
    
    6,063
    
    
    
    1,001
    
    
    
    17
    %Office supplies
    
    
    2,557
    
    
    
    2,523
    
    
    
    34
    
    
    
    1
    %
    
    
    4,995
    
    
    
    5,317
    
    
    
    (322
    )
    
    
    (6
    %)Postage and freight
    
    
    2,744
    
    
    
    3,223
    
    
    
    (479
    )
    
    
    (15
    %)
    
    
    5,145
    
    
    
    6,297
    
    
    
    (1,152
    )
    
    
    (18
    %)Miscellaneous loan costs
    
    
    1,271
    
    
    
    1,563
    
    
    
    (292
    )
    
    
    (19
    %)
    
    
    1,785
    
    
    
    2,511
    
    
    
    (726
    )
    
    
    (29
    %)Deposits and other assessments
    
    
    940
    
    
    
    974
    
    
    
    (34
    )
    
    
    (3
    %)
    
    
    1,848
    
    
    
    1,873
    
    
    
    (25
    )
    
    
    (1
    %)Collection and carrying costs
of non-performing assets
    
    
    591
    
    
    
    947
    
    
    
    (356
    )
    
    
    (38
    %)
    
    
    1,316
    
    
    
    1,255
    
    
    
    61
    
    
    
    5
    %Miscellaneous
    
    
    14,972
    
    
    
    11,689
    
    
    
    3,283
    
    
    
    28
    %
    
    
    27,724
    
    
    
    21,567
    
    
    
    6,157
    
    
    
    29
    %Total other noninterest expense
    
    
    26,769
    
    
    
    23,514
    
    
    
    3,255
    
    
    
    14
    %
    
    
    49,877
    
    
    
    44,883
    
    
    
    4,994
    
    
    
    11
    %Total noninterest expense
    
    $
    163,826
    
    
    $
    184,039
    
    
    ($
    20,213
    )
    
    
    (11
    %)
    
    $
    323,544
    
    
    $
    333,946
    
    
    ($
    10,402
    )
    
    
    (3
    %)
 Noninterest expense decreased $20.2 million, or 11%, in the second quarter of
2004 and $10.4 million, or 3%, in the six months ended June 30, 2004 compared
to the same respective periods last year. The 2003 results included $30.5
million of prepayment penalties, $28.5 million of which related to our
deleveraging program. The other components of noninterest expense increased by
7% during each of the three and six months ended June 30, 2004, respectively,
as compared to the same respective periods in the prior year. These increases
were primarily due to higher compensation and employee benefits expense,
advertising and marketing expense and miscellaneous expense. Compensation and employee benefits expense increased 6% in the second quarter
of 2004 and 7% in the six months ended June 30, 2004 compared to the same
respective periods last year. These increases were primarily due to increased
salaries and benefit costs, primarily due to acquisitions and merit increases.
These increases were partially offset by reduced expense associated with our self-funded
health plan as we recognized a $2.8 million benefit in the current quarter related to favorable claims
experience covering the period July 2002 (plan inception) through March 31,
2004. Advertising and marketing expense increased $346 thousand in the second quarter
of 2004 and $2.8 million in the six months ended June 30, 2004 compared to the
same respective periods last year. These increases were primarily to attract
customers who are looking for new banking opportunities following Bank of
America Corporations acquisition of FleetBoston Financial Corporation. The
increases 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), as well as expense associated with the
development of a new comprehensive product catalogue for use in all of our
branches. Merger and consolidation costs increased $2.6 million in the second quarter of
2004 and decreased $233 thousand in the six months ended June 30, 2004 compared
to the same respective periods last year due to the acquisitions of 23




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##### Table of Contents



CCBT and
Foxborough in April 2004. The following table summarizes merger and
consolidation costs for the three and six months ended June 30, 2004 and 2003. Table 6  Merger and consolidation costs Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Foxborough Saving Bank Merger ChargesPersonnel costs
    
    $
    217
    
    
    $
    
    
    
    $
    217
    
    
    $
    Systems conversion and integration/customer communications
    
    
    410
    
    
    
    
    
    
    
    540
    
    
    
    Other costs
    
    
    51
    
    
    
    
    
    
    
    77
    
    
    
    678
    
    
    
    
    
    
    
    834
    
    
    
    CCBT Financial Companies, Inc. Merger ChargesPersonnel costs
    
    
    903
    
    
    
    
    
    
    
    903
    
    
    
    Systems conversion and integration/customer communications
    
    
    1,645
    
    
    
    
    
    
    
    2,180
    
    
    
    Other costs
    
    
    808
    
    
    
    
    
    
    
    961
    
    
    
    3,356
    
    
    
    
    
    
    
    4,044
    
    
    
    F&O Merger ChargesPersonnel costs
    
    
    (6
    )
    
    
    
    
    
    
    279
    
    
    
    Systems conversion and integration/customer communications
    
    
    16
    
    
    
    
    
    
    
    664
    
    
    
    Other costs
    
    
    63
    
    
    
    
    
    
    
    170
    
    
    
    73
    
    
    
    
    
    
    
    1,113
    
    
    
    Other CostsAmerican Merger Charges
    
    
    18
    
    
    
    1,096
    
    
    
    187
    
    
    
    4,346Warren Bancorp, Inc. Merger Charges
    
    
    5
    
    
    
    826
    
    
    
    29
    
    
    
    2,055Bancorp Connecticut and Ipswich Bancshares, Inc. merger charges
    
    
    3
    
    
    
    209
    
    
    
    9
    
    
    
    247Andover Bancorp, Inc./MetroWest Bank Merger Charges
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    (9
    )Reverse auto
lease reserves (Banknorth - Vermont)
    
    
    
    
    
    
    (615
    )
    
    
    (470
    )
    
    
    (615
    )Other costs
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    (43
    )28
    
    
    
    1,530
    
    
    
    (243
    )
    
    
    5,981Total merger and consolidation costs
    
    $
    4,135
    
    
    $
    1,530
    
    
    $
    5,748
    
    
    $
    5,981
 The following table summarizes activity in the accrual account for merger and
consolidation costs from December 31, 2003 through June 30, 2004. TABLE 7  Merger and Consolidation Costs  Activity in the Accrual Account Purchase Accounting
    
    Merger and
    
    
    
    
    
    Non-cash WriteBalance
    
    Adjustments
    
    Consolidation
    
    Cash
    
    Downs and Other
    
    Balance12/31/03
    
    at Acquisition
    
    Costs
    
    Payments
    
    Adjustments
    
    6/30/04Boston Fed Merger
    
    $
    
    
    
    $
    
    
    
    $
    2
    
    
    ($
    2
    )
    
    $
    
    
    
    $
    0Foxborough Merger
    
    
    
    
    
    
    1,196
    
    
    
    834
    
    
    
    (1,065
    )
    
    
    (87
    )
    
    
    878CCBT Merger
    
    
    
    
    
    
    10,407
    
    
    
    4,044
    
    
    
    (10,398
    )
    
    
    (370
    )
    
    
    3,683F & O Merger
    
    
    251
    
    
    
    1,715
    
    
    
    1,113
    
    
    
    (2,415
    )
    
    
    
    
    
    
    664American Merger
    
    
    266
    
    
    
    
    
    
    
    187
    
    
    
    (187
    )
    
