BANKNORTH GROUP INC/ME - 10-Q Quarterly Report

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

For the Quarterly Period Ended March 31, 2004


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

Commission File Number: 001-31251

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 [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [ ]

The number of shares outstanding of the Registrant’s common stock and related stock purchase rights as of April 30, 2004 is:


Common stock, par value $.01 per share		172,279,203
(Class)		(Outstanding)

Available on the Web @ www.banknorth.com

BANKNORTH GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data) (Unaudited)


	March 31, 2004			December 31, 2003
Assets
Cash and due from banks	$	516,772		$	669,686
Federal funds sold and other short term investments		8,356			4,645
Securities available for sale, at market value		7,389,833			7,122,992
Securities held to maturity (market value of $116,592 and $124,344 at March 31, 2004 and December 31, 2003, respectively)		115,442			124,240
Loans held for sale		46,970			41,696
Loans and leases:
Residential real estate mortgages		2,647,540			2,710,483
Commercial real estate mortgages		5,549,406			5,528,862
Commercial business loans and leases		3,482,093			3,287,094
Consumer loans and leases		4,944,573			4,819,523

Total loans and leases		16,623,612			16,345,962
Less: Allowance for loan and lease losses		233,297			232,287

Net loans and leases		16,390,315			16,113,675

Premises and equipment, net		260,302			264,818
Goodwill		1,127,799			1,126,639
Identifiable intangible assets		34,491			36,415
Bank-owned life insurance		493,729			488,756
Other assets		495,583			460,173

Total assets	$	26,879,592		$	26,453,735

Liabilities and Shareholders’ Equity
Deposits:
Savings accounts	$	2,517,632		$	2,460,522
Money market access and NOW accounts		7,268,948			7,130,534
Certificates of deposit		4,592,577			4,733,104
Noninterest-bearing deposits		3,578,609			3,577,025

Total deposits		17,957,766			17,901,185
Short-term borrowings		1,635,160			1,522,297
Long-term debt		4,403,218			4,360,567
Other liabilities		231,537			149,167

Total liabilities		24,227,681			23,933,216

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, Issued - 182,292,973)		1,823			1,823
Paid-in capital		1,434,779			1,435,005
Retained earnings		1,566,904			1,508,292
Treasury stock, at cost (19,247,306 shares in 2004 and 20,105,254 shares in 2003)		(412,233	)		(430,608	)
Accumulated other comprehensive income		60,638			6,007

Total shareholders’ equity		2,651,911			2,520,519

Total liabilities and shareholders’ equity	$	26,879,592		$	26,453,735

See accompanying Notes to unaudited Consolidated Financial Statements.

BANKNORTH GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data) (Unaudited)


	Three Months Ended
	March 31,
	2004		2003
Interest and dividend income:
Interest and fees on loans and leases	$	215,779		220,285
Interest and dividends on securities		76,873		89,042

Total interest and dividend income		292,652		309,327

Interest expense:
Interest on deposits		38,818		51,391
Interest on borrowed funds		36,225		51,799

Total interest expense		75,043		103,190

Net interest income		217,609		206,137
Provision for loan and lease losses		9,500		10,901

Net interest income after provision for loan and lease losses		208,109		195,236

Noninterest income:
Deposit services		26,153		22,526
Insurance brokerage commissions		13,736		12,357
Merchant and electronic banking income, net		10,404		9,021
Trust and investment management services		9,149		7,351
Bank-owned life insurance		5,496		5,342
Investment planning services		4,839		3,256
Net securities gains		3,581		2,782
Other noninterest income		14,859		15,603

		88,217		78,238

Noninterest expense:
Compensation and employee benefits		87,534		80,693
Occupancy		15,709		14,909
Equipment		11,890		11,250
Data processing		10,436		10,178
Advertising and marketing		7,523		5,060
Amortization of identifiable intangible assets		1,904		1,997
Merger and consolidation costs		1,614		4,450
Other noninterest expense		23,109		21,371

		159,719		149,908

Income before income tax expense		136,607		123,566
Applicable income tax expense		46,280		42,173

Net income	$	90,327	$	81,393

Basic earnings per share	$	0.55	$	0.52
Diluted earnings per share	$	0.54	$	0.51
Weighted average shares outstanding:
Basic		162,965		157,667
Dilutive effect of stock options		3,692		1,661

Diluted		166,657		159,328

See accompanying Notes to unaudited Consolidated Financial Statements.

BANKNORTH GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands) (Unaudited)


															Accumulated
	Common														Other
	Shares			Common		Paid-in			Retained			Treasury			Comprehensive
	Outstanding			Stock		Capital			Earnings			Stock			Income		Total
Balances at December 31, 2003		162,188		$	1,823	$	1,435,005		$	1,508,292		($	430,608	)	$	6,007	$	2,520,519
Net income		—			—		—			90,327			—			—		90,327
Unrealized gains on securities, net of reclassification adjustment and net of tax		—			—		—			—			—			54,583		54,583
Unrealized gains on cash flow hedges, net of reclassification adjustment and net of tax		—			—		—			—			—			48		48

Comprehensive income																		144,958
Treasury stock issued for employee benefit plans		858			—		(20	)		—			17,999			—		17,979
Distribution of restricted stock		—			—		(206	)		—			376			—		170
Cash dividends declared		—			—		—			(31,715	)		—			—		(31,715	)

Balances at March 31, 2004		163,046		$	1,823	$	1,434,779		$	1,566,904		($	412,233	)	$	60,638	$	2,651,911

Balances at December 31, 2002		150,579		$	1,689	$	1,059,778		$	1,269,422		($	382,350	)	$	114,946	$	2,063,485
Net income		—			—		—			81,393			—			—		81,393
Unrealized gains on securities, net of reclassification adjustment and net of tax					—		—			—			—			215		215
Unrealized gains on cash flow hedges, net of reclassification adjustment and net of tax		—			—		—			—			—			927		927

Comprehensive income																		82,535
Common stock issued for acquisitions		13,401			134		382,669			—			—			—		382,803
Treasury stock issued for employee benefit plans		601			—		(2,788	)		—			11,548			—		8,760
Treasury stock purchased		(700	)		—		—			—			(15,524	)		—		(15,524	)
Distribution of restricted stock		—			—		(746	)		—			1,040			—		294
Cash dividends declared		—			—		—			(24,159	)		—			—		(24,159	)

Balances at March 31, 2003		163,881		$	1,823	$	1,438,913		$	1,326,656		($	385,286	)	$	116,088	$	2,498,194

See accompanying Notes to unaudited Consolidated Financial Statements.

BANKNORTH GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


	Three Months Ended March 31,
	2004			2003
Cash flows from operating activities:
Net income	$	90,327		$	81,393
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		9,500			10,901
Depreciation of banking premises and equipment		10,762			10,556
Net amortization of premium and discounts		7,204			13,433
Amortization of intangible assets		1,904			1,997
Provision for deferred tax expense		3,800			6,984
Distribution of restricted stock units		170			294
Net (gains) realized from sales of securities and loans		(5,092	)		(2,782	)
Net (gains) realized from sales of loans held for sale		(1,289	)		(4,031	)
Increase in cash surrender value of bank owned life insurance		(5,496	)		(5,342	)
Net decrease in mortgage servicing rights		203			450
Proceeds from sales of loans held for sale		94,688			261,154
Residential loans originated and purchased for sale		(98,599	)		(214,470	)
Net (increase) decrease in other assets		(55,428	)		(13,861	)
Net increase (decrease) in other liabilities		92,686			(44,608	)

Net cash provided by operating activities		145,340			102,068

Cash flows from investing activities:
Proceeds from sales of securities available for sale		984,631			471,817
Proceeds from maturities and principal repayments of securities available for sale		308,779			866,857
Purchases of securities available for sale		(1,473,468	)		(1,681,598	)
Proceeds from maturities and principal repayments of securities held to maturity		8,798			23,228
Net increase in loans and leases		(327,274	)		(83,789	)
Proceeds from sales of loans		37,097			—
Net additions to premises and equipment		(6,246	)		(3,566	)
Cash paid for acquisitions, net of cash acquired		—			48,354

Net cash used in investing activities		(467,683	)		(358,697	)

Cash flows from financing activities:
Net increase (decrease) in deposits		59,277			(35,596	)
Net increase in securities sold under repurchase agreements		16,402			462,585
Proceeds from Federal Home Loan Bank borrowings		5,734			—
Payments on Federal Home Loan Bank borrowings		(15,840	)		(350,864	)
Net (decrease) increase in other borrowings		(23,697	)		18,191
Treasury stock issued for employee benefit plans		17,979			8,760
Purchase of treasury stock		—			(15,524	)
Cash dividends paid to shareholders		(31,715	)		(24,159	)

Net cash provided by financing activities		28,140			63,393

Decrease in cash and cash equivalents		(294,203	)		(193,236	)
Cash and cash equivalents at beginning of period		316,331			717,003

Cash and cash equivalents at end of period	$	22,128		$	523,767

Interest paid	$	70,273		$	100,125
Income taxes paid (received)		(8,388	)		12,513

See accompanying notes to unaudited Consolidated Financial Statements.

BANKNORTH GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
March 31, 2004
(In thousands, except per share data and as noted) (Unaudited)

Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and predominant practices within the banking industry. We, Banknorth Group, Inc., have not changed our significant accounting and reporting policies from those disclosed in our 2003 Annual Report. There have been no significant changes in the methods or assumptions used in the accounting policies which require material estimates and assumptions.

In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited consolidated financial statements have been included herein. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 2004. Certain amounts in the prior periods have been reclassified to conform to the current presentation. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements.

Note 2 – Acquisitions

Acquisitions are an important part of our strategic plan. The following table summarizes acquisitions completed since January 1, 2003. The acquisitions were accounted for as purchases and, as such, were included in our results of operations from the date of acquisition.


			Balance at				Transaction-Related Items
	Acquisition		Acquisition Date						Other Identifiable		Cash		Shares		Total Purchase
(Dollars and shares in millions)	Date		Assets		Equity		Goodwill		Intangibles		Paid		Issued		Price
First & Ocean Bancorp		12/31/2003	$	274.4	$	15.6	$	35.3	$	1.8	$	49.7		—	$	49.7
American Financial Holdings, Inc.		2/14/2003		2,690.3		408.2		426.0		9.3		328.5		13.4		711.4
Insurance agency acquisitions		2003		1.2		0.1		2.4		0.7		3.2		—		3.2

Note 3 – Stock Compensation Plans

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the underlying stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock upon exercise of the stock option. We have elected to continue using the intrinsic value method in APB Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted and the effects of our employee stock purchase plan. Had we determined compensation cost based on the fair value at the grant date for all stock options and recorded expense related to our employee stock purchase plan under SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:


	Three Months Ended March 31,
	2004			2003
Net income, as reported	$	90,327		$	81,393
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(3,407	)		(2,084	)

Pro forma net income	$	86,920		$	79,309

Earnings per share
Basic - As reported	$	0.55		$	0.52
Pro forma		0.53			0.50
Diluted - As reported		0.54			0.51
Pro forma		0.52			0.50

On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued the exposure draft “Share-Based Payment, an amendment of FASB Statements No. 123 and 95.” The draft of the proposed statement concluded that all companies should expense the fair value of employee stock options using the modified prospective grant-date measurement approach as defined in SFAS 123. Compensation cost would be recognized in the financial statements over the requisite service period prospectively for fiscal years beginning after December 15, 2004, as if all share-based compensation awards granted, modified, or settled after December 15, 1994 had been accounted for using the fair-value method of accounting. We are still assessing the impact of the proposed statement on our financial statements

Note 4 – Securities Available for Sale

The following table presents the fair value of investments with continuous unrealized losses for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2004.


