##### Table of Contents



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 September 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 October 31, 2004 is:  Common stock, par value $.01 per share
    
    175,872,708(Class)
    
    (Outstanding)
 Available on the Web @ www.banknorth.com




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INDEX BANKNORTH GROUP, INC. AND SUBSIDIARIES  
 PAGEPART I.
    
    FINANCIAL INFORMATION PAGEItem 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
    
    
    45Item 4.
    
    Controls and Procedures
    
   
    45PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3.
    
    Defaults Upon Senior Securities
    
    
    46Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    46Item 5.
    
    Other Information
    
    
    46Item 6.
    
    Exhibits
    
    
    45Signatures
    
    
    47Exhibits
    
    
    48EX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification




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##### Table of Contents



BANKNORTH GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)
 September 30, 2004
    
    December 31, 2003AssetsCash and due from banks
    
    $
    575,840
    
    
    $
    669,686Federal funds sold and other short term investments
    
    
    4,031
    
    
    
    4,645Securities available for sale, at market value
    
    
    7,369,269
    
    
    
    7,122,992Securities held to maturity (market value of $94,175 and $124,344 at
September 30, 2004 and December 31, 2003, respectively)
    
    
    94,026
    
    
    
    124,240Loans held for sale
    
    
    47,487
    
    
    
    41,696Loans and leases:Residential real estate mortgages
    
    
    3,096,739
    
    
    
    2,710,483Commercial real estate mortgages
    
    
    6,182,835
    
    
    
    5,528,862Commercial business loans and leases
    
    
    3,856,296
    
    
    
    3,287,094Consumer loans and leases
    
    
    5,274,921
    
    
    
    4,819,523Total loans and leases
    
    
    18,410,791
    
    
    
    16,345,962Less: Allowance for loan and lease losses
    
    
    242,885
    
    
    
    232,287Net loans and leases
    
    
    18,167,906
    
    
    
    16,113,675Premises and equipment, net
    
    
    285,940
    
    
    
    264,818Goodwill
    
    
    1,369,112
    
    
    
    1,126,639Identifiable intangible assets
    
    
    52,593
    
    
    
    36,415Bank-owned life insurance
    
    
    517,359
    
    
    
    488,756Other assets
    
    
    502,521
    
    
    
    460,173Total assets
    
    $
    28,986,084
    
    
    $
    26,453,735Liabilities and Shareholders EquityDeposits:Savings accounts
    
    $
    2,572,473
    
    
    $
    2,460,522Money market access and NOW accounts
    
    
    7,924,839
    
    
    
    7,130,532Certificates of deposit
    
    
    4,646,725
    
    
    
    4,733,104Brokered deposits
    
    
    575
    
    
    
    Noninterest-bearing deposits
    
    
    4,225,861
    
    
    
    3,577,027Total deposits
    
    
    19,370,473
    
    
    
    17,901,185Short-term borrowings
    
    
    2,907,608
    
    
    
    2,336,947Long-term debt
    
    
    3,449,827
    
    
    
    3,545,917Other liabilities
    
    
    211,934
    
    
    
    149,167Total liabilities
    
    
    25,939,842
    
    
    
    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 - 191,673,546 in 2004 and 182,292,973 in 2003)
    
    
    1,917
    
    
    
    1,823Paid-in capital
    
    
    1,742,085
    
    
    
    1,435,005Retained earnings
    
    
    1,692,344
    
    
    
    1,508,292Treasury stock, at cost (17,650,284 shares in 2004 and 20,105,254 shares in 2003)
    
    
    (378,009
    )
    
    
    (430,608
    )Accumulated other comprehensive (loss) income
    
    
    (12,095
    )
    
    
    6,007Total shareholders equity
    
    
    3,046,242
    
    
    
    2,520,519Total liabilities and shareholders equity
    
    $
    28,986,084
    
    
    $
    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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest and dividend income:Interest and fees on loans and leases
    
    $
    240,776
    
    
    $
    219,215
    
    
    $
    682,085
    
    
    $
    665,309Interest and dividends on securities
    
    
    84,585
    
    
    
    71,535
    
    
    
    245,074
    
    
    
    237,246Total interest and dividend income
    
    
    325,361
    
    
    
    290,750
    
    
    
    927,159
    
    
    
    902,555Interest expense:Interest on deposits
    
    
    40,122
    
    
    
    45,164
    
    
    
    118,454
    
    
    
    147,290Interest on borrowed funds
    
    
    45,579
    
    
    
    35,754
    
    
    
    121,386
    
    
    
    127,722Total interest expense
    
    
    85,701
    
    
    
    80,918
    
    
    
    239,840
    
    
    
    275,012Net interest income
    
    
    239,660
    
    
    
    209,832
    
    
    
    687,319
    
    
    
    627,543Provision for loan and lease losses
    
    
    10,670
    
    
    
    10,500
    
    
    
    29,670
    
    
    
    31,901Net interest income after provision
for loan and lease losses
    
    
    228,990
    
    
    
    199,332
    
    
    
    657,649
    
    
    
    595,642Noninterest income:Deposit services
    
    
    27,583
    
    
    
    25,167
    
    
    
    80,995
    
    
    
    71,441Insurance brokerage commissions
    
    
    12,417
    
    
    
    10,930
    
    
    
    38,431
    
    
    
    34,235Merchant and electronic banking income, net
    
    
    13,723
    
    
    
    11,115
    
    
    
    37,196
    
    
    
    31,235Trust and investment management services
    
    
    10,280
    
    
    
    8,178
    
    
    
    29,300
    
    
    
    23,486Bank-owned life insurance
    
    
    5,732
    
    
    
    5,785
    
    
    
    17,503
    
    
    
    16,952Investment planning services
    
    
    4,634
    
    
    
    3,761
    
    
    
    14,619
    
    
    
    10,928Net securities gains
    
    
    3,124
    
    
    
    3,573
    
    
    
    10,060
    
    
    
    39,778Other noninterest income
    
    
    14,020
    
    
    
    20,147
    
    
    
    41,103
    
    
    
    54,66891,513
    
    
    
    88,656
    
    
    
    269,207
    
    
    
    282,723Noninterest expense:Compensation and employee benefits
    
    
    91,935
    
    
    
    82,230
    
    
    
    266,473
    
    
    
    245,170Occupancy
    
    
    15,866
    
    
    
    14,520
    
    
    
    47,274
    
    
    
    44,584Equipment
    
    
    12,074
    
    
    
    11,668
    
    
    
    35,777
    
    
    
    35,344Data processing
    
    
    11,118
    
    
    
    10,466
    
    
    
    31,573
    
    
    
    31,059Advertising and marketing
    
    
    6,278
    
    
    
    5,553
    
    
    
    20,105
    
    
    
    16,569Amortization of identifiable intangible assets
    
    
    2,379
    
    
    
    2,320
    
    
    
    6,367
    
    
    
    6,622Merger and consolidation costs
    
    
    5,603
    
    
    
    808
    
    
    
    11,351
    
    
    
    6,788Prepayment penalties on borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,490Other noninterest expense
    
    
    28,945
    
    
    
    24,082
    
    
    
    78,822
    
    
    
    68,968174,198
    
    
    
    151,647
    
    
    
    497,742
    
    
    
    485,594Income before income tax expense
    
    
    146,305
    
    
    
    136,341
    
    
    
    429,114
    
    
    
    392,771Applicable income tax expense
    
    
    48,534
    
    
    
    46,063
    
    
    
    145,169
    
    
    
    133,574Net income
    
    $
    97,771
    
    
    $
    90,278
    
    
    $
    283,945
    
    
    $
    259,197Basic earnings per share
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    1.68
    
    
    $
    1.61Diluted earnings per share
    
    $
    0.55
    
    
    $
    0.55
    
    
    $
    1.65
    
    
    $
    1.59Weighted average shares outstanding:Basic
    
    
    173,271
    
    
    
    161,517
    
    
    
    168,646
    
    
    
    160,498Dilutive effect of stock options
    
    
    3,485
    
    
    
    2,929
    
    
    
    3,555
    
    
    
    2,291Diluted
    
    
    176,756
    
    
    
    164,446
    
    
    
    172,201
    
    
    
    162,789
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    283,945
    
    
    
    
    
    
    
    
    
    
    
    283,945Unrealized gains (losses) on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,030
    )
    
    
    (18,030
    )Unrealized gains on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    (72
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,843Common stock issued for acquisitions
    
    
    9,381
    
    
    
    94
    
    
    
    304,156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304,250Treasury stock issued for employee benefit plans
    
    
    2,454
    
    
    
    
    
    
    
    3,363
    
    
    
    
    
    
    
    51,848
    
    
    
    
    
    
    
    55,211Distribution of restricted stock
    
    
    
    
    
    
    
    
    
    
    (439
    )
    
    
    
    
    
    
    751
    
    
    
    
    
    
    
    312Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99,893
    )
    
    
    
    
    
    
    
    
    
    
    (99,893
    )Balances at September 30, 2004
    
    
    174,023
    
    
    $
    1,917
    
    
    $
    1,742,085
    
    
    $
    1,692,344
    
    
    
    ($378,009
    )
    
    
    ($12,095
    )
    
    $
    3,046,242Balances at December 31, 2002
    
    
    150,579
    
    
    $
    1,689
    
    
    $
    1,059,778
    
    
    $
    1,269,422
    
    
    
    ($382,350
    )
    
    $
    114,946
    
    
    $
    2,063,485Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259,197
    
    
    
    
    
    
    
    
    
    
    
    259,197Unrealized gains (losses) on securities, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,290
    )
    
    
    (80,290
    )Unrealized gains on cash flow hedges, net of
reclassification adjustment and net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,044
    
    
    
    1,044Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,951Common stock issued for acquisitions
    
    
    13,401
    
    
    
    134
    
    
    
    382,669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382,803Treasury stock issued for employee benefit plans
    
    
    1,980
    
    
    
    
    
    
    
    (7,328
    )
    
    
    
    
    
    
    40,349
    
    
    
    
    
    
    
    33,021Treasury stock purchased
    
    
    (4,417
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,662
    )
    
    
    
    
    
    
    (103,662
    )Distribution of restricted stock
    
    
    
    
    
    
    
    
    
    
    (950
    )
    
    
    
    
    
    
    1,590
    
    
    
    
    
    
    
    640Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,658
    )
    
    
    
    
    
    
    
    
    
    
    (80,658
    )Balances at September 30, 2003
    
    
    161,543
    
    
    $
    1,823
    
    
    $
    1,434,169
    
    
    $
    1,447,961
    
    
    
    ($444,073
    )
    
    $
    35,700
    
    
    $
    2,475,580
 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)
 Nine Months Ended September 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    283,945
    
    
    $
    259,197Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan and lease losses
    
    
    29,670
    
    
    
    31,901Depreciation of banking premises and equipment
    
    
    32,845
    
    
    
    32,481Net amortization of premium and discounts
    
    
    19,027
    
    
    
    45,968Amortization of intangible assets
    
    
    6,367
    
    
    
    6,622Provision for deferred tax expense
    
    
    9,600
    
    
    
    17,100Distribution of restricted stock units
    
    
    312
    
    
    
    640Net (gains) realized from sales of securities and loans
    
    
    (11,576
    )
    
    
    (39,778
    )Prepayment penalties on borrowings
    
    
    
    
    
    
    30,490Net (gains) realized from sales of loans held for sale
    
    
    (2,682
    )
    
    
    (11,418
    )Increase in cash surrender value of bank owned life insurance
    
    
    (17,503
    )
    
    
    (16,952
    )Proceeds from sales of loans held for sale
    
    
    373,211
    
    
    
    757,404Residential loans originated and purchased for sale
    
    
    (368,672
    )
    
    
    (690,453
    )Net change in other assets
    
    
    (25,393
    )
    
    
    65,576Net change in other liabilities
    
    
    37,004
    
    
    
    (100,267
    )Net cash provided by operating activities
    
    
    366,155
    
    
    
    388,511Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    2,164,935
    
    
    
    2,890,179Proceeds from maturities and principal repayments of securities available for sale
    
    
    1,025,960
    
    
    
    2,674,338Purchases of securities available for sale
    
    
    (3,133,987
    )
    
    
    (5,207,824
    )Proceeds from maturities and principal repayments of securities held to maturity
    
    
    30,214
    
    
    
    74,783Net increase in loans and leases
    
    
    (1,103,017
    )
    
    
    (465,465
    )Proceeds from sales of loans
    
    
    37,097
    
    
    
    Net additions to premises and equipment
    
    
    (22,271
    )
    
    
    (13,937
    )Cash paid for acquisitions, net of cash acquired
    
    
    49,061
    
    
    
    48,354Net cash (used in) provided by investing activities
    
    
    (952,008
    )
    
    
    428Cash flows from financing activities:Net increase in deposits
    
    
    289,186
    
    
    
    207,044Net increase in short-term borrowings
    
    
    736,780
    
    
    
    95,595Proceeds from long-term debt
    
    
    1,692
    
    
    
    1,042,874Payments on long-term debt
    
    
    (301,183
    )
    
    
    (1,712,455
    )Treasury stock issued for employee benefit plans
    
    
    55,211
    
    
    
    33,021Purchase of treasury stock
    
    
    
    
    
    
    (103,662
    )Cash dividends paid to shareholders
    
    
    (99,893
    )
    
    
    (80,658
    )Net cash provided by (used in) financing activities
    
    
    681,793
    
    
    
    (518,241
    )Increase (Decrease) in cash and cash equivalents
    
    
    95,940
    
    
    
    (129,302
    )Cash and cash equivalents at beginning of period
    
    
    316,331
    
    
    
    717,003Cash and cash equivalents at end of period
    
    $
    412,271
    
    
    $
    587,701In 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
    
    $
    1,804,697
    
    
    $
    3,036,872Fair value of liabilities assumed
    
    
    1,417,597
    
    
    
    2,325,526Interest paid
    
    $
    233,017
    
    
    $
    276,928Income taxes paid
    
    
    102,118
    
    
    
    111,055
 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
September 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 nine months ended September 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. Transaction-Related ItemsBalance atAcquisition Date
    
    
    
    
    
    Identifiable
    
    
    
    
    
    
    
    
    
    TotalAcquisition
    
    
    
    
    
    
    Intangible
    
    Cash
    
    Shares
    
    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
    
    
    $
    178.2
    
    
    $
    19.4
    
    
    $
    
    
    
    
    9.2
    
    
    $
    298.1Foxborough Savings Bank
    
    
    4/30/2004
    
    
    
    241.8
    
    
    
    22.8
    
    
    
    62.1
    
    
    
    2.2
    
    
    
    88.9
    
    
    
    
    
    
    
    88.9First & Ocean Bancorp
    
    
    12/31/2003
    
    
    
    274.4
    
    
    
    15.6
    
    
    
    34.9
    
    
    
    1.8
    
    
    
    49.7
    
    
    
    
    
    
    
    49.7American Financial Holdings,
Inc.
    
