BANKNORTH GROUP INC/ME - 10-Q Quarterly Report

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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the Quarterly Period Ended June 30, 2002

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

Commission File Number: 0-16947

BANKNORTH GROUP, INC.

(Exact name of Registrant as specified in its charter)


Maine		01-0437984

(State or other jurisdiction of 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

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes (XBOX) No (BOX)

The number of shares outstanding of the Registrant’s common stock and related stock purchase rights as of July 31, 2002 is:


Common stock, par value $.01 per share		148,282,259

(Class)		(Outstanding)

Available on the Web @ www.banknorth.com

TABLE OF CONTENTS


		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes to Consolidated Financial Statements
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II — Other Information
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds — not applicable.
	Item 3. Defaults Upon Senior Securities — not applicable.
	Item 4. Submission of Matters to a Vote of Security Holders.
	Item 5. Other Information — not applicable.
	Item 6. Exhibits and Reports on Form 8-K.
	SIGNATURES
EXHIBIT INDEX
Ex-99.1 Certification of CEO
Ex-99.2 Certification of CFO

INDEX

BANKNORTH GROUP, INC. AND SUBSIDIARIES


PART I.	FINANCIAL INFORMATION		PAGE

	Item 1.	Financial Statements




		Consolidated Balance Sheets June 30, 2002 and December 31, 2001	3




		Consolidated Statements of Income – Three and six months ended June 30, 2002 and 2001	4




		Consolidated Statements of Changes in Shareholders’ Equity - Six months ended June 30, 2002 and 2001	5




		Consolidated Statements of Cash Flows – Six months ended June 30, 2002 and 2001	6




		Notes to Consolidated Financial Statements	7




	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12




	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39




PART II.	OTHER INFORMATION





	Item 1.	Legal proceedings	39




	Item 2.	Changes in securities and use of proceeds	39




	Item 3.	Defaults upon senior securities	39




	Item 4.	Submission of matters to a vote of security holders	39




	Item 5.	Other information	40




	Item 6.	Exhibits and reports on Form 8-K	40




Signatures			41

BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


					June 30, 2002			December 31, 2001

Assets					(Unaudited)
Cash and due from banks					$	512,703		$	650,588




Federal funds sold and other short term investments						133,853			270,623




Securities available for sale, at market value						6,031,881			5,817,238




Securities held to maturity (fair value of $286,750 and $340,737 at June 30, 2002 and December 31, 2001, respectively)						281,668			339,623




Loans held for sale						52,061			117,674




Loans and leases:




	Residential real estate mortgages					2,510,233			2,627,125




	Commercial real estate mortgages					4,316,080			4,094,039




	Commercial business loans and leases					2,677,760			2,462,653




	Consumer loans and leases					3,549,053			3,531,513

		Total loans and leases				13,053,126			12,715,330




	Less: Allowance for loan and lease losses					193,444			189,837

				Net loans and leases		12,859,682			12,525,493

Premises and equipment, net						238,006			237,440




Goodwill						409,051			409,340




Identifiable intangible assets						48,849			57,293




Mortgage servicing rights						7,578			8,484




Bank-owned life insurance						369,774			321,113




Other assets						315,532			321,677

	Total assets				$	21,260,638		$	21,076,586

Liabilities and Shareholders’ Equity




Deposits:




	Savings accounts				$	1,724,735		$	1,604,556




	Money market access and NOW accounts					5,386,871			5,129,626




	Certificates of deposit					4,579,648			4,811,357




	Brokered deposits					41,585			72,171




	Demand deposits					2,670,739			2,603,339

			Total deposits			14,403,578			14,221,049




Federal funds purchased and securities sold under repurchase agreements						1,842,195			1,620,555




Borrowings from the Federal Home Loan Bank						2,467,378			2,644,105




Other borrowings						71,558			43,972




Subordinated long-term debt						200,000			200,000




Company obligated, mandatorily redeemable securities of subsidiary trusts holding solely parent junior subordinated debentures						293,756			93,756




Other liabilities						166,735			464,034

	Total liabilities					19,445,200			19,287,471

Shareholders’ Equity:




Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, none issued)						—			—




Common stock (par value $0.01 per share, 400,000,000 shares authorized, 165,120,567 shares issued in 2002 and 165,123,674 shares issued in 2001)						1,651			1,651




Paid-in capital						955,215			958,764




Retained earnings						1,157,457			1,056,678




Unearned compensation						(371	)		(1,017	)




Treasury stock, at cost (18,025,230 shares in 2002 and 13,903,074 shares in 2001)						(374,417	)		(267,529	)




Accumulated other comprehensive income						75,903			40,568

	Total shareholders’ equity					1,815,438			1,789,115

		Total liabilities and shareholders’ equity			$	21,260,638		$	21,076,586

See accompanying Notes to Consolidated Financial Statements.

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


			Three Months Ended				Six Months Ended
			June 30,				June 30,

			2002		2001		2002		2001

Interest and dividend income:




	Interest and fees on loans and leases		$	218,981	$	221,507	$	440,764	$	450,330




	Interest and dividends on securities			90,406		95,128		174,629		192,849

		Total interest and dividend income		309,387		316,635		615,393		643,179

Interest expense:




	Interest on deposits			61,466		95,989		126,307		200,227




	Interest on borrowed funds			48,448		54,946		93,127		121,304

		Total interest expense		109,914		150,935		219,434		321,531

		Net interest income		199,473		165,700		395,959		321,648




Provision for loan and lease losses				10,829		9,311		22,657		16,450

		Net interest income after provision for loan and lease losses		188,644		156,389		373,302		305,198

Noninterest income:




	Deposit services			19,936		18,401		38,896		35,947




	Mortgage banking services			489		1,776		2,165		5,010




	Trust and investment management services			8,519		8,703		16,796		17,490




	Investment planning services			2,964		1,760		5,681		3,458




	Insurance brokerage commissions			10,060		9,241		20,215		19,209




	Bank-owned life insurance			4,994		4,891		9,371		9,198




	Merchant and electronic banking income, net			9,661		7,971		17,410		14,462




	Loan fee income			5,086		2,981		10,519		5,685




	Net securities gains			350		45		369		803




	Other noninterest income			927		1,828		3,140		5,092

				62,986		57,597		124,562		116,354

Noninterest expenses:




	Salaries and employee benefits			75,747		62,856		151,044		124,550




	Data processing			9,843		8,917		20,425		17,878




	Occupancy			12,785		11,070		25,284		22,882




	Equipment			9,908		8,746		19,638		16,907




	Amortization of goodwill			—		2,761		—		5,554




	Amortization of identifiable intangible assets			2,894		2,631		6,230		5,262




	Special charges			1,061		—		9,265		5,608




	Other noninterest expenses			26,304		24,846		51,305		48,026

				138,542		121,827		283,191		246,667

Income before income tax expense				113,088		92,159		214,673		174,885




Applicable income tax expense				38,077		32,266		72,333		59,608

		Net income before cumulative effect of change in accounting principle		75,011		59,893		142,340		115,277




Cumulative effect of change in accounting principle, net of tax				—		—		—		(290	)

		Net income	$	75,011	$	59,893	$	142,340	$	114,987

Basic earnings per share:




	Net income before cumulative effect of accounting change		$	0.51	$	0.44	$	0.96	$	0.83




	Cumulative effect of change in accounting principle, net of tax			—		—		—		—

	Net income		$	0.51	$	0.44	$	0.96	$	0.83

Diluted earnings per share:




	Net income before cumulative effect of accounting change		$	0.50	$	0.43	$	0.95	$	0.82




	Cumulative effect of change in accounting principle, net of tax			—		—		—		—

	Net income		$	0.50	$	0.43	$	0.95	$	0.82

Weighted average shares outstanding:




		Basic		147,233		137,659		148,258		139,236




		Diluted		149,064		138,901		150,068		140,461

See accompanying Notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands) (Unaudited)


																Accumulated
										Unearned						Other
		Common		Paid-in			Retained			Compen-			Treasury			Comprehensive
		Stock		Capital			Earnings			sation			Stock			Income (Loss)			Total

Balances at December 31, 2001		$	1,651	$	958,764		$	1,056,678			($1,017	)		($267,529	)	$	40,568		$	1,789,115




Net income			—		—			142,340			—			—			—			142,340




Unrealized gain on securities, net of reclassification adjustment			—		—			—			—			—			36,110			36,110




Unrealized loss on cash flow hedges, net of reclassification adjustment			—		—			—			—			—			(775	)		(775	)

	Comprehensive income																			177,675

Treasury stock issued for employee benefit plans			—		(6,541	)		—			—			32,609			—			26,068




Treasury stock purchased			—		—			—			—			(141,026	)		—			(141,026	)




Issuance and distribution of restricted stock			—		(899	)		—			—			1,529			—			630




Decrease in unearned compensation-ESOP			—		3,930			—			646			—			—			4,576




Cash in lieu of fractional shares			—		(39	)		—			—			—			—			(39)




Cash dividends			—		—			(41,561	)		—			—			—			(41,561	)

Balances at June 30, 2002		$	1,651	$	955,215		$	1,157,457			($371	)		($374,417	)	$	75,903		$	1,815,438

Balances at December 31, 2000		$	1,496	$	617,234		$	897,214			($1,354	)		($149,246	)		($34,487	)	$	1,330,857




Net income			—		—			114,987			—			—			—			114,987




Unrealized gain on securities, net of reclassification adjustment			—		—			—			—			—			33,978			33,978




Unrealized gain on cash flow hedges																	319			319

	Comprehensive income																			149,284

Treasury stock issued for employee benefit plans			—		297			(2,156	)		—			12,302			—			10,443




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




Issuance and distribution of restricted stock			—		(12	)		(48	)		—			160			—			100




Decrease in unearned compensation-ESOP			—		790			—			168			—			—			958




Cash in lieu of fractional shares			—		(2	)		—			—			—			—			(2	)




Cash dividends			—		—			(36,040	)		—			—			—			(36,040	)

Balances at June 30, 2001		$	1,496	$	618,307		$	973,957			($1,186	)		($231,722	)		($190	)	$	1,360,662

See accompanying Notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)


			Six months ended June 30,

			2002			2001

Cash flows from operating activities:




	Net income		$	142,340		$	114,987




	Adjustments to reconcile net income to net cash provided by operating activities:




		Provision for loan and lease losses		22,657			16,450




		Depreciation		17,304			14,669




		Amortization of goodwill and other intangibles		6,230			10,816




		Provision for deferred tax expense		6,754			363




		ESOP and restricted stock expense		4,576			958




		Issuance of restricted stock units		630			100




		Net (gains) realized from sales of securities and consumer loans		(369	)		(1,571	)




		Net (gains) realized from sales of loans held for sale (a component of mortgage banking services)		(3,640	)		(3,602	)




		Earnings from bank owned life insurance		(9,371	)		(9,198	)




		Net decrease in mortgage servicing rights		906			22,730




		Proceeds from sales of loans held for sale		361,989			437,241




		Residential loans originated for sale		(293,906	)		(457,687	)




		Net (increase) decrease in interest and dividends receivable and other assets		(9,593	)		19,449




		Net increase in other liabilities		12,257			55,405

Net cash provided by operating activities				258,764			221,110

Cash flows from investing activities:




	Proceeds from sales of securities available for sale			412,082			280,742




	Proceeds from maturities and principal repayments of securities available for sale			1,067,613			922,121




	Purchases of securities available for sale			(1,947,973	)		(1,161,735	)




	Proceeds from maturities and principal repayments of securities held to maturity			57,955			49,601




	Net (increase) in loans and leases			(356,846	)		(90,028	)




	Proceeds from sale of loans			—			39,303




	Net additions to premises and equipment			(17,870	)		(16,532	)




	Purchases of bank owned life insurance			(40,000	)		—




	Proceeds from death claim on bank owned life insurance			—			3,690

Net cash (used) provided by investing activities				(825,039	)		27,162

Cash flows from financing activities:




	Net increase in deposits			182,529			320,263




	Net increase in securities sold under repurchase agreements			221,640			132,417




	Proceeds from Federal Home Loan Bank borrowings			3,555			5,152,421




	Payments on Federal Home Loan Bank borrowings			(180,282	)		(6,083,989	)




	Net increase in other borrowings			27,586			166,396




	Issuance of subordinated long-term debt			—			200,000




	Issuance of securities of subsidiary trusts, net			193,150			—




	Issuance of stock			26,029			10,441




	Purchase of treasury stock			(141,026	)		(94,938	)




	Dividends paid			(41,561	)		(36,040	)

Net cash provided (used) by financing activities				291,620			(233,029	)

Increase (decrease) in cash and cash equivalents				(274,655	)		15,243




	Cash and cash equivalents at beginning of period			871,211			392,989

	Cash and cash equivalents at end of period		$	596,556		$	408,232

For the six months ended June 30, 2002 and 2001, interest of $217,021 and $324,930 and income taxes of $32,773 and $41,299 were paid, respectively

See accompanying Notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002

(In thousands, except per share data) (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. Banknorth Group, Inc. (“Banknorth”) has not changed its accounting and reporting policies from those disclosed in its 2001 Annual Report, except for the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” as discussed in Note 2 and No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets“as discussed in Note 7. There have been no significant changes in the methods or assumptions used in the accounting policies which require material estimates and assumptions.