	Less than 1 year							More than 1 year							Total
	Number of		Fair		Unrealized			Number of		Fair		Unrealized			Number of		Fair		Unrealized
	Investments		Value		Losses			Investments		Value		Losses			Investments		Value		Losses
U. S. Government obligations and obligations of U.S.Government agencies and corporations		5	$	1,035,894	($	8,935	)		—	$	—	$	—			5	$	1,035,894	($	8,935	)
Other bonds and notes		5		6,023		(38	)		1		512		(83	)		6		6,535		(121	)
Mortgage-backed securities		51		1,093,908		(3,833	)		5		464		(7	)		56		1,094,372		(3,840	)
Collateralized mortgage obligations		8		54,593		(50	)		5		955		(3	)		13		55,548		(53	)
Equity securities		—		—		—			3		368		(24	)		3		368		(24	)

		69	$	2,190,418	($	12,856	)		14	$	2,299	($	117	)		83	$	2,192,717	($	12,973	)

For securities exhibiting unrealized losses, the following information was considered in determining that the impairments are not other-than-temporary. U.S. Government securities are backed by the full faith and credit of the United States and therefore bear no credit risk. U.S. Government agencies securities have minimal credit risk as they play a vital role in the nation’s financial markets. Other bonds and notes are generally comprised of corporate securities which have a credit rating of at least investment grade by one of the nationally-recognized rating agencies. Mortgage-backed securities or collateralized mortgage obligations are either issued by federal government agencies or by private issuers with minimum security ratings of AA.

Note 5 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill and identifiable intangible assets for the three months ended March 31, 2004 are summarized as follows:


			Indentifiable Intangible Assets
			Core Deposit			Other			Total
			Intangibles			Identifiable			Identifiable
	Goodwill		(“CDI”)			Intangibles			Intangibles
Balance, December 31, 2003	$	1,126,639	$	28,165		$	8,250		$	36,415
Amortization expense		—		(965	)		(939	)		(1,904	)
Reclassification		20		(20	)		—			(20	)
Adjustments of purchase accounting estimates		1,140		—			—			—

Balance, March 31, 2004	$	1,127,799	$	27,180		$	7,311		$	34,491

Estimated amortization expense for the year ending:
Remaining 2004			$	2,896		$	1,689		$	4,585
2005				3,558			1,471			5,029
2006				3,365			723			4,088
2007				3,244			723			3,967
2008				3,239			353			3,592
thereafter				10,879			621			11,500

The components of identifiable intangible assets are as follows:


	March 31, 2004
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
Identifiable intangible assets:
Core deposit intangibles	$	55,145	$	27,964	$	27,181
Other identifiable intangibles		13,703		6,393		7,310

Total	$	68,848	$	34,357	$	34,491

Note 6 – Short-term Borrowings

A summary of short-term borrowings follows:


	March 31, 2004		December 31, 2003
Securities sold under agreements to repurchase - retail	$	1,078,114	$	1,086,900
Federal funds purchased		503,000		358,000
Treasury, tax and loan notes		54,046		77,397

	$	1,635,160	$	1,522,297

Note 7 – Long-term Debt

A summary of long-term debt (debt with original maturities of more than one year) follows:


	March 31, 2004		December 31, 2003
Federal Home Loan Bank advances	$	1,485,014	$	1,495,821
Securities sold under agreements to repurchase - wholesale		2,242,338		2,214,650
Junior subordinated debentures issued to affiliated trusts		305,591		—
Capital trust securities		—		295,275
Subordinated debt 7.625%, due 2011		200,000		200,000
Senior notes 3.75%, due 2008		149,767		149,753
Hedge-related basis adjustments on long-term debt		13,194		(1,896	)
Other long-term debt		7,314		6,964

Total	$	4,403,218	$	4,360,567

Callable borrowings amounted to $1.1 billion and $1.8 billion at March 31, 2004 and December 31, 2003, respectively, the majority of which are long-term in nature.

Note 8 - Comprehensive Income

The following table presents the reconciliation of transactions affecting accumulated other comprehensive income included in shareholders’ equity for the periods indicated.


	Three Months Ended									Three Months Ended
	March 31, 2004									March 31, 2003
	Pre-tax			Tax			Net of			Pre-tax			Tax			Net of
	Amount			Effect			Tax			Amount			Effect			Tax
Unrealized gain (loss) on securities available for sale	$	87,555		($	30,644	)	$	56,911		$	3,363		($	1,340	)	$	2,023
Unrealized (loss) on cash flow hedges		(789	)		276			(513	)		(3,102	)		1,085			(2,017	)
Reclassification adjustment for (losses) gains realized in net income		(2,718	)		951			(1,767	)		1,747			(611	)		1,136

Net change in unrealized gains	$	84,048		($	29,417	)	$	54,631		$	2,008		($	866	)	$	1,142

Note 9 - Other Noninterest Income

Other noninterest income consisted of the following for the periods indicated.


	Three Months Ended
	March 31,
	2004			2003
Covered call premiums	$	6,074		$	7,039
Loan fee income		5,170			5,102
Mortgage banking services income		3,004			3,172
Venture capital write-downs		(359	)		(517	)
Miscellaneous income		970			807

Total	$	14,859		$	15,603

Note 10 – Pension and Other Postretirement Plans

The following table presents the amount of net periodic benefit cost recognized for the periods indicated.


	Three Months Ended
	March 31,
Components of net periodic benefit cost	2004			2003
Qualified Pension
Service cost	$	2,784		$	2,313
Interest cost		3,331			3,042
Expected return on plan assets		(4,828	)		(3,586	)
Amortization of prior service cost		2			2
Amortization of transition obligation		(64	)		(64	)
Amortization of net loss		1,066			966

Net periodic benefit cost		2,291			2,673

Nonqualified Pension
Service cost		99			78
Interest cost		405			395
Amortization of prior service cost		43			43
Amortization of transition obligation		3			3
Amortization of net loss		50			31

Net periodic benefit cost		600			550

Total net periodic benefit cost - pensions plans	$	2,891		$	3,223

Other Postretirement Benefits
Service cost	$	40		$	31
Interest cost		353			289
Amortization of prior service cost		35			35
Amortization of transition obligation		98			98
Amortization of net loss		99			78

Net periodic benefit cost - other postretirement benefit plans	$	625		$	531

As previously disclosed, we expect to contribute between $15 and $20 million to our pension plans in 2004, none of which is required to satisfy minimum funding requirements. The discretionary contribution will be paid entirely in cash and, as in prior years, the entire contribution is anticipated to be paid in December after final review of the 2004 pension obligation.

Note 11 – Defined Contribution Plans

We and our subsidiaries have 401(k) Plans covering substantially all permanent employees. We match employee contributions based on a predetermined formula and may make additional discretionary contributions. The total expense for these plans for the three months ended March 31, 2004 and 2003 was $2.3 million and $2.8 million, respectively.

Note 12 - Accounting Changes

The following information addresses new or proposed accounting pronouncements related to our industry.

Accounting for Variable Interest Entities

In December 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 establishes the criteria used to identify variable interest entities and to determine whether or not to consolidate a variable interest entity. At March 31, 2004, pursuant to the criteria established by FIN 46, we deconsolidated four affiliated trusts which we had formed for the purposes of issuing capital securities to unaffiliated parties and investing the proceeds from the sale thereof and the common securities of the trusts in junior subordinated debentures issued by us. The result of the deconsolidation and the accounting for these entities was to recognize investments in these entities of approximately $10.3 million in the aggregate in other assets and to report the amount of junior subordinated debentures issued by us to such entities, rather than the related capital securities, in the long-term debt section of the consolidated balance sheet which resulted in a $10.3 million increase in long-term borrowings. The adoption of FIN 46 did not have a significant impact on our financial condition, results of operations, earnings per share or cash flows.

For information regarding the potential effect of FIN 46 on the treatment of capital securities issued by affiliated trusts as capital for regulatory purposes, see “Capital” under Item 2.

Accounting for Certain Loan or Debt Securities Acquired in a Transfer

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, to be recognized at their fair value. This SOP provides that the original excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment of yield, loss accrual, or valuation allowance. Any future excess of contractual cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow over the original expected cash flow is recognized as a valuation allowance and expensed immediately. Valuation allowances can not be created or “carried over” in the initial accounting for loans acquired. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004.

Note 13 – Subsequent Events

On April 30, 2004, Banknorth completed the acquisitions of Foxborough Savings Bank (“Foxborough”) and CCBT Financial Companies, Inc. (“CCBT”). Foxborough was acquired for $88.9 million in a cash transaction. Foxborough had $249.6 million of assets and $28.5 million of shareholders’ equity at March 31, 2004. CCBT, the parent company of Cape Cod Bank and Trust Company NA, had $1.3 billion of assets and $117.3 million of shareholders’ equity at March 31, 2004 and 8.4 million common shares outstanding. Under terms of the agreement, each outstanding share of CCBT was converted into 1.084 shares of Banknorth common stock, plus cash in lieu of any fractional share interest.

BANKNORTH GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share data and as noted)

EXECUTIVE OVERVIEW

Our financial statements for the three months ended March 31, 2003 reflect the acquisition of American Financial Holdings, Inc. (“American”) from the date of acquisition on February 14, 2003. American had total assets of $2.7 billion at the date of acquisition. Our financial statements for the three months ended March 31, 2004 also reflect the acquisition of First & Ocean Bancorp (“F&O”) from the date of acquisition on December 31, 2003. F&O had total assets of $274 million at the date of acquisition.

Our net income increased by $8.9 million in the first quarter ended March 31, 2004 compared to the first quarter last year, an increase of 11%. The following were significant factors related to the results for the first quarter of 2004 compared to the first quarter of 2003.

• Net interest income increased 6% over the first quarter of last year due primarily to a $1.1 billion increase in average earning assets from period to period. The net interest margin of 3.68% for the quarter ended March 31, 2004 increased 2 basis points from the first quarter of 2003.

• Our noninterest income, which is comprised primarily of fee income, increased 13%, primarily due to growth in income from deposit services, trust and investment management services and investment planning services.

• Our noninterest expense increased by 7%, primarily due to a 8% increase in compensation and employee benefits, reflecting our growth. In addition, advertising and marketing expense increased $2.5 million, or 48.7%, primarily to attract customers who are looking for new banking opportunities following Bank of America Corporation’s acquisition of FleetBoston Financial Corporation. Noninterest expense was benefited by a $2.8 million or 64% decrease in merger and consolidation costs.

• Total average loans and leases increased 11% during the first quarter of 2004 compared to the first quarter of 2003. Excluding the effects of acquisitions, total average loans and leases increased 5%, as strong commercial and consumer loan growth was offset by residential run-off.

• Total average deposits increased 9% during the first quarter of 2004 compared to the first quarter of 2003 primarily due to acquisitions. Excluding the effects of acquisitions, total average deposits increased $244 million, or 1%, as average checking deposits increased 17% and savings and money market deposits increased 7%, while certificates of deposit declined 16%.

• Our issuer rating was upgraded by Moody’s Investor Services to A3 on March 31, 2004.

RESULTS OF OPERATIONS

SUMMARY

Consolidated net income was $90.3 million, or $0.54 per diluted share, for the first quarter of 2004 as compared with $81.4 million, or $0.51 per diluted share, for the first quarter of 2003, a per share increase of 6%. Our growth in net income for the quarter ended March 31, 2004 over the same quarter last year was due in part to acquisitions completed in 2003 and organic growth. Results were diminished by the effect of merger and consolidation costs of $1.6 million and $4.5 million for the three months ended March 31, 2004 and 2003, respectively.

Annualized return on average equity (“ROE”) and return on average assets (“ROA”) were 14.13% and 1.37%, respectively, for the quarter ended March 31, 2004 and were 14.26% and 1.32%, respectively, for the comparable quarter last year.

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

Selected quarterly data, ratios and per share data are provided in Table 1.

TABLE 1 - Selected Quarterly Data


		2004			2003
		First			Fourth			Third			Second			First
Interest income		$	292,652		$	290,414		$	290,750		$	302,478		$	309,327
Interest expense			75,043			77,126			80,918			90,904			103,190

Net interest income	(A)		217,609			213,288			209,832			211,574			206,137
Provision for loan and lease losses			9,500			10,400			10,500			10,500			10,901

Net interest income after provision for loan and lease losses			208,109			202,888			199,332			201,074			195,236
Noninterest income (1)	(B)		88,217			84,435			88,656			115,828			78,238
Noninterest expense (2)	(C)		159,719			155,676			151,647			184,039			149,908

Income before income taxes			136,607			131,647			136,341			132,863			123,566
Income tax expense			46,280			40,085			46,063			45,338			42,173

Net income		$	90,327		$	91,562		$	90,278		$	87,525		$	81,393

Weighted average shares outstanding:
Basic			162,965			162,149			161,517			162,312			157,667
Diluted			166,657			165,685			164,446			164,559			159,328
Basic earnings per share:		$	0.55		$	0.56		$	0.56		$	0.54		$	0.52
Diluted earnings per share:		$	0.54		$	0.55		$	0.55		$	0.53		$	0.51
Return on average assets (3)			1.37	%		1.39	%		1.39	%		1.38	%		1.32	%
Return on average equity (3)			14.13	%		14.72	%		14.85	%		14.24	%		14.26	%
Net interest margin (fully-taxable equivalent) (3)			3.68	%		3.65	%		3.63	%		3.71	%		3.66	%
Noninterest income as a percent of total income (4)			28.85	%		28.36	%		29.70	%		35.38	%		27.51	%
Efficiency ratio (5)			52.23	%		52.29	%		50.81	%		56.21	%		52.71	%

(1)		In the second quarter of 2003, noninterest income included $29.2 million of net securities gains incurred as part of a deleveraging program implemented by us in the second quarter of 2003, as discussed under “Financial Condition - Securities” below.