    
    2/14/2003
    
    
    
    2,690.3
    
    
    
    408.2
    
    
    
    424.9
    
    
    
    9.3
    
    
    
    328.5
    
    
    
    13.4
    
    
    
    711.4Insurance agency acquisitions
    
    
    2003-2004
    
    
    
    2.2
    
    
    
    0.6
    
    
    
    7.1
    
    
    
    1.7
    
    
    
    3.2
    
    
    
    0.2
    
    
    
    9.4
 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 September 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
    
    
    240,300Identifiable intangible assets
    
    
    21,565Other assets
    
    
    157,403Total assets acquired
    
    
    1,804,697Liabilities:Deposits
    
    
    1,188,294Borrowings
    
    
    210,903Other liabilities
    
    
    18,400Total liabilities assumed
    
    
    1,417,597Net assets acquired
    
    $
    387,100
 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 stock option plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted
market price of the underlying stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock upon exercise
of the stock option. We have elected to continue using the intrinsic value
method in APB Opinion No. 25 and, as a result, must make proforma disclosures
of net income and earnings per share as if the fair value based method of
accounting had been applied. The proforma disclosures
include the effects of 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    97,771
    
    
    $
    90,278
    
    
    $
    283,945
    
    
    $
    259,197Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net
of related tax effects
    
    
    (4,141
    )
    
    
    (2,609
    )
    
    
    (12,670
    )
    
    
    (8,398
    )Proforma net income
    
    $
    93,630
    
    
    $
    87,669
    
    
    $
    271,275
    
    
    $
    250,799Earnings per shareBasic - As reported
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    1.68
    
    
    $
    1.61Proforma
    
    $
    0.54
    
    
    $
    0.54
    
    
    $
    1.61
    
    
    $
    1.56Diluted - As reported
    
    $
    0.55
    
    
    $
    0.55
    
    
    $
    1.65
    
    
    $
    1.59Proforma
    
    $
    0.53
    
    
    $
    0.54
    
    
    $
    1.57
    
    
    $
    1.55
 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. This draft (supplemented by recent FASB deliberations) concluded that
all companies should expense the fair value of employee stock options using
either the modified prospective or the modified retrospective 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 interim or annual periods beginning after June 15, 2005, 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 September 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
    
    
    4
    
    
    $
    545,203
    
    
    ($
    4,839
    )
    
    
    5
    
    
    $
    1,038,539
    
    
    ($
    31,242
    )
    
    
    9
    
    
    $
    1,583,742
    
    
    ($
    36,081
    )Tax exempt bonds and notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other bonds and notes
    
    
    7
    
    
    
    19,554
    
    
    
    (616
    )
    
    
    2
    
    
    
    4,389
    
    
    
    (88
    )
    
    
    9
    
    
    
    23,943
    
    
    
    (704
    )Mortgage-backed securities
    
    
    86
    
    
    
    1,816,946
    
    
    
    (15,704
    )
    
    
    43
    
    
    
    857,672
    
    
    
    (15,209
    )
    
    
    129
    
    
    
    2,674,618
    
    
    
    (30,913
    )Collateralized mortgage
obligations
    
    
    14
    
    
    
    182,616
    
    
    
    (1,876
    )
    
    
    3
    
    
    
    614
    
    
    
    (2
    )
    
    
    17
    
    
    
    183,230
    
    
    
    (1,878
    )Equity securities
    
    
    2
    
    
    
    137
    
    
    
    (15
    )
    
    
    2
    
    
    
    344
    
    
    
    (33
    )
    
    
    4
    
    
    
    481
    
    
    
    (48
    )113
    
    
    $
    2,564,456
    
    
    ($
    23,050
    )
    
    
    55
    
    
    $
    1,901,558
    
    
    ($
    46,574
    )
    
    
    168
    
    
    $
    4,466,014
    
    
    ($
    69,624
    )
 For securities with unrealized losses, the following information was considered
in determining that the impairments are not other-than-temporary. U.S.
Government securities are backed by the full faith and credit of the United
States and therefore bear nominal credit risk. U.S. Government agencies
securities are believed by management to have minimal credit risk as they play
a vital role in the nations financial markets. Other bonds and notes are
generally comprised of corporate securities which have a credit rating of at
least investment grade by one of the nationally-recognized rating agencies.
Mortgage-backed securities or collateralized mortgage obligations are either
issued by federal government agencies or by private issuers with minimum
security ratings of AA. See Note 12 for subsequent event regarding the sale of securities in the fourth
quarter of 2004. 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 nine months ended September 30, 2004 are summarized as follows: Indentifiable Intangible AssetsOther
    
    TotalIdentifiable
    
    IdentifiableCore Deposit
    
    Intangible
    
    IntangibleGoodwill
    
    Intangibles
    
    Assets
    
    AssetsBalance, December 31, 2003
    
    $
    1,126,639
    
    
    $
    28,165
    
    
    $
    8,250
    
    
    $
    36,415Recorded during the year
    
    
    244,842
    
    
    
    21,565
    
    
    
    1,000
    
    
    
    22,565Amortization expense
    
    
    
    
    
    
    (4,225
    )
    
    
    (2,142
    )
    
    
    (6,367
    )Reclassification
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Adjustments of purchase accounting estimates
    
    
    (2,389
    )
    
    
    
    
    
    
    
    
    
    
    Balance, September 30, 2004
    
    $
    1,369,112
    
    
    $
    45,485
    
    
    $
    7,108
    
    
    $
    52,593Estimated amortization expense for the year ending:Remaining 2004
    
    
    
    
    
    $
    1,762
    
    
    $
    546
    
    
    $
    2,3082005
    
    
    
    
    
    
    6,352
    
    
    
    1,591
    
    
    
    7,9432006
    
    
    
    
    
    
    5,680
    
    
    
    843
    
    
    
    6,5232007
    
    
    
    
    
    
    5,213
    
    
    
    843
    
    
    
    6,0562008
    
    
    
    
    
    
    5,192
    
    
    
    473
    
    
    
    5,665thereafter
    
    
    
    
    
    
    21,286
    
    
    
    1,082
    
    
    
    22,368
 The components of identifiable intangible assets are as follows: September 30, 2004Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    AmountIdentifiable intangible assets:Core deposit intangibles
    
    $
    76,218
    
    
    $
    30,733
    
    
    $
    45,485Other identifiable intangible assets
    
    
    14,703
    
    
    
    7,595
    
    
    
    7,108Total
    
    $
    90,921
    
    
    $
    38,328
    
    
    $
    52,593
 Note 6  Short-term Borrowings Short-term borrowings are all borrowings with an original maturity of one year
or less. A summary of short-term borrowings follows: September 30, 2004
    
    December 31, 2003Securities sold under agreements to
 repurchase - retail
    
    $
    1,110,063
    
    
    $
    1,086,900Securities sold under agreements to
 repurchase - wholesale
    
    
    875,813
    
    
    
    814,650Federal funds purchased
    
    
    167,600
    
    
    
    358,000Treasury, tax and loan notes
    
    
    751,332
    
    
    
    77,397Federal Home Loan Bank advances
    
    
    2,800
    
    
    
    $
    2,907,608
    
    
    $
    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: September 30, 2004
    
    December 31, 2003Federal Home Loan Bank advances
    
    $
    1,477,570
    
    
    $
    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
    
    
    149,796
    
    
    
    149,753Hedge-related basis adjustments on long-term debt
    
    
    3,678
    
    
    
    (1,896
    )Other long-term debt
    
    
    8,037
    
    
    
    6,964Total
    
    $
    3,449,827
    
    
    $
    3,545,917
 Callable borrowings amounted to $0.9 billion and $1.8 billion at September 30,
2004 and December 31, 2003, respectively. 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 EndedSeptember 30, 2004
    
    September 30, 2003Pre-tax
    
    Tax
    
    Net of
    
    Pre-tax
    
    Tax
    
    Net ofAmount
    
    Effect
    
    Tax
    
    Amount
    
    Effect
    
    TaxUnrealized gain (loss) on securities available for sale
    
    $
    126,350
    
    
    ($
    44,224
    )
    
    $
    82,126
    
    
    ($
    90,449
    )
    
    $
    31,656
    
    
    ($
    58,793
    )Unrealized gain (loss) on cash flow hedges
    
    
    (1,391
    )
    
    
    487
    
    
    
    (904
    )
    
    
    1,819
    
    
    
    (636
    )
    
    
    1,183Reclassification adjustment for (losses) gains realized
in net income
    
    
    (1,949
    )
    
    
    682
    
    
    
    (1,267
    )
    
    
    (5,562
    )
    
    
    1,947
    
    
    
    (3,615
    )Net change in unrealized gains (losses)
    
    $
    123,010
    
    
    ($
    43,055
    )
    
    $
    79,955
    
    
    ($
    94,192
    )
    
    $
    32,967
    
    
    ($
    61,225
    )
 Nine Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2003Pre-tax
    
    Tax
    
    Net of
    
    Pre-tax
    
    Tax
    
    Net ofAmount
    
    Effect
    
    Tax
    
    Amount
    
    Effect
    
    TaxUnrealized gain (loss) on securities available for sale
    
    ($
    17,681
    )
    
    $
    6,189
    
    
    ($
    11,492
    )
    
    ($
    83,495
    )
    
    $
    29,061
    
    
    ($
    54,434
    )Unrealized gain (loss) on cash flow hedges
    
    
    (1,243
    )
    
    
    435
    
    
    
    (808
    )
    
    
    (6,018
    )
    
    
    2,106
    
    
    
    (3,912
    )Reclassification adjustment for gains (losses) realized
in net income
    
    
    (8,926
    )
    
    
    3,124
    
    
    
    (5,802
    )
    
    
    (32,153
    )
    
    
    11,253
    
    
    
    (20,900
    )Net change in unrealized gains (losses)
    
    ($
    27,850
    )
    
    $
    9,748
    
    
    ($
    18,102
    )
    
    ($
    121,666
    )
    
    $
    42,420
    
    
    ($
    79,246
    )
 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Loan fee income
    
    $
    5,841
    
    
    $
    7,376
    
    
    $
    19,527
    
    
    $
    19,456Covered call premiums
    
    
    5,661
    
    
    
    7,152
    
    
    
    14,039
    
    
    
    21,390Mortgage banking services income
    
    
    1,913
    
    
    
    3,087
    
    
    
    5,249
    
    
    
    9,328Venture capital write-downs
    
    
    (1,664
    )
    
    
    (374
    )
    
    
    (2,189
    )
    
    
    (989
    )Miscellaneous income
    
    
    2,269
    
    
    
    2,906
    
    
    
    4,477
    
    
    
    5,483Total
    
    $
    14,020
    
    
    $
    20,147
    
    
    $
    41,103
    
    
    $
    54,668
 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Qualified PensionService cost
    
    $
    3,379
    
    
    $
    2,313
    
    
    $
    8,947
    
    
    $
    6,939Interest cost
    
    
    2,988
    
    
    
    3,042
    
    
    
    9,650
    
    
    
    9,126Expected return on plan assets
    
    
    (5,083
    )
    
    
    (3,586
    )
    
    
    (14,739
    )
    
    
    (10,758
    )Amortization of prior service cost
    
    
    2
    
    
    
    2
    
    
    
    6
    
    
    
    6Amortization of transition obligation
    
    
    (65
    )
    
    
    (64
    )
    
    
    (193
    )
    
    
    (192
    )Amortization of net loss
    
    
    686
    
    
    
    966
    
    
    
    2,818
    
    
    
    2,898Net periodic benefit cost
    
    
    1,907
    
    
    
    2,673
    
    
    
    6,489
    
    
    
    8,019Nonqualified PensionService cost
    
    
    189
    
    
    
    78
    
    
    $
    387
    
    
    $
    234Interest cost
    
    
    504
    
    
    
    395
    
    
    
    1,314
    
    
    
    1,185Amortization of prior service cost
    
    
    76
    
    
    
    43
    
    
    
    162
    
    
    
    129Amortization of transition obligation
    
    
    3
    
    
    
    3
    
    
    
    9
    
    
    
    9Amortization of net loss
    
    
    179
    
    
    
    31
    
    
    
    279
    
    
    
    93Net periodic benefit cost
    
    
    951
    
    
    
    550
    
    
    
    2,151
    
    
    
    1,650Total net
periodic benefit cost - pensions plans
    
    $
    2,858
    
    
    $
    3,223
    
    
    $
    8,640
    
    
    $
    9,669Other Postretirement BenefitsService cost
    
    $
    40
    
    
    $
    31
    
    
    $
    120
    
    
    $
    93Interest cost
    
    
    353
    
    
    
    289
    
    
    
    1,059
    
    
    