Effective January 1, 2002, Banknorth completed the consolidation of eight of its banking subsidiaries and its subsidiary trust company into its Maine-based banking subsidiary, Peoples Heritage Bank NA, which was renamed Banknorth, NA in connection with these transactions.

In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations and other data for the three months and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 2002. Certain amounts in the prior periods have been reclassified to conform to the current presentation.

Note 2 – Goodwill and Other Intangible Assets

Banknorth adopted the provisions of SFAS No. 142 effective January 1, 2002. As of the date of adoption, we had unamortized goodwill in the amount of $409.3 million, and unamortized identifiable intangible assets in the amount of $57.3 million, all of which were subject to the transition provisions of SFAS No. 141, “Business Combinations” and SFAS No. 142. Banknorth has completed the transitional impairment test on goodwill assets and has concluded that the amount of recorded goodwill was not impaired as of January 1, 2002. Banknorth does not currently have any other indefinite-lived intangible assets recorded in the consolidated balance sheet. In addition, no material reclassifications or adjustments to the useful lives of finite-lived intangible assets were made as a result of adopting the new standard. The full impact of adopting SFAS No. 142 is expected to result in an increase in net income of approximately $11.0 million, or approximately $.07 per diluted share in 2002, as a result of no longer having to amortize goodwill. At June 30, 2002, Banknorth had $48.8 million in unamortized identifiable intangible assets consisting of core deposit intangibles, “SFAS 72” intangibles and other intangibles. Total amortization expense associated with these intangible assets in the second quarter of 2002 and 2001 was $2.9 million and $2.6 million, respectively, and $6.2 million and $5.3 million for the six months ended June 30, 2002 and 2001, respectively.

The changes in the carrying amount of goodwill and identifiable intangible assets for the six months ended June 30, 2002 follows:


								Other			Total
					Core Deposit			Identifiable			Identifiable
		Goodwill			Intangibles			Intangibles			Intangibles

Balance, December 31, 2001		$	409,340		$	21,321		$	35,972		$	57,293




Recorded during the year			—			—			—			—




Reclassification			2,214			(2,214	)		—			(2,214	)




Amortization expense			—			(2,501	)		(3,729	)		(6,230	)




Impairment recognized			—			—			—			—




Adjustment of purchase accounting estimates			(1,060	)		—			—			—




Change in deferred taxes related to remaining book/tax basis differences of purchase accounting adjustments			(1,443	)		—			—			—

Balance, June 30, 2002		$	409,051		$	16,606		$	32,243		$	48,849

Estimated Annual Amortization Expense:




	2002		—			5,684			7,338			13,022




	2003		—			2,017			3,690			5,707




	2004		—			1,563			2,936			4,499




	2005		—			1,548			2,486			4,034




	2006		—			1,548			2,486			4,034

The components of identifiable intangible assets follows:


		June 30, 2002

		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Identifiable intangible assets:




Core deposit intangibles		$	35,765	$	19,159	$	16,606




“SFAS 72” intangibles			45,787		14,594		31,193




Other identifiable intangibles			1,350		300		1,050

	Total	$	82,902	$	34,053	$	48,849

The following table sets forth the reconcilement of net income and earnings per share excluding goodwill amortization for the three and six months ended June 30, 2002 and 2001.


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2002		2001		2002		2001

Reported net income		$	75,011	$	59,893	$	142,340	$	114,987




Add back:




	Goodwill amortization (1)		—		2,529		—		5,091

Adjusted net income		$	75,011	$	62,422	$	142,340	$	120,078

Basic earnings per share:




Reported net income		$	0.51	$	0.44	$	0.96	$	0.83




Add back:




	Goodwill amortization (1)		—		0.02		—		0.04

Adjusted net income		$	0.51	$	0.46	$	0.96	$	0.87

Diluted earnings per share:




Reported net income		$	0.50	$	0.43	$	0.95	$	0.82




Add back:




	Goodwill amortization (1)		—		0.02		—		0.04

Adjusted net income		$	0.50	$	0.45	$	0.95	$	0.86

(1) After-tax effect

Note 3 – Capital Trust Securities

On February 22, 2002, Banknorth Capital Trust II, a subsidiary of Banknorth issued $200 million of 8% trust preferred securities (“Securities”) to the public and invested the proceeds from this offering in an equivalent amount of junior subordinated debentures issued by Banknorth. The proceeds from the offering to Banknorth, which was net of $6.8 million of issuance costs, will be used for general corporate purposes, including working capital, capital expenditures, investments in or advances to existing or future indebtedness, repayment of maturing obligations, replacement of outstanding indebtedness and repurchase of outstanding stock. The Securities pay interest quarterly, are mandatorily redeemable on April 1, 2032 and may be redeemed by the Trust at par any time on or after April 1, 2007.

Note 4 – Share Repurchase Programs

During the six months ended June 30, 2002, Banknorth repurchased 5.8 million shares of its outstanding common stock at an average price of $24.25. At June 30, 2002, there were a total of 7.8 million shares remaining under existing repurchase authorizations.

Note 5 — Comprehensive Income

The components of comprehensive income for Banknorth are net income, unrealized gains (losses) on securities available for sale and unrealized gains (losses) on cash flow hedges, net of tax. The following is a reconciliation of comprehensive income for the six months ended June 30, 2002 and 2001.


			Six Months Ended
			June 30,

			2002			2001

Net income			$	142,340		$	114,987




Other comprehensive income (loss), net of tax:




Unrealized gains (losses) on available for sale securities:




		Unrealized holding gains arising during the period		36,350			34,500




	Less: reclassification adjustment for gains included in net income			240			522

				36,110			33,978

Unrealized gains (losses) on cash flow hedges:




		Unrealized holding losses arising during the period		(1,095	)		(224	)




	Less: reclassification adjustment for losses included in net income			(320	)		(543	)

				(775	)		319

Other comprehensive income, net				35,335			34,297

Comprehensive income			$	177,675		$	149,284

Note 6 — Earnings Per Share

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


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2002		2001		2002		2001

Net income before cumulative effect of accounting change		$	75,011	$	59,893	$	142,340	$	115,277




Cumulative effect of change in accounting principle, net of tax			—		—		—		(290	)

Net income		$	75,011	$	59,893	$	142,340	$	114,987

Weighted average basic common shares outstanding			147,233		137,659		148,258		139,236




Effect of dilutive stock options			1,831		1,242		1,810		1,225

Weighted average diluted common shares outstanding			149,064		138,901		150,068		140,461

Basic earnings per share:




	Net income before cumulative effect of accounting change	$	0.51	$	0.44	$	0.96	$	0.83




	Cumulative effect of change in accounting principle, net of tax		—		—		—		—

	Net income	$	0.51	$	0.44	$	0.96	$	0.83

Diluted earnings per share:




	Net income before cumulative effect of accounting change	$	0.50	$	0.43	$	0.95	$	0.82




	Cumulative effect of change in accounting principle, net of tax		—		—		—		—

	Net income	$	0.50	$	0.43	$	0.95	$	0.82

Note 7 — Adoption of New Accounting Standards

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” SFAS No. 144 provides additional implementation guidance and supersedes SFAS No. 121, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of”, among other things. It is effective for financial statements issued for fiscal years beginning after December 15, 2001. SFAS No. 144 was adopted on January 1, 2002 with no impact on our financial condition or results of operations.

Note 8 — Pending Acquisitions

On April 11, 2002, Banknorth announced that it had entered into an agreement to acquire Bancorp Connecticut, Inc. (“Bancorp”) for $28.00 per share in cash. At June 30, 2002, Bancorp had total assets of $671 million and shareholders’ equity of $62 million. Bancorp is the parent company of Southington Savings Bank. The definitive agreement has been approved by the Boards of Directors of Banknorth and Bancorp and all required regulatory approvals have been received. The consummation of the merger is subject to the receipt of the approval of the shareholders of Bancorp and other customary closing conditions. The acquisition is expected to be completed in the third quarter of 2002.

On July 26, 2002, Banknorth completed its acquisition of Massachusetts-based Ipswich Bancshares, Inc. (“Ipswich”) for total consideration of $19.9 million in cash and $20.0 million of Banknorth common stock. Approximately 842,000 shares of Banknorth common stock will be issued in this transaction following the completion of post-closing election and allocation procedures. Ipswich had $324 million in assets and $16.7 million in shareholders’ equity at June 30, 2002. Under terms of the agreement, each outstanding share of common stock of Ipswich was converted into the right to receive $20.50 in cash or a number of whole shares of Banknorth common stock determined by dividing $20.50 by the average closing prices of the Banknorth common stock during a specified period preceding the merger, plus cash in lieu of any fractional share interest, subject to election and allocation procedures which are intended to ensure that 51% of the outstanding shares of Ipswich common stock will be

converted into the right to receive Banknorth common stock and 49% of the outstanding Ipswich common stock will be converted into cash.

On July 2, 2002, the Company acquired Community Insurance Agencies, Inc. (“Community”) in exchange for approximately 213,000 shares of Company common stock. Community is headquartered in South Glens Falls, New York and has 57 employees and had $24 million of premium revenue in 2001. Community will be combined with and managed by Banknorth Insurance Group, the insurance agency division of Banknorth, NA.

On August 8, 2002, the Company announced that it had entered into an agreement to acquire Massachusetts-based Warren Bancorp, Inc. (“Warren”), parent company of Warren Five Cents Savings Bank. Warren had $460 million in assets and $44 million in shareholders’ equity at June 30, 2002. Under terms of the agreement, each outstanding share of common stock of Warren will be converted into the right to receive $15.75 in cash or a number of whole shares of Banknorth common stock determined by dividing $15.75 by the average closing prices of Banknorth common stock during a specified period preceding the merger, plus cash in lieu of any fractional share interest, subject to election and allocation procedures which are intended to ensure that 50% of the outstanding shares of Warren common stock will be converted into the right to receive Banknorth common stock and 50% of the outstanding Warren common stock will be converted into cash. The agreement has been approved by Banknorth and Warren Boards of Directors. The consummation of the merger is subject to the receipt of the approval of the shareholders of Warren and all required regulatory approvals and other customary closing conditions. The acquisition is expected to be completed by the end of the year.

Note 9 – State Tax Assessment

In June 2002, a notice of intent to assess tax plus interest for the years ended 1999 and 2000 was received from the Massachusetts Department of Revenue (“DOR”). The assessment notices relate to Massachusetts banks which have been acquired by the Company through July 2002 and had a real estate investment trust (“REIT”) in their corporate structure. The DOR contends that dividend distributions from a REIT to a parent company are fully taxable in Massachusetts. The Company disagrees with the position of the DOR and contends that Massachusetts law provides for a 95% dividends-received deduction. The Company intends to appeal the assessment and defend its position. Should the DOR prevail, the potential assessment for 1999, 2000 and 2001 (we have not yet been assessed for 2001) of tax is approximately $4.5 million, net of Federal benefit, exclusive of interest and penalties. Such tax assessment would be accounted for as an adjustment to the purchase price for the acquisition of these banks and would increase goodwill.

BANKNORTH GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The Company’s financial statements for the three and six month periods ended June 30, 2002 reflect the acquisitions of Andover Bancorp, Inc. (“Andover”) and MetroWest Bank (“MetroWest”), both of which closed on October 31, 2001. Because these mergers were accounted for under the purchase method of accounting, periods prior to October 31, 2001 have not been restated. Therefore, combined operations are presented only from October 31, 2001, and operations for the three and six month periods ended June 30, 2001 include only Banknorth. The acquisitions of Andover and MetroWest increased the Company’s total assets by approximately $2.7 billion, or 15%. The operational conversions of the Andover and MetroWest systems were completed in the first quarter of 2002; related personnel and expense reductions were also substantially completed in the first quarter of 2002.

SUMMARY

We reported consolidated net income of $75.0 million, or $0.50 per diluted share, for the second quarter of 2002 as compared with $59.9 million, or $0.43 per diluted share, for the second quarter of 2001, an increase of 16% on a per share basis. Results in the second quarter of 2002 were diminished by the effect of special charges, which consist of merger-related charges, charter consolidation costs, certain asset write-downs and branch closing costs while the second quarter of 2001 included goodwill amortization which ceased January 1, 2002 under new accounting rules. Special charges totaled $690 thousand (after-tax), or $.01 per diluted share for the three months ended June 30, 2002. There were no special charges in the second quarter of 2001. Goodwill amortization totaled $2.5 million (after-tax), or $.02 per diluted share for the three months ended June 30, 2001. There was no goodwill amortization (or impairment) in the second quarter of 2002.