(2)		In the second quarter of 2003, noninterest expense included $28.5 million of prepayment penalties on borrowings incurred as part of the deleveraging program.

(3)		Annualized.

(4)		Represents noninterest income as a percentage of net interest income plus noninterest income. Noninterest income as a percent of total income is calculated as (B) divided by (A+B).

(5)		Represents noninterest expense as a percentage of net interest income and noninterest income. Efficiency ratio is calculated as (C) divided by (A+B).

Net Interest Income

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

Fully-taxable equivalent net interest income for the first quarter of 2004 increased $11.7 million, or 6%, compared to the first quarter of 2003. This increase was primarily attributable to an increase in net earning assets and, to a lesser extent, noninterest-bearing deposits comprising a larger share of the funding base, which more than offset the effects of lower interest rates.

Fully-taxable equivalent interest income decreased by $16.4 million in the first quarter of 2004, as compared to the first quarter of 2003, as a result of a decrease in the weighted average yield on earning assets from 5.50% to 4.94% during the three months ended March 31, 2003 and 2004, respectively, which reflected declining interest rates during 2003. This decrease more than offset a $1.1 billion or 4.8% increase in average earning assets from period to period as a result of increases in the average balances of commercial real estate loans, commercial business loans and leases and consumer loans and leases.

Interest expense decreased by $28.1 million in the first quarter of 2004, as compared to the first quarter of 2003, primarily as a result of a decrease in the weighted average rate on interest-bearing liabilities from 2.13% to 1.48% during the three months ended March 31, 2003 and 2004, respectively. This decrease more that offset a $619 million, or 3%, increase in the average balance of interest-bearing liabilities during the first quarter of 2004, as

compared to 2003. Average interest-bearing deposits increased by $843 million, or 6%, in the first quarter of 2004, as compared to the first quarter of 2003. Excluding acquisitions, average deposits increased by $244 million, or 1.4%, as strong growth in demand and money market accounts was offset by declines in higher-costing certificates of deposit. Average borrowings decreased $224 million, or 4%, in the first quarter of 2004 compared to the first quarter of 2003, primarily due to the reduction of Federal Home Loan Bank borrowings.

Net interest margin, which represents fully-taxable equivalent net interest income as a percentage of average interest-earning assets, increased from 3.66% to 3.68% during the three months ended March 31, 2003 and 2004, respectively. The slight improvement in the margin was due to a balance sheet deleveraging program implemented and interest rate swap agreements entered into in the second quarter of 2003. The combined effect of the interest rate swaps was to lower interest expense by $2.6 million. There were no swaps in the first quarter of 2003. See “Other Funding Sources” for more detailed discussion.

Interest rate spread, which represents the difference between the yield earned on our interest-earning assets and the rate paid on our interest-bearing liabilities, increased from 3.37% to 3.46% on a fully-taxable equivalent basis during the three months ended March 31, 2003 and 2004, respectively, as the 65 basis point decrease in the weighted average rate paid on interest-bearing liabilities exceeded the 56 basis point decrease in the weighted average yield on interest-earning assets. See “Asset-Liability Management” below.

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin (net interest income divided by average interest-earning assets). For purposes of the tables and the above discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of our securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) nonaccrual loans have been included in the appropriate average balance loan category, but unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Average balances are based on average daily balances during the indicated periods.

TABLE 2 - Average Balances, Yields and Rates


	2004 First Quarter								2003 First Quarter
						Yield/								Yield/
	Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)
Loans and leases (2):
Residential real estate mortgages	$	2,725,221	$	35,376			5.19	%	$	2,792,615	$	41,652			5.97	%
Commercial real estate mortgages		5,540,489		78,614			5.71			4,913,188		77,810			6.42
Commercial business loans and leases		3,387,309		40,579			4.82			3,006,370		39,475			5.32
Consumer loans and leases		4,883,031		62,206			5.12			4,186,917		62,178			6.02

Total loans and leases		16,536,050		216,775			5.27			14,899,090		221,115			6.00
Investment securities (3)		7,339,247		77,352			4.22			7,879,925		89,449			4.54
Federal funds sold and other short-term investments		7,624		15			0.80			4,535		25			2.21

Total earning assets		23,882,921		294,142			4.94			22,783,550		310,589			5.50

Bank owned life insurance		490,428								425,136
Noninterest-earning assets		2,153,678								1,858,791

Total assets	$	26,527,027							$	25,067,477

Interest-bearing deposits:
Regular savings	$	2,468,416		1,838			0.30		$	2,173,771		3,075			0.57
NOW and money market accounts		7,118,939		14,160			0.80			6,217,880		15,707			1.02
Certificates of deposit		4,660,009		22,820			1.97			5,012,351		32,609			2.64
Brokered deposits		—		—			—			—		—			—

Total interest-bearing deposits		14,247,364		38,818			1.10			13,404,002		51,391			1.55
Borrowed funds		6,048,457		36,225			2.41			6,272,657		51,799			3.34

Total interest-bearing liabilities		20,295,821		75,043			1.48			19,676,659		103,190			2.13

Non-interest bearing deposits		3,487,716								2,905,737
Other liabilities		171,584								170,732
Shareholders’ equity		2,571,906								2,314,349

Total liabilities and shareholders’ equity	$	26,527,027							$	25,067,477

Net earning assets	$	3,587,100							$	3,106,891

Net interest income (fully-taxable equivalent)				219,099								207,399
Less: fully-taxable equivalent adjustments				(1,490	)							(1,262	)

Net interest income			$	217,609							$	206,137

Net interest rate spread (fully-taxable equivalent)							3.46	%							3.37	%
Net interest margin (fully-taxable equivalent)							3.68	%							3.66	%

(1)		Annualized.

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

(3)		Includes securities available for sale and held to maturity

The following table presents certain information on a fully-taxable equivalent basis regarding changes in our interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest- bearing liabilities, information is provided with respect to changes attributable to (i) changes in volume (change in volume multiplied by old rate), (ii) changes in rate (change in rate multiplied by old volume) and (iii) changes in rate/volume (change in rate multiplied by change in volume).

TABLE 3 - Rate /Volume Analysis


	Three Months Ended March 31, 2004 vs. March 31, 2003 Increase (decrease) due to
							Rate and			Total
	Volume (1)			Rate			Volume (2)			Change
Interest income:
Loans and leases	$	24,420		($	27,042	)	($	1,718	)	($	4,340	)
Investment securities		(6,103	)		(6,269	)		275			(12,097	)
Federal funds sold and other short-term investements		17			(16	)		(11	)		(10	)

Total interest income		18,334			(33,327	)		(1,454	)		(16,447	)

Interest expense:
Interest-bearing deposits:
Regular savings		418			(1,459	)		(196	)		(1,237	)
NOW and money market accounts		2,285			(3,401	)		(431	)		(1,547	)
Certificates of deposit		(2,313	)		(8,350	)		874			(9,789	)

Total interest-bearing deposits		390			(13,210	)		247			(12,573	)
Borrowed funds		(1,862	)		(14,504	)		792			(15,574	)

Total interest expense		(1,472	)		(27,714	)		1,039			(28,147	)

Net interest income (fully taxable equivalent)	$	19,806		($	5,613	)	($	2,493	)	$	11,700

(1)		Volume increases include the effects of acquisitions, including the acquisition of American on February 14, 2003 and First and Ocean on December 31, 2003.

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

Provision and Allowance for Loan and Lease Losses

The provision for loan and lease losses is recorded to bring the allowance for loan and lease losses to a level deemed appropriate by management based on factors discussed in the “Analysis and Determination of the Allowance for Loan and Lease Losses” in the “Risk Management” section. Although we utilize judgment in providing for losses, for the reasons discussed under the “Risk Management” section, there can be no assurance that we will not have to increase the amount of our provision for loans and lease losses in future periods.

We provided $9.5 million and $10.9 million for loan and lease losses in the quarters ended March 31, 2004 and 2003, respectively. The lower provision in the first quarter of 2004 was due to lower net charge-offs during the three months ended March 31, 2004 compared to the three months ended December 31, 2003 and March 31, 2003. At March 31, 2004, the allowance for loan and lease losses amounted to $233.3 million, or 1.40% of total portfolio loans and leases, as compared to $232.3 million, or 1.42%, at December 31, 2003. The ratio of the allowance for loan and lease losses to nonperforming loans was 344% at March 31, 2004, as compared to 389% at December 31, 2003 and 288% at March 31, 2003. See “Risk Management” below for further information on the provision for loan and lease losses, net charge-offs, nonperforming assets and other factors we consider in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.

Noninterest Income

The following table presents noninterest income for the periods indicated.

Table 4 - Noninterest Income


	Three Months Ended
	March 31,						Change
	2004			2003			Amount			Percent
Noninterest income:
Deposit services	$	26,153		$	22,526		$	3,627			16	%
Insurance brokerage commissions		13,736			12,357			1,379			11	%
Merchant and electronic banking income, net		10,404			9,021			1,383			15	%
Trust and investment management services		9,149			7,351			1,798			24	%
Bank-owned life insurance		5,496			5,342			154			3	%
Investment planning services		4,839			3,256			1,583			49	%
Net securities gains		3,581			2,782			799			29	%
Other noninterest income:
Covered call premiums		6,074			7,039			(965	)		(14	%)
Loan fee income		5,170			5,102			68			1	%
Mortgage banking services income		3,004			3,172			(168	)		(5	%)
Venture capital write-downs		(359	)		(517	)		158			31	%
Miscellaneous income		970			807			163			20	%

Total other noninterest income		14,859			15,603			(744	)		(5	%)

Total	$	88,217		$	78,238		$	9,979			13	%

Deposit services income increased $3.6 million, or 16%, primarily as a result of an increased number of deposit accounts and an increase in cash management and overdraft fees. Acquisitions during 2003 comprised a significant portion of the increased number of deposit accounts and increased overdraft fees.

Insurance brokerage commissions increased $1.4 million, or 11%, primarily as a result of increases in renewal and new business in 2004.

Merchant and electronic banking income increased $1.4 million, or 15%, primarily due to increases in the volume of transactions processed and increased market share from acquisitions. This increase was net of the impact of decreased debit card fee revenue due to the reductions in interchange rates resulting from the settlement of antitrust litigation brought against VISA and MasterCard by Wal-Mart, Sears and other retailers in August 2003. Merchant and electronic banking income represents fees and interchange income generated by the use of our ATMs and debit cards issued by us, along with charges to merchants for credit card transactions processed, net of third-party costs directly attributable to handling these transactions.

Trust and investment management services income increased $1.8 million, or 24%, primarily due to an increase in fees which are based on the market value of trust assets under management. Assets under management increased to $8.9 billion at March 31, 2004 from $8.2 billion at March 31, 2003, an increase of $685 million. This increase was primarily due to improvements in the financial markets as well as new accounts.

Income from bank-owned life insurance (“BOLI”) increased $154 thousand, or 3%. Income from BOLI represents the increase in the cash surrender value of life insurance policies on the lives of certain employees who have consented to allowing Banknorth, NA, our wholly-owned banking subsidiary, to be the beneficiary of such policies. The cash surrender value of our BOLI was $493.7 million at March 31, 2004 compared to $488.8 million at December 31, 2003. Most of our BOLI is invested in the ‘general account’ of quality insurance companies. Standard and Poors rated all such general account carriers AA- or better at March 31, 2004. The BOLI investment

provides a means to mitigate increasing employee benefit costs. For the first quarter of 2004, the average carrying value of BOLI was $490 million compared to $425 million for the first quarter of 2003.

Investment planning services income increased $1.6 million, or 49%, primarily due to an increase in commissions earned from increased sales of third party mutual funds and annuities resulting from improved market conditions.

Net securities gains increased $799 thousand, or 29%. Gains from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future.