    
    (266
    )
    
    
    Warren Merger
    
    
    27
    
    
    
    
    
    
    
    29
    
    
    
    (29
    )
    
    
    (27
    )
    
    
    Bancorp Connecticut Merger
    
    
    466
    
    
    
    
    
    
    
    9
    
    
    
    (312
    )
    
    
    
    
    
    
    163Andover / MetroWest Mergers
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    81Other merger and consolidation costs
    
    
    3
    
    
    
    
    
    
    
    (470
    )
    
    
    (1
    )
    
    
    468
    
    
    
    Total
    
    $
    1,097
    
    
    $
    13,318
    
    
    $
    5,748
    
    
    ($
    14,412
    )
    
    ($
    282
    )
    
    $
    5,469
 Other noninterest expense increased $3.3 million, or 14%, in the second quarter
of 2004 and $5.0 million, or 11%, for the six months ended June 30, 2004
compared to the same respective periods last year. These increases were
largely due to increased professional and consulting fees. 24




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##### Table of Contents



Taxes The effective tax rate was 34% for each of the three and six month periods ended June
30, 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. In June
2004, the Vermont Department of Taxes assessed three Vermont-based banks,
previously acquired by us, for taxes, interest and penalties for the years 2000 and
2001 on the basis that subsidiary investment companies established by these
banks pursuant to Vermont law should be considered part of the Bank for
purposes of calculating taxes due the State of Vermont. We believe that we
have substantial defenses to this assessment and are in the process of
appealing it in accordance with administrative procedures. Although not
considered probable, there can be no assurance that Vermont will not ultimately
prevail on this matter. Our estimate of the range of possible
exposure above established reserves on this
matter is from $0 to $2.1 million, after federal tax benefits. There can be no assurance
that we will not receive additional assessments from state tax
authorities in the future. Any such assessments resolved in excess of
established reserves could have a material adverse effect on our
consolidated results of operations in a future reporting period.
However, based on currently available information, advice of counsel
and tax advisors and established reserves, we believe the amounts
accrued for income taxes are adequate. Comprehensive Income Our comprehensive income (loss) amounted to ($56.8) million and $68.4 million
in the second quarters of 2004 and 2003, respectively and $88.1 million and
$150.9 million in the six months ended June 30, 2004 and 2003, respectively.
Comprehensive income differed from our net income as a result of changes in the
amount of unrealized gains and losses on our portfolio of securities available
for sale and, to a much lesser extent, on our derivative contracts that are
accounted for as cash flow hedges. For additional information, see the
Consolidated Statements of Changes in Shareholders Equity in, and Note 8 to,
the unaudited Consolidated Financial Statements. Our available for sale investment portfolio had net unrealized gains (losses)
of ($139.1) million, $11.8 million and $151.7 million (($90.4) million, $7.7
million and $98.6 million net of applicable income tax effects, respectively)
at June 30, 2004, December 31, 2003 and June 30, 2003, respectively. The
changes from period to period were primarily due 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 tends to offset the change in fair value of available for
sale securities, is not included in other comprehensive income. FINANCIAL CONDITION Our consolidated total assets increased by $2.8 billion, or 11%, from $26.5
billion at December 31, 2003 to $29.3 billion at June 30, 2004. Total average
assets were $28.4 billion and $25.5 billion for the three months ended June 30,
2004 and 2003, respectively, and $27.5 billion and $25.3 billion for the six
months ended June 30, 2004 and 2003, respectively. The increase in total
average assets was largely due to acquisitions, which increased average assets
by approximately $1.3 billion and $1.5 billion in the three and six months
ended June 30, 2004, respectively, as compared to the same periods of 2003.
Total liabilities increased by $2.5 billion since year-end 2003, primarily due
to acquisitions and increases in borrowings. Shareholders equity totaled $2.9
billion at June 30, 2004 and $2.5 billion at December 31, 2003. 25




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##### Table of Contents



Securities The securities portfolio is utilized for several purposes. It serves as a
vehicle to manage interest rate and prepayment risk, generates interest and
dividend income from the investment of excess funds, provides liquidity
and is used as collateral for public deposits and
wholesale funding sources. The securities portfolio (including securities classified as held to maturity)
averaged $7.9 billion during the second quarter of 2004, as compared to $7.3
billion in the second quarter of 2003. The net increase in the securities
portfolio resulted primarily from acquisitions. The securities portfolio is
held in and managed by Northgroup Asset Management Company, a wholly-owned
subsidiary of Banknorth, NA, and consists primarily of mortgage-backed
securities and U.S. Government and agency securities. Other securities in the
portfolio are collateralized mortgage obligations, which include securitized
residential real estate loans held in a REMIC, and asset-backed securities.
Substantially all of securities available for sale were rated AAA or
equivalently rated at June 30, 2004. The average yield on securities was 4.27%
for the quarter ended June 30, 2004 compared to 4.24% for the quarter ended
June 30, 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
(loss) of ($90.4) million and $7.7 million at June 30, 2004 and December 31,
2003, respectively. These unrealized gains (losses) do not impact net income
or regulatory capital but are recorded as adjustments to shareholders equity,
net of related deferred income taxes. Unrealized gains (losses), net of
related deferred income taxes, are a component of Accumulated Other
Comprehensive Income (Loss) contained in the unaudited Consolidated Statement
of Changes in Shareholders Equity. Loans and Leases Total loans and leases (including loans held for sale) averaged $17.5 billion
during the second quarter of 2004, an increase of $1.8 billion, or 12%, from
the second quarter of 2003. This increase was primarily attributable to growth
in commercial loans and, to a lesser extent, consumer loans. Excluding
acquisitions, average loans were $1.0 billion, or 6%, higher for the quarter
ended June 30, 2004 than the comparable period of 2003. Average loans and
leases as a percent of average earning assets was 69% during the quarter ended
June 30, 2004 compared to 68% during the quarter ended June 30, 2003. Average residential real estate loans (which include mortgage loans held for
sale) of $3.0 billion during the second quarter of 2004 decreased $8.9 million
from the average amount of such loans during the second quarter of last year.
Excluding acquisitions, average residential loans decreased approximately $297
million, or 9%, as a result of historically high levels of refinancing activity
and prepayments in a lower interest rate environment. The weighted average
yield on residential real estate loans decreased from 5.76% to 5.00% during the quarters
ended June 30, 2003 and 2004, respectively, primarily due to the repricing of
adjustable-rate loans and the refinancing of fixed-rate loans at lower rates. Mortgage loans held for sale amounted to $67.2 million and $41.7 million at
June 30, 2004 and December 31, 2003, respectively. We are currently selling
substantially all of the conforming 30-year fixed-rate loans we originate. Commercial real estate loans averaged $5.9 billion during the second quarter of
2004, an increase of $809 million, or 16%, from the second quarter of last
year. Excluding acquisitions, average commercial real estate loans increased
$527 million, or 10%, during this period. Most of our markets reflected
increases, with the largest increases in Massachusetts and Connecticut. The
weighted average yield on commercial real estate loans during the second
quarter of 2004 was 5.74%, as compared to 6.19% in the second quarter of 2003,
a decrease of 45 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 $3.7 billion during the second
quarter of 2004, an increase of $521 million, or 17%, over the second quarter
of 2003. Excluding acquisitions, average commercial business loans and leases
increased $397 million, or 12%. Massachusetts reflected the greatest amount of
growth. The weighted average yield on commercial business loans and leases
decreased to 4.71% in the second quarter of 2004 from 26