Annualized return on average equity (ROE) and return on average assets (ROA) were 1.44% and 17.18%, respectively for the quarter ended June 30, 2002 and were 1.32% and 17.85%, respectively, for the comparable quarter one year ago.

Annualized operating cash return on average equity (“Operating Cash ROE”) and operating cash return on average assets (“Operating Cash ROA”) were 24.21% and 1.53%, respectively, for the quarter ended June 30, 2002 and were 22.11% and 1.44%, respectively, for the comparable quarter one year ago. Operating cash ROE and operating cash ROA exclude the after-tax effect of special charges and the amortization of goodwill and intangible assets.

Results for the second quarter of 2002 improved over the second quarter of 2001 due largely to increased net interest income tempered by higher expenses; credit quality remained strong. Net interest income grew by 20% as a result of increased net interest margins and the acquisitions of Andover and MetroWest. The net interest margin increased by 22 basis points due to a decline in short-term interest rates resulting from Federal Reserve Board rate cuts during 2001 and growth in higher-margin core deposits and commercial loans. Non-interest expenses increased by 14% due in large part to the acquisitions of Andover and MetroWest and increased incentive compensation expense. The efficiency ratio was 52.86% in the second quarter of 2002 compared to 54.57% in the comparable period last year. For a description of the methodology we use to calculate the cash efficiency ratio, see Note 5 to Table 1. Selected quarterly data, ratios and per share data are provided in Table 1.

For the first six months of 2002 consolidated net income was $142.3 million, or $0.95 per diluted share as compared with $115.0 million, or $0.82 per diluted share, for the first six months of the prior year. Results in each period were diminished by the effect of special charges which totaled $6.0 million (after-tax), or $.04 per diluted share, for the six months ended June 30, 2002 and $3.7 million (after-tax), or $.03 per diluted share, for the six months ended June 30, 2001. (See Table 5 for special charge activity for the six months ended June 30, 2002). The first six months of 2001 were burdened with goodwill amortization of $5.1 million (after-tax), or $.04 per diluted share. Under new accounting rules, there was no goodwill amortization (or impairment) in the six months of 2002. Net interest income for the six months ended June 30, 2002 increased 23% from the same period last year primarily due to a 35 basis point increase in net interest margin and the acquisitions of Andover and MetroWest. The provision for loan and lease losses for the six months ended June 30, 2002 increased 38% over the same period last year mostly due to higher net charge-offs and

increased loans outstanding. Noninterest income for the six months ended June 30, 2002 increased 7% compared to the same period last year while noninterest expense increased 15%.

Annualized operating cash return on average equity (“Operating Cash ROE”) and operating cash return on average assets (“Operating Cash ROA”) were 23.84% and 1.53%, respectively, for the six months ended June 30, 2002 and were 22.12% and 1.44%, respectively, for the comparable period one year ago. Operating cash ROE and operating cash ROA exclude the after-tax effect of special charges and the amortization of goodwill and intangible assets. Annualized return on average equity (ROE) and return on average assets (ROA) were 1.44% and 17.18%, respectively for the six months ended June 30, 2002 and were 1.32% and 17.85%, respectively, for the comparable quarter one year ago.

TABLE 1 — Selected Quarterly Data
(Dollars in thousands, except per share data)


				2002						2001

				Second			First			Fourth			Third			Second			First

Net interest income				$	199,473		$	196,486		$	188,458		$	169,784		$	165,699		$	155,949




Provision for loan and lease losses					10,829			11,828			13,378			12,061			9,311			7,138

Net interest income after loan and lease loss provision					188,644			184,658			175,080			157,723			156,388			148,811




Noninterest income (1)					62,636			61,557			63,560			60,065			57,552			57,997




Net securities gains					350			19			39			486			45			759




Noninterest expenses (excluding special charges) (2)					137,481			136,445			136,016			124,632			121,826			119,233




Special charges (2)					1,061			8,204			2,007			—			—			5,608

Income before income taxes					113,088			101,585			100,656			93,642			92,159			82,726




Income tax expense					38,077			34,256			35,152			31,440			32,266			27,343

Net income before extraordinary item and cumulative effect of change in accounting principle					75,011			67,329			65,504			62,202			59,893			55,383




Extraordinary item-early extinguishment of debt, net of tax					—			—			(3,897	)		—			—			—




Cumulative effect of change in accounting principle, net of tax					—			—			—			—			—			(290	)

Net income				$	75,011		$	67,329		$	61,607		$	62,202		$	59,893		$	55,093

Basic earnings per share:




	Net income before extraordinary item and cumulative effect of change in accounting principle			$	0.51		$	0.45		$	0.45		$	0.45		$	0.44		$	0.39




		Extraordinary item-early extinguishment of debt, net of tax			—			—			(0.03	)		—			—			—




		Cumulative effect of change in accounting principle, net of tax			—			—			—			—			—			—

				$	0.51		$	0.45		$	0.42		$	0.45		$	0.44		$	0.39

Diluted earnings per share:




	Net income before extraordinary item and cumulative effect of change in accounting principle			$	0.50		$	0.45		$	0.44		$	0.45		$	0.43		$	0.39




		Extraordinary item-early extinguishment of debt, net of tax			—			—			(0.03	)		—			—			—




		Cumulative effect of change in accounting principle, net of tax			—			—			—			—			—			—

				$	0.50		$	0.45		$	0.41		$	0.45		$	0.43		$	0.39

Return on average assets (3)					1.44	%		1.33	%		1.23	%		1.37	%		1.32	%		1.24	%




Return on average equity (3)					17.18	%		15.46	%		14.45	%		17.63	%		17.85	%		16.59	%




Net interest margin					4.18	%		4.24	%		4.13	%		4.09	%		3.98	%		3.78	%




Noninterest income as a percent of total income (1)					23.90	%		23.86	%		25.22	%		26.13	%		25.78	%		27.11	%




Efficiency ratio (4)					52.86	%		56.06	%		54.77	%		54.22	%		54.57	%		58.35	%




Operating data (5):




	Net income			$	75,011		$	67,329		$	61,607		$	62,202		$	59,893		$	55,093




		Add: Special charges, net of tax			690			5,342			1,294			—			—			3,651




			Extraordinary item — early extinguishment of debt, net of tax		—			—			3,897			—			—			—




			Cumulative effect of change in accounting principle, net of tax		—			—			—			—			—			290

	Operating income			$	75,701		$	72,671		$	66,798		$	62,202		$	59,893		$	59,034

Operating ratios (5):




Return on average assets (excluding special items) (2) (3)					1.45	%		1.44	%		1.33	%		1.37	%		1.32	%		1.32	%




Return on average equity (excluding special items) (2) (3)					17.34	%		16.69	%		15.67	%		17.63	%		17.85	%		17.78	%




Efficiency ratio (4) (6)					52.45	%		52.88	%		53.97	%		54.22	%		54.57	%		55.73	%




Cash return on average assets (excluding special items)(2)(3)(7)					1.53	%		1.53	%		1.46	%		1.48	%		1.44	%		1.44	%




Cash return on average equity (excluding special items)(2)(3)(7)					24.21	%		23.50	%		21.35	%		21.57	%		22.12	%		22.15	%




Cash efficiency ratio(4)(8)					51.34	%		51.58	%		51.64	%		51.88	%		52.15	%		53.20	%

(1)		Excludes securities transactions.




(2)		Special charges consist of merger charges, charter consolidation costs, asset write-downs and branch closing costs where applicable. See table 5. Special items consists of (i) special charges, (ii) extraordinary item for the early extinguishment of debt in the fourth quarter of 2001 and (iii) cumulative effect of change in accounting principle in the first quarter 2001.




(3)		Annualized.




(4)		Represents noninterest expenses as a percentage of net interest income and noninterest income, excluding net securities gains and losses.




(5)		Operating data and ratios set forth above are not presented in accordance with accounting principles generally accepted in the United States of America or any other standardized requirements and, accordingly, there can be no assurance that this data is comparable with similar financial data of other issuers. However, management believes that the data provides meaningful supplemental information regarding operating results.




(6)		Excludes special charges.




(7)		Excludes the after-tax effect of amortization of intangible assets.




(8)		Excludes special charges and amortization of intangible assets.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the difference between interest income on earning assets such as loans, leases and securities, and interest expense paid on liabilities such as deposits and borrowings, and continues to be our largest revenue source. Net interest income is affected by the level of interest rates, changes in interest rates and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities.

Fully-taxable equivalent net interest income for the second quarter of 2002 increased $33.5 million compared to the second quarter of 2001 while the net interest margin increased from 3.96% to 4.18% for the respective periods. Approximately two-thirds of the $33.5 million increase in net interest income was due to the acquisition of Andover and MetroWest, while the balance of the increase and the improved margins were due mainly to the cost of funds falling faster than the yields on earning assets. Average net earning assets increased $2.3 billion for the three months ended June 30, 2002 compared to the same period in the prior year, primarily as a result of the acquisitions of Andover and MetroWest. The rate decreases were reflective of the Federal Reserve rate cuts during 2001. Average loans as a percent of average earning assets was 67% and 65% for the quarters ended June 30, 2002 and 2001, respectively. Average loans and leases increased by $2.0 billion, or 18%, compared to the second quarter of 2001 due primarily to the acquisition of Andover and MetroWest in the fourth quarter of 2001 and internal loan growth.

Our fully-taxable equivalent net interest income for the six months ended June 30, 2002 increased $73.8 million compared to the six months ended June 30, 2001 primarily for the same reasons as the increase during the three months ended June 30, 2002, as discussed above. The net interest margin increased from 3.86% for the six months ended June 30, 2001 to 4.21% for the six months ended June 30, 2002 primarily due to a 173 basis point decrease in rates paid on interest-bearing liabilities compared to a 119 basis point decrease in interest rates earned on earning assets. Average net earning assets increased $488.7 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001 due in part to the acquisition of Andover and MetroWest in the fourth quarter of 2001. Table 2 shows quarterly average balances, net interest income by category and rates for each of the quarters in 2002 and 2001 and for the six months ended June 30, 2002 and 2001. 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.

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin (net interest income divided by average interest-earning assets). For purposes of the tables and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of 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
(Dollars in thousands)


					2002 Second Quarter								2002 First Quarter

										Yield/								Yield/
					Average Balance		Interest			Rate(1)			Average Balance		Interest			Rate (1)

Loans and leases (2):




	Residential real estate mortgages				$	2,569,964	$	43,946			6.84	%	$	2,675,415	$	47,265			7.07	%




	Commercial real estate mortgages					4,216,766		74,347			7.07			4,101,873		72,724			7.19




	Commercial business loans and leases					2,595,548		39,333			6.08			2,464,378		38,661			6.36




	Consumer loans and leases					3,530,040		62,158			7.06			3,539,213		63,952			7.33

				Total loans and leases		12,912,318		219,784			6.82			12,780,879		222,602			7.04




Investment securities						6,276,523		90,804			5.79			5,943,057		84,296			5.68




Federal funds sold and other short-term investments						25,856		52			0.81			72,107		415			2.33

		Total earning assets				19,214,697		310,640			6.48			18,796,043		307,313			6.59

Noninterest-earning assets						1,676,185								1,671,783

		Total assets			$	20,890,882							$	20,467,826

Interest-bearing deposits:




	Regular savings				$	1,716,942	$	4,061			0.95		$	1,646,822	$	3,964			0.98




	NOW and money market accounts					5,246,053		19,897			1.52			5,099,310		18,895			1.50




	Certificates of deposit					4,652,499		37,273			3.21			4,762,399		41,694			3.55




	Brokered deposits					50,741		235			1.86			63,594		288			1.84

			Total interest-bearing deposits			11,666,235		61,466			2.11			11,572,125		64,841			2.27




Borrowed funds						4,784,197		48,448			4.06			4,511,945		44,679			4.01

			Total interest-bearing liabilities			16,450,432		109,914			2.68			16,084,070		109,520			2.76

Non-interest bearing deposits						2,520,968								2,446,539




Other liabilities						168,403								171,449




Shareholders’ equity						1,751,079								1,765,768

		Total liabilities and shareholders’ equity			$	20,890,882							$	20,467,826

Net earning assets					$	2,764,265							$	2,711,973

Net interest income (fully-taxable equivalent)								200,726								197,793




Less: fully-taxable equivalent adjustments								(1,253	)							(1,307	)

		Net interest income					$	199,473							$	196,486

Net interest rate spread (fully-taxable equivalent)											3.80	%							3.83	%




Net interest margin (fully-taxable equivalent)											4.18	%							4.23	%

(1)		Annualized.