Other noninterest income decreased by $744 thousand, or 5%, primarily as a result of lower premiums received on covered call options.

Noninterest Expense

The following table presents noninterest expense during the periods indicated.

Table 5 - Noninterest Expense


	Three Months Ended
	March 31,				Change
	2004		2003		Amount			Percent
Noninterest expense:
Compensation and employee benefits	$	87,534	$	80,693	$	6,841			8	%
Occupancy		15,709		14,909		800			5	%
Equipment		11,890		11,250		640			6	%
Data processing		10,436		10,178		258			3	%
Advertising and marketing		7,523		5,060		2,463			49	%
Amortization of identifiable intangible assets		1,904		1,997		(93	)		(5	%)
Merger and consolidation costs		1,614		4,450		(2,836	)		(64	%)
Other noninterest expense:
Telephone		3,370		3,468		(98	)		(3	%)
Office supplies		2,438		2,794		(356	)		(13	%)
Postage and freight		2,401		3,074		(673	)		(22	%)
Miscellaneous loan costs		514		948		(434	)		(46	%)
Deposits and other assessments		908		899		9			1	%
Collection and carrying costs of non-performing assets		725		308		417			135	%
Miscellaneous		12,753		9,880		2,873			29	%

Total other noninterest expense		23,109		21,371		1,738			8	%

Total	$	159,719	$	149,908	$	9,811			7	%

Noninterest expense increased $9.8 million, or 7%, in the first quarter of 2004 compared to the same period last year. This increase was primarily due to a higher compensation and employee benefits expense, advertising and marketing expense and miscellaneous expense, which were offset in part by reduced merger and consolidation costs.

Compensation and employee benefits expense increased 8% in the first quarter of 2004 compared to the same period last year primarily due to increased salaries and benefit costs primarily from acquisitions and merit increases. These increases were partially offset by decreased pension expense. Pension expense under the defined benefit pension plan was $2.9 million and $3.1 million for the three months ended March 31, 2004 and 2003, respectively. The fair value of plan assets as of March 31, 2004 was $240.6 million as compared to $158.1 million at March 31, 2003.

Advertising and marketing expense increased $2.5 million in the first quarter of 2004 compared to the same period last year primarily to attract customers who are looking for new banking opportunities following Bank of America Corporation’s acquisition of FleetBoston Financial Corporation. The increase in expense included new advertising promotions and corporate sponsorships (such as for the Boston Bruins, “Win a day with Ray” promotions and Tobin Bridge sponsorships) and expenses for the new comprehensive product catalogue for use in all of our branches.

The 64% decrease in merger and consolidation costs was due to the completion of the system conversions of the acquisitions of American and Warren Bancorp, Inc. in the first quarter of 2003. The following table summarizes merger and consolidation costs for the three months ended March 31, 2004 and 2003.

Table 6 - Merger and consolidation costs


	Three Months Ended
	March 31,
	2004			2003
Foxborough Saving Bank Merger Charges
Systems conversion and integration/customer communications	$	130		$	—
Other costs		27			—

		157			—

CCBT Financial Companies, Inc. Merger Charges
Systems conversion and integration/customer communications		535			—
Other costs		153			—

		688			—

F&O Merger Charges
Personnel costs		285			—
Systems conversion and integration/customer communications		648			—
Other costs		107			—

		1,040			—

American Merger Charges
Personnel costs		104			915
Systems conversion and integration/customer communications		6			1,221
Other costs		59			1,114

		169			3,250

Warren Bancorp, Inc. Merger Charges
Personnel costs		—			623
Systems conversion and integration/customer communications		—			505
Other costs		24			100

		24			1,228

Andover Bancorp, Inc./MetroWest Bank Merger Charges
Personnel costs					1
Other costs					(24	)

		—			(23	)

Other Costs
Bancorp Connecticut and Ipswich Bancshares, Inc. merger charges		6			38
Branch decommissioning costs		—			(43	)
Reverse auto lease reserves (Banknorth - Vermont)		(470	)		—

		(464	)		(5	)

Total Merger and Consolidation Costs	$	1,614		$	4,450

The following table summarizes activity in the accrual account for merger and consolidation costs from December 31, 2003 through March 31, 2004.

TABLE 7 - Merger and Consolidation Costs - Activity in the Accrual Account


											Non-cash Write
	Balance		Other					Cash			Downs and Other			Balance
	12/31/03		Reclassification		Charges			Payments			Adjustments			3/31/04
Foxborough Merger	$	0	$	0	$	157		($	157	)	$	0		$	0
Cape Cod Merger		—		—		688			(688	)		—			—
First & Ocean		250		1,715		1,040			(2,314	)		—			691
American Merger		266		—		169			(169	)		(266	)		—
Warren Merger		27		—		24			(24	)		(27	)		—
Bancorp Connecticut Merger		466		—		6			(157	)		—			315
Andover / MetroWest Mergers		84		—		—			(2	)		—			82
Other Merger and Consolidation Costs		4		—		(470	)		(4	)		470			—

Total	$	1,097	$	1,715	$	1,614		($	3,515	)	$	177		$	1,088

Other noninterest expense increased $1.7 million, or 8%, in the first quarter of 2004 compared to the same period last year largely due to increased professional and consulting fees.

Taxes

The effective tax rate was 34% for each of the three months ended March 31, 2004 and 2003.

We are subject to examinations by various federal and state governmental tax authorities from time to time regarding tax returns we have filed. Currently, federal and certain state income tax returns filed by us in recent years are under examination or scheduled to be examined in the near future. Examinations by tax authorities may result in challenges to the tax positions taken and judgments made by us. We believe that the positions taken and judgments made by us and amounts accrued for income taxes are adequate. Should tax laws change or tax authorities determine that our judgments were inappropriate, however, the result and adjustments required could have an adverse effect on our operations.

Comprehensive Income

Our comprehensive income amounted to $145.0 million and $82.5 million during the first quarters of 2004 and 2003, respectively. Comprehensive income differed from our net income in 2004 primarily due to a $54.6 million net unrealized gain on securities. For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the unaudited Consolidated Financial Statements.

Our available for sale investment portfolio had net unrealized gains of $96.1 million, $11.8 million and $181.7 million ($62.5 million, $7.7 million and $118.1 million net of applicable income tax effects, respectively) at March 31, 2004, December 31, 2003 and March 31, 2003, respectively. The changes from period to period are due mainly to changes in prevailing interest rates and, to a lesser degree, the size of the available for sale investment portfolio. The change in fair value of our interest-bearing liabilities, which would tend to offset the change in fair value of available for sale securities, is not included in other comprehensive income.

FINANCIAL CONDITION

Our consolidated total assets increased by $426 million, or 2%, from $26.5 billion at December 31, 2003 to $26.9 billion at March 31, 2004. Total average assets were $26.5 billion and $25.1 billion for the three months ended March 31, 2004 and 2003, respectively. The increase in total average assets was largely due to the acquisitions in 2003, which increased average assets by approximately $1.9 billion. Total liabilities increased by $294 million

since year-end 2003, primarily due to increases in borrowings. Shareholders’ equity totaled $2.7 billion at March 31, 2004 and $2.5 billion at December 31, 2003.

Securities

The securities portfolio is utilized for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, generates interest and dividend income from the investment of excess funds, provides liquidity to meet liquidity requirements and is used as collateral for public deposits and wholesale funding sources.

The securities portfolio (including securities classified as held to maturity) averaged $7.3 billion during the first quarter of 2004, as compared to $7.9 billion in the first quarter of 2003. The net decrease in the securities portfolio resulted from the deleveraging program implemented by us in the second quarter of 2003, pursuant to which we sold $901 million of investments securities and used the proceeds to prepay $853 million of borrowings. The securities portfolio is held in and managed by Northgroup Asset Management Company, a wholly-owned subsidiary of the Company, and consists primarily of mortgage-backed securities and U.S. Government and agency securities. Other securities in the portfolio are collateralized mortgage obligations, which included securitized residential real estate loans held in a REMIC, and asset-backed securities. The majority of securities available for sale were rated AAA or equivalently rated at March 31, 2004. The average yield on securities was 4.22% for the quarter ended March 31, 2004 and 4.54% for the quarter ended March 31, 2003. With the exception of securitized residential real estate loans held in a REMIC that were classified as held to maturity and carried at cost, all of our securities are classified as available for sale and carried at market value. Securities available for sale had an after-tax unrealized gain of $62.5 million and $7.7 million at March 31, 2004 and December 31, 2003, respectively. These unrealized gains do not impact net income or regulatory capital but are recorded as adjustments to shareholders’ equity, net of related deferred income taxes. Unrealized gains, net of related deferred income taxes, are a component of “Accumulated Other Comprehensive Income” contained in the unaudited Consolidated Statement of Changes in Shareholders’ Equity.

Loans and Leases

Total loans and leases (including loans held for sale) averaged $16.5 billion during the first quarter of 2004, an increase of $1.6 billion, or 11%, from the first quarter of 2003. This increase was primarily attributable to growth in consumer loans and leases, commercial real estate loans and, to a lesser extent, commercial business loans and leases. Average loans and leases as a percent of average earning assets was 69% during the quarter ended March 31, 2004 compared to 65% during the quarter ended March 31, 2003.

Average residential real estate loans (which include mortgage loans held for sale) of $2.7 billion during the first quarter of 2004 decreased $67 million from the average amount of such loans during the first quarter of last year. Excluding acquisitions, average residential loans decreased approximately $502 million, or 16%, as a result of increased refinancing activity and prepayments in a lower interest rate environment. Mortgage loans held for sale amounted to $47.0 million and $41.7 million at March 31, 2004 and December 31, 2003, respectively. We are currently selling substantially all of the conforming 30-year fixed-rate loans we originate.

Average commercial real estate loans of $5.5 billion increased $627 million, or 13%, from the first quarter of last year. Excluding acquisitions, average commercial real estate loans increased $524 million, or 10%. While most of our markets reflected increases, the largest increases were in Massachusetts and Connecticut. The average yield on commercial real estate loans during the first quarter of 2004 was 5.71%, as compared to 6.42% in the first quarter of 2003, a decrease of 71 basis points. The lower yield reflects the effect of the downward repricing of variable-rate loans, the refinancing of fixed-rate loans at lower rates and the origination of new loans at the lower prevailing rates.

Commercial business loans and leases averaged $3.4 billion during the first quarter of 2004, an increase of $380 million, or 13%, over the first quarter of 2003. Excluding acquisitions, average commercial business loans and leases increased $327 million, or 11%. Massachusetts reflected the greatest amount of growth. The yield on commercial business loans and leases decreased to 4.82% in the first quarter of 2004 from 5.32% in the first quarter

of 2003. The decrease in the yield was primarily due to lower rates on new loans and the repricing of variable-rate loans.

Consumer loans and leases averaged $4.9 billion during the first quarter of 2004, an increase of $696 million, or 17%, from the first quarter of 2003. Excluding acquisitions, average consumer loans and leases increased $410 million or 9%. The growth in consumer loans was primarily in home equity loans and indirect automobile loans. The average yield on consumer loans and leases decreased to 5.12% in the first quarter of 2004 from 6.02% in the first quarter of 2003. For a description of the types of loans and leases in our loan and lease portfolio and a breakdown of our consumer loans, see “Credit Risk.”

Deposits

Total deposits averaged $17.7 billion during the first quarter of 2004, an increase of $1.4 billion from the first quarter of 2003 due primarily to an increase in noninterest-bearing and money market and NOW accounts. The ratio of loans to deposits was 93% at March 31, 2004 and 91% at December 31, 2003.

Average noninterest-bearing deposits totaled $3.5 billion during the first quarter of 2004, an increase of $582 million, or 20%, from the first quarter of 2003. Excluding acquisitions, average noninterest-bearing deposits increased $509 million, or 17%.

Average interest-bearing deposits of $14.2 billion during the first quarter of 2004 increased $843 million from the first quarter of 2003. Excluding acquisitions, average savings, money market and NOW accounts increased $620 million, or 7%, while certificates of deposits declined by 16%. The decline in certificates of deposits resulted from our decision to allow deposits priced above alternate funding costs to run off. The average rates paid on NOW and money market accounts decreased 22 basis points from 1.02% in the first quarter of 2003 to 0.80% in the first quarter of 2004 due largely to lower prevailing interest rates. The average rates paid on all deposit types decreased by 45 basis points from 1.55% in the first quarter of 2003 to 1.10% in the first quarter of 2004, reflecting the decline in prevailing interest rates.