    867Amortization of prior service cost
    
    
    35
    
    
    
    35
    
    
    
    105
    
    
    
    105Amortization of transition obligation
    
    
    98
    
    
    
    98
    
    
    
    294
    
    
    
    294Amortization of net loss
    
    
    99
    
    
    
    78
    
    
    
    297
    
    
    
    234Net
periodic benefit cost - other
postretirement benefit plans
    
    $
    625
    
    
    $
    531
    
    
    $
    1,875
    
    
    $
    1,593
 12




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##### Table of Contents



We expect to contribute approximately $17 million to our pension plans in 2004,
none of which is required to satisfy minimum funding requirements. The
discretionary
contribution will be paid entirely in cash and, as in prior years, the entire
contribution is anticipated to be paid in December after final review of the
2004 pension obligation. 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. In accordance with FASB Staff
Position 106-2, Accounting and Disclosure Requirement Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2) we
have determined that the benefits we provide are at least actuarially
equivalent to Medicare Part D. The effects of the federal subsidy will result
in an actuarial gain of approximately $1.7 million. The gain will not have a
material effect on our net periodic postretirement cost or on our accumulated
postretirement benefit obligation. Therefore, we will incorporate the effects
of the Act at the next measurement date, which is January 2005. As a result,
we have not reflected the impact of FSP 106-2 in our net periodic
postretirement cost or in our accumulated postretirement benefit obligation as
of September 30, 2004 but will begin to amortize the benefit of the Act
prospectively starting January 1, 2005. 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 September 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 impaired loans acquired. This SOP is effective for impaired
loans acquired in fiscal years beginning after December 15, 2004. We
anticipate that we will first apply the provisions of SOP 03-3 in the pending
acquisition of BostonFed Bancorp, Inc., which is expected to close in the first
quarter of 2005. 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 $98.7 million of
shareholders equity at September 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 approximately 15% (based on a $32.00 per
share market price on announcement date 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 August 25, 2004, Banknorth entered into an agreement and plan of merger with
The Toronto-Dominion Bank (TD), a Canadian chartered bank, Berlin Merger Co.,
a Delaware corporation and a wholly-owned subsidiary of TD, and Banknorth
Delaware Inc., a Delaware corporation and a wholly-owned subsidiary of
Banknorth (Banknorth Delaware). Subject to the terms and conditions in the
TD/Banknorth merger agreement, Banknorth will merge with and into Banknorth
Delaware, and immediately thereafter Berlin Merger Co. will merge with and into
Banknorth Delaware (collectively, the TD mergers). Upon completion of the TD
mergers, each Banknorth shareholder will be entitled to receive, in exchange
for the shares of Banknorth common stock owned by such shareholder, a package
of consideration consisting of (1) a number of TD common shares equal to
0.2351, (2) an amount in cash equal to $12.24 and (3) a number of shares of
Banknorth Delaware common stock equal to 0.49, in each case multiplied by the
number of shares of Banknorth common stock owned by such shareholder, plus cash
in lieu of any fractional share interests. Upon consummation of the TD
mergers, TD will hold 51% of the outstanding common stock of Banknorth
Delaware, which will change its name to TD Banknorth Inc. The transaction is
subject to all required regulatory approvals, approval of the shareholders of
Banknorth and other customary conditions. The transaction is expected to close
in the first quarter of 2005. In October 2004, as part of a deleveraging strategy approved by the board of
directors on October 13, 2004, we sold approximately $1.2 billion of securities
and prepaid a similar amount of borrowings, both of which had a duration of
approximately 3.5 years. This transaction will result in an after-tax charge
of approximately $51.5 million ($79.3 million pre-tax) in the fourth quarter of
2004. The $79.3 million pre-tax charge is comprised of a $17.8 million loss on
sale of securities and a $61.5 million charge to prepay borrowings. 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 include the results of the following acquisitions
since acquisition date, as summarized below: Total AssetsDate
    
    at AcquisitionAcquisition
    
    Acquired
    
    Date(in millions)CCBT Financial Companies, Inc.
    
    
    4/30/2004
    
    
    $
    1,292.9Foxborough Savings Bank
    
    
    4/30/2004
    
    
    
    241.8First & Ocean Bancorp
    
    
    12/31/2003
    
    
    
    274.4American Financial Holdings, Inc.
    
    
    2/14/2003
    
    
    
    2,690.3Insurance agency acquisitions
    
    
    2003-2004
    
    
    
    2.2
 Fully diluted earnings per share were $0.55 and $1.65 for the three and nine
months ended September 30, 2004, compared to $0.55 and $1.59 for the comparable
periods last year. Merger and consolidation costs for the three and nine
months ended September 30, 2004 were $5.6 million and $11.4 million, as
compared to $0.8 million and $6.8 million for the comparable periods last year.
Approximately $3.2 million of current year merger and consolidation costs were
incurred in connection with our proposed transaction with The Toronto-Dominion
Bank (TD). Annualized return on average equity (ROE) and annualized return on average
assets (ROA) were 13.24% and 1.33%, respectively, for the quarter ended
September 30, 2004 and were 14.85% and 1.39%, respectively, for the comparable
quarter last year. ROE and ROA were 13.61% and 1.35%, respectively, for the
nine months ended September 30, 2004, and 14.45% and 1.36%, respectively, for
the nine months ended September 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 $7.5 million in the third quarter ended September
30, 2004 compared to the third quarter last year, an increase of 8%. The
following were significant factors related to the results for the third quarter
of 2004 compared to the third quarter of 2003.  
    
    Net interest income increased 14% over the third quarter of last
year due primarily to a $2.9 billion increase (or 13%) in average
earning assets. The net interest margin of 3.68% for the quarter ended
September 30, 2004 increased 5 basis points from the third quarter of
2003 as the cost of interest-bearing liabilities fell more than the
yield on interest-earning assets. In addition, average
noninterest-bearing deposits increased 25%.
    
    Noninterest income increased 3% over the third quarter last year.
Income from deposit services, insurance brokerage commissions, merchant
and electronic banking services, trust and investment management
services and investment planning services increased by $9 million (or
16%) in the aggregate due in part to acquisitions. Other noninterest
income fell by $6.1 million. See Table 4 for details.
    
    Noninterest expense increased by 15% due primarily to the operating
expenses of acquired banks, increased spending on advertising and
marketing and higher merger and consolidation costs.
    
    Total average loans and leases increased 15% during the third
quarter of 2004 compared to the third quarter of 2003. Excluding the
effects of acquisitions, total average loans and leases 15




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##### Table of Contents



increased 8%,
as strong commercial and consumer loan growth was offset by residential
loan declines.
    
    Total average deposits increased 9% during the third quarter of
2004 compared to the third quarter of 2003 primarily due to
acquisitions. Excluding the effects of acquisitions, total average
deposits increased $217 million, or 1%, as average checking deposits
increased 14% and savings and money market deposits increased 4%, while
certificates of deposit declined 13%.
    
    In October 2004, we implemented a deleveraging strategy pursuant to
which we sold approximately $1.2 billion of securities with a weighted
average yield of 2.76% and prepaid a similar amount of borrowings with
a weighted average rate of 4.77%, both of which had a duration of
approximately 3.5 years. A $51.5 million after-tax loss will be
incurred in the fourth quarter. This transaction, which was approved
by the board of directors on October 13, 2004, is expected to improve
prospective annual net interest income by approximately $24 million (or
approximately $0.09 per diluted share assuming a 34% effective tax rate
and 177 million diluted shares outstanding). Selected quarterly data, ratios and per share data are provided in Table 1. 16




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##### Table of Contents



TABLE 1 - Selected Quarterly Data 2004
    
    2003Third
    
    Second
    
    First
    
    Fourth
    
    ThirdCondensed Income StatementInterest income
    
    
    
    
    
    $
    325,361
    
    
    $
    309,146
    
    
    $
    292,652
    
    
    $
    290,414
    
    
    $
    290,750Interest expense
    
    
    
    
    
    
    85,701
    
    
    
    79,096
    
    
    
    75,043
    
    
    
    77,126
    
    
    
    80,918Net interest income
    
    
    (A
    )
    
    
    239,660
    
    
    
    230,050
    
    
    
    217,609
    
    
    
    213,288
    
    
    
    209,832Provision for loan and lease losses
    
    
    
    
    
    
    10,670
    
    
    
    9,500
    
    
    
    9,500
    
    
    
    10,400
    
    
    
    10,500Net interest income after provision
for loan and lease losses
    
    
    
    
    
    
    228,990
    
    
    
    220,550
    
    
    
    208,109
    
    
    
    202,888
    
    
    
    199,332Noninterest income
    
    
    (B
    )
    
    
    91,513
    
    
    
    89,476
    
    
    
    88,217
    
    
    
    84,435
    
    
    
    88,656Noninterest expense, excluding merger and
consolidation costs
    
    
    (C
    )
    
    
    168,595
    
    
    
    159,691
    
    
    
    158,105
    
    
    
    154,360
    
    
    
    150,839Merger and consolidation costs
    
    
    (D
    )
    
    
    5,603
    
    
    
    4,135
    
    
    
    1,614
    
    
    
    1,316
    
    
    
    808Income before income taxes
    
    
    
    
    
    
    146,305
    
    
    
    146,200
    
    
    
    136,607
    
    
    
    131,647
    
    
    
    136,341Income tax expense
    
    
    
    
    
    
    48,534
    
    
    
    50,353
    
    
    
    46,280
    
    
    
    40,085
    
    
    
    46,063Net income
    
    
    
    
    
    $
    97,771
    
    
    $
    95,847
    
    
    $
    90,327
    
    
    $
    91,562
    
    
    $
    90,278Weighted average shares outstanding:Basic
    
    
    
    
    
    
    173,271
    
    
    
    169,637
    
    
    
    162,965
    
    
    
    162,149
    
    
    
    161,517Diluted
    
    
    
    
    
    
    176,756
    
    
    
    173,109
    
    
    
    166,657
    
    
    
    165,685
    
    
    
    164,446Basic earnings per share
    
    
    
    
    
    $
    0.56
    
    
    $
    0.57
    
    
    $
    0.55
    
    
    $
    0.56
    
    
    $
    0.56Diluted earnings per share
    
    
    
    
    
    $
    0.55
    
    
    $
    0.55
    
    
    $
    0.54
    
    
    $
    0.55
    
    
    $
    0.55Financial RatiosReturn on average assets (1)
    
    
    
    
    
    
    1.33
    %
    
    
    1.36
    %
    
    
    1.37
    %
    
    
    1.39
    %
    
    
    1.39
    %Return on average equity (1)
    
    
    
    
    
    
    13.24
    %
    
    
    13.54
    %
    
    
    14.13
    %
    
    
    14.72
    %
    
    
    14.85
    %Net interest margin (fully-taxable equivalent) (1)
    
    
    
    
    
    
    3.68
    %
    
    
    3.66
    %
    
    
    3.68
    %
    
    
    3.65
    %
    
    
    3.63
    %Noninterest income as a percent of total income (2)
    
    
    
    
    
    
    27.63
    %
    
    
    28.00
    %
    
    
    28.85
    %
    
    
    28.36
    %
    
    
    29.70
    %Efficiency ratio (3)
    
    
    
    
    
    
    52.60
    %
    
    
    51.27
    %
    
    
    52.23
    %
    
    
    52.29
    %
    
    
    50.81
    %Per Share DataBook value per share
    
    
    
    
    
    $
    17.50
    
    
    $
    16.61
    
    
    $
    16.26
    
    
    $
    15.54
    
    
    $
    15.32Dividends per share
    
    
    
    
    
    $
    0.20
    
    
    $
    0.195
    
    
    $
    0.195
    
    
    $
    0.19
    
    
    $
    0.19
   (1)
    
    Annualized.(2)
    
    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).(3)
    
    Represents noninterest expense as a percentage of net interest income and noninterest income.
Efficiency ratio is calculated as (C+D) divided by (A+B). 17




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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 third quarter of 2004
increased $29.9 million, or 14%, compared to the third 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 allows us to be less reliant on higher-costing
certificates of deposit. Together, these factors more than offset the negative
effects of lower prevailing interest rates. Fully-taxable equivalent interest income increased by $34.7 million in the
third quarter of 2004, as compared to the third quarter of 2003, as a result of
a $2.9 billion increase in total earning assets. This increase was offset in
part by a decrease in the weighted average yield on earning assets from 5.02%
to 4.98% during the three months ended September 30, 2003 and 2004,
respectively. 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 increased by $4.8 million in the third quarter of 2004, as
compared to the third quarter of 2003, primarily as a result of a $2.1 billion,
or 10%, increase in the average balance of interest-bearing liabilities during
the third quarter of 2004, as compared to 2003, resulting from acquisitions
and, to a lesser extent, internal growth. This increase was offset in part by
a decrease in the weighted average rate paid on interest-bearing liabilities
from 1.63% to 1.56% during the three months ended September 30, 2003 and 2004,
respectively, a decline of 4%. Average deposits increased by $1.7 billion, of
which approximately $1.5 billion came from acquisitions. Excluding
acquisitions, average deposits increased by $217 million, or 1.1%, as growth in
demand and money market accounts more than offset a decline in higher-costing
certificates of deposit. Average borrowings increased $1.2 billion, or 23%, in
the third quarter of 2004 compared to the third 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, increased to 3.68%
in the third quarter of 2004 from 3.63% in the third quarter of 2003 primarily
due to a 7 basis point decrease in the cost of funds. Interest rate spread, which represents the difference between the yield earned
on our interest-earning assets and the rate paid on our interest-bearing
liabilities, increased to 3.42% from 3.39% on a fully-taxable equivalent basis
during the three months ended September 30, 2003 and 2004, respectively, as a 4
basis point decrease in the weighted
average yield on interest-earning assets was more than offset by a 7 basis
point decrease in the weighted average rate paid on interest-bearing
liabilities. See Asset-Liability Management below. Our fully-taxable equivalent net interest income for the nine months ended
September 30, 2004 increased $60.2 million compared to the nine months ended
September 30, 2003. The net interest margin was 3.67% for the nine months
ended September 30, 2004 and 2003, and the fully-taxable equivalent interest
rate spread increased from 3.40% to 3.44% during the same period because a 32
basis point decrease in the weighted average yield on interest-earning assets
was more than offset by a 36 basis point decrease in the weighted average rate
paid on interest-bearing liabilities. Average net earning assets increased
$692.2 million in the nine months ended September 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 September 30, 2004 and 2003 and for the nine months ended
September 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. 18