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

TABLE 2 — Average Balances, Yields and Rates
(Dollars in thousands)


					2001 Fourth Quarter								2001 Third Quarter

										Yield/								Yield/
					Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)

Loans and leases (2):




	Residential real estate mortgages				$	2,568,103	$	47,262			7.36	%	$	2,102,988	$	38,716			7.36	%




	Commercial real estate mortgages					3,737,282		70,871			7.52			3,121,928		64,802			8.24




	Commercial business loans and leases					2,379,623		40,275			6.72			2,360,191		44,482			7.48




	Consumer loans and leases					3,508,370		68,384			7.73			3,359,036		69,027			8.15

				Total loans and leases		12,193,378		226,792			7.39			10,944,143		217,027			7.88




Investment securities						6,127,076		88,950			5.80			5,815,678		90,657			6.23




Federal funds sold and other short-term investments						52,108		263			1.99			17,125		131			3.02

		Total earning assets				18,372,562		316,005			6.85			16,776,946		307,815			7.30

Noninterest-earning assets						1,516,800								1,273,973

		Total assets			$	19,889,362							$	18,050,919

Interest-bearing deposits:




	Regular savings				$	1,543,616	$	4,070			1.05		$	1,416,784	$	4,391			1.23




	NOW and money market accounts					4,826,227		22,820			1.88			4,166,281		26,114			2.49




	Certificates of deposit					4,664,683		49,158			4.18			4,386,194		53,692			4.86




	Brokered deposits					110,772		1,175			4.21			165,115		2,327			5.59

			Total interest-bearing deposits			11,145,298		77,223			2.75			10,134,374		86,524			3.39




Borrowed funds						4,495,463		48,803			4.31			4,133,666		49,817			4.79

			Total interest-bearing liabilities			15,640,761		126,026			3.20			14,268,040		136,341			3.79

Non-interest bearing deposits						2,387,677								2,212,517




Other liabilities						169,235								170,672




Shareholders’ equity						1,691,689								1,399,690

		Total liabilities and shareholders’ equity			$	19,889,362							$	18,050,919

Net earning assets					$	2,731,801							$	2,508,906

Net interest income (fully-taxable equivalent)								189,979								171,474




Less: fully-taxable equivalent adjustments								(1,521	)							(1,690	)

		Net interest income					$	188,458							$	169,784

Net interest rate spread (fully-taxable equivalent)											3.65	%							3.51	%




Net interest margin (fully-taxable equivalent)											4.13	%							4.08	%

(1)		Annualized.




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

TABLE 2 — Average Balances, Yields and Rates
(Dollars in thousands)


					2001 Second Quarter								2001 First Quarter

										Yield/								Yield/
					Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)

Loans and leases (2):




	Residential real estate mortgages				$	2,206,518	$	40,866			7.41	%	$	2,285,219	$	43,118			7.55	%




	Commercial real estate mortgages					3,036,744		64,949			8.58			2,964,053		64,658			8.85




	Commercial business loans and leases					2,322,572		46,509			8.03			2,304,625		49,439			8.70




	Consumer loans and leases					3,342,216		70,166			8.42			3,373,971		72,604			8.73

				Total loans and leases		10,908,050		222,490			8.18			10,927,868		229,819			8.51




Investment securities						5,931,974		95,241			6.42			5,819,082		97,939			6.74




Federal funds sold and other short-term investments						48,148		476			3.93			20,946		296			5.68

		Total earning assets				16,888,172		318,207			7.55			16,767,896		328,054			7.88

Noninterest-earning assets						1,264,302								1,307,350

		Total assets			$	18,152,474							$	18,075,246

Interest-bearing deposits:




	Regular savings				$	1,405,540	$	4,898			1.40		$	1,390,834	$	5,561			1.62




	NOW and money market accounts					4,059,390		28,525			2.82			3,969,403		32,539			3.32




	Certificates of deposit					4,484,684		60,086			5.37			4,513,295		63,502			5.71




	Brokered deposits					167,419		2,480			5.94			165,065		2,637			6.48

			Total interest-bearing deposits			10,117,033		95,989			3.81			10,038,597		104,239			4.21




Borrowed funds						4,428,380		54,946			4.98			4,572,935		66,357			5.88

			Total interest-bearing liabilities			14,545,413		150,935			4.16			14,611,532		170,596			4.73

Non-interest bearing deposits						2,101,326								1,966,919




Other liabilities						159,955								150,037




Shareholders’ equity						1,345,780								1,346,758

		Total liabilities and shareholders’ equity			$	18,152,474							$	18,075,246

Net earning assets					$	2,342,759							$	2,156,364

Net interest income (fully-taxable equivalent)								167,272								157,458




Less: fully-taxable equivalent adjustments								(1,572	)							(1,509	)

		Net interest income					$	165,700							$	155,949

Net interest rate spread (fully-taxable equivalent)											3.39	%							3.15	%




Net interest margin (fully-taxable equivalent)											3.96	%							3.76	%

(1)		Annualized.




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

TABLE 2 — Average Balances, Yields and Rates
(Dollars in thousands)


		Six Months Ended								Six Months Ended
		June 30, 2002								June 30, 2001

							Yield/								Yield/
		Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)

Loans and leases (2):




	Residential real estate mortgages	$	2,622,398	$	91,211			6.96	%	$	2,245,651	$	83,984			7.48	%




	Commercial real estate mortgages		4,159,637		147,071			7.13			3,000,600		129,607			8.71




	Commercial business loans and leases		2,530,326		77,994			6.21			2,313,648		95,950			8.36




	Consumer loans and leases		3,534,601		126,110			7.19			3,358,006		142,770			8.57

	Total loans and leases		12,846,962		442,386			6.93			10,917,905		452,311			8.34




Securities			6,110,711		175,100			5.73			5,875,840		193,180			6.58




Federal funds sold and other short-term investments			48,854		467			1.93			34,622		772			4.50

	Total earning assets		19,006,527		617,953			6.53			16,828,367		646,263			7.72

Noninterest earning assets			1,673,796								1,284,891

	Total assets	$	20,680,323							$	18,113,258

Interest-bearing deposits:




	Regular savings	$	1,682,076		8,025			0.96		$	1,398,228		10,459			1.51




	NOW and money market accounts		5,173,087		38,792			1.51			4,014,645		61,064			3.07




	Certificates of deposit		4,707,146		78,967			3.38			4,498,911		123,588			5.54




	Brokered deposits		57,131		523			1.85			166,248		5,117			6.21

	Total interest-bearing deposits		11,619,440		126,307			2.19			10,078,032		200,228			4.01




Borrowed funds			4,648,327		93,127			4.03			4,500,288		121,304			5.43

	Total interest-bearing liabilities		16,267,767		219,434			2.72			14,578,320		321,532			4.45

Non-interest bearing deposits			2,483,959								2,034,494




Other liabilities			169,654								153,906




Shareholders’ equity			1,758,943								1,346,538

	Total liabilities and shareholders’ equity	$	20,680,323							$	18,113,258

Net earning assets		$	2,738,760							$	2,250,047


Net interest income (fully-taxable equivalent)					398,519								324,731




Less: fully-taxable equivalent adjustments					(2,560	)							(3,083	)

	Net interest income			$	395,959							$	321,648

Net interest rate spread (fully-taxable equivalent)								3.81	%							3.27	%




Net interest margin (fully-taxable equivalent)								4.21	%							3.86	%

(1)		Annualized.




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

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 (1) changes in rate (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate) and (3) changes in rate/volume (change in rate multiplied by change in volume).

TABLE 3 — Rate /Volume Analysis
(Dollars in thousands)


		Three Months Ended June 30, 2002 vs. 2001												Six Months Ended June 30, 2002 vs. 2001
		Increase (decrease) due to												Increase (decrease) due to

								Rate and			Total									Rate and			Total
		Volume (1)			Rate			Volume (2)			Change			Volume (1)			Rate			Volume (2)			Change

Interest income:




Loans and leases		$	40,875			$(36,986	)		$(6,595	)		$(2,706	)	$	79,781			$(76,339	)		$(13,367	)		$(9,925	)




Securities			5,515			(9,317	)		(635	)		(4,437	)		7,664			(24,767	)		(977	)		(18,080	)




Federal funds sold and other short-term investments			(218	)		(375	)		169			(424	)		318			(441	)		(182	)		(305	)

Total interest income			46,172			(46,678	)		(7,061	)		(7,567	)		87,763			(101,547	)		(14,526	)		(28,310	)

Interest expense:




Interest-bearing deposits




	Regular savings		1,087			(1,577	)		(347	)		(837	)		2,125			(3,814	)		(745	)		(2,434	)
	NOW and money market accounts		8,343			(13,157	)		(3,814	)		(8,628	)		17,636			(31,057	)		(8,851	)		(22,272	)




	Certificates of deposit		2,247			(24,151	)		(909	)		(22,813	)		5,721			(48,189	)		(2,153	)		(44,621	)




	Brokered deposits		(1,728	)		(1,703	)		1,186			(2,245	)		(3,360	)		(3,594	)		2,360			(4,594	)

Total interest-bearing deposits			9,949			(40,588	)		(3,884	)		(34,523	)		22,122			(86,654	)		(9,389	)		(73,921	)




Borrowed funds			4,418			(10,157	)		(759	)		(6,498	)		3,986			(31,243	)		(920	)		(28,177	)

Total interest expense			14,367			(50,745	)		(4,643	)		(41,021	)		26,108			(117,897	)		(10,309	)		(102,098	)

Net interest income (fully taxable equivalent)		$	31,805		$	4,067			$(2,418	)	$	33,454		$	61,655		$	16,350			$(4,217	)	$	73,788

(1)		Volume increases include the effects of the acquisitions of Andover and MetroWest on October 31, 2001.




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

Noninterest Income

Second quarter noninterest income totaled $63.0 million, an increase of $5.4 million, or 9%, from the second quarter of 2001. Noninterest income for the six months ended June 30, 2002 totaled $124.6 million, a 7% increase from the comparable period of 2001. These increases were primarily due to increases in loan fee income, merchant and electronic banking income and deposit services income. These increases were partially offset lower mortgage banking services income. Noninterest income, excluding securities gains and losses, as a percent of total income was 24% and 26% for the quarters ended June 30, 2002 and 2001, respectively. The decline was attributable in large part to the acquisition of Andover and MetroWest, which had a combined ratio of noninterest income as a percent of total income of 8%.

Deposit services income increased by $1.5 million, or 8%, during the three months ended June 30, 2002 as compared to the same period in the prior year, and by $2.9 million, or 8%, during the six months ended June 30, 2002, as compared to the same period in the prior year. For the six months ended June 30, 2002 and 2001, deposit services income amounted to $38.9 million and $35.9 million, respectively. These increases were primarily attributable to volume-driven increases in checking account, ATM and overdraft fees which in part were due to the acquisitions of Andover and MetroWest.

Mortgage banking services income was $489 thousand and $1.8 million for the quarters ended June 30, 2002 and 2001, respectively. Residential mortgage sales income decreased $869 thousand as compared to the second quarter of last year due to lower gains on the sale of mortgage loans as a result of the retention of 15-year and 20-year fixed-rate loans as well as all variable-rate loans in our loan portfolio in 2002. Mortgage loan originations remained strong in the second quarter of 2002, as loan refinancings continued in the favorable rate environment. Residential mortgage loan originations were $301.0 million, $376.9 million and $361.7 million for the three months ended June 30, 2002, March 31, 2002 and June 30, 2001, respectively. Included in mortgage banking services income for the quarter ended June 30, 2002 is amortization expense of $925 thousand on capitalized mortgage servicing rights resulting from the acquisition of Andover in the fourth quarter of 2001. Amortization of mortgage servicing rights increased $595 thousand from the quarter ended March 31, 2002 due to continued high prepayment levels in this low interest rate environment. For the six months ended June 30, 2002 and 2001, mortgage banking services income amounted to $2.2 million and $5.0 million, respectively. This decrease was primarily for the same reasons as the decrease during the three months ended June 30, 2002, as discussed above, and a $706 thousand gain on the sale of mortgage servicing rights in the first quarter of 2001. The amount of loans serviced for others was $847.5 million, $964.0 million and $303.6 million at June 30, 2002, December 31, 2001 and June 30, 2001, respectively. Capitalized mortgage servicing rights amounted to $7.6 million at June 30, 2002, $8.5 million at December 31, 2001 and $0.5 million at June 30, 2001. The increase in mortgage servicing rights was due to the servicing rights acquired in connection with the acquisition of Andover in the fourth quarter of 2001. See Table 4 for a summary of mortgage banking services income by quarter for 2002 and 2001.