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##### Table of Contents



5.23% in the second
quarter 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 $5.0 billion during the second quarter of
2004, an increase of $519 million, or 12%, from the second 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 weighted average yield on consumer loans
and leases decreased to 5.02% in the second quarter of 2004 from 5.76% in the
second quarter of 2003. For a description of the types of loans and leases in
our consumer portfolio and a breakdown of our consumer loans and leases, see
Credit Risk. Deposits Total deposits averaged $18.9 billion during the second quarter of 2004, an
increase of $1.5 billion from the second quarter of 2003; approximately $1.0
billion of this increase related to acquisitions. Money market and NOW
accounts and noninterest-bearing accounts showed the largest increases. The
ratio of loans to deposits was 94% at June 30, 2004 and 91% at December 31,
2003. At June 30, 2004, none of our deposits had been obtained with the
assistance of brokers. Average noninterest-bearing deposits totaled $3.9 billion during the second
quarter of 2004, an increase of $800 million, or 26%, from the second quarter
of 2003. Excluding acquisitions, average noninterest-bearing deposits
increased $609 million, or 19%. Average interest-bearing deposits of $15.0 billion during the second quarter of
2004 increased $686 million from the second quarter of 2003. Excluding
acquisitions, average savings, money market and NOW accounts increased $626
million, or 7%, while certificates of deposits declined by 14%. The decline in
certificates of deposit resulted from our decision to allow certain deposits
priced above alternate funding costs to run off. The average rates paid on NOW
and money market accounts decreased 18 basis points from 0.97% in the second
quarter of 2003 to 0.79% in the second quarter of 2004 due largely to lower
prevailing interest rates. The average rates paid on all interest-bearing
deposits decreased by 36 basis points from 1.42% in the second quarter of 2003
to 1.06% in the second quarter of 2004, reflecting the decline in prevailing
interest rates and run-off of higher-costing certificates of deposits. Included within the deposit categories above are government banking deposits,
which averaged $1.7 billion in the second quarter of 2004 and $1.2 billion in
the second 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,
securities sold under agreements to repurchase and other short-term borrowings,
amounted to $3.5 billion and $2.3 billion at June 30, 2004 and December 31,
2003, respectively, an increase of $1.2 billion. This increase was due
primarily to debt assumed in acquisitions and lower long-term debt. At June 30, 2004, we 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 six months ended
June 30, 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 27




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##### Table of Contents



maturities
greater than one year. Long-term debt amounted to $3.4 billion at June 30,
2004 and $3.5 billion at December 31, 2003. At June 30, 2004 and December 31, 2003, FHLB borrowings amounted to $1.5
billion and were collateralized primarily with first mortgage loans secured by
single-family properties. These borrowings had an average cost of 4.25% during
the three months ended June 30, 2004 as compared to 4.37% during the three
months ended June 30, 2003. At June 30, 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 June 30, 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 June 30, 2004 and December 31, 2003, we had outstanding $310.7 million and
$305.6 million, respectively, of junior subordinated debentures issued by us to
affiliated trusts. See Capital below. At June 30, 2004 and December 31, 2003, long-term wholesale securities sold
under repurchase agreements amounted to $1.3 billion and $1.4 billion,
respectively, and were collateralized by mortgage-backed securities and U.S.
Government obligations. Shareholders Equity Shareholders equity amounted to $2.9 billion at June 30, 2004, an increase of
$346.2 million, or 13.7%, from our $2.5 billion of shareholders equity at
December 31, 2003. This increase was primarily attributable to our $88.1
million of comprehensive income during the six months ended June 30, 2004 and
$298.1 million of equity resulting from the issuance of common stock in
connection with our acquisition of CCBT, which more than offset the payment of
$65.3 million of cash dividends declared on our common stock during this
period. For information regarding our compliance with applicable capital
requirements, see Capital below. CONTRACTUAL OBLIGATIONS The following tables summarize our contractual cash obligations, other
commitments and derivative financial instruments at June 30, 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
    
    $
    2,128,812
    
    
    $
    160,965
    
    
    $
    665,691
    
    
    $
    305,523
    
    
    $
    996,633Capital lease obligations
    
    
    6,808
    
    
    
    93
    
    
    
    281
    
    
    
    1,179
    
    
    
    5,255Repurchase
agreements - wholesale
    
    
    1,300,000
    
    
    
    1,200,000
    
    
    
    
    
    
    
    
    
    
    
    100,000Total long-term debt
    
    
    3,435,620
    
    
    
    1,361,058
    
    
    
    665,972
    
    
    
    306,702
    
    
    
    1,101,888Operating lease obligations
    
    
    137,903
    
    
    
    25,834
    
    
    
    42,528
    
    
    
    31,369
    
    
    
    38,172Pension plan contribution
    
    
    20,000
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    Other benefit plan payments
    
    
    35,022
    
    
    
    3,130
    
    
    
    6,196
    
    
    
    5,955
    
    
    
    19,741Other vendor obligations
    
    
    30,369
    
    
    
    10,123
    
    
    
    20,246
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    3,658,914
    
    
    $
    1,420,145
    
    
    $
    734,942
    
    
    $
    344,026
    
    
    $
    1,159,801
  (1)
    
    Other liabilities are short term in nature, except for liabilities related to employee benefit plans. 28




---



##### 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
    
    $
    4,630,185
    
    
    $
    369,878
    
    
    $
    212,010
    
    
    $
    38,496
    
    
    $
    4,009,801Standby letters of credit
    
    
    454,413
    
    
    
    132,398
    
    
    
    63,433
    
    
    
    93,205
    
    
    
    165,377Commercial letters of credit
    
    
    16,830
    
    
    
    13,859
    
    
    
    1,690
    
    
    
    
    
    
    
    1,281Commitments to originate loans
    
    
    2,125,362
    
    
    
    1,520,350
    
    
    
    331,670
    
    
    
    36,053
    
    
    
    237,289Other commitments
    
    
    290,805
    
    
    
    11,559
    
    
    
    13,910
    
    
    
    2,684
    
    
    
    262,652Total commitments
    
    $
    7,517,595
    
    
    $
    2,048,044
    
    
    $
    622,713
    
    
    $
    170,438
    
    
    $
    4,676,400
 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)
    
    $
    507,969
    
    
    $
    8,142
    
    
    $
    2,348
    
    
    $
    90,607
    
    
    $
    406,872Interest rate swaps with dealers (2)
    
    
    507,969
    
    
    
    8,142
    
    
    
    2,348
    
    
    
    90,607
    
    
    
    406,872Interest rate swaps on borrowings (3)
    
    
    566,500
    
    
    
    66,500
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    200,000Forward commitments to sell loans
    
    
    90,189
    
    
    
    90,189
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency forward contracts:(4)Forward contracts with customers
    
    
    34,157
    
    
    
    29,048
    
    
    
    5,109
    
    
    
    
    
    
    
    Forward contracts with dealers
    
    
    33,964
    
    
    
    28,880
    
    
    
    5,084
    
    
    
    
    
    
    