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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 Third Quarter
    
    2003 Third QuarterYield/
    
    
    
    
    
    
    
    
    
    Yield/Average Balance
    
    Interest
    
    Rate (1)
    
    Average Balance
    
    Interest
    
    Rate (1)Loans and leases (2):Residential real estate mortgages
    
    $
    3,135,400
    
    
    $
    38,768
    
    
    
    4.95
    %
    
    $
    2,852,568
    
    
    $
    38,740
    
    
    
    5.43
    %Commercial real estate mortgages
    
    
    6,158,271
    
    
    
    89,116
    
    
    
    5.76
    
    
    
    5,263,002
    
    
    
    77,962
    
    
    
    5.88Commercial business loans and leases
    
    
    3,827,919
    
    
    
    47,550
    
    
    
    4.93
    
    
    
    3,216,254
    
    
    
    40,837
    
    
    
    5.04Consumer loans and leases
    
    
    5,185,483
    
    
    
    66,458
    
    
    
    5.10
    
    
    
    4,577,421
    
    
    
    62,684
    
    
    
    5.43Total loans and leases
    
    
    18,307,073
    
    
    
    241,892
    
    
    
    5.26
    
    
    
    15,909,245
    
    
    
    220,223
    
    
    
    5.50Investment securities (3)
    
    
    7,822,646
    
    
    
    85,126
    
    
    
    4.35
    
    
    
    7,270,800
    
    
    
    72,037
    
    
    
    3.96Federal funds sold and other short-term investments
    
    
    5,609
    
    
    
    22
    
    
    
    1.55
    
    
    
    16,113
    
    
    
    55
    
    
    
    1.36Total earning assets
    
    
    26,135,328
    
    
    
    327,040
    
    
    
    4.98
    
    
    
    23,196,158
    
    
    
    292,315
    
    
    
    5.02Bank-owned life insurance
    
    
    508,425
    
    
    
    
    
    
    
    
    
    
    
    478,572Noninterest-earning assets
    
    
    2,532,355
    
    
    
    
    
    
    
    
    
    
    
    2,139,519Total assets
    
    $
    29,176,108
    
    
    
    
    
    
    
    
    
    
    $
    25,814,249Interest-bearing deposits:Regular savings
    
    $
    2,603,474
    
    
    
    1,887
    
    
    
    0.29
    
    
    $
    2,474,169
    
    
    
    2,502
    
    
    
    0.40NOW and money market accounts
    
    
    7,884,927
    
    
    
    15,758
    
    
    
    0.80
    
    
    
    6,815,603
    
    
    
    13,727
    
    
    
    0.80Certificates of deposit
    
    
    4,672,879
    
    
    
    22,475
    
    
    
    1.91
    
    
    
    5,053,277
    
    
    
    28,935
    
    
    
    2.27Brokered deposits
    
    
    506
    
    
    
    2
    
    
    
    1.63
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing deposits
    
    
    15,161,786
    
    
    
    40,122
    
    
    
    1.05
    
    
    
    14,343,049
    
    
    
    45,164
    
    
    
    1.25Borrowed funds
    
    
    6,652,815
    
    
    
    45,579
    
    
    
    2.73
    
    
    
    5,407,580
    
    
    
    35,754
    
    
    
    2.63Total interest-bearing liabilities
    
    
    21,814,601
    
    
    
    85,701
    
    
    
    1.56
    
    
    
    19,750,629
    
    
    
    80,918
    
    
    
    1.63Non-interest bearing deposits
    
    
    4,236,569
    
    
    
    
    
    
    
    
    
    
    
    3,388,018Other liabilities
    
    
    186,203
    
    
    
    
    
    
    
    
    
    
    
    263,171Shareholders equity
    
    
    2,938,735
    
    
    
    
    
    
    
    
    
    
    
    2,412,431Total liabilities and shareholders equity
    
    $
    29,176,108
    
    
    
    
    
    
    
    
    
    
    $
    25,814,249Net earning assets
    
    $
    4,320,727
    
    
    
    
    
    
    
    
    
    
    $
    3,445,529Net interest income (fully-taxable equivalent)
    
    
    
    
    
    
    241,339
    
    
    
    
    
    
    
    
    
    
    
    211,397Less: fully-taxable equivalent adjustments
    
    
    
    
    
    
    (1,679
    )
    
    
    
    
    
    
    
    
    
    
    (1,565
    )Net interest income
    
    
    
    
    
    $
    239,660
    
    
    
    
    
    
    
    
    
    
    $
    209,832Net interest rate spread (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.42
    %
    
    
    
    
    
    
    
    
    
    
    3.39
    %Net interest margin (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.68
    %
    
    
    
    
    
    
    
    
    
    
    3.63
    %
   (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



TABLE 2  Average Balances, Yields and Rates Nine Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2003Yield/
    
    
    
    
    
    
    
    
    
    Yield/Average Balance
    
    Interest
    
    Rate (1)
    
    Average Balance
    
    Interest
    
    Rate (1)Loans and leases (2):Residential real estate mortgages
    
    $
    2,950,094
    
    
    $
    111,512
    
    
    
    5.04
    %
    
    $
    2,880,776
    
    
    $
    123,538
    
    
    
    5.72
    %Commercial real estate mortgages
    
    
    5,861,892
    
    
    
    251,689
    
    
    
    5.74
    
    
    
    5,084,858
    
    
    
    234,115
    
    
    
    6.16Commercial business loans and leases
    
    
    3,630,870
    
    
    
    131,143
    
    
    
    4.82
    
    
    
    3,126,338
    
    
    
    121,416
    
    
    
    5.19Consumer loans and leases
    
    
    5,017,428
    
    
    
    190,886
    
    
    
    5.08
    
    
    
    4,410,562
    
    
    
    189,007
    
    
    
    5.73Total loans and leases
    
    
    17,460,284
    
    
    
    685,230
    
    
    
    5.24
    
    
    
    15,502,534
    
    
    
    668,076
    
    
    
    5.76Investment securities (3)
    
    
    7,680,939
    
    
    
    246,590
    
    
    
    4.28
    
    
    
    7,474,971
    
    
    
    238,664
    
    
    
    4.26Federal funds sold and other short-term investments
    
    
    5,562
    
    
    
    53
    
    
    
    1.27
    
    
    
    12,922
    
    
    
    134
    
    
    
    1.39Total earning assets
    
    
    25,146,785
    
    
    
    931,873
    
    
    
    4.95
    
    
    
    22,990,427
    
    
    
    906,874
    
    
    
    5.27Bank-owned life insurance
    
    
    498,736
    
    
    
    
    
    
    
    
    
    
    
    459,049Noninterest-earning assets
    
    
    2,391,826
    
    
    
    
    
    
    
    
    
    
    
    2,016,447Total assets
    
    $
    28,037,347
    
    
    
    
    
    
    
    
    
    
    $
    25,465,923Interest-bearing deposits:Regular savings
    
    $
    2,562,340
    
    
    
    5,655
    
    
    
    0.29
    
    
    $
    2,373,161
    
    
    
    8,667
    
    
    
    0.49NOW and money market accounts
    
    
    7,551,311
    
    
    
    44,878
    
    
    
    0.79
    
    
    
    6,540,686
    
    
    
    45,342
    
    
    
    0.93Certificates of deposit
    
    
    4,684,097
    
    
    
    67,919
    
    
    
    1.94
    
    
    
    5,103,328
    
    
    
    93,281
    
    
    
    2.44Brokered deposits
    
    
    170
    
    
    
    2
    
    
    
    1.63
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing deposits
    
    
    14,797,918
    
    
    
    118,454
    
    
    
    1.07
    
    
    
    14,017,175
    
    
    
    147,290
    
    
    
    1.40Borrowed funds
    
    
    6,394,319
    
    
    
    121,386
    
    
    
    2.53
    
    
    
    5,710,875
    
    
    
    127,722
    
    
    
    2.99Total interest-bearing liabilities
    
    
    21,192,237
    
    
    
    239,840
    
    
    
    1.51
    
    
    
    19,728,050
    
    
    
    275,012
    
    
    
    1.87Non-interest bearing deposits
    
    
    3,875,740
    
    
    
    
    
    
    
    
    
    
    
    3,132,825Other liabilities
    
    
    182,209
    
    
    
    
    
    
    
    
    
    
    
    206,378Shareholders equity
    
    
    2,787,161
    
    
    
    
    
    
    
    
    
    
    
    2,398,670Total liabilities and shareholders equity
    
    $
    28,037,347
    
    
    
    
    
    
    
    
    
    
    $
    25,465,923Net earning assets
    
    $
    3,954,548
    
    
    
    
    
    
    
    
    
    
    $
    3,262,377Net interest income (fully-taxable equivalent)
    
    
    
    
    
    
    692,033
    
    
    
    
    
    
    
    
    
    
    
    631,862Less: fully-taxable equivalent adjustments
    
    
    
    
    
    
    (4,714
    )
    
    
    
    
    
    
    
    
    
    
    (4,319
    )Net interest income
    
    
    
    
    
    $
    687,319
    
    
    
    
    
    
    
    
    
    
    $
    627,543Net interest rate spread (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.44
    %
    
    
    
    
    
    
    
    
    
    
    3.40
    %Net interest margin (fully-taxable equivalent)
    
    
    
    
    
    
    
    
    
    
    3.67
    %
    
    
    
    
    
    
    
    
    
    
    3.67
    %
   (1)
    
    Annualized.(2)
    
    Loans and leases include loans held for sale.(3)
    
    Includes securities available for sale and held to maturity. 20




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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
    
    Nine Months EndedSeptember 30, 2004 vs. September 30, 2003
    
    September 30, 2004 vs. September 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
    
    $
    33,150
    
    
    ($
    9,598
    )
    
    ($
    1,883
    )
    
    $
    21,669
    
    
    $
    84,421
    
    
    ($
    60,350
    )
    
    ($
    6,917
    )
    
    $
    17,154Investment securities
    
    
    5,493
    
    
    
    7,128
    
    
    
    468
    
    
    
    13,089
    
    
    
    6,569
    
    
    
    1,119
    
    
    
    238
    
    
    
    7,926Federal funds sold and
other short-term investements
    
    
    (36
    )
    
    
    8
    
    
    
    (5
    )
    
    
    (33
    )
    
    
    (77
    )
    
    
    (12
    )
    
    
    8
    
    
    
    (81
    )Total interest income
    
    
    38,607
    
    
    
    (2,462
    )
    
    
    (1,420
    )
    
    
    34,725
    
    
    
    90,913
    
    
    
    (59,243
    )
    
    
    (6,671
    )
    
    
    24,999Interest expense:Interest-bearing deposits:Regular savings
    
    
    130
    
    
    
    (684
    )
    
    
    (61
    )
    
    
    (615
    )
    
    
    694
    
    
    
    (3,553
    )
    
    
    (153
    )
    
    
    (3,012
    )NOW and money market accounts
    
    
    2,150
    
    
    
    0
    
    
    
    (119
    )
    
    
    2,031
    
    
    
    7,036
    
    
    
    (6,855
    )
    
    
    (645
    )
    
    
    (464
    )Certificates of deposit
    
    
    (2,171
    )
    
    
    (4,573
    )
    
    
    284
    
    
    
    (6,460
    )
    
    
    (7,658
    )
    
    
    (19,103
    )
    
    
    1,399
    
    
    
    (25,362
    )Brokered deposits
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    2
    
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    2Total interest-bearing deposits
    
    
    109
    
    
    
    (5,257
    )
    
    
    106
    
    
    
    (5,042
    )
    
    
    72
    
    
    
    (29,511
    )
    
    
    603
    
    
    
    (28,836
    )Borrowed funds
    
    
    8,232
    
    
    
    1,359
    
    
    
    234
    
    
    
    9,825
    
    
    
    15,298
    
    
    
    (19,667
    )
    
    
    (1,967
    )
    
    
    (6,336
    )Total interest expense
    
    
    8,341
    
    
    
    (3,898
    )
    
    
    340
    
    
    
    4,783
    
    
    
    15,370
    
    
    
    (49,178
    )
    
    
    (1,364
    )
    
    
    (35,172
    )Net interest income (fully
taxable equivalent)
    
    $
    30,266
    
    
    $
    1,436
    
    
    ($
    1,760
    )
    
    $
    29,942
    
    
    $
    75,543
    
    
    ($
    10,065
    )
    
    ($
    5,307
    )
    
    $
    60,171
   (1)
    
    Volume increases include the effects of acquisitions, including the acquisition of Foxborough Savings Bank and
CCBT Financial Companies, Inc. on April 30, 2004, First & Ocean Bancorp on December 31, 2003 and American
Financial Holdings, Inc. on February 14, 2003.(2)
    