TABLE 4 — Mortgage Banking Services
(In thousands)


		At or for the Three Months Ended

		6/30/02			3/31/02			12/31/01			9/30/01			6/30/01		3/31/01

Residential mortgages serviced for investors		$	847,545		$	866,689		$	964,027		$	285,400		$	303,590	$	294,898

Mortgage servicing rights:




	Balance at beginning of period	$	8,503		$	8,484		$	440		$	495		$	491	$	23,225




	Mortgage servicing rights capitalized		—			349			177			—			—		382




	Mortgage servicing rights acquired through purchase acquisitions		—			—			8,804			—			—		—




	Amortization charged against mortgage servicing fee income		(925	)		(330	)		(589	)		(55	)		4		(500	)




	Mortgage servicing rights sold		—			—			(348	)		—			—		(22,616	)

	Balance at end of period	$	7,578		$	8,503		$	8,484		$	440		$	495	$	491

Mortgage banking services income:




	Residential mortgage sales income	$	693		$	1,068		$	3,580		$	1,734		$	1,562	$	2,184




	Residential mortgage servicing income, net		(204	)		608			358			448			214		344




	Gain on sale of capitalized mortgage servicing rights		—			—			—			—			—		706

	Total	$	489		$	1,676		$	3,938		$	2,182		$	1,776	$	3,234


		Six Months Ended

		6/30/02		6/30/01

Mortgage banking services income:




	Residential mortgage sales income	$	1,761	$	3,746




	Residential mortgage servicing income, net		404		558




	Gain (loss) on sale of capitalized mortgage servicing rights		—		706

	Total	$	2,165	$	5,010

Trust and investment management services income amounted to $8.5 million for the quarter ended June 30, 2002 compared to $8.7 million for the second quarter of 2001, a decrease of 2%. For the six months ended June 30, 2002 and 2001, trust and investment management services income amounted to $16.8 million and $17.5 million, respectively, a decrease of 4%. Assets under management decreased to $8.0 billion at June 30, 2002 from $8.6 billion at June 30, 2001 as a result of broad-based declines in the stock markets.

Investment planning services income increased $1.2 million, or 68%, in the second quarter of 2002 compared to the second quarter of 2001. For the six months ended June 30, 2002 and 2001, investment planning services income amounted to $5.7 million and $3.5 million, respectively, an increase of 64%. These increases were primarily attributable to higher sales of fixed annuities.

Insurance brokerage commissions income amounted to $10.1 million for the second quarter of 2002 compared to $9.2 million for the same period in 2001, an increase of 9%. For the six months ended June 30, 2002 and 2001, insurance brokerage commissions income amounted to $20.2 million and $19.2 million, respectively. Approximately two-thirds of the increase was due to rate increases on existing policies while one-third of the increase was due to new business.

Bank-owned life insurance (“BOLI”) income represents life insurance on the lives of certain employees of Banknorth and its subsidiaries. Most of the BOLI is invested in the “general account” of quality insurance companies. Standard and Poors rated all such companies AA or better at June 30, 2002. We purchased $40 million of BOLI in the first quarter of 2002. The BOLI investment provides a means to finance increasing employee benefit costs. BOLI income was $5.0 million for the second quarter of 2002, compared to $4.9 million for the same period in 2001, an increase of 2%. For the six months ended June 30, 2002 and 2001, BOLI income amounted to $9.4 million and $9.2 million, respectively. For the second quarter of 2002, the average carrying value of BOLI was $366 million compared to $310 million for the second quarter of 2001. BOLI represented 20.83% of capital and reserves at June 30, 2002.

Merchant and electronic banking income was $9.7 million for the second quarter of 2002 compared to $8.0 million for the second quarter of 2001, an increase of 21%. For the six months ended June 30, 2002 and 2001, merchant and electronic banking income amounted to $17.4 million and $14.5 million, respectively, an increase of 20%. This income represents fees and interchange income generated by the use of debit cards issued by us and charges to merchants for credit card transactions processed, net of third-party costs directly attributable to handling these transactions. The increases were due to increases in the volume of transactions processed.

Loan fee income was $5.1 million for the second quarter of 2002 compared to $3.0 million for the second quarter of 2001, an increase of $2.1 million, or 71%. For the six months ended June 30, 2002 and 2001, loan fee income amounted to $10.5 million and $5.7 million, respectively, an increase of $4.8 million, or 85%. Loan fee income includes early payoff charges, letter of credit fees, late charges and other loan related fees. The increases in fee income in 2002 were primarily due to increased volumes and refinancing activities.

Net securities gains amounted to $350 thousand and $45 thousand during the quarters ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, net securities gains amounted to $369 thousand and $803 thousand, respectively. 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 $901 thousand, or 49%, for the quarter ended June 30, 2002 compared to the same quarter last year. For the six months ended June 30, 2002 and 2001, other noninterest income amounted to $3.1 million and $5.1 million, respectively. The declines were primarily due to losses on venture capital investments and funded executive retirement plans, which were partially offset by increases in income on covered call options.

Noninterest Expense

Noninterest expense was $138.5 million and $121.8 million for the quarters ended June 30, 2002 and 2001, respectively, which represented an increase of $16.7 million, or 14%. The increase was primarily due to salaries and employee benefits expense ($12.9 million), occupancy expense ($1.7 million) and other noninterest expense ($1.5 million.) which were partially offset by a decrease in goodwill amortization expense of $2.8 million. The cash efficiency ratio was 51.34% and 52.16% for the quarters ended June 30, 2002 and 2001, respectively. For a description of the methodology we used to calculate the cash efficiency ratio, see Note 5 to Table 1. For the six months ended June 30, 2002 and 2001, noninterest expense amounted to $283.2 million and $246.7 million, respectively, an increase of 15%. The increase was due to additional expenses from the acquisitions of Andover and MetroWest and increased incentive compensation.

Salaries and benefits expense of $75.8 million for the quarter ended June 30, 2002 increased $12.9 million, or 21%, from the same quarter of last year. For the six months ended June 30, 2002 and 2001, salaries and benefits expense amounted to $151.0 million and $124.6 million, respectively, also a 21% increase. These increases were primarily due to additional employees from the acquisitions of Andover and MetroWest in the fourth quarter of 2001 and increased incentive compensation. The total number of full-time equivalent employees was approximately 6,100 at June 30, 2002 compared to 5,600 at June 30, 2001. Pension expense under the defined benefit pension plan (which is included in salaries and benefits expense) was $1.7 million and $1.1 million for the six months ended June 30, 2002 and 2001, respectively. An important component in the annual determination of pension expense is the fair value of assets in the pension plan at the end of the year. The fair value of plan assets as of June 30, 2002 was $128.7 million as compared to $141.0 million at December 31, 2001. The year-to-date return on plan assets was minus 5% primarily

due to broad-based declines in the stock markets. It is not possible to determine whether the fair value of plan assets will increase, decrease, or stay the same by the next measurement date (December 31, 2002.)

Data processing expense of $9.8 million for the quarter ended June 30, 2002 increased $926 thousand, or 10%, from the same quarter a year ago. For the six months ended June 30, 2002 and 2001, data processing expense amounted to $20.4 million and $17.9 million, respectively. Continued investments in information technology and increased transaction volume contributed to the increases.

Occupancy expense of $12.8 million during the three months ended June 30, 2002 increased $1.7 million, or 15%, from the same quarter in 2001 due to the cost of additional facilities from two acquisitions in the fourth quarter of 2001. For the six months ended June 30, 2002 and 2001, occupancy expense amounted to $25.3 million and $22.9 million respectively, a 11% increase.

Equipment expense of $9.9 million during the three months ended June 30, 2002 increased $1.2 million, or 13%, from the second quarter of last year. For the six months ended June 30, 2002 and 2001, equipment expense amounted to $19.6 million and $16.9 million, respectively, an increase of 16%. These increases were primarily due to depreciation relating to new technology equipment and software.

Amortization of goodwill was $0 and $2.8 million for the quarters ended June 30, 2002 and 2001, respectively. In accordance with SFAS No. 142, we discontinued the amortization of goodwill effective January 1, 2002. The amortization of other intangible assets (principally core deposit intangibles and “FAS 72” intangibles) increased by $263 thousand due largely to the amortization of core deposit intangibles recorded in connection with the two acquisitions consummated during the fourth quarter of 2001. Amortization of goodwill amounted to $5.6 million for the six months ended June 30, 2001 while there was no amortization expense in 2002.

During the three months ended June 30, 2002, special charges of $1.1 million ($690 thousand after-tax) included merger-related expenses for the two acquisitions effected in the fourth quarter of 2001 and costs related to consolidating the charters of our eight national bank subsidiaries and trust subsidiary to a single national bank charter effective January 1, 2002. There were no special charges recorded in the second quarter of 2001. Special charges for the six months ended June 30, 2002 and 2001 amounted to $9.3 million ($6.0 million after-tax) and $5.6 million ($3.7 million after-tax) respectively. The following table summarizes the detail of special charges for the three and six months ended June 30, 2002 and 2001.

TABLE 5 — Special Charges
(In thousands)


	Three Months Ended					Six Months Ended
	June 30,					June 30,

	2002			2001		2002			2001

Andover/MetroWest Merger Charges
Severance costs (1)	$	(423	)	$	0	$	635		$	0




Data processing/systems integration		336			—		3,052			—




Other costs (1)		(174	)		—		1,858			—

		(261	)		—		5,545			—

Ipswich Merger Charges
Data processing/systems integration		133			—		133			—




Other costs		499			—		502			—

		632			—		635			—

Southington Merger Charges
Data processing/systems integration		1			—		1			—




Other costs		78			—		78			—

		79			—		79			—

Banknorth Merger Charges
Severance costs		—			—		—			2,329




Asset write-downs/facility costs		29			—		29			—




Gain on regulatory-mandated branch sales		(478	)		—		(478	)		—

		(449	)		—		(449	)		2,329

Charter Consolidation Costs
Severance costs		770					770




Branch signage		—			—		729			—




Customer notices		—			—		567			—




Forms and documents		192			—		576			—




Other costs		131			—		780			—

		1,093			—		3,422			—

Branch closings
Severance costs		—			—		—			47




Asset write-downs/lease terminations		—			—		—			1,585




Branch decommissioning costs		—			—		66			755




Reversal of prior accruals		(33	)		—		(33	)		—

		(33	)		—		33			2,387

Other Special Charges
Write-down of auto lease residuals		—			—		—			892

		—			—		—			892

Total Special Charges	$	1,061		$	0	$	9,265		$	5,608

(1)

Includes reversal of prior accruals.

The following table summarizes activity in the accrual account for special charges from December 31, 2001 through June 30, 2002.

TABLE 6 — Special Charges — Activity in the Accrual Account
(In thousands)


										Banknorth
	Andover/									Group, Inc.
	MetroWest			Ipswich			Southington			(Vermont)			Charter			Branch
	Mergers			Merger			Merger			Merger			Consolidation			Closings			Other		Total

Balance, December 31, 2001	$	11,207		$	0		$	0		$	330		$	0		$	296		$	0	$	11,833




Special charges		5,545			635			79			(449	)		3,422			33			—		9,265




Cash payments		(15,915	)		(635	)		(79	)		304			(2,748	)		(218	)		—		(19,291	)




Non-cash write-downs and other adjustments		(49	)		—			—			—			(674	)		166			—		(557	)

Balance, June 30, 2002	$	788		$	0		$	0		$	185		$	0		$	277		$	0	$	1,250

Other non-interest expenses increased by $1.5 million, or 6%, during the three months ended June 30, 2002 as compared to the comparable period in the prior year. Through the six months ended June 30, 2002 and 2001, other noninterest expenses amounted to $51.3 million and $48.0 million, respectively, a $3.3 million, or 7% increase. The following table summarizes the principal components of other noninterest expenses for the periods indicated.

TABLE 7 — Other Noninterest Expenses
(In thousands)


	2002				2001

	Second		First		Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter

Advertising and marketing	$	4,237	$	3,977	$	3,615	$	2,582	$	3,324	$	2,387




Telephone		3,332		3,189		2,796		2,918		2,853		3,007




Office supplies		2,597		2,819		2,183		2,097		2,506		2,320




Postage and freight		2,206		2,609		2,400		2,039		2,448		2,478




Miscellaneous loan costs		1,706		1,167		2,041		1,902		1,699		1,737




Deposits and other assessments		901		799		963		825		837		835




Collection and carrying costs of non-performing assets		807		649		1,714		705		482		610




Other		10,518		9,793		12,678		9,661		10,697		9,806

Total	$	26,304	$	25,002	$	28,390	$	22,729	$	24,846	$	23,180


	Six Months Ended

	6/30/02		6/30/01

Advertising and marketing	$	8,214	$	5,711




Telephone		6,521		5,860




Office supplies		5,416		4,826




Postage and freight		4,815		4,926




Miscellaneous loan costs		2,873		3,436




Deposits and other assessments		1,700		1,672




Collection and carrying costs of non-performing assets		1,456		1,092




Other		20,310		20,503

Total	$	51,305	$	48,026

Taxes

The effective tax rate was 34% and 35% for the quarters ended June 30, 2002 and 2001, respectively, and 34% for each of the six months ended June 30, 2002 and 2001, respectively.