Included within the deposit categories above are government banking deposits, which averaged $1.5 billion in the first quarter of 2004 and $1.1 billion in the first quarter of 2003. Government banking deposits include deposits received from state and local governments, school districts, colleges/universities, utility districts, public housing authorities and court systems in our market area. Many of these deposits exceed the FDIC insurance coverage amounts and require us to pledge specific collateral or maintain private insurance.

Other Funding Sources

We use both short-term and long-term borrowings to balance earning assets growth. Short-term borrowings, which include federal funds purchased, retail securities sold under agreements to repurchase and other short-term borrowings, amounted to $1.6 billion and $1.5 billion at March 31, 2004 and December 31, 2003, respectively, a decrease of $113 million, or 7%.

At March 31, 2004, we also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. There were no drawdowns on this line in either the first quarter of 2004 or 2003. We also have additional borrowing capacity as more fully described under “Liquidity” below.

Long-term debt includes FHLB advances, senior notes, subordinated notes, junior subordinated debentures, wholesale securities sold under agreements to repurchase, capital lease obligations and other debt with original maturities greater than one year. Long-term debt amounted to $4.4 billion at March 31, 2004 and December 31, 2003.

At March 31, 2004 and December 31, 2003, FHLB borrowings amounted to $1.5 billion. FHLB collateral consists primarily of first mortgage loans secured by single-family properties. These borrowings had an average cost of

4.25% during the three months ended March 31, 2004 as compared to 4.52% during the three months ended March 31, 2003.

At March 31, 2004 and December 31, 2003, we had $150 million of 5-year senior notes carrying a fixed rate of 3.75%. These securities, which were issued in April 2003, are rated A3 by Moody’s Investor Services.

At March 31, 2004 and December 31, 2003, subordinated debt consisted of $200 million of 7.625% subordinated notes due 2011 issued by our banking subsidiary in 2001. The notes qualify as Tier 2 capital for regulatory purposes.

At March 31, 2004 and December 31, 2003, we had outstanding $305.6 million of junior subordinated debentures issued by us to affiliated trusts. See “Capital” below.

At March 31, 2004 and December 31, 2003, wholesale securities sold under repurchase agreements amounted to $2.2 billion and were collateralized by mortgage-backed securities and U.S. Government obligations.

CONTRACTUAL OBLIGATIONS

The following tables summarize our contractual cash obligations, other commitments and derivative financial instruments at March 31, 2004.

Table 8 - Contractual obligations and other commitments
Contractual Obligations (1)


			Payments Due By Period
			Less than		1 - 3		4 - 5		After 5
	Total		1 Year		Years		Years		Years
Long-term debt	$	2,154,856	$	104,346	$	728,827	$	311,204	$	1,010,479
Capital lease obligations		6,024		62		213		995		4,754
Repurchase agreements - wholesale		2,242,338		1,042,338		1,100,000		—		100,000

Total long-term debt		4,403,218		1,146,746		1,829,040		312,199		1,115,233
Operating lease obligations		128,245		25,477		39,877		26,324		36,567
Pension plan contribution		20,000		20,000		—		—		—
Other benefit plan payments		35,022		3,130		6,196		5,955		19,741
Other vendor obligations		32,900		10,123		20,246		2,531		—

Total contractual obligations	$	4,619,385	$	1,205,476	$	1,895,359	$	347,009	$	1,171,541

(1) Other liabilities are short term in nature, except for liabilities related to employee benefit plans.

Other Commitments


	Total		Amount of Commitment Expiration - Per Period
	Amounts		Less than		1 - 3		4 - 5		After 5
	Committed		1 Year		Years		Years		Years
Unused portions on lines of credit	$	4,320,681	$	287,906	$	261,970	$	31,808	$	3,738,997
Standby letters of credit		441,304		115,103		60,788		117,147		148,266
Commercial letters of credit		14,740		7,051		6,407		1		1,281
Commitments to originate loans		1,840,128		1,279,534		302,603		45,851		212,140
Other commitments		46,640		13,239		5,834		1,451		26,116

Total commitments	$	6,663,493	$	1,702,833	$	637,602	$	196,258	$	4,126,800

Derivative Financial Instruments


	Total		Amount of Commitment Expiration - Per Period
	Amounts		Less than		1 - 3		4 - 5		After 5
	Committed		1 Year		Years		Years		Years
Interest rate swaps (notional amount):
Commercial loan swap program:
Interest rate swaps with commercial borrowers (1)	$	370,564	$	23,176	$	—	$	67,085	$	280,303
Interest rate swaps with dealers (2)		370,564		23,176		—		67,085		280,303
Interest rate swaps on borrowings (3)		566,500		25,000		191,500		150,000		200,000
Forward commitments to sell loans		106,957		106,957		—		—		—
Foreign currency forward contracts: (4)
Forward contracts with customers		39,545		27,940		11,605		—		—
Forward contracts with dealers		39,382		27,867		11,515		—		—
Rate-locked loan commitments		73,243		73,243		—		—		—

(1)		Swaps with commercial loan customers (Banknorth receives fixed, pays variable).

(2)		Swaps with dealers (Banknorth pays fixed, receives variable) which offset the interest rate swaps with commercial borrowers.

(3)		Swaps on borrowings (Banknorth pays variable, receives fixed).

(4)		Forward contracts for customer accommodations.

RISK MANAGEMENT

The primary goal of our risk management program is to determine how certain existing or emerging issues in the financial services industry affect the nature and extent of the risks faced by us. Based on a periodic self-evaluation, we determine key issues and develop plans and/or objectives to address risk. Our board of directors and management believe that there are seven applicable “risk categories,” consisting of credit, interest rate, liquidity, transaction, compliance, strategic and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled with a quality of risk management perspective. In addition, an aggregate level of risk is assigned as a whole as well as the direction of risk (stable, increasing or decreasing). Each risk category and the overall risk level is compared to regulatory views on a regular basis and then reported to the board with an accompanying explanation as to the existence of any differences. The risk program includes risk identification, measurement, control and monitoring.

Our board of directors has established the overall strategic direction for Banknorth and approves our overall risk policies and oversees our overall risk management process. The board has established two board committees, consisting of Audit and Board Risk Management, and has charged each committee with overseeing key risks. In addition, there is a management Operational Risk Committee, which is comprised of senior officers in key business lines, which identifies and monitors key operational risks. The Operational Risk Committee reports to the Board Risk Management Committee on a regular basis.

CREDIT RISK MANAGEMENT

General

The Board Risk Management Committee monitors our credit risk management. Our strategy for credit risk management includes centralized policies and uniform underwriting criteria for all loans. The strategy also includes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management review of large loans and loans with a deterioration of credit quality. We maintain an internal rating system that provides a mechanism to regularly monitor the credit quality of our loan portfolio. The rating system is intended to identify and measure the credit quality of lending relationships. For consumer loans, we utilize standard credit scoring systems to assess consumer credit risks and to price consumer products accordingly. We strive to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels. See “Results of Operations - Provision and Allowance for Loan and Lease Losses.”

Our residential loan portfolio accounted for 16% of the total loan portfolio at March 31, 2004 and 17% at December 31, 2003. Our residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless the excess is protected by mortgage insurance. At March 31, 2004, 0.30% of our residential loans were nonperforming, as compared to 0.26% at December 31, 2003 and 0.32% at March 31, 2003.

Our commercial real estate loan portfolio accounted for 33% of the total loan portfolio at March 31, 2004 and 34% at December 31, 2003. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate. These loans generally are secured by properties located in the New England states and upstate New York. At March 31, 2004, 0.44% of our commercial real estate loans were nonperforming, as compared to 0.36% at December 31, 2003 and 0.46% at March 31, 2003.

Our commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at March 31, 2004 and December 31, 2003. Commercial business loans and leases are generally made to small to medium size businesses located within our market areas. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England and upstate New York. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to businesses in the form of lines of credit. Through a subsidiary, we also offer direct equipment leases, which amounted to $96.8 million at March 31, 2004. We do not emphasize the purchase of participations in syndicated commercial loans. At March 31, 2004, we had $389.7 million of outstanding participations in syndicated commercial loans and had an additional $338 million of unfunded commitments related to these participations. At March 31, 2004, 0.83% of our commercial business loans were nonperforming, as compared to 0.74% at December 31, 2003 and 1.25% at March 31, 2003.

The following table presents the geographic distribution of our commercial loans and leases at March 31, 2004 and December 31, 2003.

Table 9 - Commercial Loans and Leases by State


	Commercial Real Estate Loans										Commercial Business Loans and Leases
	March 31,		December 31,		Change						March 31,		December 31,		Change
	2004		2003		Amount			Percent			2004		2003		Amount			Percent
Massachusetts	$	2,540,855	$	2,565,064	($	24,209	)		(0.94	%)	$	1,254,668	$	1,173,803	$	80,865			6.89	%
Maine		880,383		885,791		(5,408	)		(0.61	%)		708,129		658,902		49,227			7.47	%
New Hampshire		751,034		732,249		18,785			2.57	%		494,683		494,811		(128	)		(0.03	%)
Vermont		647,735		645,608		2,127			0.33	%		461,226		438,483		22,743			5.19	%
Connecticut		529,768		504,624		25,144			4.98	%		371,139		332,749		38,390			11.54	%
New York		199,631		195,526		4,105			2.10	%		192,248		188,346		3,902			2.07	%

Total	$	5,549,406	$	5,528,862	$	20,544			0.37	%	$	3,482,093	$	3,287,094	$	194,999			5.93	%

Consumer loans and leases accounted for 30% of our total loan portfolio at March 31, 2004 and 29% at December 31, 2003. In the fourth quarter of 2003, we ceased originating vision, dental and orthodontia fee plan loans and mobile home loans. The decrease in this loan type reflects the run-off of those loans. At March 31, 2004, 0.13% of our consumer loans were nonperforming, as compared to 0.18% at December 31, 2003 and 0.17% at March 31, 2003.

The following table lists our consumer loans and leases by type as of March 31, 2004 and December 31, 2003:

Table 10 - Composition of Consumer Loans and Leases


	March 31,					December 31,					Change
	2004					2003					2004-2003
			% of					% of
	Amount		Total			Amount		Total			Amount			Percent
Home equity	$	2,351,463		47.56	%	$	2,274,793		47.20	%	$	76,670			3.37	%
Automobile		1,654,744		33.47	%		1,596,504		33.13	%		58,240			3.65	%
Mobile home		133,566		2.70	%		141,407		2.93	%		(7,841	)		(5.54	%)
Vision, dental, and orthodontia fee plan		97,490		1.97	%		120,694		2.50	%		(23,204	)		(19.23	%)
Education		269,220		5.44	%		234,226		4.86	%		34,994			14.94	%
Other		438,090		8.86	%		451,899		9.38	%		(13,809	)		(3.06	%)

Total	$	4,944,573		100.00	%	$	4,819,523		100.00	%	$	125,050			2.59	%

Nonperforming Assets

Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue), other real estate owned, repossessed assets and certain securities available for sale. Total nonperforming assets as a percentage of total assets were 0.26% at March 31, 2004, 0.24% at December 31, 2003 and 0.31% at March 31, 2003. Total nonperforming assets as a percentage of total loans and total other nonperforming assets was 0.42% at March 31, 2004, 0.39% at December 31, 2003 and 0.53% at March 31, 2003. See Table 11 for a summary of nonperforming assets for the last five quarters. On a dollar basis, our nonperforming assets decreased from $82.7 million at March 31, 2003 to $63.1 million at December 31, 2003, due primarily to a $14.2 million decrease in nonperforming commercial business loans and leases, and increased to $70.6 million at March 31, 2004, due to a $4.9 million increase in nonperforming commercial real estate loans and a $4.6 million increase in nonperforming commercial business loans and leases.

We continue to focus on asset quality issues and to allocate significant resources to the key asset quality control functions of credit policy and administration and loan review. The collection, workout and asset management functions focus on the reduction of nonperforming assets. Despite the ongoing focus on asset quality and relatively low levels of nonperforming assets, there can be no assurance that adverse changes in the real estate markets and economic conditions in our primary market areas will not result in higher nonperforming asset levels in the future and negatively impact our operations through higher provisions for loan losses, net loan charge-offs, decreased accrual of interest income and increased noninterest expenses as a result of the allocation of resources to the collection and workout of nonperforming assets.

The following table presents nonperforming assets for the last five quarters.