    Rate-locked loan commitments
    
    
    43,221
    
    
    
    43,221
    
    
    
    
    
    
    
    
    
    
    
    
   (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. 29




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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 17% of the total loan portfolio at
June 30, 2004 and 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
June 30, 2004, 0.25% of our residential loans were nonperforming, as compared
to 0.26% at December 31, 2003 and 0.34% at June 30, 2003. Our commercial real estate loan portfolio accounted for 34% of the total loan
portfolio at June 30, 2004 and 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 June 30, 2004, 0.46% of our commercial real estate loans were nonperforming,
as compared to 0.36% at December 31, 2003 and 0.37% at June 30, 2003. Our commercial business loan and lease portfolio accounted for 21% of the total
loan portfolio at June 30, 2004 and 21% at December 31, 2003. Commercial
business loans and leases are generally made to small to medium size businesses
located within our market areas. These loans are not concentrated in any
particular industry, but reflect the broad-based economy of New England and
upstate New York. Commercial loans consist primarily of loans secured by
various equipment, machinery and other corporate assets, as well as loans to
provide working capital to businesses in the form of lines of credit. Through
a subsidiary, we also offer direct equipment leases, which amounted to $92.6
million at June 30, 2004. We do not emphasize the purchase of participations
in syndicated commercial loans. At June 30, 2004, we had $400.8 million of
outstanding participations in syndicated commercial loans and had an additional
$367.5 million of unfunded commitments related to these participations. At
June 30, 2004, 0.62% of our commercial business loans were nonperforming, as
compared to 0.74% at December 31, 2003 and 0.76% at June 30, 2003. The following table presents the geographic distribution of our commercial
loans and leases at June 30, 2004 and December 31, 2003. Table 9  Commercial Loans and Leases by State Commercial Real Estate Loans
    
    Commercial Business Loans and LeasesJune 30,
    
    December 31,
    
    Change
    
    June 30,
    
    December 31,
    
    Change2004
    
    2003
    
    Amount
    
    Percent
    
    2004
    
    2003
    
    Amount
    
    PercentMassachusetts
    
    $
    3,005,062
    
    
    $
    2,565,064
    
    
    $
    439,998
    
    
    
    17.15
    %
    
    $
    1,467,870
    
    
    $
    1,173,803
    
    
    $
    294,067
    
    
    
    25.05
    %Maine
    
    
    908,464
    
    
    
    885,791
    
    
    
    22,673
    
    
    
    2.56
    %
    
    
    765,347
    
    
    
    658,902
    
    
    
    106,445
    
    
    
    16.15
    %New Hampshire
    
    
    735,262
    
    
    
    732,249
    
    
    
    3,013
    
    
    
    0.41
    %
    
    
    551,066
    
    
    
    494,811
    
    
    
    56,255
    
    
    
    11.37
    %Vermont
    
    
    655,448
    
    
    
    645,608
    
    
    
    9,840
    
    
    
    1.52
    %
    
    
    438,811
    
    
    
    438,483
    
    
    
    328
    
    
    
    0.07
    %Connecticut
    
    
    571,922
    
    
    
    504,624
    
    
    
    67,298
    
    
    
    13.34
    %
    
    
    404,399
    
    
    
    332,749
    
    
    
    71,650
    
    
    
    21.53
    %New York
    
    
    210,642
    
    
    
    195,526
    
    
    
    15,116
    
    
    
    7.73
    %
    
    
    197,510
    
    
    
    188,346
    
    
    
    9,164
    
    
    
    4.87
    %Total
    
    $
    6,086,800
    
    
    $
    5,528,862
    
    
    $
    557,938
    
    
    
    10.09
    %
    
    $
    3,825,003
    
    
    $
    3,287,094
    
    
    $
    537,909
    
    
    
    16.36
    %
 30




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##### Table of Contents



Consumer loans and leases accounted for 28% of our total loan portfolio at June
30, 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 these loan types during the first half of 2004
reflects the run-off of these loans. At June 30, 2004, 0.11% of our consumer
loans were nonperforming, as compared to 0.18% at December 31, 2003 and 0.16%
at June 30, 2003. The following table presents our consumer loans and leases by type at June 30,
2004 and December 31, 2003. Table 10  Composition of Consumer Loans and Leases June 30,
    
    December 31,2004
    
    2003
    
    Change% of
    
    
    
    
    
    % ofAmount
    
    Total
    
    Amount
    
    Total
    
    Amount
    
    PercentHome equity
    
    $
    2,865,351
    
    
    
    56.12
    %
    
    $
    2,472,471
    
    
    
    51.30
    %
    
    $
    392,880
    
    
    
    15.89
    %Automobile
    
    
    1,705,173
    
    
    
    33.39
    %
    
    
    1,596,504
    
    
    
    33.13
    %
    
    
    108,669
    
    
    
    6.81
    %Mobile home
    
    
    125,647
    
    
    
    2.46
    %
    
    
    141,407
    
    
    
    2.93
    %
    
    
    (15,760
    )
    
    
    (11.15
    %)Vision, dental, and
orthodontia fee plan
    
    
    78,681
    
    
    
    1.54
    %
    
    
    120,694
    
    
    
    2.50
    %
    
    
    (42,013
    )
    
    
    (34.81
    %)Education
    
    
    85,324
    
    
    
    1.67
    %
    
    
    234,226
    
    
    
    4.86
    %
    
    
    (148,902
    )
    
    
    (63.57
    %)Other
    
    
    246,064
    
    
    
    4.82
    %
    
    
    254,221
    
    
    
    5.28
    %
    
    
    (8,157
    )
    
    
    (3.21
    %)Total
    
    $
    5,106,240
    
    
    
    100.00
    %
    
    $
    4,819,523
    
    
    
    100.00
    %
    
    $
    286,717
    
    
    
    5.95
    %
 Nonperforming Assets Nonperforming assets consist of nonperforming loans (which do not include
accruing loans 90 days or more overdue), other real estate owned, repossessed
assets and certain securities available for sale. Total nonperforming assets
as a percentage of total assets amounted to 0.23% at June 30, 2004, 0.24% at
December 31, 2003 and 0.25% at June 30, 2003. Total nonperforming assets as a
percentage of total loans and total other nonperforming assets amounted to
0.37% at June 30, 2004, 0.39% at December 31, 2003 and 0.41% at June 30, 2003.
See Table 11 for a summary of nonperforming assets for the last five quarters.
On a dollar basis, our nonperforming assets increased from $64.5 million at
June 30, 2003 to $67.2 million at June 30, 2004, but decreased $3.4 million
from $70.6 million at March 31, 2004, The increase from last year was due to an
$8.8 million increase in nonperforming commercial real estate loans. 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. 31




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##### Table of Contents



The following table presents nonperforming assets for the last five quarters. TABLE 11  Nonperforming Assets 2004
    
    2003June 30
    
    March 31
    
    December 31
    
    September 30
    
    June 30Nonaccrual loans and leases:Residential real estate loans
    
    $
    7,870
    
    
    $
    7,990
    
    
    $
    7,157
    
    
    $
    9,135
    
    
    $
    9,827Commercial real estate loans
    
    
    27,951
    
    
    
    24,619
    
    
    
    19,700
    
    
    
    27,069
    
    
    
    19,139Commercial business loans and leases
    
    
    23,636
    
    
    