    Includes changes in interest income and expense not due solely to volume or rate changes. 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 loan and lease losses in future periods. We provided $10.7 million and $10.5 million for loan and lease losses in the
quarters ended September 30, 2004 and 2003, respectively, and $29.7 million and
$31.9 million for the nine months ended September 30, 2004 and 2003,
respectively. Net charge-offs totaled $8.8 million in the third quarter of
2004 compared to $8.2 million in the third quarter of 2003. The coverage ratio
(ratio of the allowance for loan and lease losses to nonperforming loans) was
378% at September 30, 2004, as compared to 389% at December 31, 2003 and 344%
at September 30, 2003. At September 30, 2004, the allowance for credit losses
amounted to $249.5 million, or 1.36% of total portfolio loans and leases, as
compared to $232.3 million, or 1.42%, at December 31, 2003 and $229.6 million,
or 1.44% at September 30, 2003. See Risk Management below for further
information on the provision for loan and lease losses, net charge- 21




---



##### Table of Contents



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. Noninterest Income The following table presents noninterest income for the periods indicated. Table 4  Noninterest Income Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    Change2004
    
    2003
    
    Amount
    
    Percent
    
    2004
    
    2003
    
    Amount
    
    PercentNoninterest income:Deposit services
    
    $
    27,583
    
    
    $
    25,167
    
    
    $
    2,416
    
    
    
    10
    %
    
    $
    80,995
    
    
    $
    71,441
    
    
    $
    9,554
    
    
    
    13
    %Insurance brokerage commissions
    
    
    12,417
    
    
    
    10,930
    
    
    
    1,487
    
    
    
    14
    %
    
    
    38,431
    
    
    
    34,235
    
    
    
    4,196
    
    
    
    12
    %Merchant and electronic banking income,
net
    
    
    13,723
    
    
    
    11,115
    
    
    
    2,608
    
    
    
    23
    %
    
    
    37,196
    
    
    
    31,235
    
    
    
    5,961
    
    
    
    19
    %Trust and investment management services
    
    
    10,280
    
    
    
    8,178
    
    
    
    2,102
    
    
    
    26
    %
    
    
    29,300
    
    
    
    23,486
    
    
    
    5,814
    
    
    
    25
    %Bank-owned life insurance
    
    
    5,732
    
    
    
    5,785
    
    
    
    (53
    )
    
    
    (1
    %)
    
    
    17,503
    
    
    
    16,952
    
    
    
    551
    
    
    
    3
    %Investment planning services
    
    
    4,634
    
    
    
    3,761
    
    
    
    873
    
    
    
    23
    %
    
    
    14,619
    
    
    
    10,928
    
    
    
    3,691
    
    
    
    34
    %Net securities gains
    
    
    3,124
    
    
    
    3,573
    
    
    
    (449
    )
    
    
    (13
    %)
    
    
    10,060
    
    
    
    39,778
    
    
    
    (29,718
    )
    
    
    (75
    %)Other noninterest incomeCovered call premiums
    
    
    5,661
    
    
    
    7,152
    
    
    
    (1,491
    )
    
    
    (21
    %)
    
    
    14,039
    
    
    
    21,390
    
    
    
    (7,351
    )
    
    
    (34
    %)Loan fee income
    
    
    5,841
    
    
    
    7,376
    
    
    
    (1,535
    )
    
    
    (21
    %)
    
    
    19,527
    
    
    
    19,456
    
    
    
    71
    
    
    
    0
    %Mortgage banking services income
    
    
    1,913
    
    
    
    3,087
    
    
    
    (1,174
    )
    
    
    (38
    %)
    
    
    5,249
    
    
    
    9,328
    
    
    
    (4,079
    )
    
    
    (44
    %)Venture capital write-downs
    
    
    (1,664
    )
    
    
    (374
    )
    
    
    (1,290
    )
    
    
    (345
    %)
    
    
    (2,189
    )
    
    
    (989
    )
    
    
    (1,200
    )
    
    
    (121
    %)Miscellaneous income
    
    
    2,269
    
    
    
    2,906
    
    
    
    (637
    )
    
    
    (22
    %)
    
    
    4,477
    
    
    
    5,483
    
    
    
    (1,006
    )
    
    
    (18
    %)Total other noninterest income
    
    
    14,020
    
    
    
    20,147
    
    
    
    (6,127
    )
    
    
    (30
    %)
    
    
    41,103
    
    
    
    54,668
    
    
    
    (13,565
    )
    
    
    (25
    %)Total noninterest income
    
    $
    91,513
    
    
    $
    88,656
    
    
    $
    2,857
    
    
    
    3
    %
    
    $
    269,207
    
    
    $
    282,723
    
    
    ($
    13,516
    )
    
    
    (5
    %)
 Deposit services income for the three months ended September 30, 2004 increased
$2.4 million, or 10%, compared to the same period last year, primarily due to
volume and fee increases in deposit accounts and an increase in overdraft fees.
This increase was partially offset by a decline in service charge income on
business accounts resulting from the introduction of Free Business Checking
in 2004. For the nine months ended September 30, 2004, deposit services income
increased $9.6 million, or 13%, compared to the same period last year,
primarily due to volume and fee increases on deposit accounts and an increase
in overdraft fees. Acquisitions comprised a portion of the increased number of
deposit accounts, increased overdraft fees and increased service charges. Insurance brokerage commissions in the three months ended September 30, 2004
increased $1.5 million, or 14%, compared to the same period last year. In the
nine months ended September 30, 2004, insurance brokerage commissions increased
$4.2 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 as
well as from agency acquisitions in 2004 and 2003. Merchant and electronic banking income represents fees and interchange income
generated by the use of our ATMs and debit cards issued by us, along with
charges to merchants for credit card transactions processed, net of third-party
costs directly attributable to handling these transactions. Merchant and
electronic banking income in the three months ended September 30, 2004
increased $2.6 million, or 23%, compared to the same period last year and
increased $6.0 million, or 19%, in the nine months ended September 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. Trust and investment management services income increased $2.1 million, or 26%,
in the three months ended September 30, 2004 and $5.8 million, or 25%, in the
nine months ended September 30, 2004 compared to the same respective periods
last year. These increases were primarily due to an increase in assets under
management, which 22




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##### Table of Contents



increased to $9.9 billion at September 30, 2004 from $8.7
billion at September 30, 2003, an increase of $1.2 billion. The acquisition
of CCBT in April 2004 accounted for $773 million of the increase in trust
assets under management. Income from bank-owned life insurance (BOLI) for the three months ended
September 30, 2004 was essentially unchanged form the same period last year but
increased $551 thousand, or 3%, in the nine months ended September 30, 2004
compared to the same respective period last year. Income from BOLI represents
the increase in the cash surrender value of life insurance policies on the
lives of certain employees who have consented to allowing Banknorth, NA, our
wholly-owned banking subsidiary, to be the beneficiary of such policies. The
cash surrender value of our BOLI was $517.4 million at September 30, 2004
compared to $488.8 million at December 31, 2003. The $28.6 million increase
was primarily comprised of amounts from acquisitions and increases in the cash
surrender value of policies, which were partially offset by death claims. 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 September 30, 2004. Investment in BOLI provides us a means to
mitigate increasing employee benefit costs. For the third quarter of 2004, the
average carrying value of BOLI was $508 million compared to $479 million for
the third quarter of 2003. Investment planning services income increased $873 thousand, or 23%, in the
three months ended September 30, 2004 and $3.7 million, or 34%, in the nine
months ended September 30, 2004 compared to the same respective periods last
year. These increases were primarily due to commissions earned from increased
sales of third party fixed annuities. The CCBT acquisition generated
approximately $300 thousand of investment planning revenues for the three
months ended September 30, 2004. Net securities gains decreased $449 thousand, or 13%, in the three months ended
September 30, 2004 and $29.7 million, or 75%, in the nine months ended
September 30, 2004 compared to the same respective periods last year. The 2003
results included $29.2 million of gains 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 $6.1 million, or 30%, in the three months
ended September 30, 2004 and $13.6 million, or 25%, in the nine months ended
September 30, 2004 compared to the same respective periods last year. These
decreases were primarily due to lower income from covered calls, loan fees,
mortgage banking and venture capital investments. Premiums received on covered
call options declined by $1.5 million and $7.4 million during the three and
nine months ended September 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 nine months ended September 30, 2004 compared to the same
period last year reduced the income opportunities related to covered call
options. Loan fees for the three-month period declined primarily due to lower
commercial loan swap fees received on fewer brokered swaps. Mortgage banking
services income declines were due largely to reduced volumes of residential
loan originations and loan sales in the secondary market. 23




---



##### Table of Contents



Noninterest Expense The following table presents noninterest expense during the periods indicated. Table 5  Noninterest Expense Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    Change2004
    
    2003
    
    Amount
    
    Percent
    
    2004
    
    2003
    
    Amount
    
    PercentNoninterest expense:Compensation and employee benefits
    
    $
    91,935
    
    
    $
    82,230
    
    
    $
    9,705
    
    
    
    12
    %
    
    $
    266,473
    
    
    $
    245,170
    
    
    $
    21,303
    
    
    
    9
    %Occupancy
    
    
    15,866
    
    
    
    14,520
    
    
    
    1,346
    
    
    
    9
    %
    
    
    47,274
    
    
    
    44,584
    
    
    
    2,690
    
    
    
    6
    %Equipment
    
    
    12,074
    
    
    
    11,668
    
    
    
    406
    
    
    
    3
    %
    
    
    35,777
    
    
    
    35,344
    
    
    
    433
    
    
    
    1
    %Data processing
    
    
    11,118
    
    
    
    10,466
    
    
    
    652
    
    
    
    6
    %
    
    
    31,573
    
    
    
    31,059
    
    
    
    514
    
    
    
    2
    %Advertising and marketing
    
    
    6,278
    
    
    
    5,553
    
    
    
    725
    
    
    
    13
    %
    
    
    20,105
    
    
    
    16,569
    
    
    
    3,536
    
    
    
    21
    %Amortization of identifiable
intangible assets
    
    
    2,379
    
    
    
    2,320
    
    
    
    59
    
    
    
    3
    %
    
    
    6,367
    
    
    
    6,622
    
    
    
    (255
    )
    
    
    (4
    %)Merger and consolidation costs
    
    
    5,603
    
    
    
    808
    
    
    
    4,795
    
    
    
    593
    %
    
    
    11,351
    
    
    
    6,788
    
    
    
    4,563
    
    
    
    67
    %Prepayment penalties on borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,490
    
    
    
    (30,490
    )
    
    
    (100
    %)Other noninterest expense:Telephone
    
    
    3,829
    
    
    
    3,666
    
    
    
    163
    
    
    
    4
    %
    
    
    10,893
    
    
    
    9,729
    
    
    
    1,164
    
    
    
    12
    %Office supplies
    
    
    2,829
    
    
    
    2,611
    
    
    
    218
    
    
    
    8
    %
    
    
    7,823
    
    
    
    7,928
    
    
    
    (105
    )
    
    
    (1
    %)Postage and freight
    
    
    2,742
    
    
    
    2,246
    
    
    
    496
    
    
    
    22
    %
    
    
    7,887
    
    
    
    8,543
    
    
    
    (656
    )
    
    
    (8
    %)Miscellaneous loan costs
    
    
    1,405
    
    
    
    1,729
    
    
    
    (324
    )
    
    
    (19
    %)
    
    
    3,190
    
    
    
    4,240
    
    
    
    (1,050
    )
    
    
    (25
    %)Deposits and other assessments
    
    
    963
    
    
    
    963
    
    
    
    
    
    
    
    
    
    
    
    2,811
    
    
    
    2,836
    
    
    
    (25
    )
    
    
    (1
    %)Collection and carrying costs
of non-performing assets
    
    
    628
    
    
    
    709
    
    
    
    (81
    )
    
    
    (11
    %)
    
    
    1,944
    
    
    
    1,964
    
    
    
    (20
    )
    
    
    (1
    %)Miscellaneous
    
    
    16,549
    
    
    
    12,158
    
    
    
    4,391
    
    
    
    36
    %
    
    
    44,274
    
    
    
    33,728
    
    
    
    10,546
    
    
    
    31
    %Total other noninterest expense
    
    
    28,945
    
    
    
    24,082
    
    
    
    4,863
    
    
    
    20
    %
    
    
    78,822
    
    
    
    68,968
    
    
    
    9,854
    
    
    
    14
    %Total noninterest expense
    
    $
    174,198
    
    
    $
    151,647
    
    
    $
    22,551
    
    
    
    15
    %
    
    $
    497,742
    
    
    $
    485,594
    
    
    $
    12,148
    
    
    
    3
    %
 Noninterest expense increased $22.6 million, or 15%, in the third quarter of
2004 and $12.1 million, or 3%, in the nine months ended September 30, 2004
compared to the same respective periods last year. The nine months ended
September 30, 2003 results included $30.5 million of prepayment penalties,
$28.5 million of which related to a deleveraging program implemented in that
period. The increases in 2004 were primarily due to the operating costs of
acquired banks (staff and facilities costs), advertising and marketing costs,
merger and consolidation costs and miscellaneous expenses. Compensation and employee benefits expense increased $9.7 million, or 12%, in
the third quarter of 2004 and $21.3 million, or 9%, in the nine months ended
September 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. The nine-month increase was partially
offset by reduced expense associated with our self-funded health plan resulting
from a $3.2 million benefit in the second quarter of 2004 related to favorable
claims experience covering the period July 2002 (plan inception) through June
30, 2004. Advertising and marketing expense increased $725 thousand, or 13%, in the third
quarter of 2004 and $3.5 million, or 21%, in the nine months ended September
30, 2004 compared to the same respective periods last year. The increase in
the third quarter of 2004 compared to the same period last year was due to a
2004 summer campaign of promotional L.L. Bean bags as well as increased media
advertising in the Massachusetts and Connecticut markets. The increase for the
nine months ended September 30, 2004 compared to the same period last year was
primarily due to expenses incurred to identify and attract customers who were
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. 24