Cumulative Effect of Accounting Change

On January 1, 2001, we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which sets accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 138, requires us to recognize all derivatives on the balance sheet at fair value. We recognized an after-tax loss of $290 thousand from the cumulative effect of adoption of SFAS No. 133. This was recorded as an unrealized loss on forward sale commitments which hedged residential mortgage loans held for sale at December 31, 2000.

Stock Option Accounting

The Company currently accounts for employee stock options using the intrinsic value method. Under the intrinsic value method, no compensation cost is recognized related to options if the exercise price of the option is greater than

or equal to the fair market value of the underlying stock on the date of grant. Under an alternative method, the fair value method, the “cost” of the option is estimated using an option valuation model and recognized as compensation expense over the vesting period of the option. Any change from the intrinsic value method to the fair value method of accounting for stock options is required to be applied prospectively for options granted after the date of change in method which must be as of the beginning of a fiscal year. The Company generally awards stock options annually with a grant date in October. In 2001 the Company granted 3,193,168 options with a weighted average fair value of $6.10 using the Black- Scholes option pricing model; these options vest ratably over a 3 year period. Had the Company adopted the fair value method of accounting for stock options effective as of January 1, 2001, the options granted in 2001 would have resulted in compensation expense (after tax effect) of $0.9 million in 2001, $4.2 million in 2002, $4.2 million in 2003, and $3.3 million in 2004. Assuming stock options were issued annually after October 31, 2001, the after-tax compensation expense attributable to stock options would continue to increase annually through 2004 and then level off. The accounting standard-setters are contemplating changes to the transition requirements with respect to the adoption of the fair market value method.

Comprehensive Income

Comprehensive income amounted to $177.7 million and $149.3 million during the six months ended June 30, 2002 and 2001, respectively, which were different from our reported net income during the respective periods as a result of changes in the amount of unrealized gains and losses on our portfolio of securities available for sale and on our derivative contracts (primarily forward sales commitments) that are accounted for as cash flow hedges. For additional information, see Note 5 to the Unaudited Consolidated Financial Statements included herein.

Our available for sale investment portfolio had unrealized gains (losses), net of applicable income tax effects, of $76.4 million, $40.3 million and ($510) thousand at June 30, 2002, December 31, 2001 and June 30, 2001, respectively. At June 30, 2002, the net unrealized gains of $117.5 million, before related tax effect, represented 2% of securities available for sale. We attempt to balance the interest rate risk of assets with liabilities (see “Interest Rate Risk and Asset Liability Management”). However, the change in value of our liabilities, which tend to fall in rising interest rate environments and rise in falling interest rate environments, is not included in “other comprehensive income.”

FINANCIAL CONDITION

Our consolidated total assets amounted to $21.3 billion and $21.1 billion at June 30, 2002 and December 31, 2001, respectively. Total average assets were $20.9 billion and $20.7 billion for the three and six months ended June 30, 2002, respectively, compared to $18.2 billion and $18.1 billion for the comparable periods of 2001; these increases were largely due to the Andover and MetroWest acquisitions on October 31, 2001. Shareholders’ equity totaled $1.8 billion at June 30, 2002 and December 31, 2001, respectively.

Securities and Other Earning Assets

The securities portfolio averaged $6.3 billion during the second quarter of 2002, as compared to $5.9 billion in the second quarter of 2001. The securities portfolio consisted primarily of mortgage-backed securities, most of which were seasoned 15-year federal agency securities and U.S. Government and agency securities. Other securities in the portfolio were collateralized mortgage obligations, which included securitized residential real estate loans held in a REMIC, and asset-backed securities. The majority of securities available for sale were rated AAA or equivalently rated. The average yield on securities was 5.79% for the quarter ended June 30, 2002 and 6.42% for the quarter ended June 30, 2001. With the exception of the securitized residential real estate loans held in a REMIC that were classified as held to maturity and carried at cost, all of our securities are classified as available for sale and carried at market value. Securities available for sale had an after-tax unrealized gain of $76.4 million and $40.3 million at June 30, 2002 and December 31, 2001, respectively. The increase was primarily due to lower prevailing long-term rates at June 30, 2002.

Loans and Leases

Total loans and leases (including loans held for sale) averaged $12.9 billion during the second quarter of 2002, an increase of $2.0 billion, or 18%, from the second quarter of 2001. This increase was primarily attributable to the acquisition of $1.9 billion of loans and leases in connection with the acquisitions of Andover and MetroWest in the fourth quarter of 2001. Average loans as a percent of average earning assets was 67% during the quarter ended June 30, 2002 compared to 65% during the quarter ended June 30, 2001.

Average residential real estate loans (which include mortgage loans held for sale) of $2.6 billion during the second quarter of 2002 increased $363 million from the second quarter of last year. Excluding the fourth quarter of 2001 acquisitions, average residential loans decreased $458 million. Increased refinancing activity and prepayments in a lower interest rate environment caused residential loans to decline. Mortgage loans held for sale amounted to $52.1 million and $75.1 million at June 30, 2002 and 2001, respectively, and $117.7 million at December 31, 2001. We are currently selling substantially all of the 30-year fixed-rate loans we originate while all new 15-year and 20-year fixed-rate loans and all adjustable-rate loans are originated for our portfolio.

Average commercial real estate loans of $4.2 billion increased $1.2 billion, or 39%, from the second quarter of last year. Excluding the acquisitions in the fourth quarter of 2001, average commercial real estate loans increased $530 million. The majority of the increase was in the Massachusetts market. The average yield on commercial real estate loans during the second quarter of 2002 was 7.07%, as compared to 8.58% in the second quarter of 2001, a decrease of 151 basis points. The lower yield reflects the effect of the Federal Reserve Board rate cuts in 2001 on variable-rate loans as well as fixed-rate loans which have refinanced at lower rates.

Commercial business loans and leases averaged $2.6 billion during the second quarter of 2002, an increase of $273 million, or 12%, over the second quarter of 2001. Excluding the acquisitions in the fourth quarter of 2001, average commercial business loans and leases increased $140 million. The largest increases were in New York, Maine and Massachusetts. The yield on commercial business loans and leases decreased to 6.08% in the second quarter of 2002 from 8.03% in the second quarter of 2001 due to repricing of variable-rate loans in response to the Federal Reserve Board rate cuts and to competition for new loans.

Average consumer loans and leases of $3.5 billion during the second quarter of 2002 increased $188 million, or 6%, from the second quarter of 2001. Acquisitions in the fourth quarter of 2001 accounted for approximately $150

million (or 5%) of the increase while internal loan growth accounted for approximately $38 million (or 1%) of the increase. Although the internal increase is seemingly small, origination levels have offset significant prepayment activity as proceeds of mortgage loans refinancings have been used to pay down consumer loans. The average yield on consumer loans and leases decreased to 7.06% in the second quarter of 2002 from 8.42% in the second quarter of 2001, which also reflected the Federal Reserve Board rate cuts in 2001.

Asset Quality

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. As shown in Table 8, nonperforming assets were $72.2 million at June 30, 2002, or 0.34% of total assets, compared to $81.2 million, or 0.39% of total assets, at December 31, 2001 and to $73.3 million, or 0.40% of total assets, at June 30, 2001. Total nonperforming loans as a percentage of total loans (excluding residential real estate loans held for sale) was 0.51%, 0.59% and 0.62% at June 30, 2002, December 31, 2001 and June 30, 2001, respectively. We continue to focus on asset quality issues and allocate significant resources to the key asset quality control functions of credit policy and administration and loan review. We maintain an internal rating system which provides a mechanism to regularly monitor the credit quality of our loan portfolio.

Residential real estate loans accounted for 19% of the total loan portfolio at June 30, 2002, as compared with 21% at December 31, 2001. Residential loans are generally secured by single-family homes (one to four units) and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At June 30, 2002, 0.28% of the residential loans were nonperforming, as compared with 0.32% at December 31, 2001 and 0.46% at June 30, 2001.

Commercial real estate loans accounted for 33% of the total loan portfolio at June 30, 2002 and 32% at December 31, 2001. Commercial real estate loans consist primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate (including food stores). These loans generally are secured by properties located in the New England states and upstate New York, particularly Maine, Massachusetts, New Hampshire and Vermont. At June 30, 2002, 0.47% of the commercial real estate loans were nonperforming, as compared with 0.42% at December 31, 2001 and 0.41% at June 30, 2001.

Commercial business loans and leases accounted for 21% of the total loan portfolio at June 30, 2002 and 19% at December 31, 2001. Commercial business loans and leases are not concentrated in any particular industry, but reflect the broad-based economies 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. Our commercial business loans and leases are generally to small and medium size businesses located within our geographic market area. We generally do not emphasize the purchase of participations in syndicated commercial loans. At June 30, 2002, we had $147 million of participations in syndicated commercial loans and commitments to purchase an additional $244 million of such participations. At June 30, 2002, 1.25% of commercial business loans and leases were non-performing, as compared with 1.64% at December 31, 2001 and June 30, 2001.

Consumer loans and leases accounted for 27% of the total loan portfolio at June 30, 2002 and 28% at December 31, 2001. We have a diversified consumer loan and lease portfolio consisting of home equity, automobile, mobile home, boat and recreational vehicles and education loans, as well as loans to finance certain medical /dental procedures (vision, dental and orthodontia fee plan loans). At June 30, 2002 and 2001, 0.17% of our consumer loans and leases were nonperforming, as compared with 0.27% at December 31, 2001.

At June 30, 2002, we had $2.7 million of accruing loans which were 90 days or more delinquent, as compared to $6.2 million of such loans at December 31, 2001 and $5.8 million at June 30, 2001. The decrease was due to a reduction in delinquent consumer loans, particularly guaranteed student loans and fee plan loans.

TABLE 8 — Nonperforming Assets
(Dollars in thousands)


		6/30/02			3/31/02			12/31/01			9/30/01			6/30/01			3/31/01

Nonaccrual loans and leases:




Residential real estate loans		$	7,075		$	7,689		$	8,311		$	8,222		$	9,590		$	10,575




Commercial real estate loans			20,254			20,812			17,124			15,145			12,550			13,205




Commercial business loans and leases			33,573			34,481			40,341			34,220			39,208			32,233




Consumer loans and leases			6,008			8,183			9,470			6,380			5,795			5,611

Total nonaccrual loans and leases			66,910			71,165			75,246			63,967			67,143			61,624




Total troubled debt restructurings			—			—			—			—			—			—





	Total nonperforming loans and leases		66,910			71,165			75,246			63,967			67,143			61,624





Other nonperforming assets:




Other real estate owned, net of related reserves			1,212			1,262			1,861			4,468			4,508			4,310




Repossessions, net of related reserves			1,964			2,251			2,016			2,428			1,618			1,935




Securities available for sale			2,104			2,104			2,104			—			—			—

	Total other nonperforming assets		5,280			5,617			5,981			6,896			6,126			6,245

Total nonperforming assets		$	72,190		$	76,782		$	81,227		$	70,863		$	73,269		$	67,869

Accruing loans and leases which are 90 days or more overdue		$	2,680		$	5,430		$	6,227		$	6,055		$	5,799		$	7,664

Total nonperforming loans as a percentage of total loans and leases(1)			0.51	%		0.56	%		0.59	%		0.59	%		0.62	%		0.57	%




Total nonperforming assets as a percentage of total assets			0.34	%		0.37	%		0.39	%		0.39	%		0.40	%		0.37	%




Total nonperforming assets as a percentage of total loans and leases(1) and total other nonperforming assets			0.55	%		0.60	%		0.64	%		0.65	%		0.67	%		0.63	%

(1)

Total loans and leases exclude residential real estate loans held for sale.

Provision/Allowance for Loan and Lease Losses

We provided $10.8 million and $9.3 million for loan and lease losses in the quarters ended June 30, 2002 and 2001, respectively. As shown in Table 9, net charge-offs for the second quarter of 2002 were $8.3 million, or 0.26% of average loans outstanding, compared to $7.6 million, or 0.28% of average loans outstanding, for the second quarter of 2001. The increase in the provision for loan and lease losses for the three months ended June 30, 2002 reflect higher levels of net charge-offs and increased loans outstanding, as compared to the second quarter of 2001. At June 30, 2002, the allowance for loan and lease losses amounted to $193.4 million, or 1.48% of total portfolio loans and leases, as compared to $155.3 million, or 1.43%, at June 30, 2001. The ratio of the allowance for loan and lease losses to nonperforming loans was 289% at June 30, 2002 and 231% at June 30, 2001.