    28,978
    
    
    
    24,412
    
    
    
    22,857
    
    
    
    24,577Consumer loans and leases
    
    
    5,685
    
    
    
    6,267
    
    
    
    8,493
    
    
    
    7,664
    
    
    
    7,192Total nonaccrual loans and leases
    
    
    65,142
    
    
    
    67,854
    
    
    
    59,762
    
    
    
    66,725
    
    
    
    60,735Other nonperforming assets:Other real estate owned, net of related reserves
    
    
    398
    
    
    
    389
    
    
    
    529
    
    
    
    921
    
    
    
    814Repossessions, net of related reserves
    
    
    1,627
    
    
    
    2,311
    
    
    
    2,812
    
    
    
    2,711
    
    
    
    2,911Total other nonperforming assets
    
    
    2,025
    
    
    
    2,700
    
    
    
    3,341
    
    
    
    3,632
    
    
    
    3,725Total nonperforming assets
    
    $
    67,167
    
    
    $
    70,554
    
    
    $
    63,103
    
    
    $
    70,357
    
    
    $
    64,460Accruing loans and leases which are 90 days or more
overdue
    
    $
    4,142
    
    
    $
    7,929
    
    
    $
    4,915
    
    
    $
    3,163
    
    
    $
    2,995Total nonperforming loans as a percentage of total
loans and leases(1)
    
    
    0.36
    %
    
    
    0.41
    %
    
    
    0.37
    %
    
    
    0.42
    %
    
    
    0.39
    %Total nonperforming assets as a percentage of total assets
    
    
    0.23
    %
    
    
    0.26
    %
    
    
    0.24
    %
    
    
    0.27
    %
    
    
    0.25
    %Total nonperforming assets as a percentage of total loans
and leases (1) and total other nonperforming assets
    
    
    0.37
    %
    
    
    0.42
    %
    
    
    0.39
    %
    
    
    0.44
    %
    
    
    0.41
    %
   (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 June 30, 2004, we had
$4.1 million of accruing loans which were 90 days or more delinquent, as
compared to $4.9 million at December 31, 2003 and $3.0 million at June 30,
2003. 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 $8.8 million during the three months ended June 30,
2004, as compared to $9.9 million during the three months ended June 30, 2003.
Net charge-offs represented 0.20% and 0.25% of average loans and leases
outstanding for the quarters ended June 30, 2004 and 2003, respectively. 32




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##### Table of Contents



The following table presents net charge-offs by loan type and the activity in
the allowance for loan and lease losses during the periods indicated. TABLE 12  Allowance for Loan and Lease Losses 2004 Second
    
    2004 First
    
    2003 Fourth
    
    2003 Third
    
    2003 SecondQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterAllowance at beginning of period
    
    $
    233,297
    
    
    $
    232,287
    
    
    $
    229,581
    
    
    $
    227,240
    
    
    $
    226,677Additions due to acquisitions
    
    
    13,665
    
    
    
    
    
    
    
    2,661
    
    
    
    
    
    
    
    Charge-offs:Residential real estate mortgages (1)
    
    
    (25
    )
    
    
    (55
    )
    
    
    25
    
    
    
    63
    
    
    
    53Commercial real estate mortgages
    
    
    172
    
    
    
    221
    
    
    
    87
    
    
    
    27
    
    
    
    202Commercial business loans and leases
    
    
    5,460
    
    
    
    2,711
    
    
    
    4,302
    
    
    
    3,011
    
    
    
    5,754Consumer loans and leases
    
    
    7,434
    
    
    
    8,405
    
    
    
    9,212
    
    
    
    8,782
    
    
    
    6,959Total loans and leases charged off
    
    
    13,041
    
    
    
    11,282
    
    
    
    13,626
    
    
    
    11,883
    
    
    
    12,968Recoveries:Residential real estate mortgages
    
    
    17
    
    
    
    17
    
    
    
    15
    
    
    
    5
    
    
    
    22Commercial real estate mortgages
    
    
    835
    
    
    
    667
    
    
    
    255
    
    
    
    296
    
    
    
    676Commercial business loans and leases
    
    
    2,073
    
    
    
    926
    
    
    
    1,900
    
    
    
    2,493
    
    
    
    1,286Consumer loans and leases
    
    
    1,274
    
    
    
    1,182
    
    
    
    1,101
    
    
    
    930
    
    
    
    1,047Total loans and leases recovered
    
    
    4,199
    
    
    
    2,792
    
    
    
    3,271
    
    
    
    3,724
    
    
    
    3,031Net charge-offs
    
    
    8,842
    
    
    
    8,490
    
    
    
    10,355
    
    
    
    8,159
    
    
    
    9,937Provision for loan and lease losses
    
    
    9,500
    
    
    
    9,500
    
    
    
    10,400
    
    
    
    10,500
    
    
    
    10,500Allowance at end of period
    
    $
    247,620
    
    
    $
    233,297
    
    
    $
    232,287
    
    
    $
    229,581
    
    
    $
    227,240Ratio of net charge-offs to average loans and
leases outstanding during the period, annualized (2)
    
    
    0.20
    %
    
    
    0.21
    %
    
    
    0.26
    %
    
    
    0.20
    %
    
    
    0.25
    %Ratio of allowance to total loans and leases
at end of period (2)
    
    
    1.37
    %
    
    
    1.40
    %
    
    
    1.42
    %
    
    
    1.44
    %
    
    
    1.44
    %Ratio of allowance to nonperforming loans
and leases at end of period
    
    
    380
    %
    
    
    344
    %
    
    
    389
    %
    
    
    344
    %
    
    
    374
    %Ratio of net charge-offs (recoveries) as a percent of
average outstanding loans and leases, annualized (2):Residential real estate mortgages
    
    
    (0.006
    %)
    
    
    (0.011
    %)
    
    
    0.001
    %
    
    
    0.008
    %
    
    
    0.004
    %Commercial real estate mortgages
    
    
    (0.045
    %)
    
    
    (0.032
    %)
    
    
    (0.012
    %)
    
    
    (0.020
    %)
    
    
    (0.037
    %)Commercial business loans and leases
    
    
    0.370
    %
    
    
    0.211
    %
    
    
    0.295
    %
    
    
    0.064
    %
    
    
    0.568
    %Consumer loans and leases
    
    
    0.496
    %
    
    
    0.593
    %
    
    
    0.688
    %
    
    
    0.681
    %
    
    
    0.531
    %Total portfolio loans and leases at end of period (2)
    
    
    18,110,312
    
    
    
    16,623,612
    
    
    
    16,345,962
    
    
    
    15,925,852
    
    
    
    15,733,312Total nonperforming loans and leases at end of period
    
    
    65,142
    
    
    
    67,854
    
    
    
    59,762
    
    
    
    66,725
    
    
    
    60,735Average loans and leases outstanding
during the period (2)
    
    
    17,484,997
    
    
    
    16,511,538
    
    
    
    15,976,068
    
    
    
    15,841,521
    
    
    
    15,634,071
   (1)
    
    Residential real estate charge-offs include estimates of charge-offs and reversals of prior period estimates, which may result in negative charge-offs.(2)
    
    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 $127 million at June 30, 2004 and $142 million at
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. 33