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##### Table of Contents



Merger and consolidation costs increased $4.8 million in the third quarter of
2004 and increased $4.6 million in the nine months ended September 30, 2004
compared to the same respective periods last year due to costs incurred in
connection with our proposed transaction with TD and our acquisitions of CCBT
Financial Companies, Inc. and Foxborough Savings Bank in April 2004. The
following table summarizes merger and consolidation costs for the three and
nine months ended September 30, 2004 and 2003. Table 6  Merger
and consolidation costs
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003The Toronto-Dominion Bank Merger ChargesInvestment banker fees and other professional costs
    
    $
    3,190
    
    
    $
    
    
    
    $
    3,190
    
    
    $
    3,190
    
    
    
    
    
    
    
    3,190
    
    
    
    Foxborough Savings Bank Merger ChargesPersonnel costs
    
    
    275
    
    
    
    
    
    
    
    492
    
    
    
    Systems conversion and integration/customer communications
    
    
    688
    
    
    
    
    
    
    
    1,227
    
    
    
    Other costs
    
    
    223
    
    
    
    
    
    
    
    301
    
    
    
    1,186
    
    
    
    
    
    
    
    2,020
    
    
    
    CCBT Financial Companies, Inc. Merger ChargesPersonnel costs
    
    
    393
    
    
    
    
    
    
    
    1,296
    
    
    
    Systems conversion and integration/customer communications
    
    
    247
    
    
    
    
    
    
    
    2,426
    
    
    
    Other costs
    
    
    271
    
    
    
    
    
    
    
    1,233
    
    
    
    911
    
    
    
    
    
    
    
    4,955
    
    
    
    BostonFed Bancorp, Inc. Merger ChargesSystems conversion and integration/customer communications
    
    
    169
    
    
    
    
    
    
    
    169
    
    
    
    Other costs
    
    
    44
    
    
    
    
    
    
    
    46
    
    
    
    213
    
    
    
    
    
    
    
    215
    
    
    
    Other CostsAmerican merger charges
    
    
    70
    
    
    
    432
    
    
    
    257
    
    
    
    4,779First & Ocean Bancorp merger charges
    
    
    30
    
    
    
    
    
    
    
    1,142
    
    
    
    Warren Bancorp, Inc. merger charges
    
    
    
    
    
    
    345
    
    
    
    29
    
    
    
    2,399Bancorp Connecticut and Ipswich Bancshares, Inc. merger charges
    
    
    3
    
    
    
    16
    
    
    
    11
    
    
    
    121Andover Bancorp, Inc./MetroWest Bank merger charges
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    6Reverse auto
lease reserves (Banknorth - Vermont)
    
    
    
    
    
    
    
    
    
    
    (470
    )
    
    
    (615
    )Other costs
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    98103
    
    
    
    808
    
    
    
    971
    
    
    
    6,788Total merger and consolidation costs
    
    $
    5,603
    
    
    $
    808
    
    
    $
    11,351
    
    
    $
    6,788
  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
    
    9/30/04The Toronto-Dominion Bank Merger
    
    $
    
    
    
    $
    
    
    
    $
    3,190
    
    
    ($
    2,567
    )
    
    $
    
    
    
    $
    623Boston Fed Merger
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    (215
    )
    
    
    
    
    
    
    Foxborough Merger
    
    
    
    
    
    
    1,196
    
    
    
    2,020
    
    
    
    (2,645
    )
    
    
    (87
    )
    
    
    484CCBT Financial Companies, Inc. Merger
    
    
    
    
    
    
    10,407
    
    
    
    4,955
    
    
    
    (12,829
    )
    
    
    (370
    )
    
    
    2,163First & Ocean Bancorp Merger
    
    
    250
    
    
    
    1,715
    
    
    
    1,143
    
    
    
    (2,856
    )
    
    
    
    
    
    
    252American Financial Holdings,
Inc. Merger
    
    
    266
    
    
    
    
    
    
    
    257
    
    
    
    (257
    )
    
    
    (266
    )
    
    
    Warren Bancorp Merger
    
    
    27
    
    
    
    
    
    
    
    29
    
    
    
    (29
    )
    
    
    (27
    )
    
    
    Bancorp Connecticut Merger
    
    
    466
    
    
    
    
    
    
    
    12
    
    
    
    (445
    )
    
    
    
    
    
    
    33Andover / MetroWest Mergers
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    79Other merger and consolidation costs
    
    
    4
    
    
    
    
    
    
    
    (470
    )
    
    
    (2
    )
    
    
    468
    
    
    
    Total
    
    $
    1,097
    
    
    $
    13,318
    
    
    $
    11,351
    
    
    ($
    21,850
    )
    
    ($
    282
    )
    
    $
    3,634
 25




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##### Table of Contents



Other noninterest expense increased $4.9 million, or 20%, in the third quarter
of 2004 and $9.9 million, or 14%, for the nine months ended September 30, 2004
compared to the same respective periods last year. These increases were
largely due to increased professional (audit and legal) fees, consulting fees,
travel and telephone costs. Taxes The effective tax rate was 33% and 34% for the three months and nine months
ended September 30, 2004, respectively. The slight decline to 33% related to
lower than previously estimated non-deductible interest expense related to
carrying tax-exempt securities. The effective tax rate was 34% for the three
months and nine months ended September 30, 2003, respectively. Excluding the
effects of merger related charges and the deleveraging transaction, the
effective tax rate is expected to return to 34% in the fourth quarter. 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. 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 our banking subsidiary 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 assessment 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 $178 million and $29 million in the
third quarters of 2004 and 2003, respectively and $265.8 million and $180.0
million in the nine months ended September 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 ($15.8) million, $11.8 million and $57.6 million (($10.3) million, $7.7
million and $37.4 million net of applicable income tax effects, respectively)
at September 30, 2004, December 31, 2003 and September 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 $2.5 billion, or 10%, from $26.5
billion at December 31, 2003 to $29.0 billion at September 30, 2004. Total
average assets were $29.2 billion and $25.8 billion for the three months ended
September 30, 2004 and 2003, respectively, and $28.0 billion and $25.5 billion
for the nine months ended September 30, 2004 and 2003, respectively. The
increase in total average assets was largely due to acquisitions, which
increased average assets by approximately $1.8 billion and $1.1 billion in the
three and nine months ended 26




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##### Table of Contents



September 30, 2004, respectively, as compared to
the same periods of 2003. Total liabilities increased by $2.0 billion since
year-end 2003, primarily due to acquisitions and increases in borrowings.
Shareholders equity totaled $3.0 billion at September 30, 2004 and $2.5
billion at December 31, 2003. Securities The securities portfolio is utilized for several purposes. It serves as a
vehicle to manage interest rate and prepayment risk, generates interest and
dividend income from the investment of excess funds, provides liquidity and is
used as collateral for public deposits and wholesale funding sources. The securities portfolio (including securities classified as held to maturity)
averaged $7.8 billion during the third quarter of 2004, as compared to $7.3
billion in the third 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 securities available for
sale were AAA or equivalently rated at September 30, 2004. The average yield
on securities was 4.35% for the quarter ended September 30, 2004 compared to
3.96% for the quarter ended September 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 ($10.3) million and $7.7
million at September 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.
Subsequent to September 30, 2004, we sold approximately $1.2 billion of
securities as part of a deleverging program. See Note 12 to the consolidated
financial statements. Loans and Leases Total loans and leases (including loans held for sale) averaged $18.3 billion
during the third quarter of 2004, an increase of $2.4 billion, or 15%, from the
third quarter of 2003. This increase was primarily attributable to growth in
commercial loans and, to a lesser extent, consumer loans. Excluding
acquisitions, average loans for the quarter ended September 30, 2004 were $1.3
billion, or 8%, higher than the comparable period in 2003. Average loans and
leases as a percent of average earning assets was 70% during the quarter ended
September 30, 2004 compared to 69% during the quarter ended September 30, 2003. Average residential real estate loans (which include mortgage loans held for
sale) of $3.1 billion during the third quarter of 2004 increased $282.8 million
from the average amount of such loans during the third quarter of last year.
Excluding acquisitions, average residential loans decreased approximately $114
million, or 4%, as a result of continued refinancing activity and prepayments
in a low interest rate environment. The weighted average yield on residential
real estate loans decreased from 5.43% to 4.95% during the quarters ended
September 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 $47.5 million and $41.7 million at
September 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 $6.2 billion during the third quarter of
2004, an increase of $895 million, or 17%, from the third quarter of last
year. Excluding acquisitions, average commercial real estate loans increased
$428 million, or 7%, during this period. Most of our markets posted increases,
with the largest increases in 27




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##### Table of Contents



Massachusetts and Connecticut. The weighted
average yield on commercial real estate loans during the third quarter of 2004
was 5.76%, as compared to 5.88% in the third quarter of 2003, a decrease of 12
basis points. The lower yield reflects the effect of the competitive pressures
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 $3.8 billion during the third
quarter of 2004, an increase of $612 million, or 19%, over the third quarter of
2003. Excluding acquisitions, average commercial business loans and leases
increased $498 million, or 15%. Massachusetts reflected the strongest growth.
The weighted average yield on commercial business loans and leases decreased to
4.93% in the third quarter of 2004 from 5.04% in the third 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 $5.2 billion during the third quarter of
2004, an increase of $608 million, or 13%, from the third quarter of 2003.
Excluding acquisitions, average consumer loans and leases increased $462
million or 10%. 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 5.10% in the third quarter of 2004 from 5.43% in
the third 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 $19.4 billion during the third quarter of 2004, an
increase of $1.7 billion from the third quarter of 2003; approximately $1.5
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 95% at September 30, 2004 and 91% at December
31, 2003. Average noninterest-bearing deposits totaled $4.2 billion during the third
quarter of 2004, an increase of $849 million, or 25%, from the third quarter of
2003. Excluding acquisitions, average noninterest-bearing deposits increased
$530 million, or 14%. Average interest-bearing deposits of $15.2 billion during the third quarter of
2004 increased $819 million from the third quarter of 2003. Excluding
acquisitions, average savings, money market and NOW accounts increased $363
million, or 4%, while certificates of deposits declined by 13%. The decline in
certificates of deposit resulted from our decision to allow certain deposits
priced above alternate funding costs to run off. The average rates paid on all
interest-bearing deposits decreased by 20 basis points from 1.25% in the third
quarter of 2003 to 1.05% in the third quarter of 2004, reflecting the decline
in prevailing interest rates and run-off of higher-costing certificates of
deposit. Included within the deposit categories above are government banking deposits,
which averaged $1.7 billion in the third quarter of 2004 and $1.3 billion in
the third 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 asset
growth. Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and borrowings from the U. S.
Treasury, amounted to $2.9 billion and $2.3 billion at September 30, 2004 and
December 31, 2003, respectively, an increase of $571 million. This increase
was due primarily to debt assumed in acquisitions and lower long-term debt. At September 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 nine months 28




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##### Table of Contents



ended
September 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 maturities
greater than one year. Long-term debt amounted to $3.5 billion at September
30, 2004 and $3.5 billion at December 31, 2003. At September 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 4.16% during
the three months ended September 30, 2004 as compared to 4.23% during the three
months ended September 30, 2003. At September 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 September 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 September 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 September 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 $3.0 billion at September 30, 2004, an
increase of $525.7 million, or 20.9%, from our $2.5 billion of shareholders
equity at December 31, 2003. This increase was primarily attributable to our
$265.8 million of comprehensive income during the nine months ended September
30, 2004, $304.3 million of equity resulting from the issuance of common stock
in connection with acquisitions and $55.2 million of equity resulting from the
issuance of common stock for employee benefit plans, which more than offset the
payment of $99.9 million of cash dividends declared on our common stock during
this period. For information regarding our compliance with applicable capital
requirements, see Capital below. Book value per share amounted to $17.50 and
$15.54 at September 30, 2004 and December 31, 2003, respectively. Dividends
declared in the third quarter of 2004 were $0.20 per share compared to $0.19
per share for the same period last year. 29




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##### Table of Contents



CONTRACTUAL OBLIGATIONS The following tables summarize our contractual cash obligations, other
commitments and derivative financial instruments at September 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
    
    $
    2,143,084
    
    
    $
    311,736
    
    
    $
    516,523
    
    
    $
    307,224
    
    
    $
    1,007,601Capital lease obligations
    
    
    6,743
    
    
    
    56
    
    
    
    360
    
    
    
    1,245
    
    
    
    5,082Repurchase agreements  wholesale
    
    
    1,300,000
    
    
    
    350,000
    
    
    
    850,000
    
    
    
    
    
    
    
    100,000Total long-term debt
    
    
    3,449,827
    
    
    
    661,792
    
    
    
    1,366,883
    
    
    
    308,469
    
    
    
    1,112,683Off balance sheet obligations:Operating lease obligations
    
    
    143,061
    
    
    
    25,422
    
    
    
    43,036
    
    
    
    31,868
    
    
    
    42,735Pension plan contribution
    
    
    17,100
    
    
    
    17,100
    
    
    
    
    
    
    
    
    
    
    
    Other benefit plan payments
    
    
    35,022
    
    
    
    3,130
    
    
    
    6,196
    
    
    
    5,955
    
    
    
    19,741Other vendor obligations
    
    
    28,168
    
    
    
    10,251
    
    
    
    17,917
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    3,673,178
    
    
    $
    717,695
    
    
    $
    1,434,032
    
    
    $
    346,292
    
    
    $
    1,175,159
  (1)
    
    Other liabilities which are short term in nature are not included in this table. Other Commitments Amount of Commitment Expiration - Per PeriodTotalAmounts
    
    Less than
    
    1 - 3
    
    4 -5
    
    After 5Committed
    
    1 Year
    
    Years
    
    Years
    
    YearsUnused portions on lines of credit
    
    $
    4,791,772
    
    
    $
    1,385,511
    
    
    $
    244,936
    
    
    $
    34,692
    
    
    $
    3,126,633Standby letters of credit
    
    
    447,856
    
    
    