TABLE 11 — Nonperforming assets


	2004			2003
	March 31			December 31			September 30			June 30			March 31
Nonaccrual loans and leases:
Residential real estate loans	$	7,990		$	7,157		$	9,135		$	9,827		$	9,828
Commercial real estate loans		24,619			19,700			27,069			19,139			22,990
Commercial business loans and leases		28,978			24,412			22,857			24,577			38,562
Consumer loans and leases		6,267			8,493			7,664			7,192			7,457

Total nonaccrual loans and leases		67,854			59,762			66,725			60,735			78,837
Other nonperforming assets:
Other real estate owned, net of related reserves		389			529			921			814			541
Repossessions, net of related reserves		2,311			2,812			2,711			2,911			3,276
Securities available for sale		—			—			—			—			—

Total other nonperforming assets		2,700			3,341			3,632			3,725			3,817

Total nonperforming assets	$	70,554		$	63,103		$	70,357		$	64,460		$	82,654

Accruing loans and leases which are 90 days or more overdue	$	7,929		$	4,915		$	3,163		$	2,995		$	3,349

Total nonperforming loans as a percentage of total loans and leases(1)		0.41	%		0.37	%		0.42	%		0.39	%		0.51	%
Total nonperforming assets as a percentage of total assets		0.26	%		0.24	%		0.27	%		0.25	%		0.31	%
Total nonperforming assets as a percentage of total loans and leases (1) and total other nonperforming assets		0.42	%		0.39	%		0.44	%		0.41	%		0.53	%

(1)

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

Residential real estate loans are generally placed on nonaccrual when they become 120 days past due or are in the process of foreclosure. All closed-end consumer loans 90 days or more past due, unless well secured and in the process of collection, and any equity lines of credit in the process of foreclosure are placed on nonaccrual status. Consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. We generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. At March 31, 2004, we had $7.9 million of accruing loans which were 90 days or more delinquent, as compared to $4.9 million at December 31, 2003 and $3.3 million at March 31, 2003. The $3.0 million increase in accruing loans which were 90 days or more delinquent was primarily related to guaranteed student loans. We may also place loans which are less than 90 days past due on nonaccrual (and, therefore, nonperforming) status when in our judgment these loans are likely to present future principal and/or interest repayment problems and ultimately would be classified as nonperforming.

Net Charge-offs

Net charge-offs amounted to $8.5 million for the three months ended March 31, 2004, as compared to $8.8 million for the three months ended March 31, 2003. Net charge-offs represented 0.21% and 0.24% of average loans and leases outstanding for the quarters ended March 31, 2004 and 2003, respectively.

The following table presents net charge-offs by loan type and the activity in the allowance for loan and lease losses during the period indicated.

TABLE 12 — Allowance for Loan and Lease Losses


	2004 First			2003 Fourth			2003 Third			2003 Second			2003 First
	Quarter			Quarter			Quarter			Quarter			Quarter
Allowance at beginning of period	$	232,287		$	229,581		$	227,240		$	226,677		$	208,273
Additions due to acquisitions		—			2,661			—			—			16,346
Charge-offs:
Residential real estate mortgages (1)		(55	)		25			63			53			55
Commercial real estate mortgages		221			87			27			202			262
Commercial business loans and leases		2,711			4,302			3,011			5,754			3,205
Consumer loans and leases		8,405			9,212			8,782			6,959			7,609

Total loans and leases charged off		11,282			13,626			11,883			12,968			11,131

Recoveries:
Residential real estate mortgages		17			15			5			22			22
Commercial real estate mortgages		667			255			296			676			534
Commercial business loans and leases		926			1,900			2,493			1,286			689
Consumer loans and leases		1,182			1,101			930			1,047			1,043

Total loans and leases recovered		2,792			3,271			3,724			3,031			2,288

Net charge-offs		8,490			10,355			8,159			9,937			8,843
Provision for loan and lease losses		9,500			10,400			10,500			10,500			10,901

Allowance at end of period	$	233,297		$	232,287		$	229,581		$	227,240		$	226,677

Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (2)		0.21	%		0.26	%		0.20	%		0.25	%		0.24	%
Ratio of allowance to total loans and leases at end of period (2)		1.40	%		1.42	%		1.44	%		1.44	%		1.46	%
Ratio of allowance to nonperforming loans and leases at end of period		344	%		389	%		344	%		374	%		288	%
Ratio of net charge-offs (recoveries) as a percent of average outstanding loans and leases, annualized (2):
Residential real estate mortgages		(0.011	%)		0.001	%		0.008	%		0.004	%		0.005	%
Commercial real estate mortgages		(0.032	%)		(0.012	%)		(0.020	%)		(0.037	%)		(0.022	%)
Commercial business loans and leases		0.211	%		0.295	%		0.064	%		0.568	%		0.339	%
Consumer loans and leases		0.593	%		0.688	%		0.681	%		0.531	%		0.636	%
Total portfolio loans and leases at end of period		16,623,612			16,345,962			15,925,852			15,733,312			15,579,173
Total nonperforming loans and leases at end of period		67,854			59,762			66,725			60,735			78,837
Average loans and leases outstanding during the period (2)		16,511,538			15,976,068			15,841,521			15,634,071			14,829,108

(1)		Residential real estate charge-offs include estimates of charge-offs and reversals of prior period estimates which may result in a “negative charge-offs.”

(2)		Excludes residential real estate loans held for sale.

Potential Problem Loans

In addition to the nonperforming loans discussed under “Credit Risk Management” above, we also have loans that are 30 to 89 days delinquent and still accruing. These loans amounted to $142 million at March 31, 2004 and December 31, 2003. These loans and related delinquency trends are considered in the evaluation of the allowance for loan and lease losses and the determination of the provision for loan and lease losses.

Analysis and Determination of the Allowance for Loan and Lease Losses

The allowance for loan and lease losses amounted to $233.3 million at March 31, 2004 and $232.3 million at December 31, 2003. The $1.0 million increase was due to the provision for loan and lease losses exceeding net charge-offs during the first quarter of 2004. The ratio of the allowance to total portfolio loans and leases at March 31, 2004 was 1.40% compared to 1.42% at December 31, 2003. The ratio of the allowance for loan and lease losses to nonperforming loans was 344% at March 31, 2004 and 389% at December 31, 2003.

The allowance for loan and lease losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to income and by recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment and is determined based on management’s ongoing evaluation. As discussed under “Critical Accounting Policies,” we believe that the methods used by us in determining the allowance for loan and lease losses constitute a critical accounting policy. Although we exercise judgment in providing for losses, for the reasons discussed under “Critical Accounting Policies” and “Credit Risk Management - Nonperforming Assets,” there can be no assurance that we will not have to increase the amount of our provision for loan and lease losses in future periods. Management determined that the allowance for loan and lease losses was adequate at March 31, 2004.

ASSET-LIABILITY MANAGEMENT

The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-liability management is governed by policies, goals, and objectives that are adopted and reviewed by our board of directors and monitored periodically by the Board Risk Management Committee. The board delegates responsibility for asset-liability management strategies to achieve these goals and objectives to the Asset Liability Management Committee (“ALCO”), which is comprised of members of senior management. Senior management determines the strategic directives that guide the day-to-day management of our activities and interest rate risk exposure. The ALCO also reviews and approves all major risk, liquidity and capital management programs, except for product pricing. Product pricing is reviewed and approved by the Pricing Committee, which is comprised of a subset of ALCO members and the regional presidents of our banking subsidiary.

Interest Rate Risk

Interest rate risk is the risk of loss to future earnings or long-term value resulting from changes in interest rates and is by far the most significant non-credit risk to which we are exposed. This risk arises directly from our core lending and deposit gathering activities and is predominantly concentrated in our mortgage-related assets as well as our non-maturity deposits. Mortgage related assets typically give borrowers the option to prepay at any time without penalty. Principal cash flows that come from these assets are highly interest rate sensitive. As interest rates fall, borrowers are more likely to pay off their existing mortgages, which results in higher cash flows that we must in turn reinvest. Replacing these higher-rate mortgage assets with lower-rate mortgage assets has the potential to reduce our net interest income unless we can also reduce either our wholesale or retail funding costs. In the low interest rate environment, bank deposits can increase, especially if the market risk premium is not sufficient to adequately compensate investors. Consequently, under such circumstances, we can have even more cash to reinvest in low yielding assets. Conversely, rising rates tend to have the opposite effect on both mortgage assets and non-maturity deposits. Higher rates make borrowers less likely to refinance existing debt, resulting in lower cash flows for us to reinvest. And, if the market risk premium is sufficiently high, depositors could be enticed to take additional investment risk and move deposits from banks into riskier assets, such as equities. This in turn could result in less cash to invest or even require us to use wholesale funding market sources more actively. In the case of higher interest rates, our funding sources could reprice faster than our assets and at higher rates, thereby reducing our interest rate spread and net interest margin. The degree to which future earnings or long-term value is subject to interest rate risk depends on how closely the characteristics of our interest-earning assets match those of our interest-bearing liabilities.

In addition to directly impacting mortgage asset and deposit cash flows, interest rate changes affect (i) the amount of loans originated and sold by us, (ii) the level and composition of deposits, (iii) the ability of borrowers to repay adjustable or variable rate loans, (iv) the average maturity of loans and investments, (v) the rate of amortization of premiums paid on securities, capitalized mortgage servicing rights, deferred fees and purchase accounting adjustments, (vi) the fair value of our saleable assets, the amount of unrealized gains and losses on securities available for sale per SFAS No. 115, and the resultant ability to realize gains and (vii) per SFAS Nos. 133 and 138, the fair value of derivatives carried on our balance sheet, derivative hedge effectiveness testing and the amount of ineffectiveness recognized in earnings.

Assessment and Measurement

The overall objective of interest rate risk management is to deliver consistent net interest income growth and returns on equity over a wide range of possible interest rate environments. To that end, management focuses on (i) key interest rate risk metrics and assessment of our exposure to this risk, (ii) a careful review and consideration of modeling assumptions and (iii) asset and liability management strategies that help attain the corporate goals and objectives adopted by our board of directors.

The primary objective of interest rate risk management is to control our measured exposure to interest rate risk both within limits and guidelines established by the ALCO and approved by our board. These limits and guidelines reflect our tolerance for interest rate risk over a wide range of both short-term and long-term measurements. In addition, we evaluate interest rate risk based on ongoing business risk measures, liquidation or run-off measures of the existing balance sheet and stress test measures. Ongoing measurements and runoff analysis provide management with information concerning day-to-day operations. Stress testing shows the impact of very extreme but lower probability events. The combination of these measures gives management a comprehensive view of possible risks to future earnings and long-term equity value. We attempt to control interest rate risk by identifying, quantifying and, where appropriate, hedging our exposure.

Net Interest Income Sensitivity

Net interest income is our largest source of revenue. Net interest income sensitivity is our primary short-term measurement used to assess risk to our ongoing business. Management believes that net interest income sensitivity gives us the best perspective of how day-to-day decisions affect our interest rate risk profile. We subject forward 12-month net interest income projections to various rate movements using a simulation model for various specified interest rate scenarios. Simulations are run monthly and include scenarios where market rates are “shocked” up and down, scenarios where market rates gradually change or “ramp” up and down and scenarios where the slope of the market yield curve changes. Our base simulation assumes that rates do not change for the next 12 months. The sensitivity measurement is calculated as the percentage variance of the net interest income simulations to the base simulation results. Results for the gradual “ramps” are compared to policy guidelines and are disclosed in the interest rate risk results below.

Economic Value of Equity

Economic value of equity is a theoretical long-term liquidation measure of interest rate risk. It is a useful measure because it attempts to capture all cash flow optionality on the balance sheet at a particular point in time. Using this analysis, we can compute additional interest rate measures, such as effective duration and convexity, for internal asset or liability classifications. While these measurements are an integral part of our risk management process, they are not based on on-going measurements of interest rate risk because they do not consider the effects of future business activity. For this reason, management believes that net interest income sensitivity is a more appropriate measurement when making day-to-day interest rate risk management decisions. To calculate the theoretical economic value of equity, we subtract the calculated value of liabilities from the calculated value of assets at a particular point in time, usually month end. Where observable market prices are available, market values are used. For financial assets or liabilities with no or few observable market prices, we compute a net present value of cash

flows using an assigned risk premium. However, in the case of certain assets or liabilities, cash flows or risk premiums may not be known with certainty. This requires us to use material modeling assumptions.