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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 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. The allowance for loan and lease losses amounted to $247.6 million at June 30,
2004 and $232.3 million at December 31, 2003. The $15.3 million increase was
due to $13.7 million from acquired banks and the effect of the provision for
loan and lease losses exceeding net charge-offs during the first half of 2004.
The ratio of the allowance for loan and lease losses to nonperforming loans was
380% at June 30, 2004 and 389% at December 31, 2003. The ratio of the
allowance to total portfolio loans and leases at June 30, 2004 was 1.37%
compared to 1.42% at December 31, 2003. The decline in this ratio is
consistent with the improvement in asset quality
as evidenced by lower levels of nonperforming assets, past due loans and net charge-offs. ASSET-LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk,
liquidity and capital. Asset-liability management is governed by policies,
goals, and objectives that are adopted and reviewed by our board of directors
and monitored periodically by the Board Risk Management Committee. The board
delegates responsibility for asset-liability management strategies to achieve
these goals and objectives to the Asset Liability Management Committee
(ALCO), which is comprised of members of senior management. Senior
management determines the strategic directives that guide the day-to-day
management of our activities and interest rate risk exposure. The ALCO also
reviews and approves all major risk, liquidity and capital management programs,
except for product pricing. Product pricing is reviewed and approved by the
Pricing Committee, which is comprised of a subset of ALCO members and the state
presidents of our banking subsidiary. Interest Rate Risk Interest rate risk is the risk of loss to future earnings or long-term value
resulting from changes in interest rates and is by far the most significant
non-credit risk to which we are exposed. This risk arises directly from our
core lending and deposit gathering activities and is predominantly concentrated
in our mortgage-related assets as well as our non-maturity deposits. Mortgage
related assets typically give borrowers the option to prepay at any time
without penalty. Principal cash flows that come from these assets are highly
interest rate sensitive. As interest rates fall, borrowers are more likely to
pay off their existing mortgages, which results in higher cash flows that we
must in turn reinvest. Replacing these higher-rate mortgage assets with
lower-rate mortgage assets has the potential to reduce our net interest income
unless we can also reduce either our wholesale or retail funding costs. In the
low interest rate environment, bank deposits can increase, especially if the
market risk premium is not sufficient to adequately compensate investors.
Consequently, under such circumstances, we can have even more cash to reinvest
in low yielding assets. Conversely, rising rates tend to have the opposite
effect on both mortgage assets and non-maturity deposits. Higher rates make
borrowers less likely to refinance existing debt, resulting in lower cash flows
for us to reinvest. And if the market risk premium is sufficiently high,
depositors could be enticed to take additional investment risk and move
deposits from banks into riskier assets, such as equity securities. This in
turn could result in less cash to invest or even require us to use wholesale
funding market sources more actively. In the case of higher interest rates,
our funding sources could reprice faster than our assets and at higher rates,
thereby reducing our interest rate spread and net interest margin. The degree
to which future earnings or long-term value is subject to interest rate risk
depends on how closely the characteristics of our interest-earning assets match
those of our interest-bearing liabilities. 34




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##### Table of Contents



In addition to directly impacting mortgage asset and deposit cash flows,
interest rate changes could affect (i) the amount of loans originated and sold
by us, (ii) the level and composition of deposits, (iii) the ability of
borrowers to repay adjustable or variable rate loans, (iv) the average maturity
of loans and investments, (v) the rate of amortization of premiums paid on
securities, capitalized mortgage servicing rights, deferred fees and purchase
accounting adjustments, (vi) the fair value of our saleable assets, the amount
of unrealized gains and losses on securities available for sale per SFAS No.
115, and the resultant ability to realize gains on the sale of such securities
and (vii) per SFAS Nos. 133 and 138, the fair value of derivatives carried on
our balance sheet, derivative hedge effectiveness testing and the amount of
ineffectiveness recognized in earnings. Assessment and Measurement The overall objective of interest rate risk management is to deliver consistent
net interest income growth and returns on equity over a wide range of possible
interest rate environments. To that end, management focuses on (i) key
interest rate risk metrics and assessment of Banknorths exposure to this risk,
(ii) a careful review and consideration
of modeling assumptions and (iii) asset and liability management strategies
that help attain the corporate goals and objectives adopted by our board of
directors. The primary objective of interest rate risk management is to control our
estimated exposure to interest rate risk within limits and guidelines
established by the ALCO and approved by our Board. These limits and guidelines
reflect our tolerance for interest rate risk over a wide range of both
short-term and long-term measurements. In addition, we evaluate interest rate
risk based on ongoing business risk measures, liquidation or run-off measures
of assets and liabilities on our balance sheet and stress test measures.
Ongoing measurements and runoff analysis provide management with information
concerning day-to-day operations. Stress testing shows the impact of very
extreme but lower probability events. The combination of these measures gives
management a comprehensive view of possible risks to future earnings and
long-term equity value. We attempt to control interest rate risk by
identifying, quantifying and, where appropriate, hedging our exposure to these
risks. Net Interest Income Sensitivity Net interest income is our largest source of revenue. Net interest income
sensitivity is our primary short-term measurement used to assess 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 estimated net interest income over a 12-month
period to various rate movements using a simulation model for various specified
interest rate scenarios. Simulations are run monthly and include scenarios
where market rates are shocked up and down, scenarios where market rates
gradually change or ramp up and down and scenarios where the slope of the
market yield curve changes. Our base simulation assumes that rates do not
change for the next 12 months. The sensitivity measurement is calculated as
the percentage variance of the net interest income simulations to the base
simulation results. Results for the gradual ramps are compared to policy
guidelines and are disclosed in the interest rate risk results below. 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, therefore the table below sets forth
information regarding estimated changes in net interest income for the 12
months following the indicated dates. 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 rate
interest-earning assets generally will reprice less quickly than will total
interest-bearing liabilities. These results are dependent on material
assumptions such as interest rate movements, product pricing and customer
behavior. 35




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##### Table of Contents



Table 13  Sensitivity of Net Interest Income 200 Basis Point
    
    100 Basis Point
    
    100 Basis PointRate Increase
    
    Rate Increase
    
    Rate DecreaseJune 30, 2004
    
    
    (0.97
    %)
    
    
    (0.21
    %)
    
    
    (0.32
    %)December 31, 2003
    
    
    (0.26
    %)
    
    
    0.24
    %
    
    
    (0.71
    %)
 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 June 30, 2004 and December 31, 2003. Derivative Instruments Purpose and Benefits Derivative financial instruments are important tools that we use to manage
interest rate risk. When appropriate, we use derivatives such as interest-rate
swaps, interest rate floors, interest rate caps, interest rate corridor
agreements and forward security sales, among other instruments. Certain derivatives are used to hedge certain wholesale funding activities and
the mortgage origination pipeline. These instruments are designated as hedges
at inception in accordance with SFAS No. 133. At June 30, 2004, our designated
hedging activities consisted of forward commitments related to hedging our
mortgage banking operations, a $150 million notional amount interest rate swap
at 3-month LIBOR plus 0.41% that hedged $150 million of 3.75% fixed-rate senior
notes maturing on May 1, 2008, a $200 million notional amount interest rate
swap at 3-month LIBOR plus 3.47% that hedged $200 million of 7.625% fixed-rate
subordinated debt issued by Banknorth, NA which matures on June 15, 2011, and
five interest rate swaps with an aggregate notional amount of $216.5 million
and a weighted average rate of 1-month LIBOR plus 3.82%, which hedge $216.5
million of FHLB advances with a weighted average cost of 5.47% that mature
throughout 2005. We manage the interest rate risk inherent in our mortgage banking operations by
entering into forward sales contracts and, to a lesser extent, by purchasing
mortgage-backed security options. An increase in market interest rates between
the time we commit to terms on a loan and the time we ultimately sell the loan
in the secondary market generally will have the effect of reducing the gain (or
increasing the loss) we record on the sale. We attempt to mitigate this risk by
entering into forward sales commitments in amounts sufficient to cover 70% to
90% of 30-year fixed-rate loans which are currently closed or are anticipated
to close. Purchased mortgage-backed security options are also used to hedge
rate-locked loans. For the quarter and six months ended June 30, 2004, higher mortgage rates
contributed to a decline in residential mortgage loan originations. 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Residential mortgage loans held for sale
    