    130,516
    
    
    
    82,175
    
    
    
    79,482
    
    
    
    155,683Commercial letters of credit
    
    
    22,024
    
    
    
    14,830
    
    
    
    5,077
    
    
    
    
    
    
    
    2,117Commitments to originate loans
    
    
    2,058,277
    
    
    
    1,373,507
    
    
    
    374,351
    
    
    
    34,046
    
    
    
    276,373Other commitments
    
    
    281,996
    
    
    
    6,757
    
    
    
    13,611
    
    
    
    2,684
    
    
    
    258,944Total commitments
    
    $
    7,601,925
    
    
    $
    2,911,121
    
    
    $
    720,150
    
    
    $
    150,904
    
    
    $
    3,819,750
 30




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##### Table of Contents



Derivative Financial Instruments Amount of Commitment Expiration - Per PeriodTotalAmounts
    
    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)
    
    $
    548,730
    
    
    $
    0
    
    
    $
    9,665
    
    
    $
    109,911
    
    
    $
    429,154Interest rate swaps with dealers (2)
    
    
    548,730
    
    
    
    
    
    
    
    9,665
    
    
    
    109,911
    
    
    
    429,154Interest rate swaps on borrowings (3)
    
    
    566,500
    
    
    
    216,500
    
    
    
    
    
    
    
    150,000
    
    
    
    200,000Forward commitments to sell loans
    
    
    85,996
    
    
    
    85,996
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency forward contracts: (4)Forward contracts with customers
    
    
    26,492
    
    
    
    9,605
    
    
    
    16,887
    
    
    
    
    
    
    
    Forward contracts with dealers
    
    
    27,166
    
    
    
    9,696
    
    
    
    17,470
    
    
    
    
    
    
    
    Foreign Exchange OptionsOptions purchased
    
    
    42,975
    
    
    
    1,350
    
    
    
    41,625
    
    
    
    
    
    
    
    Options to sell
    
    
    42,975
    
    
    
    1,350
    
    
    
    41,625
    
    
    
    
    
    
    
    Rate-locked loan commitments
    
    
    54,389
    
    
    
    54,389
    
    
    
    
    
    
    
    
    
    
    
    
   (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. 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 31




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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
September 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
September 30, 2004, 0.23% of our residential loans were nonperforming, as
compared to 0.26% at December 31, 2003 and 0.34% at September 30, 2003. Our commercial real estate loan portfolio accounted for 33% of the total loan
portfolio at September 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 September 30, 2004, 0.54% of our commercial real estate loans were
nonperforming, as compared to 0.36% at December 31, 2003 and 0.51% at September
30, 2003. Our commercial business loan and lease portfolio accounted for 21% of the total
loan portfolio at September 30, 2004 and 20% 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 $86.5
million at September 30, 2004. We do not emphasize the purchase of
participations in syndicated commercial loans. At September 30, 2004, we had
$372.4 million of outstanding participations in syndicated commercial loans and
had an additional $288.0 million of unfunded commitments related to these
participations. At September 30, 2004, 0.48% of our commercial business loans
were nonperforming, as compared to 0.74% at December 31, 2003 and 0.70% at
September 30, 2003. The following table presents the geographic distribution of our commercial
loans and leases at September 30, 2004 and December 31, 2003. Table 9  Commercial Loans and Leases by State Commercial Real Estate Loans
    
    Commercial Business Loans and LeasesSeptember 30,
    
    December 31,
    
    Change
    
    September 30,
    
    December 31,
    
    Change2004
    
    2003
    
    Amount
    
    Percent
    
    2004
    
    2003
    
    Amount
    
    PercentMassachusetts
    
    $
    3,055,752
    
    
    $
    2,565,064
    
    
    $
    490,688
    
    
    
    19.13
    %
    
    $
    1,479,242
    
    
    $
    1,173,803
    
    
    $
    305,439
    
    
    
    26.02
    %Maine
    
    
    917,752
    
    
    
    885,791
    
    
    
    31,961
    
    
    
    3.61
    %
    
    
    786,994
    
    
    
    658,902
    
    
    
    128,092
    
    
    
    19.44
    %New Hampshire
    
    
    759,295
    
    
    
    732,249
    
    
    
    27,046
    
    
    
    3.69
    %
    
    
    535,064
    
    
    
    494,811
    
    
    
    40,253
    
    
    
    8.14
    %Vermont
    
    
    667,047
    
    
    
    645,608
    
    
    
    21,439
    
    
    
    3.32
    %
    
    
    435,761
    
    
    
    438,483
    
    
    
    (2,722
    )
    
    
    -0.62
    %Connecticut
    
    
    569,152
    
    
    
    504,624
    
    
    
    64,528
    
    
    
    12.79
    %
    
    
    425,806
    
    
    
    332,749
    
    
    
    93,057
    
    
    
    27.97
    %New York
    
    
    213,837
    
    
    
    195,526
    
    
    
    18,311
    
    
    
    9.36
    %
    
    
    193,429
    
    
    
    188,346
    
    
    
    5,083
    
    
    
    2.70
    %Total
    
    $
    6,182,835
    
    
    $
    5,528,862
    
    
    $
    653,973
    
    
    
    11.83
    %
    
    $
    3,856,296
    
    
    $
    3,287,094
    
    
    $
    569,202
    
    
    
    17.32
    %
 Consumer loans and leases accounted for 29% of our total loan portfolio at
September 30, 2004 and 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 September 30, 2004, 0.13% of our
consumer loans were nonperforming, as compared to 0.18% at December 31, 2003
and 0.16% at September 30, 2003. 32




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The following table presents our consumer loans and leases by type at September
30, 2004 and December 31, 2003. Table 10  Composition of Consumer Loans and Leases September 30,
    
    December 31,2004
    
    2003
    
    Change% of
    
    
    
    
    
    % ofAmount
    
    Total
    
    Amount
    
    Total
    
    Amount
    
    PercentHome equity
    
    $
    3,043,885
    
    
    
    57.71
    %
    
    $
    2,472,471
    
    
    
    51.30
    %
    
    $
    571,414
    
    
    
    23.11
    %Automobile
    
    
    1,701,002
    
    
    
    32.25
    %
    
    
    1,596,504
    
    
    
    33.13
    %
    
    
    104,498
    
    
    
    6.55
    %Mobile home
    
    
    118,393
    
    
    
    2.24
    %
    
    
    141,407
    
    
    
    2.93
    %
    
    
    (23,014
    )
    
    
    (16.28
    %)Vision, dental, and
orthodontia fee plan
    
    
    62,888
    
    
    
    1.19
    %
    
    
    120,694
    
    
    
    2.50
    %
    
    
    (57,806
    )
    
    
    (47.89
    %)Education
    
    
    129,906
    
    
    
    2.46
    %
    
    
    234,226
    
    
    
    4.86
    %
    
    
    (104,320
    )
    
    
    (44.54
    %)Other
    
    
    218,847
    
    
    
    4.15
    %
    
    
    254,221
    
    
    
    5.28
    %
    
    
    (35,374
    )
    
    
    (13.91
    %)Total
    
    $
    5,274,921
    
    
    
    100.00
    %
    
    $
    4,819,523
    
    
    
    100.00
    %
    
    $
    455,398
    
    
    
    9.45
    %
 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 September 30, 2004, 0.24%
at December 31, 2003 and 0.27% at September 30, 2003. Total nonperforming
assets as a percentage of total loans and total other nonperforming assets
amounted to 0.37% at September 30, 2004, 0.39% at December 31, 2003 and 0.44%
at September 30, 2003. See Table 11 for a summary of nonperforming assets for
the last five quarters. On a dollar basis, our nonperforming assets decreased
from $70.4 million at September 30, 2003 to $68.0 million at September 30,
2004, but increased $4.9 million from $63.1 million at December 31, 2003. The
increase from December 31, 2003 was due to a $13.6 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. The following table presents information regarding our nonperforming assets for
the last five quarters. 33




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TABLE 11  Nonperforming Assets 2004
    
    2003September 30
    
    June 30
    
    March 31
    
    December 31
    
    September 30Nonaccrual loans and leases:Residential real estate loans
    
    $
    7,274
    
    
    $
    7,870
    
    
    $
    7,990
    
    
    $
    7,157
    
    
    $
    9,135Commercial real estate loans
    
    
    33,249
    
    
    
    27,951
    
    
    
    24,619
    
    
    
    19,700
    
    
    
    27,069Commercial business loans and leases
    
    
    18,573
    
    
    
    23,636
    
    
    
    28,978
    
    
    
    24,412
    
    
    
    22,857Consumer loans and leases
    
    
    6,827
    
    
    
    5,685
    
    
    
    6,267
    
    
    
    8,493
    
    
    
    7,664Total nonaccrual loans and leases
    
    
    65,923
    
    
    
    65,142
    
    
    
    67,854
    
    
    
    59,762
    
    
    
    66,725Other nonperforming assets:Other real estate owned, net of related reserves
    
    
    698
    
    
    
    398
    
    
    
    389
    
    
    
    529
    
    
    
    921Repossessions, net of related reserves
    
    
    1,358
    
    
    
    1,627
    
    
    
    2,311
    
    
    
    2,812
    
    
    
    2,711Total other nonperforming assets
    
    
    2,056
    
    
    
    2,025
    
    
    
    2,700
    
    
    
    3,341
    
    
    
    3,632Total nonperforming assets
    
    $
    67,979
    
    
    $
    67,167
    
    
    $
    70,554
    
    
    $
    63,103
    
    
    $
    70,357Accruing loans and leases which are 90 days or more
overdue
    
    $
    5,018
    
    
    $
    4,142
    
    
    $
    7,929
    
    
    $
    4,915
    
    
    $
    3,163Total nonperforming loans as a percentage of total
loans and leases(1)
    
    
    0.36
    %
    
    
    0.36
    %
    
    
    0.41
    %
    
    
    0.37
    %
    
    
    0.42
    %Total nonperforming assets as a percentage of total assets
    
    
    0.23
    %
    
    
    0.23
    %
    
    
    0.26
    %
    
    
    0.24
    %
    
    
    0.27
    %Total nonperforming assets as a percentage of total loans
and leases (1) and total other nonperforming assets
    
    
    0.37
    %
    
    
    0.37
    %
    
    
    0.42
    %
    
    
    0.39
    %
    
    
    0.44
    %
   (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 September 30, 2004, we had $5.0 million of
accruing loans which were 90 days or more delinquent, as compared to $4.9
million at December 31, 2003 and $3.2 million at September 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
September 30, 2004, as compared to $8.2 million during the three months ended
September 30, 2003. Net charge-offs represented 0.19% and 0.20% of average
loans and leases outstanding for the quarters ended September 30, 2004 and
2003, respectively. 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. 34




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TABLE 12  Allowance for Credit Losses 2004 Third
    
    2004 Second
    
    2004 First
    
    2003 Fourth
    
    2003 ThirdQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterAllowance for loan and lease losses at beginning of period
    
    $
    247,620
    
    
    $
    233,297
    
    
    $
    232,287
    
    
    $
    229,581
    
    
    $
    227,240Additions due to acquisitions
    
    
    
    
    
    
    13,665
    
    
    
    
    
    
    
    2,661
    
    
    
    Charge-offs:Residential real estate mortgages (1)
    
    
    101
    
    
    
    (25
    )
    
    
    (55
    )
    
    
    25
    
    
    
    63Commercial real estate mortgages
    
    
    4
    
    
    
    172
    
    
    
    221
    
    
    
    87
    
    
    
    27Commercial business loans and leases
    
    
    4,458
    
    
    
    5,460
    
    
    
    2,711
    
    
    
    4,302
    
    
    
    3,011Consumer loans and leases
    
    
    7,566
    
    
    
    7,434
    
    
    
    8,405
    
    
    
    9,212
    
    
    
    8,782Total loans and leases charged off
    
    
    12,129
    
    
    
    13,041
    
    
    
    11,282
    
    
    
    13,626
    
    
    
    11,883Recoveries:Residential real estate mortgages
    
    
    15
    
    
    
    17
    
    
    
    17
    
    
    
    15
    
    
    
    5Commercial real estate mortgages
    
    
    534
    
    
    
    835
    
    
    
    667
    
    
    
    255
    
    
    
    296Commercial business loans and leases
    
    
    1,519
    
    
    
    2,073
    
    
    
    926
    
    
    
    1,900
    
    
    
    2,493Consumer loans and leases
    
    
    1,256
    
    
    
    1,274
    
    
    
    1,182
    
    
    
    1,101
    
    
    
    930Total loans and leases recovered
    
    
    3,324
    
    
    
    4,199
    
    
    
    2,792
    
    
    
    3,271
    
    
    
    3,724Net charge-offs
    
    
    8,805
    
    
    
    8,842
    
    
    
    8,490
    
    
    
    10,355
    
    
    
    8,159Transfer for off-balance sheet loan commitments (2)
    
    
    (6,600
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision for loan and lease losses
    
    
    10,670
    
    
    
    9,500
    
    
    
    9,500
    
    
    
    10,400
    
    
    
    10,500Allowance
for loan and lease losses at end of period (2)
    
    $
    242,885
    
    
    $
    247,620
    
    
    $
    233,297
    
    
    $
    232,287
    
    
    $
    229,581Total Allowances for Credit Losses:Allowance for loan and lease losses
    
    $
    242,885Liability for unfunded credit commitments (2)
    
    
    6,600Total Allowances for Credit Losses
    
    $
    249,485Ratio of net charge-offs to average loans and
leases outstanding during the period, annualized (3)
    
    
    0.19
    %
    
    
    0.20
    %
    
    
    0.21
    %
    
    
    0.26
    %
    
    
    0.20
    %Ratio of allowance for credit losses to total loans and leases
at end of period (2)
    