Review of Modeling Assumptions

Key assumptions related to the above measurements include interest rate movements, product pricing and customer behavior. In the case of mortgage asset cash flows, the majority of our assumptions are derived from a vendor supported prepayment model that is periodically tested using actual loan portfolio behavior. Both ALCO and the Pricing Committee carefully monitor deposit retention, pricing and product behavior.

Interest Rates

The net interest income simulation and economic value of equity model use the same parallel interest rate “shocks” of 1%. We consider these scenarios to be stress tests that measure the impact of sudden and severe market rate movements on our short and long term interest rate risk measures. Another stress test periodically performed is asymmetric interest rate behavior that measures the impact of yield curve slope changes on interest rate risk measures.

Not all interest rates are modeled to move with the market. Because we control the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built into the model. Many of these non-maturity interest-bearing deposit products (e.g. interest checking, savings and money market deposits) are modeled to have only a limited sensitivity to market rate movements based on historical experience. These product rates change with only a small fraction of market rate movements and are assumed to have pricing floors. Other accounts, such as home equity lines of credit, price off the prime rate applied on a lagged basis. New commercial business and commercial real estate loans generally price off average spreads to LIBOR and the swap curve. Most new fixed rate commercial loans have standard yield maintenance language, which reduces the likelihood of prepayments in portfolios that typically have higher turnover rates due to business activity. More and more large commercial customers are opting to hedge LIBOR and prime loan rates using interest rate derivatives, including interest rate swaps, which allows us to reduce our interest rate risk. In turn, this affects the mix of new loans as more of the commercial portfolio becomes variable.

Borrower Cash Flows

One of the most material assumptions relates to varying cash flows and prepayment risk. Assets that have prepayment risk include mortgage and home equity loans and lines of credit, mortgage-backed securities, collateralized mortgage obligations and mortgage servicing rights. The likelihood for a borrower to prepay usually increases when interest rates fall. Since the future prepayment behavior of borrowers is uncertain, the resulting loan cash flows cannot be determined exactly. Complicating our efforts to measure interest rate risk is the uncertainty of the maturity, repricing and/or runoff of some of our assets and liabilities.

Future Business Activity

Future business activity is projected in the net interest income sensitivity analysis and includes new loan originations, deposit growth, planned investment transactions, funding actions, and non-interest income and expense projections. The basis for future business activity combines budget projections, current balance sheet and income statement run rates, as well as business forecasts to simulate balance sheet and income statement growth over the next 12 months. Because future business activity forecasts are uncertain, assumptions are more likely to impact the net interest income results. Therefore, the net interest income simulation is thought to contain more assumption risk than the economic value of equity liquidation analysis.

Asset Liability Management and Strategies

We manage the interest rate risk inherent in our core banking operations using both cash based investments and wholesale funding sources, as well as interest rate derivatives. For example, the types of investments available for sale or wholesale borrowings can have widely varying interest rate risk characteristics. Either of these instruments might also contain embedded options, such as calls, caps, floors and collars. Depending on our overall risk position, these investment or funding transactions can be used to further change our overall interest rate risk profile.

Our asset-liability management policy on interest rate risk simulation specifies that if market interest rates were to shift gradually up or down 2%, estimated net interest income for the subsequent 12 months should decline by less than 5%. All interest rate risk measures were within compliance guidelines at March 31, 2004. The ALCO currently is more focused on strategies that prove beneficial to income should rates rise and the yield curve flattens, as well as on the gradual decreasing 1% rate scenario.

The table below sets forth information regarding estimated changes in net interest income for the 12 months following the indicated dates, assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, because most deposit accounts have implied interest rate floors, it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest income would be more than the simulated increase in interest expense because total adjustable interest-earning assets will reprice more quickly than will total adjustable interest-bearing liabilities. These results are dependent on material assumptions such as those discussed above.

Table 13 - Sensitivity of Net Interest Income


	200 Basis Point			100 Basis Point			100 Basis Point
	Rate Increase			Rate Increase			Rate Decrease
March 31, 2004		(0.78	%)		(0.13	%)		(0.52	%)

December 31, 2003		(0.26	%)		0.24	%		(0.71	%)

Derivative Instruments

Purpose and Benefits

Derivative financial instruments are important tools that we use to manage interest rate risk. When appropriate, we use derivatives such as interest-rate swaps, interest rate floors, interest rate caps and interest rate corridor agreements and forward security sales, among other instruments.

Certain derivatives are used to hedge certain wholesale funding activities and the mortgage origination pipeline. These instruments are designated as hedges at inception in accordance with SFAS No. 133. At March 31, 2004, our designated hedging activities consisted of forward commitments related to hedging our mortgage banking operations and interest-rate swaps on fixed-rate borrowings. See Table 15 below.

We manage the interest rate risk inherent in our mortgage banking operations by entering into forward sales contracts and, to a lesser extent, by purchasing mortgage-backed security options. An increase in market interest rates between the time we commit to terms on a loan and the time we ultimately sell the loan in the secondary market generally will have the effect of reducing the gain (or increasing the loss) we record on the sale. We attempt to mitigate this risk by entering into forward sales commitments in amounts sufficient to cover 70% to 90% of 30-year fixed-rate loans which are currently closed or are anticipated to close. Purchased mortgage-backed security options are also used to hedge rate-locked loans.

The decrease in residential mortgage loan originations in the first quarter of 2004 resulted in a decrease in average residential mortgages held for sale and average rate-locked commitments in the first quarter of 2004 compared to the first quarter of 2003. The following table summarizes the average balances of residential mortgage loans held for sale and related hedge positions during the periods indicated.

Table 14 - Average Balances of Loans Held for Sale and Related Hedges


	Three Months Ended
	March 31,
	2004		2003
Residential mortgage loans held for sale	$	37,858	$	86,893
Rate-locked loan commitments		48,961		94,513
Forward sales contracts		75,600		170,075

Interest rate derivatives, primarily interest rate swaps, offered to commercial borrowers through our hedging program are designated as speculative under SFAS 133. However, we believe that our exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an identical dealer transaction. The commercial customer hedging program allows us to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. In the first quarter of 2004, we recorded a total notional amount of $51.8 million of interest rate swaps with commercial borrowers and an equal notional amount of dealer transactions. It is anticipated that over time, customer interest rate derivatives will reduce the interest rate risk inherent in our longer-term, fixed-rate commercial business and real estate loans. The customer-related positions summarized in the table below includes both the customer and offsetting dealer transactions.

Foreign Exchange or Market Risk

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

Foreign currency forward contracts are contracts that we enter into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these customers, we set aside a percentage of the customer’s available line of credit until the foreign currency contract is settled. Foreign exchange and trade services are provided under a private label arrangement with a correspondent bank. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting our exposure to the replacement value of the contracts rather than the notional principal or contract amounts. To date, all customers and correspondents have performed in accordance with contractual terms.

The following table summarizes our derivative positions at March 31, 2004.

Table 15 - Derivative Positions

Asset-Liability Management Positions


	Notional Amount Maturing												Fair
March 31, 2004	2004		2005		2006		2007		Thereafter		Total		Value
Interest rate contracts
Pay variable, receive fixed	$	—	$	216,500	$	—	$	—	$	350,000	$	566,500	$	13,800
Forward commitments to sell loans		106,957		—		—		—		—		106,957		(33	)

Customer-related Positions


	Notional Amount Maturing												Fair
March 31, 2004	2004		2005		2006		2007		Thereafter		Total		Value
Interest rate contracts
Receive fixed, pay variable	$	23,176	$	—	$	—	$	12,846	$	334,542	$	370,564	$	13,263
Pay fixed, receive variable		23,176		—		—		12,846		334,542		370,564		(13,263	)
Foreign currency forward contracts
Forward contracts with customers		27,940		11,605		—		—		—		39,545		(2,806	)
Forward contracts with dealers		27,867		11,515		—		—		—		39,382		2,993
Rate-locked loan commitments		73,243		—		—		—		—		73,243		202	(1)

(1)

No value has been assigned to potential mortagage servicing rights related to rate-locked loan commitments.

2004 Asset Liability Management Actions

The most significant factors affecting market risk exposure of net interest income in the first quarter of 2004 were (i) changes in the shape of the U.S. Government securities and interest rate swap yield curves, (ii) changes in the composition of the investment portfolio, (iii) changes in the composition of mortgage assets and prepayment speeds of mortgage assets, (iv) reduction of deposit interest expense and (v) changes in the wholesale funding structure, including $500 million of fixed-rate repurchase agreements maturing in February 2006 to an average of 3 month LIBOR plus 0.48%.

Interest rates in the first quarter of 2004 fell, with 10-year Treasury yields falling to end the first quarter approximately 41 basis points lower than year-end. Falling mortgage rates resulted in a pick up of mortgage loan activity and projected mortgage loan prepayments are forecasted to be slightly higher to start the second quarter. Asset and liability management actions taken in the first quarter of 2004 reduced simulated asset sensitivity. These actions included the purchase of securities less susceptible to prepayments in a rising rate environment. The above net interest income table reflects the net impact of these changes. The falling interest rate scenarios remain asset sensitive, albeit to a lesser degree than year-end and our rising rate scenarios are now slightly liability sensitive. Without further actions, net interest income is projected to remain stable if short and long interest rates move symmetrically higher and increase if the yield curve becomes steeper.

LIQUIDITY

Our Board Risk Management Committee establishes policies and analyzes and manages liquidity to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. Liquidity management is viewed from a long-term and a short-term perspective, as well as from an asset and liability perspective. We monitor liquidity through a regular review of loan and deposit maturities, yield and rate scenarios and loan and deposit forecasts to minimize funding risk. Other factors affecting our ability to meet liquidity needs include variations in the markets served and general economic conditions. We have various funding sources available to us on a parent-only basis as well as through our banking subsidiary, as outlined below.

Parent Company

On a parent-only basis at March 31, 2004, our debt service requirements consisted primarily of $305.6 million junior subordinated debentures issued by us to affiliated trusts and $150 million of 3.75% senior notes due May 1, 2008. The junior subordinated debentures were issued to four affiliated trusts in connection with their issuance of capital securities to unaffiliated parties. These obligations mature starting in 2027, have interest rates ranging from 8% to 10.52% and annual debt service payments of $26.0 million. The senior notes have annual debt service payments of $5.6 million.

The principal sources of funds for us to meet parent-only obligations are dividends from our banking subsidiary, which are subject to regulatory limitations, income from investment securities and borrowings, including draws on a $110 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. At March 31, 2004, our subsidiary bank had $590.0 million available for dividends that could be paid without prior regulatory approval. In addition, the parent company had $225.3 million in cash or cash equivalents at March 31, 2004.

Banking Subsidiary

For our banking subsidiary, Banknorth, NA, liquidity represents the ability to fund asset growth and accommodate deposit withdrawals and meet other funding requirements. Liquidity risk is the danger that Banknorth, NA cannot meet anticipated or unexpected funding requirements or can meet them only at excessive cost. Liquidity is measured by the ability to raise cash when needed at a reasonable cost. Many factors affect a bank’s ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions.

In addition to traditional retail deposits, Banknorth, NA has various other liquidity sources, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and borrowed funds such as FHLB advances, reverse repurchase agreements and brokered deposits.

We continually monitor and forecast our liquidity position. There are several interdependent methods which we use for this purpose, including daily review of federal funds positions, monthly review of balance sheet changes, monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingency funding plans.

As of March 31, 2004, Banknorth, NA had in the aggregate $4.0 billion of “immediately accessible liquidity,” defined as cash that could be raised within 1-3 days through collateralized borrowings or sales of securities. This represented 22% of retail deposits, as compared to a current policy minimum of 10% of deposits.

Also as of March 31, 2004, Banknorth, NA had in the aggregate “potentially volatile funds” of $2.4 billion. These are funds that might flow out of the bank over a 90-day period in an adverse environment. Management estimates

this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources.

As of March 31, 2004, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 163%, versus a policy minimum of 100%.

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

We have a shelf registration on file with the Securities and Exchange Commission which allows us to sell up to $1.0 billion of debt securities, preferred stock, depository shares, common stock and warrants and which allows affiliated trusts to sell capital securities. We had $650 million of remaining authority under this shelf registration statement at March 31, 2004.

CAPITAL

At March 31, 2004, shareholders’ equity amounted to $2.7 billion, or 9.87% of total assets. At December 31, 2003, shareholders’ equity amounted to $2.5 billion, or 9.53% of total assets.

We paid a cash dividend of $0.195 per share on our common stock during the first quarter of 2004 compared to $0.16 per share in the first quarter of 2003.

We have a stock repurchase program that was approved by the Board in 2002 and has a total of 2.9 million shares available for repurchase at March 31, 2004. There were no repurchases in the first quarter of 2004.

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of Currency of the United States (“OCC”) respectively require us and our banking subsidiary to maintain certain ratios, set forth below. At March 31, 2004, Banknorth Group, Inc. and Banknorth, NA were deemed to be “well capitalized” under the regulations of the Federal Reserve Board and the OCC, respectively, and in compliance with applicable capital requirements.

Table 16 - Capital Ratios


	Actual					Capital Requirements					Excess
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2004
Banknorth Group, Inc.
Total capital (to risk-weighted assets)	$	2,167,587		11.47	%	$	1,511,723		8.00	%	$	655,864		3.47	%
Tier 1 capital (to risk weighted assets)		1,734,290		9.18	%		755,861		4.00	%		978,429		5.18	%
Tier 1 leverage capital ratio (to average assets)		1,734,290		6.84	%		1,013,951		4.00	%		720,339		2.84	%
Banknorth NA
Total capital (to risk-weighted assets)		2,073,285		10.99	%		1,508,869		8.00	%		564,416		2.99	%
Tier 1 capital (to risk-weighted assets)		1,639,988		8.70	%		754,435		4.00	%		885,553		4.70	%
Tier 1 leverage capital ratio (to average assets)		1,639,988		6.48	%		1,013,029		4.00	%		626,959		2.48	%
As of December 31, 2003
Banknorth Group, Inc.
Total capital (to risk-weighted assets)	$	2,088,061		11.29	%	$	1,479,352		8.00	%	$	608,709		3.29	%
Tier 1 capital (to risk-weighted assets)		1,656,848		8.96	%		739,676		4.00	%		917,172		4.96	%
Tier 1 leverage capital ratio (to average assets)		1,656,848		6.65	%		996,777		4.00	%		660,071		2.65	%
Banknorth NA
Total capital (to risk-weighted assets)		1,970,705		10.67	%		1,477,591		8.00	%		493,114		2.67	%
Tier 1 capital (to risk-weighted assets)		1,539,814		8.34	%		738,796		4.00	%		801,018		4.34	%
Tier 1 leverage capital ratio (to average assets)		1,539,814		6.18	%		995,893		4.00	%		543,921		2.18	%

Net risk-weighted assets were $18.8 billion and $18.5 billion at March 31, 2004 and December 31, 2003, respectively, for Banknorth Group, Inc. and Banknorth, NA.

At March 31, 2004 and December 31, 2003, we operated four affiliated trusts for the purpose of issuing to unaffiliated parties capital securities and investing the proceeds from the sale thereof in junior subordinated debentures issued by us. All of the proceeds from the issuance of the capital securities and the common securities issued by the trusts are invested in our junior subordinated debentures, which represent the sole assets of the trusts. The capital securities pay cumulative cash distributions quarterly at the same rate as the junior subordinated debentures held by the trusts. We own all of the outstanding common securities of the trusts and effectively are the guarantor of the obligations of the trusts.

The following table provides information on each of our affiliated trusts and the outstanding capital securities of such trusts and the related junior subordinated debentures issued by us at December 31, 2003 and March 31, 2004.

Table 17 - Affiliated Trusts


							Junior
	Issuance		Capital		Common		Subordinated		Stated			Maturity
Name	Date		Securities		Securities		Debentures (1)		Rate			Date
Peoples Heritage Capital Trust I		1/31/1997	$	61,775	$	3,093	$	64,868		9.06	%		2/1/2027
Banknorth Capital Trust I		5/1/1997		30,000		928		30,928		10.52	%		5/1/2027
Ipswich Statutory Trust I		2/22/2001		3,500		109		3,609		10.20	%		2/22/2031
Banknorth Capital Trust II		2/22/2002		200,000		6,186		206,186		8.00	%		4/1/2032

			$	295,275	$	10,316	$	305,591

(1)

Amounts include junior subordinated debentures acquired by affiliated trusts from us with the capital contributed by us in exchange for the common securities of such trusts. Junior subordinated debentures are equal to capital securities plus common securities.

The regulatory capital treatment of capital securities issued by subsidiary trusts of bank holding companies is currently under review by the banking regulators in light of the issuance by the Financial Accounting Standards Board of Interpretation No. 46R, Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51 (“FIN 46”). See Note 12 to the unaudited Consolidated Financial Statements. Our capital securities are currently included in the Tier 1 capital of Banknorth and, at March 31, 2004, amounted to 17.0% of its Tier 1 capital. Depending on the future determination of banking regulators, capital securities issued by affiliated trusts which are not consolidated under FIN 46 may no longer qualify for Tier 1 capital treatment, but instead they or the related junior subordinated debentures may qualify for Tier 2 capital treatment. Outstanding capital securities may or may not be grandfathered by the Federal Reserve Board for treatment as Tier 1 capital for regulatory purposes. On July 2, 2003, the Federal Reserve Board issued a Supervision and Regulation Letter requiring that bank holding companies continue to follow the current instructions for reporting capital securities in their regulatory reports. The effect of the letter is that we will continue to report our capital securities in Tier 1 capital until further notice from the Federal Reserve Board. As noted above, at March 31, 2004, we were classified as “well capitalized” for regulatory purposes, the highest classification. We believe that our classification would have remained “well-capitalized” were the capital securities issued by subsidiary trusts included in our Tier 2 capital and not in Tier 1 capital. If our trust capital securities were no longer allowed to be included in Tier 1 capital as a result of accounting and regulatory developments, we would be permitted to redeem the capital securities without penalty. If capital securities issued by affiliated trusts or the related junior subordinated debentures were not granted Tier 2 status, we believe that we would remain in compliance with existing minimum capital requirements.

At March 31, 2004 and December 31, 2003, we also had $200 million of 7.625% subordinated notes due in 2011 issued by our banking subsidiary, which qualify as Tier 2 capital for regulatory purposes.

Banking regulators have also established guidelines as to the level of investments in BOLI. These guidelines are expressed in terms of a percentage of Tier 1 capital plus loan loss reserves. Our guideline (which is consistent with

regulatory guidelines) is that BOLI should not exceed 25% of our Tier 1 capital plus loan loss reserves, which we monitor monthly. The ratio of BOLI to Tier 1 capital plus loan loss reserves was 25.1% at March 31, 2004 and 25.9% at December 31, 2003. We currently do not anticipate any additional purchases or sales of BOLI.

CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies comply with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The preparation of financials statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding reported results. Management has discussed the development and the selection of critical accounting policies with the Audit Committee of our board of directors. As discussed in our 2003 Annual Report on Form 10-K, we have identified the following critical accounting policies: allowance for loan and lease losses, accounting for acquisitions and review of related goodwill and other intangible assets, accounting for pension plans and accrued income taxes. We consider these policies as our critical accounting policies due to the potential impact on our results of operations and the carrying value of certain of our assets based on any changes in judgments and assumptions required to be made by us in the application of these policies. Our critical accounting policies have not changed since December 31, 2003.

IMPACT OF NEW ACCOUNTING STANDARDS

For information on the impact of new accounting standards, see Note 12 to the unaudited Consolidated Financial Statements.

FORWARD LOOKING STATEMENTS

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are

designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

In the ordinary course of business, Banknorth and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions, including actions brought on behalf of various classes of claimants. Certain of these actions assert claims for substantial monetary damages against Banknorth and its subsidiaries. Based on currently available information, advice of counsel, available insurance coverage and established reserves, management does not believe that the eventual outcome of pending litigation against Banknorth and its subsidiaries will have a material adverse effect on the consolidated financial position, liquidity or results of operations of Banknorth. In view of the inherent difficulty of predicting such matters, however, there can be no assurance that the outcome of any such action will not have a material adverse effect on Banknorth’s consolidated results of operations in any future reporting period.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table sets forth information with respect to any purchase made by or on behalf of Banknorth or any “affiliated purchaser,” as defined in §240.10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of Banknorth common stock during the indicated periods.

Total Number of

Shares Purchased as

Maximum Number of

Total Number

Average

Part of Publicly

Shares that May Yet Be

of Shares

Price Paid

Announced Plans or

Purchased Under the

Period

Purchased

per Share

Programs

Plans or Programs (1)

January 1-31, 2004

—

February 1-29, 2004

—

March 1-31, 2004

—

2,853,200

(1)

In February 2002, the Board of Directors approved a program to repurchase up to 8,000,000 shares of Banknorth common stock. The program does not have an expiration date.

Item 3. Defaults Upon Senior Securities - not applicable.

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

(a) An annual meeting of shareholders of Banknorth was held on April 27, 2004 (“Annual Meeting”).

(b) Not applicable.

(c) There were 162,912,877 shares of Common Stock eligible to be voted at the Annual Meeting and 141,272,347 shares were represented at the meeting by the holders thereof, which constituted a quorum. The items voted upon at the Annual Meeting and vote for each proposal were as follows:

1. Election of directors for Three-Year Terms and one for One-Year Term.

Director Nominees Elected for Three-Year Terms:


	FOR		AGAINST
Dana S. Levenson		140,161,297		1,111,042
John M. Naughton		138,378,878		2,893,462
Angelo P. Pizzagalli		140,078,775		1,193,563

2. Proposal to ratify the appointment of KPMG LLP as our independent auditor for the year ending December 31, 2004.


FOR		AGAINST		ABSTAIN
	137,880,076		3,126,472		265,788

Item 5. Other Information – not applicable.

Item 6. Exhibits and Reports on Form 8-K.

(a) The following exhibits are filed as part of this report.

Exhibit 31.1 Certification of Chief Executive Officer under Rules 13a-14 and 15d-14.

Exhibit 31.2 Certification of Chief Financial Officer under Rules 13a-14 and 15d-14.

Exhibit 32.1 Certification of Chief Executive Officer under 18 U.S.C. § 1350.

Exhibit 32.2 Certification of Chief Financial Officer under 18 U.S.C. § 1350.

(b) During the quarter ended March 31, 2004, we filed the following Current Reports on Form 8-K or 8-K/A:

January 2, 2004, relating to the completion of the First & Ocean BanCorp acquisition;

January 20, 2004, relating to our fourth quarter and year-ended 2003 financial results;

February 26, 2004, relating to our chairman’s presentation at a KBW conference;

March 3, 2004 relating to our chief operating officer’s presentation at a Sandler conference and

March 15, 2004 relating to the announcement of the conference call for the first quarter of 2004 financial results.


	BANKNORTH GROUP, INC.

Date:May 5, 2004	By:	/s/ William J. Ryan

		William J. Ryan
		Chairman, President and
		Chief Executive Officer

Date: May 5, 2004	By:	/s/ Stephen J. Boyle

		Stephen J. Boyle
		Executive Vice President and
		Chief Financial Officer
		(principal financial and accounting officer)


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

•		Net interest income increased 6% over the first quarter of last year due primarily to a $1.1 billion increase in average earning assets from period to period. The net interest margin of 3.68% for the quarter ended March 31, 2004 increased 2 basis points from the first quarter of 2003.

•		Our noninterest income, which is comprised primarily of fee income, increased 13%, primarily due to growth in income from deposit services, trust and investment management services and investment planning services.

•		Our noninterest expense increased by 7%, primarily due to a 8% increase in compensation and employee benefits, reflecting our growth. In addition, advertising and marketing expense increased $2.5 million, or 48.7%, primarily to attract customers who are looking for new banking opportunities following Bank of America Corporation’s acquisition of FleetBoston Financial Corporation. Noninterest expense was benefited by a $2.8 million or 64% decrease in merger and consolidation costs.

•		Total average loans and leases increased 11% during the first quarter of 2004 compared to the first quarter of 2003. Excluding the effects of acquisitions, total average loans and leases increased 5%, as strong commercial and consumer loan growth was offset by residential run-off.

•		Total average deposits increased 9% during the first quarter of 2004 compared to the first quarter of 2003 primarily due to acquisitions. Excluding the effects of acquisitions, total average deposits increased $244 million, or 1%, as average checking deposits increased 17% and savings and money market deposits increased 7%, while certificates of deposit declined 16%.

•		Our issuer rating was upgraded by Moody’s Investor Services to A3 on March 31, 2004.

(a)		An annual meeting of shareholders of Banknorth was held on April 27, 2004 (“Annual Meeting”).

(b)		Not applicable.