    $
    61,471
    
    
    $
    84,002
    
    
    $
    49,664
    
    
    
    85,447Rate-locked loan commitments
    
    
    57,707
    
    
    
    133,833
    
    
    
    53,334
    
    
    
    114,173Forward sales commitments
    
    
    104,622
    
    
    
    196,781
    
    
    
    90,111
    
    
    
    183,428
 36




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##### Table of Contents



Interest rate derivatives, primarily interest rate swaps, offered to commercial
borrowers through our hedging program are designated as speculative under SFAS
133. However, we believe that our exposure to commercial customer derivatives
is limited because these contracts are simultaneously matched at inception with
an identical dealer transaction. The commercial customer hedging program
allows us to retain variable-rate commercial loans while allowing the customer
to synthetically fix the loan rate by entering into a variable-to-fixed
interest rate swap. For the six months ended June 30, 2004, we recorded a
total notional amount of $207.5 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 include both the customer and offsetting dealer transactions. Foreign Exchange or Market Risk Our earnings are not directly and materially impacted by movements in foreign
currency rates or commodity prices. Virtually all transactions are denominated
in the U.S. dollar. Movements in equity prices may have an indirect but modest
impact on earnings by affecting the volume of activity or the amount of fees
from investment-related businesses. Foreign currency forward contracts are contracts that we enter into as an
accommodation for customers involved in international trade for the future
delivery or purchase of foreign currency at a specified price. For these
credit-worthy customers, we set aside a percentage of the customers available
line of credit until the foreign currency contract is settled. Foreign
exchange and trade services are provided under a private label arrangement with
a correspondent bank. Risks arise from the possible inability of the seller
and/or our customer to perform and from any resultant exposure to movement in
foreign currency exchange rates, limiting our exposure to the replacement value
of the contracts rather than the notional principal or contract amounts. The following table summarizes our derivative positions at June 30, 2004. Table 15  Derivative Positions Asset-Liability Management Positions Notional Amount Maturing
    
    
    
    
    
    FairJune 30, 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    Total
    
    ValueInterest rate contractsPay variable, receive fixed
    
    $
    
    
    
    $
    216,500
    
    
    $
    
    
    
    $
    
    
    
    $
    350,000
    
    
    $
    566,500
    
    
    $
    11,441Forward commitments to sell loans
    
    
    90,189
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,189
    
    
    
    (572
    )
 Customer-related Positions Notional Amount Maturing
    
    
    
    
    
    FairJune 30, 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    Total
    
    ValueInterest rate contractsReceive fixed, pay variable
    
    $
    8,142
    
    
    $
    
    
    
    $
    
    
    
    $
    14,494
    
    
    $
    485,333
    
    
    $
    507,969
    
    
    $
    14,615Pay fixed, receive variable
    
    
    8,142
    
    
    
    
    
    
    
    
    
    
    
    14,494
    
    
    
    485,333
    
    
    
    507,969
    
    
    
    (14,615
    )Foreign currency forward contracts
    
    
    18,569
    
    
    
    15,043
    
    
    
    545
    
    
    
    
    
    
    
    
    
    
    
    34,157
    
    
    
    (1,836
    )Forward contracts with customersForward contracts with dealers
    
    
    18,475
    
    
    
    14,946
    
    
    
    543
    
    
    
    
    
    
    
    
    
    
    
    33,964
    
    
    
    2,027Rate-locked loan commitments
    
    
    43,221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,221
    
    
    
    238
    (1)
   (1)
    
    No value has been assigned to potential mortagage servicing rights related to rate-locked loan commitments. 37




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##### Table of Contents



2004 Asset Liability Management Actions The most significant factors affecting market risk exposure of net interest
income in the second 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
prepayment speeds of mortgage assets and (iii) the reduction of deposit
interest expenses. The long anticipated increase in the federal funds rate from 1.00% to 1.25%
finally materialized on June 30, 2004. Long-term interest rates also rose in
the second quarter, with 10-year Treasury yields up 75 basis points quarter
over quarter and up approximately 34 basis points over year-end. Mortgage
rates rose in April, May and most of June, which resulted in a decrease in
residential mortgage loan activity. Mortgage loan prepayments are projected to
be slower in the third quarter compared to prepayments in the second quarter.
The above net interest income table (Table 13) reflects the net impact of these
changes. The falling interest rate scenario remains asset sensitive, albeit to
a lesser degree than at year-end and our rising rate scenarios are now slightly
liability sensitive. Without further actions, our model projects net interest
income to decline slightly if short and long interest rates move symmetrically
higher and to increase if the yield curve becomes steeper. However, this
projected decline may be mitigated or offset by the lag of deposit rates
increases versus market rates. 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 June 30, 2004, our debt service requirements
consisted primarily of $310.7 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 five affiliated trusts in
connection with their issuance of capital securities to unaffiliated parties.
These obligations mature starting in 2027, have interest rates ranging from
4.75% to 10.52% and annual debt service payments of $26.2 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 June 30, 2004, our
subsidiary bank had $572.8 million available for dividends that could be paid
without prior regulatory approval. In addition, the parent company had $202.2
million in cash or cash equivalents at June 30, 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 38




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##### Table of Contents



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. At June 30, 2004, Banknorth, NA had in the aggregate $3.7 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 19% of retail deposits, as compared to a current policy minimum of
10% of deposits. Also at June 30, 2004, Banknorth, NA had in the aggregate potentially volatile
funds of $2.7 billion. These are funds that might flow out of the bank over a
90-day period in an adverse environment. Management estimates this figure by
applying adverse probabilities to its various credit-sensitive and
economically-sensitive funding sources. At June 30, 2004, the ratio of immediately accessible liquidity to
potentially volatile funds was 141%, which substantially exceeded our policy
minimum of 100%. In addition to the liquidity sources discussed above, we believe that our
residential and consumer loan portfolios provide a significant amount of
contingent liquidity that could be accessed in a reasonable time period through
sales or securitizations. We believe we also have significant untapped access
to the national brokered deposit market. These sources are contemplated as
secondary liquidity in our contingent funding plan. We believe that the level
of our liquidity is sufficient to meet current and future funding requirements. We have a shelf registration statement 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 June 30, 2004. CAPITAL At June 30, 2004, shareholders equity amounted to $2.9 billion, or 9.79% 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 each of
the first and second quarters of 2004 compared to $0.16 per share in the each
of the first and second quarters 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 June 30, 2004.
There were no repurchases in 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
June 30, 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. 39