Provisions are made to the allowance for loan and lease losses in order to maintain the allowance at a level which management believes is reasonable and reflective of the overall risk of loss inherent in the loan and lease portfolio. Management considers the allowance appropriate and adequate to cover probable losses inherent in the loan and lease portfolio based on the current economic environment. During 2002, we have not changed our overall approach in the determination of the allowance for loan and lease losses and there have been no material changes in assumptions or estimation techniques as compared to prior periods in determining the adequacy of the allowance for loan and lease losses in the current period.

Provisions for loan and lease losses are attributable to management’s ongoing evaluation of the adequacy of the allowance for loan and lease losses, which includes, among other factors, consideration of the character and size of the loan and lease portfolio, such as internal risk ratings and credit concentrations, trends in nonperforming loans, delinquency trends and charge-off experience, portfolio migration data, the volume of new loan originations and other asset quality factors. Although management utilizes its judgment in providing for probable losses, there can be no assurance that we will not have to change our provisions for loan and lease losses in future periods. Changing economic and business conditions in

our market areas, fluctuations in local markets for real estate, future changes in nonperforming asset trends, large movements in market-based interest rates or other reasons could affect our future provisions for loan and lease losses.

TABLE 9 — Allowance for Loan and Lease Losses
(Dollars in thousands)


			2002 Second			2002 First			2001 Fourth			2001 Third			2001 Second			2001 First
			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter

Allowance at beginning of period			$	190,890		$	189,837		$	158,532		$	155,303		$	153,621		$	153,550




Additions due to acquisitions				—			—			31,277			—			—			—




Charge-offs:




Real estate mortgages				474			501			644			735			724			790




Commercial business loans and leases				5,319			5,374			8,186			4,074			4,864			3,774




Consumer loans and leases				5,834			7,042			7,253			5,439			4,706			4,463

	Total loans and leases charged off			11,627			12,917			16,083			10,248			10,294			9,027

Recoveries:




Real estate mortgages				48			50			(87	)		62			349			138




Commercial business loans and leases				2,137			1,101			1,908			476			1,524			890




Consumer loans and leases				1,168			991			911			878			792			932

	Total loans and leases recovered			3,353			2,142			2,732			1,416			2,665			1,960

Net charge-offs				8,274			10,775			13,351			8,832			7,629			7,067




Provision for loan and lease losses				10,829			11,828			13,379			12,061			9,311			7,138

Allowance at end of period			$	193,445		$	190,890		$	189,837		$	158,532		$	155,303		$	153,621

Average loans and leases outstanding during the period (1)			$	12,912,318		$	12,723,083		$	11,173,723		$	10,869,870		$	10,816,524		$	10,880,534

Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (1)				0.26	%		0.34	%		0.44	%		0.32	%		0.28	%		0.26	%




Ratio of allowance to total loans and leases at end of period (1)				1.48	%		1.50	%		1.49	%		1.45	%		1.43	%		1.43	%




Ratio of allowance to nonperforming loans and leases at end of period				289	%		268	%		252	%		248	%		231	%		249	%




Ratio of net charge-offs as a percent of average outstanding loans and leases, annualized (1):




		Real estate mortgages		0.025	%		0.027	%		0.046	%		0.052	%		0.029	%		0.051	%




		Commercial business loans and leases		0.486	%		0.688	%		1.047	%		0.605	%		0.577	%		0.508	%




		Consumer loans and leases		0.524	%		0.678	%		0.717	%		0.539	%		0.470	%		0.424	%

(1)

Excludes residential real estate loans held for sale.

Deposits

Total deposits averaged $14.2 billion during the second quarter of 2002, an increase of $2.0 billion from the second quarter of 2001. Excluding deposits of Andover and MetroWest acquired in the fourth quarter of 2001, deposits were essentially unchanged from the second quarter of last year. However, the deposit mix changed favorably. Certificates of deposit and brokered deposits (which tend to pay higher rates) as a percent of total deposits declined from 37% in the second quarter of 2001 to 32% in the second quarter of 2002. The ratio of loans to deposits was 91% and 89% at June 30, 2002 and December 31, 2001, respectively.

Average non-interest bearing deposits of $2.5 billion during the second quarter of 2002 increased $419.6 million, or 20%, from the second quarter of 2001, including approximately $294.0 million from Andover and MetroWest. The increase in non-interest bearing deposits reflected strong growth in commercial, government and personal accounts.

Average interest-bearing deposits of $11.7 billion during the second quarter of 2002 increased $1.5 billion from the second quarter of 2001 primarily due to the acquisition of Andover and MetroWest in the fourth quarter of 2001. Andover and MetroWest had combined interest-bearing deposits of approximately $1.7 billion. The net decrease in interest-bearing deposits, exclusive of acquisitions, was primarily due to the planned run-off of brokered deposits and, to a lesser extent, certificates of deposit run-off related to relatively low market rates. The average rates paid on NOW and money market accounts decreased 130 basis points from 2.82% in the second quarter of 2001 to 1.52% in the second quarter of 2002 due largely to lower prevailing interest rates. The average rates paid on all deposit types decreased by 170 basis points from 3.81% in the second quarter of 2001 to 2.11% in the second quarter of 2002, reflecting the decline in prevailing interest rates during 2001.

Included within the deposit categories above are government banking deposits, which averaged $1.3 billion in the second quarter of 2002 and $1.2 billion in the second quarter of 2001. Government banking deposits include deposits received from state and local governments, school districts, public 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

Other than deposits, our primary sources of funds are borrowings. Our principal borrowing sources are advances from Federal Home Loan Banks (“FHLB”) and securities sold under repurchase agreements. Other borrowing sources which we have used include the U.S. Treasury’s Note Option Treasury, Tax and Loan program, overnight borrowings from other banks, trust preferred securities, and public/private debt offerings. Average total borrowings in the second quarter of 2002 were $4.8 billion, an increase of $356 million from the second quarter of 2001. This increase was primarily the result of borrowings assumed in the acquisitions of Andover and MetroWest. Average total borrowings in the first six months of 2002 were $4.6 billion, an increase of $148 million from the comparable period of 2001.

Significant transactions related to borrowings from the second quarter of 2001 through June 30, 2002 include the issuance of $200 million of subordinated debt by a subsidiary bank in June 2001, the assumption of approximately $480 million of borrowings in the Andover and MetroWest acquisitions, the prepayment of approximately $175 million of FHLB advances in the fourth quarter of 2001 and the issuance of $200 million of trust preferred securities in February 2002.

Average FHLB borrowings for the second quarter of 2002 were $2.5 billion, which decreased $489 million or 16% from the second quarter of 2001. Collateral for FHLB borrowings consists primarily of first mortgage loans secured by 1 - 4 family properties, certain unencumbered securities and other qualified assets. These borrowings had an average cost of 4.50% during the quarter ended June 30, 2002 as compared to 5.15% for the comparable period last year. The 65 basis point decrease was due to the Federal Reserve Board rate cuts during 2001 and prepayment of $174.6 million of FHLB borrowings with a weighted average cost of 5.62%. At June 30, 2002, FHLB borrowings amounted to $2.5 billion and our additional borrowing capacity from the FHLB was $1.8 billion.

Average balances for securities sold under repurchase agreements were $1.6 billion and $1.1 billion for the quarters ended June 30, 2002 and 2001, respectively, an increase of $473.3 million. Our borrowings under wholesale repurchase agreements increased while our FHLB borrowings decreased because of better pricing on the wholesale repurchase agreements. Borrowings under repurchase agreements had a weighted average rate of 2.35% and 4.14% for the quarters ended June 30, 2002 and 2001, respectively, and are secured by mortgage-backed securities and U.S. Government obligations.

In June 2001, Banknorth, NA issued $200 million of 7.625% subordinated notes due in 2011. Interest is payable semi-annually in June and December. The notes qualify as Tier 2 capital.

In January 2002, we renewed an existing line of credit in the amount of $80 million at the rate of LIBOR plus 0.625%. The average outstanding balance on this line for the six months ended June 30, 2002 was $4.3 million.

In February 2002, we filed a shelf registration statement with the SEC which allows us to sell up to $1.0 billion of debt securities, preferred stock, depository shares, common stock, and warrants and which allows subsidiary trusts to sell capital securities. In February 2002, Banknorth Capital Trust II issued $200 million of 8% trust preferred securities (“Securities”) to the public under the shelf registration. These Securities pay interest quarterly and are mandatorily redeemable on April 1, 2032 and may be redeemed by the Trust at par any time on or after April 1, 2007. The Securities qualify as Tier 1 capital.

CONTRACTUAL OBLIGATIONS

We have entered into numerous contractual obligations and commitments. The following tables summarize our contractual cash obligations and other commitments at June 30, 2002.

Contractual Cash Obligations
(In thousands)


			Payments Due - By Period

			Less than		1 - 3		4 -5		After 5
	Total		1 Year		Years		Years		Years

Long-term debt	$	2,947,159	$	257,318	$	896,091	$	662,881	$	1,130,869




Facility lease obligations		133,004		18,310		29,855		22,977		61,862




Other long-term obligations		894,745		23,382		571,363		200,000		100,000





Total contractual cash obligations	$	3,974,908	$	299,010	$	1,497,309	$	885,858	$	1,292,731

Other Commitments
(In thousands)


			Amount of Commitment Expiration - Per Period
		Total
	Amounts		Less than		1 - 3		4 -5		After 5
	Committed		1 Year		Years		Years		Years

Lines of credit	$	3,274,665	$	456,451	$	157,558	$	80,902	$	2,579,754




Standby letters of credit		245,390		131,810		71,433		29,653		12,494




Other commitments		1,503,385		214,903		157,670		65,189		1,065,623




Forward commitments to sell loans		99,000		99,000		—		—		—





Total commitments	$	5,122,440	$	902,164	$	386,661	$	175,744	$	3,657,871

RISK MANAGEMENT

The primary goal of our risk management program is to determine how certain existing or emerging issues facing us or 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. The Board of Directors (the “Board”) and management believe that there are seven applicable “risk categories,” consisting of credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled with a quality of risk perspective. In

addition, an aggregate level of risk is assigned 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 of any differences. The risk program includes risk identification, measurement, control and monitoring.

The Board has established the overall strategic direction. It approves the overall risk policies and oversees the overall risk management process. The Board has delegated authority to 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.

ASSET-LIABILITY MANAGEMENT

The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-liability management is governed by policies reviewed and approved annually by the Board and monitored periodically by a committee of the Board. The Board delegates responsibility for asset-liability management to the Asset Liability Management Committee (“ALCO”), which is comprised of members of senior management who set strategic directives that guide the day-to-day asset-liability management of our activities. 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 regional presidents.

Market Risk

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

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

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

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

To cope with these uncertainties, we give careful attention to our assumptions. For example, many of our interest-bearing deposit products (e.g. interest checking, savings and money market deposits) have no contractual maturity and based on historical experience have only a limited sensitivity to movements in market rates. Because we believe we have some control with respect to the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built into the model. In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans or from a vendor supported loan prepayment model that is periodically tested using observed loan prepayment behavior.

We manage the interest-rate risk inherent in our core banking operations primarily using on-balance sheet instruments, which sometimes contain embedded options, mainly fixed-rate portfolio securities and borrowed funds. When appropriate, we utilize interest rate instruments such as interest-rate swaps, interest rate floors and interest rate corridor agreements, among other instruments. As of June 30, 2002, there were no such agreements in effect. During the quarter ended June 30, 2002, the ALCO, Corporate Credit Committee and Board Risk Management Committee approved a pilot program to offer interest rate derivative hedging products to commercial customers, provided these products are in turn hedged. The program is geared to putting variable rate commercial loans on the balance sheet while allowing the customer to synthetically fix the rate by purchasing a variable to fixed interest rate swap. The Bank would enter into an exact offsetting fixed to variable interest rate swap with a broker. The program’s success depends on the receptiveness of commercial customers, but it is anticipated that interest rate derivatives will reduce interest rate risk. As of June 30, 2002, there were no such agreements in effect.

We manage the interest-rate risk inherent in our mortgage banking operations by entering into forward sales contracts and, to a lesser extent, by using purchased 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 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 all closed loans and approximately 80% of loan commitments on rate-locked loans. Purchased mortgage-backed security options are used to hedge a percentage of rate-locked loans.