    
    1.36
    %
    
    
    1.37
    %
    
    
    1.40
    %
    
    
    1.42
    %
    
    
    1.44
    %Ratio of allowance for credit losses to nonperforming
loans
and leases at end of period
    
    
    378
    %
    
    
    380
    %
    
    
    344
    %
    
    
    389
    %
    
    
    344
    %Ratio of net charge-offs (recoveries) as a percent of
average outstanding loans and leases, annualized (3):Residential real estate mortgages
    
    
    0.011
    %
    
    
    (0.006
    %)
    
    
    (0.011
    %)
    
    
    0.001
    %
    
    
    0.008
    %Commercial real estate mortgages
    
    
    (0.034
    %)
    
    
    (0.045
    %)
    
    
    (0.032
    %)
    
    
    (0.012
    %)
    
    
    (0.020
    %)Commercial business loans and leases
    
    
    0.305
    %
    
    
    0.370
    %
    
    
    0.211
    %
    
    
    0.295
    %
    
    
    0.064
    %Consumer loans and leases
    
    
    0.483
    %
    
    
    0.496
    %
    
    
    0.593
    %
    
    
    0.688
    %
    
    
    0.681
    %Total portfolio loans and leases at end of period (3)
    
    
    18,410,791
    
    
    
    18,110,312
    
    
    
    16,623,612
    
    
    
    16,345,962
    
    
    
    15,925,852Total nonperforming loans and leases at end of period
    
    
    65,923
    
    
    
    65,142
    
    
    
    67,854
    
    
    
    59,762
    
    
    
    66,725Average loans and leases outstanding
during the period (3)
    
    
    18,263,613
    
    
    
    17,484,997
    
    
    
    16,511,538
    
    
    
    15,976,068
    
    
    
    15,841,521
   (1)
    
    Residential real estate charge-offs include estimates of charge-offs and reversals of prior period estimates, which may result in negative charge-offs.(2)
    
    During the third quarter of 2004, we reclassified the portion of our allowance for credit losses related to unfunded credit commitments from the allowance
for loan and lease losses to a separate liability account. The liability for unfunded credit commitments previously included in the allowance for loan and
and lease losses was $5.4 million,
$5.1 million,
$5.6 million and
$5.1 million as of June 30, 2004, March 31, 2004, December 31, 2003, and
September 30, 2003, respectively.(3)
    
    Excludes residential real estate loans held for sale. 35




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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 $147 million at September 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. 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 $242.9 million at September
30, 2004 and $232.3 million at December 31, 2003. The $10.6 million increase
is net of a transfer of $6.6 million to other liabilities related to reserves
for off-balance sheet loan commitments. The increase was also impacted by
$13.7 million from acquired banks and the effect of the provision for loan and
lease losses exceeding net charge-offs during 2004. The ratio of the allowance
for credit losses to nonperforming loans was 378% at September 30, 2004 and
389% at December 31, 2003. The ratio of the allowance for credit losses to
total portfolio loans and leases at September 30, 2004 was 1.36% compared to
1.42% at December 31, 2003. ASSET-LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk,
liquidity and capital. Asset-liability management is governed by policies,
goals, and objectives that are adopted and reviewed by our board of directors
and monitored periodically by the Board Risk Management Committee. The board
delegates responsibility for asset-liability management strategies to achieve
these goals and objectives to the Asset Liability Management Committee
(ALCO), which is comprised of members of senior management. Senior
management determines the strategic directives that guide the day-to-day
management of our activities and interest rate risk exposure. The ALCO also
reviews and approves all major risk, liquidity and capital management programs,
except for product pricing. Product pricing is reviewed and approved by the
Pricing Committee, which is comprised of a subset of ALCO members and the state
presidents of our banking subsidiary. Interest Rate Risk Interest rate risk is the risk of loss to future earnings or long-term value
resulting from changes in interest rates and is by far the most significant
non-credit risk to which we are exposed. This risk arises directly from our
core lending and deposit gathering activities and is predominantly concentrated
in our mortgage-related assets, as well as in our non-maturity deposits.
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 36




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deposits. Higher rates make borrowers less likely to refinance existing debt,
resulting in lower cash flows for us to reinvest. And if the market risk
premium is sufficiently high, depositors could be enticed to take additional
investment risk and move deposits from banks into riskier assets, such as
equity securities. This in turn could result in less cash to invest or even
require us to use wholesale funding market sources more actively. In the case
of higher interest rates, our funding sources could reprice faster than our
assets and at higher rates, thereby reducing our interest rate spread and net
interest margin. The degree to which future earnings or long-term value is
subject to interest rate risk depends on how closely the characteristics of our
interest-earning assets match those of our interest-bearing liabilities. In addition to directly impacting mortgage asset and deposit cash flows,
interest rate changes could affect (i) the amount of loans originated and sold
by us, (ii) the level and composition of deposits, (iii) the ability of
borrowers to repay adjustable or variable rate loans, (iv) the average maturity
of loans and investments, (v) the rate of amortization of premiums paid on
securities, capitalized mortgage servicing rights, deferred fees and purchase
accounting adjustments, (vi) the fair value of our saleable assets, the amount
of unrealized gains and losses on securities available for sale per SFAS No.
115, and the resultant ability to realize gains on the sale of such securities
and (vii) per SFAS Nos. 133 and 138, the fair value of derivatives carried on
our balance sheet, derivative hedge effectiveness testing and the amount of
ineffectiveness recognized in earnings. Assessment and Measurement The overall objective of interest rate risk management is to deliver consistent
net interest income growth and returns on equity over a wide range of possible
interest rate environments. To that end, management focuses on (i) key
interest rate risk metrics and assessment of 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 following table 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 37




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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. Table 13  Sensitivity of Net Interest Income 200 Basis Point
    
    100 Basis Point
    
    100 Basis PointRate Increase
    
    Rate Increase
    
    Rate DecreaseSeptember 30, 2004
    
    
    (1.61
    %)
    
    
    (0.52
    %)
    
    
    (0.09
    %)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
September 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 September 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 nine months ended September 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. 38




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Table 14  Average Balances of Loans Held for Sale and Related Hedges Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Residential mortgage loans held for sale
    
    $
    41,913
    
    
    $
    101,528
    
    
    $
    47,081
    
    
    $
    90,808Rate-locked loan commitments
    
    
    50,421
    
    
    
    85,551
    
    
    
    52,363
    
    
    
    104,632Forward sales commitments
    
    
    77,839
    
    
    
    178,361
    
    
    
    86,020
    
    
    
    181,739
 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 nine months ended September 30, 2004, we recorded
a total notional amount of $264.1 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 September 30, 2004. 39




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Table 15  Derivative Positions Asset-Liability Management Positions Notional Amount Maturing
    
    
    
    
    
    FairSeptember 30, 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    Total
    
    ValueInterest rate contractsPay variable, receive fixed
    
    $
    
    
    
    $
    216,500
    
    
    $
    
    
    
    $
    
    
    
    $
    350,000
    
    
    $
    566,500
    
    
    $
    3,678Forward commitments to sell loans
    
    
    85,996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,996
    
    
    
    (476
    )
 Customer-related Positions Notional Amount Maturing
    
    
    
    
    
    FairSeptember 30, 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    Total
    
    ValueInterest rate contractsReceive fixed, pay variable
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    14,059
    
    
    $
    534,671
    
    
    $
    548,730
    
    
    $
    19,159Pay fixed, receive variable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,059
    
    
    
    534,671
    
    
    
    548,730
    
    
    
    (19,159
    )Foreign currency forward contractsForward contracts with customers
    
    
    9,605
    
    
    
    15,581
    
    
    
    1,306
    
    
    
    
    
    
    
    
    
    
    
    26,492
    
    
    
    2,586Forward contracts with dealers
    
    
    9,696
    
    
    
    16,159
    
    
    
    1,311
    
    
    
    
    
    
    
    
    
    
    
    27,166
    
    
    
    (2,430
    )Foreign exchange optionsOptions purchased
    
    
    1,350
    
    
    
    33,750
    
    
    
    7,875
    
    
    
    
    
    
    
    
    
    
    
    42,975
    
    
    
    1,724Options to sell
    
    
    1,350
    
    
    
    33,750
    
    
    
    7,875
    
    
    
    
    
    
    
    
    
    
    
    42,975
    
    
    
    (1,724
    )Rate-locked loan commitments (1)
    
    
    54,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,389
    
    
    
    416
   (1)
    
    No value has been assigned to potential mortagage servicing rights related to rate-locked loan commitments. 2004 Asset Liability Management Actions The most significant factors affecting market risk exposure of net interest
income in the third 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 Federal Reserve Board increased the federal funds target rate to 1.50% on
August 10, 2004 and again to 1.75% on September 21, 2004. However, long-term
interest rates fell in the third quarter, with 10-year U. S. Treasury yields
down approximately 47 basis points quarter over quarter and down approximately
18 basis points over year-end. Mortgage rates also fell in the third quarter,
which resulted in an increase in residential mortgage loan activity. As a
result, the yield curve used to measure interest income sensitivity has
flattened considerably. The above net interest income table (Table 13)
reflects the estimated 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 increase if the
yield curve
becomes steeper and to decline slightly if short and long interest rates move
symmetrically higher. 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 40




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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 September 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 by us or acquired entities 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 September 30, 2004,
our subsidiary bank had $689.3 million available for dividends that could be
paid without prior regulatory approval. In addition, the parent company had
$184.1 million in cash or cash equivalents at September 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 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 September 30, 2004, Banknorth, NA had in the aggregate $4.3 billion of
immediately accessible liquidity, defined as cash that could be raised within
1-3 days through collateralized borrowings or sales of securities. This
represented 22% of retail deposits, as compared to a current policy minimum of
10% of deposits. Also at September 30, 2004, Banknorth, NA had in the aggregate potentially
volatile funds of $2.9 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 September 30, 2004, the ratio of immediately accessible liquidity to
potentially volatile funds was 146%, 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. 41




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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 September 30, 2004. CAPITAL At September 30, 2004, shareholders equity amounted to $3.0 billion, or 10.51%
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 $0.20 per share on our common stock during the third
quarter of 2004 compared to $0.19 per share in the third quarter last year. 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 September 30,
2004. There were no repurchases to date in 2004. Capital guidelines issued by the Federal Reserve Board and the Office of the
Comptroller of the Currency of the United States (OCC) respectively require
us and our banking subsidiary to maintain certain capital ratios, set forth
below. At September 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. Table 16  Capital Ratios Actual
    
    Capital Requirements
    
    ExcessAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioSeptember 30, 2004Banknorth Group, Inc.Total capital (to risk-weighted assets)
    
    $
    2,385,570
    
    
    
    11.62
    %
    
    $
    1,643,039
    
    
    
    8.00
    %
    
    
    $742,531
    
    
    
    3.62
    %Tier 1 capital (to risk weighted assets)
    
    
    1,935,686
    
    
    
    9.42
    %
    
    
    821,519
    
    
    
    4.00
    %
    
    
    1,114,167
    
    
    
    5.42
    %Tier 1 leverage capital ratio (to average assets)
    
    
    1,935,686
    
    
    
    6.95
    %
    
    
    1,113,291
    
    
    
    4.00
    %
    
    
    822,395
    
    
    
    2.95
    %Banknorth, NATotal capital (to risk-weighted assets)
    
    
    2,327,560
    
    
    
    11.37
    %
    
    
    1,638,244
    
    
    
    8.00
    %
    
    
    689,316
    
    
    
    3.37
    %Tier 1 capital (to risk-weighted assets)
    
    
    1,880,921
    
    
    
    9.19
    %
    
    
    819,122
    
    
    
    4.00
    %
    
    
    1,061,799
    
    
    
    5.19
    %Tier 1 leverage capital ratio (to average assets)
    
    
    1,880,921
    
    
    
    6.77
    %
    
    
    1,111,011
    
    
    
    4.00
    %
    
    
    769,910
    
    
    
    2.77
    %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 $20.5 billion and $18.5 billion at September 30,
2004 and December 31, 2003, respectively, for Banknorth Group, Inc. and
Banknorth, NA. 42




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At September 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 September 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
    
    
    
    5.27
    %
    
    
    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 September 30, 2004, trust preferred securities amounted to 16.1% 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 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 September 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. 43




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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 23.68% at September 30, 2004. CRITICAL ACCOUNTING POLICIES Our accounting and reporting policies comply with accounting principles
generally accepted in the United States of America and conform to general
practices within the banking industry. The preparation of financials
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. The financial position and
results of operations can be affected by these estimates and assumptions, which
are integral to understanding reported results. Management has discussed the
development and the selection of critical accounting policies with the Audit
Committee of our board of directors. As discussed in our 2003 Annual Report on
Form 10-K, we have identified the following critical accounting policies:
allowance for loan and lease losses, accounting for acquisitions and review of
related goodwill and other intangible assets, accounting for pension plans and
accrued income taxes. We consider these policies as our critical accounting
policies due to the potential impact on our results of operations and the
carrying value of certain of our assets based on any changes in judgments and
assumptions required to be made by us in the application of these policies.
Our critical accounting policies have not changed since December 31, 2003. IMPACT OF NEW ACCOUNTING STANDARDS For information on the impact of new accounting standards, see Note 12 to the
unaudited Consolidated Financial Statements. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are
forward-looking statements within the meaning of Section 21A of the
Securities Exchange Act of 1934, 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. 44




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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. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a)  (b) Not applicable. 45




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(c) 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)July 1-31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,853,200August 1-31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,853,200September 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. 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.
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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: November 8, 2004
    
    By:
    
    /s/ William J. RyanWilliam J. RyanChairman, President andChief Executive OfficerDate: November 8, 2004
    
    By:
    
    /s/ Stephen J. BoyleStephen J. BoyleExecutive Vice President andChief Financial Officer(principal financial and accounting officer)
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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.
 48