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Table 16  Capital Ratios Actual
    
    Capital Requirements
    
    ExcessAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of June 30, 2004Banknorth Group, Inc.Total capital (to risk-weighted assets)
    
    $
    2,284,629
    
    
    
    11.15
    %
    
    $
    1,638,713
    
    
    
    8.00
    %
    
    $
    645,916
    
    
    
    3.15
    %Tier 1 capital (to risk weighted assets)
    
    
    1,837,008
    
    
    
    8.97
    %
    
    
    819,357
    
    
    
    4.00
    %
    
    
    1,017,651
    
    
    
    4.97
    %Tier 1 leverage capital ratio (to
average assets)
    
    
    1,837,008
    
    
    
    6.80
    %
    
    
    1,079,928
    
    
    
    4.00
    %
    
    
    757,080
    
    
    
    2.80
    %Banknorth NATotal capital (to risk-weighted assets)
    
    
    2,210,568
    
    
    
    10.80
    %
    
    
    1,637,756
    
    
    
    8.00
    %
    
    
    572,812
    
    
    
    2.80
    %Tier 1 capital (to risk-weighted assets)
    
    
    1,768,610
    
    
    
    8.64
    %
    
    
    818,878
    
    
    
    4.00
    %
    
    
    949,732
    
    
    
    4.64
    %Tier 1 leverage capital ratio (to
average assets)
    
    
    1,768,610
    
    
    
    6.56
    %
    
    
    1,078,319
    
    
    
    4.00
    %
    
    
    690,291
    
    
    
    2.56
    %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
    %
 Net risk-weighted assets were $20.8 billion and $18.5 billion at June 30, 2004
and December 31, 2003, respectively, for Banknorth Group, Inc. and Banknorth,
NA. At June 30, 2004, we operated five affiliated trusts for the purpose of issuing
to unaffiliated parties capital securities and investing the proceeds from the
sale thereof in junior subordinated debentures issued by us. All of the
proceeds from the issuance of the capital securities and the common securities
issued by the trusts are invested in our junior subordinated debentures, which
represent the sole assets of the trusts. The capital securities pay cumulative
cash distributions quarterly at the same rate as the junior subordinated
debentures held by the trusts. We own all of the outstanding common securities
of the trusts and effectively are the guarantor of the obligations of the
trusts. 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 June 30, 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
    %
    
    
    2/22/2031CCBT Statutory Trust I
    
    
    7/31/2001
    
    
    
    5,000
    
    
    
    155
    
    
    
    5,155
    
    
    
    4.75
    %
    
    
    7/31/2031Banknorth Capital Trust II
    
    
    2/22/2002
    
    
    
    200,000
    
    
    
    6,186
    
    
    
    206,186
    
    
    
    8.00
    %
    
    
    4/1/2032$
    300,275
    
    
    $
    10,471
    
    
    $
    310,746
   (1)
    
    Amounts include junior subordinated debentures acquired by affiliated trusts from us
with the capital contributed by us in exchange for the common securities of such trusts.
Junior subordinated debentures are equal to capital securities plus common securities. At June 30, 2004, trust capital securities amounted to 16.3% of Banknorths
Tier 1 capital. Although pursuant to FIN 46(R), the trusts which issued
capital securities are no longer consolidated with Banknorth and these
securities therefore are no longer considered a minority interest in
consolidated subsidiary for accounting purposes, pursuant to a supervisory
letter sent by the Federal Reserve Board to all bank holding companies in July
2003, Banknorth has 40




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continued to include trust preferred securities in its Tier
1 capital. On May 6, 2004, the Federal Reserve Board issued a proposed
regulation which proposed to permit bank holding companies to continue to
include trust preferred securities in Tier 1 capital, subject to stricter
quantitative and qualitative standards. Under the proposed regulation,
commencing on March 31, 2007, the aggregate amount of restricted core capital
elements (which include qualifying trust preferred securities, as well as
qualifying cumulative perpetual preferred stock and Class B and Class C
minority interests in consolidated subsidiaries, as defined) may not exceed 25%
(15% for internationally active bank holding companies) of a bank holding
companys core capital elements (which consist of qualifying common
stockholders equity, qualifying non-cumulative preferred stock and Class A
minority interest in subsidiaries, as defined), net of goodwill. This test is
more restrictive than the current limit for trust preferred securities, which
does not deduct goodwill prior to calculating the 25% limit or explicitly
include minority interests in consolidated subsidiaries, and is likely to
reduce the ability of some bank holding companies, particularly those that have
completed significant purchase acquisitions, to include trust preferred
securities in Tier 1 capital. In addition, the proposed rule would limit the
amount of qualifying trust preferred securities and Class C minority interests
in excess of the restricted core capital limit that can be included in Tier 2
capital by providing that the amount of such elements, together with
subordinated debt and limited life preferred stock, that may be included in
Tier 2 capital would be limited to 50% of Tier 1 capital. The proposed rule
also would provide that during the last five years prior to maturity of the
underlying subordinated note or debentures, trust preferred securities must be
treated as limited-life preferred stock, excluding it from Tier 1 capital and
amortizing it out of Tier 2 capital at the rate of 20% per year. If the
proposed capital regulation were adopted as proposed, we believe that we would
continue to qualify as well capitalized under Federal Reserve Board
regulations. There can be no assurance that the proposed capital regulation
will be adopted as proposed or at all. At June 30, 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 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 24.5% at June 30, 2004 and 25.9%
at December 31, 2003. 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. 41




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##### Table of Contents



FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are
forward-looking statements within the meaning of Section 21A of the
Securities Exchange Act of 1934, as amended. Forward-looking statements, which
are based on various assumptions (some of which are beyond our control), may be
identified by reference to a future 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 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 putitive classes of
claimants. Certain of these actions assert claims for substantial monetary
damages against Banknorth and its subsidiaries. Based on currently available
information, advice of counsel, available insurance coverage and established
reserves, management does not believe that the 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. 42




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##### Table of Contents



Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities (a) - (d) Not applicable. (e) 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)April 1-30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,853,200May 1-31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,853,200June 1-30, 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   not applicable. 
 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 June 30, 2004, we filed the
following Current Reports on Form 8-K or 8-K/A:  April 22, 2004, under Item 5 relating to the announcement of the
webcast of our annual meeting;April 26, 2004, under Item 12 relating to our first quarter 2004
financial results;April 27, 2004, under Item 5 relating to our annual meeting
results;May 3, 2004, under Item 5 relating to the completion of two
acquisitions;May 5, 2004, under Item 5 relating to our chairmans presentation
at a Lehman Brothers Financial Services conference andJune 22, 2004, under Item 5 relating to our agreement and plan of
merger to acquire BostonFed Bancorp, Inc. 43




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. BANKNORTH GROUP, INC.Date: August 4, 2004
    
    By:
    
    /s/ William J. RyanWilliam J. RyanChairman, President andChief Executive Officer
 Date: August 4, 2004
    
    By:
    
    /s/ Stephen J. BoyleStephen J. BoyleExecutive Vice President andChief Financial Officer(principal financial and accounting officer)
 44




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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. 45