The average balances during the second quarter of 2002 of residential mortgage loans held for sale and related average hedge positions are summarized below (in millions):


Residential mortgage loans held for sale	$	53,033




Rate-locked loan commitments		51,967




Forward sales contracts		94,270




Purchased mortgage-backed security/treasury options		1,667

Our policy on interest-rate risk simulation specifies that if 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%. Our gradual 2% rising rate scenario was within compliance guidelines at June 30, 2002. However, the gradual 2% falling rate scenario was slightly outside guidelines. Given the slight exception to the guidelines, historically low rates and the steep yield curve, which is thought to imply that further significant rate reductions are unlikely, we have not taken immediate corrective action to bring the falling rate exposure within guidelines. Rather, we continue to focus on strategies that prove beneficial to income should rates rise or the yield curve flattens without worsening exposure to falling rates.

The following table sets forth the estimated effects on our net interest income over a 12-month period following the indicated dates in the event of the indicated increases or decreases in market interest rates.


	200 Basis Point			100 Basis Point			100 Basis Point			200 Basis Point
	Rate Decrease			Rate Decrease			Rate Increase			Rate Increase

June 30, 2002		(5.58	%)		(2.18	%)		2.06	%		2.94	%

December 31, 2001		(5.37	)%		(2.45	)%		1.71	%		2.73	%

The results implied in the above table indicate estimated changes in simulated net interest income for the subsequent 12 months assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, savings, money market and NOW accounts have implied interest rate floors and it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest income would be more than the simulated increase in interest expense because total adjustable earning assets will reprice more quickly than will total adjustable cost liabilities. It should be emphasized, however, that the results are dependent on material assumptions such as those discussed above. For instance, asymmetrical rate behavior can have a material impact on the simulation results.

The most significant factors affecting market risk exposure of net interest income during the three months ended June 30, 2002 were (i) the shape of the U.S. Government securities and interest rate swap yield curve, (ii) changes in the composition and prepayment speeds of mortgage assets, (iii) reduction of deposit interest expense, and (iv) changes in the wholesale borrowings portfolio structure. Since March 2002, the yield curve fell most significantly in the 2-year term (approximately 90 basis points) and in the 10-year term (approximately 60 basis points). As a result, projected mortgage and loan prepayments were faster in the second quarter of 2002 than in the first quarter of 2002. Overall total loans and securities available for sale effective duration estimates became slightly shorter due to increased prepayment estimates. To help protect against rising rates, during the quarter ended June 30, 2002, $200 million of wholesale borrowings were replaced with variable-rate borrowings with interest rates tied to three-month LIBOR with caps ranging from 3% to 6%. The above table reflects the impact of these changes. There was little net change in the estimated sensitivity of our net interest income to changes in interest rates during the second quarter of 2002 as a result of these factors. We remain asset sensitive and project net interest income to increase if short and long interest rates move symmetrically higher.

In connection with the Andover and MetroWest acquisitions in the fourth quarter of 2001, we recorded $8.8 million of mortgage servicing rights at market value at the date of acquisition. Mortgage servicing rights as of June 30, 2002 totaled $7.6 million compared to $8.5 million as December 31, 2001. New mortgage servicing rights from originations are sold on a flow basis shortly after the mortgages are sold. As a result, future earnings exposure to changes in the value of mortgage servicing rights is not expected to be material.

Our earnings are not directly and materially impacted by movements in foreign currency rate or commodity prices. Virtually all transactions are denominated in the U.S. dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related businesses.

LIQUIDITY

Parent Company

On a parent-only basis at June 30, 2002, our debt service requirements consisted primarily of junior subordinated debentures issued to three subsidiaries: $103 million to Peoples Heritage Capital Trust I, $31 million to Banknorth Capital Trust I and $200 million to Banknorth Capital Trust II, in connection with the issuance of 9.06% Capital Securities due 2027, 10.52% Capital Securities due 2027 and 8% Capital Securities due 2032, respectively. 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 its small investment securities portfolio and borrowings, including draws on a $80 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. Our subsidiary bank had $213.5 million available for dividends that could be paid without prior

regulatory approval. The average balance outstanding on the line of credit during the six months ended June 30, 2002 was $4.3 million. In addition, the parent company had $181.6 million in cash or cash equivalents at June 30, 2002.

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 fed funds positions, monthly review of balance sheet changes, monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans.

As of June 30, 2002, Banknorth, NA had in the aggregate $2.7 billion of “immediately accessible liquidity,” defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represents 19% of deposits, as compared to a current policy minimum of 10% of deposits.

Also as of June 30, 2002, Banknorth, NA had in the aggregate “potentially volatile funds” of $1.4 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.

As of June 30, 2002, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 190%, versus a policy minimum of 100%.

In addition to the liquidity sources discussed above, we believe that our residential and consumer loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales or securitizations. We believe we also have significant untapped access to the national brokered deposit market. These sources are contemplated as secondary liquidity in our contingent funding plan. We believe that the level of liquidity is sufficient to meet current and future funding requirements.

CAPITAL

At June 30, 2002, shareholders’ equity amounted to $1.8 billion, or 8.54% of total assets. In addition, through subsidiary trusts, we had outstanding at such date $293.8 million of capital securities, of which $93.8 million mature in 2027 and $200 million mature in 2032, which qualify as Tier 1 Capital. We also have $200 million of 7.625% subordinated notes due in 2011 which qualify as Tier 2 capital.

We paid a $0.145 per share dividend on our common stock during the second quarter of 2002. In February 2002, the Board authorized 8 million shares to be repurchased in the open market in addition to the 13 million share repurchase program authorized in 2001. During the six months ended June 30, 2002, we repurchased 5.8 million shares at an average price of $24.25. As of June 30, 2002, a total of 7.8 million shares were available for repurchase under these authorizations.

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

TABLE 10 — Regulatory Capital Requirements
(Dollars in thousands)

For Capital Adequacy

Actual Purposes Excess

Amount Ratio Amount Ratio Amount Ratio

As of June 30, 2002:

Total capital (to risk weighted assets)
$ 1,967,272 13.23 % 1,189,490 8.00 % $ 777,782 5.23 %

Tier 1 capital (to risk weighted assets)
1,581,321 10.64 % 594,745 4.00 % 986,576 6.64 %

Tier 1 leverage capital (to average assets)
1,581,321 7.75 % 816,234 4.00 % 765,087 3.75 %

As of December 31, 2001:

Total capital (to risk weighted assets)
$ 1,763,236 12.23 % 1,153,369 8.00 % 609,867 4.23 %

Tier 1 capital (to risk weighted assets)
1,382,903 9.59 % 576,685 4.00 % 806,218 5.59 %

Tier 1 leverage capital (to average assets)
1,382,903 7.14 % 775,163 4.00 % 607,740 3.14 %

Net risk weighted assets were $14.9 billion and $14.4 billion at June 30, 2002 and December 31, 2001, respectively.

Banknorth NA is also subject to federal regulatory capital requirements. At June 30, 2002, Banknorth NA was deemed to be “well capitalized” under the regulations of the Office of the Comptroller of Currency of the United States and in compliance with applicable capital requirements.

IMPACT OF NEW ACCOUNTING STANDARDS

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This Statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Adoption of this standard is not expected to materially affect our financial condition, results of operations, earnings per share or cash flows.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Upon adoption of Statement No. 145, companies will be required to apply the criteria in APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” in determining the classification of gains and losses resulting from the extinguishment of debt. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002, with early adoption of the provisions related to the rescission of Statement No. 4 encouraged. Upon adoption, enterprises must reclassify prior period items that do not meet the extraordinary item classification criteria in Opinion No. 30. We have not yet adopted this standard. In the fourth quarter of 2001, under the provisions of SFAS No. 4, we recorded an extraordinary item from the early extinguishment of debt of $3.9 million after-tax, or $.03 per diluted share. Upon adoption of SFAS No. 145, this will no longer qualify for extraordinary treatment and must be reclassified.

In August, 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” SFAS No. 144 provides additional implementation guidance and supersedes SFAS No. 121, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of.” It is effective for financial

statements issued for fiscal years beginning after December 15, 2001. Adoption of this standard did not materially affect our financial condition, results of operations, earnings per share or cash flows.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset. It is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this standard is not expected to have a material impact on our financial condition, results of operations, earnings per share or cash flows.

FORWARD LOOKING STATEMENTS

Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond our control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms or variations on those terms or the negative of those terms. Forward-looking statements are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, changes in general economic conditions, interest rates, deposit flows, loan demand, competition, legislation or regulation and accounting principles, policies or guidelines, as well as other economic, competitive, governmental, regulatory and technological factors affecting Banknorth’s operations. In addition, acquisitions may result in large one-time charges to income, may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated and may result in unforeseen integration difficulties.

We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information contained in the section captioned “Management’s Discussion and Analysis – Asset-Liability Management” is incorporated herein by reference.

Part II — Other Information


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

Item 2. Changes in Securities and Use of Proceeds — not applicable.

Item 3. Defaults Upon Senior Securities — not applicable.

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

(a) An annual meeting of shareholders of Banknorth was held on April 23, 2002 (“Annual Meeting”).

(b) Not applicable.

(c) There were 147,369,279 shares of Common Stock eligible to be voted at the Annual Meeting and 130,747,980 shares were represented at the meeting by the holders thereof, which constituted a quorum. The items voted upon at the Annual Meeting and the vote for each proposal were as follows:
1. Election of directors for Three Year Terms:

Director Nominees Elected for Three Year Terms:


		FOR		AGAINST

	P. Kevin Condron		129,552,143		1,195,832




	Colleen Khoury		127,344,886		3,403,089




	Irving E. Rogers, III		129,522,015		1,225,960




	William J. Ryan		129,554,879		1,203,096




	Curtis M. Scribner		129,536,629		1,211,346




Election of director for a two-year term:




	Director Nominee elected for Two Year Term:




	Luther F. Hackett		129,524,170		1,223,805




Election of director for a one-year term:




	Director Nominee elected for a One Year Term:




	Allen M. Glick		127,321,433		3,426,542

2. Proposal to approve the Executive Incentive Plan.


FOR	AGAINST		ABSTAIN

118,729,260		10,467,393		1,598,454

3. Proposal to approve an amended and restated Employee Stock Purchase Plan.


FOR	AGAINST		ABSTAIN

126,836,924		2,994,954		1,239,834

4. Proposal to ratify the appointment of KPMG LLP as the Company’s independent auditors for the year ending December 31, 2002.


FOR	AGAINST		ABSTAIN

126,885,746		3,812,218		323,752

Item 5. Other Information — not applicable.


Item 6.		Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as part of this report. Exhibit No. 99.1 Certification of Chief Executive Officer Under 18 U.S.C. § 1350. Exhibit No. 99.2 Certification of Chief Financial Officer Under 18 U.S.C. § 1350.

(b) We filed a Current Report on Form 8-K or 8-K/A on January 22, 2002, February 22,2002, February 28, 2002, April 11, 2002 and April 12, 2002.

SIGNATURES

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


	BANKNORTH GROUP, INC.









Date: August 13, 2002	By:	/s/ William J. Ryan

		William J. Ryan Chairman, President and Chief Executive Officer









Date: August 13, 2002	By:	/s/ Peter J. Verrill

		Peter J. Verrill Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer









Date: August 13, 2002	By:	/s/ Stephen J. Boyle

		Stephen J. Boyle Executive Vice President and Controller (principal accounting officer)

EXHIBIT INDEX


Exhibit 99.1		Statement under oath of Principal Executive Officer, dated August 13, 2002









Exhibit 99.2		Statement under oath of Principal Financial Officer, dated August 13, 2002


	For Capital Adequacy

	Actual					Purposes					Excess

	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of June 30, 2002:




Total capital (to risk weighted assets)	$	1,967,272		13.23	%		1,189,490		8.00	%	$	777,782		5.23	%




Tier 1 capital (to risk weighted assets)		1,581,321		10.64	%		594,745		4.00	%		986,576		6.64	%




Tier 1 leverage capital (to average assets)		1,581,321		7.75	%		816,234		4.00	%		765,087		3.75	%




As of December 31, 2001:




Total capital (to risk weighted assets)	$	1,763,236		12.23	%		1,153,369		8.00	%		609,867		4.23	%




Tier 1 capital (to risk weighted assets)		1,382,903		9.59	%		576,685		4.00	%		806,218		5.59	%




Tier 1 leverage capital (to average assets)		1,382,903		7.14	%		775,163		4.00	%		607,740		3.14	%

	(a)		An annual meeting of shareholders of Banknorth was held on April 23, 2002 (“Annual Meeting”).

	(b)		Not applicable.

	(c)		There were 147,369,279 shares of Common Stock eligible to be voted at the Annual Meeting and 130,747,980 shares were represented at the meeting by the holders thereof, which constituted a quorum. The items voted upon at the Annual Meeting and the vote for each proposal were as follows: 1. Election of directors for Three Year Terms: