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 September 30, 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 October 31, 2004 is:

Common stock, par value $.01 per share		175,872,708

(Class)		(Outstanding)

Available on the Web @ www.banknorth.com

BANKNORTH GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)


	September 30, 2004			December 31, 2003
Assets
Cash and due from banks	$	575,840		$	669,686
Federal funds sold and other short term investments		4,031			4,645
Securities available for sale, at market value		7,369,269			7,122,992
Securities held to maturity (market value of $94,175 and $124,344 at September 30, 2004 and December 31, 2003, respectively)		94,026			124,240
Loans held for sale		47,487			41,696
Loans and leases:
Residential real estate mortgages		3,096,739			2,710,483
Commercial real estate mortgages		6,182,835			5,528,862
Commercial business loans and leases		3,856,296			3,287,094
Consumer loans and leases		5,274,921			4,819,523

Total loans and leases		18,410,791			16,345,962
Less: Allowance for loan and lease losses		242,885			232,287

Net loans and leases		18,167,906			16,113,675

Premises and equipment, net		285,940			264,818
Goodwill		1,369,112			1,126,639
Identifiable intangible assets		52,593			36,415
Bank-owned life insurance		517,359			488,756
Other assets		502,521			460,173

Total assets	$	28,986,084		$	26,453,735

Liabilities and Shareholders’ Equity
Deposits:
Savings accounts	$	2,572,473		$	2,460,522
Money market access and NOW accounts		7,924,839			7,130,532
Certificates of deposit		4,646,725			4,733,104
Brokered deposits		575			—
Noninterest-bearing deposits		4,225,861			3,577,027

Total deposits		19,370,473			17,901,185
Short-term borrowings		2,907,608			2,336,947
Long-term debt		3,449,827			3,545,917
Other liabilities		211,934			149,167

Total liabilities		25,939,842			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 - 191,673,546 in 2004 and 182,292,973 in 2003)		1,917			1,823
Paid-in capital		1,742,085			1,435,005
Retained earnings		1,692,344			1,508,292
Treasury stock, at cost (17,650,284 shares in 2004 and 20,105,254 shares in 2003)		(378,009	)		(430,608	)
Accumulated other comprehensive (loss) income		(12,095	)		6,007

Total shareholders’ equity		3,046,242			2,520,519

Total liabilities and shareholders’ equity	$	28,986,084		$	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				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Interest and dividend income:
Interest and fees on loans and leases	$	240,776	$	219,215	$	682,085	$	665,309
Interest and dividends on securities		84,585		71,535		245,074		237,246

Total interest and dividend income		325,361		290,750		927,159		902,555

Interest expense:
Interest on deposits		40,122		45,164		118,454		147,290
Interest on borrowed funds		45,579		35,754		121,386		127,722

Total interest expense		85,701		80,918		239,840		275,012

Net interest income		239,660		209,832		687,319		627,543
Provision for loan and lease losses		10,670		10,500		29,670		31,901

Net interest income after provision for loan and lease losses		228,990		199,332		657,649		595,642

Noninterest income:
Deposit services		27,583		25,167		80,995		71,441
Insurance brokerage commissions		12,417		10,930		38,431		34,235
Merchant and electronic banking income, net		13,723		11,115		37,196		31,235
Trust and investment management services		10,280		8,178		29,300		23,486
Bank-owned life insurance		5,732		5,785		17,503		16,952
Investment planning services		4,634		3,761		14,619		10,928
Net securities gains		3,124		3,573		10,060		39,778
Other noninterest income		14,020		20,147		41,103		54,668

		91,513		88,656		269,207		282,723

Noninterest expense:
Compensation and employee benefits		91,935		82,230		266,473		245,170
Occupancy		15,866		14,520		47,274		44,584
Equipment		12,074		11,668		35,777		35,344
Data processing		11,118		10,466		31,573		31,059
Advertising and marketing		6,278		5,553		20,105		16,569
Amortization of identifiable intangible assets		2,379		2,320		6,367		6,622
Merger and consolidation costs		5,603		808		11,351		6,788
Prepayment penalties on borrowings		—		—		—		30,490
Other noninterest expense		28,945		24,082		78,822		68,968

		174,198		151,647		497,742		485,594

Income before income tax expense		146,305		136,341		429,114		392,771
Applicable income tax expense		48,534		46,063		145,169		133,574

Net income	$	97,771	$	90,278	$	283,945	$	259,197

Basic earnings per share	$	0.56	$	0.56	$	1.68	$	1.61
Diluted earnings per share	$	0.55	$	0.55	$	1.65	$	1.59
Weighted average shares outstanding:
Basic		173,271		161,517		168,646		160,498
Dilutive effect of stock options		3,485		2,929		3,555		2,291

Diluted		176,756		164,446		172,201		162,789

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 (Loss)			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		—			—		—			283,945			—			—			283,945
Unrealized gains (losses) on securities, net of reclassification adjustment and net of tax		—			—		—			—			—			(18,030	)		(18,030	)
Unrealized gains on cash flow hedges, net of reclassification adjustment and net of tax		—			—		—			—			—			(72	)		(72	)

Comprehensive income																			265,843
Common stock issued for acquisitions		9,381			94		304,156			—			—			—			304,250
Treasury stock issued for employee benefit plans		2,454			—		3,363			—			51,848			—			55,211
Distribution of restricted stock		—			—		(439	)		—			751			—			312
Cash dividends declared		—			—		—			(99,893	)		—			—			(99,893	)

Balances at September 30, 2004		174,023		$	1,917	$	1,742,085		$	1,692,344			($378,009	)		($12,095	)	$	3,046,242

Balances at December 31, 2002		150,579		$	1,689	$	1,059,778		$	1,269,422			($382,350	)	$	114,946		$	2,063,485
Net income		—			—		—			259,197			—			—			259,197
Unrealized gains (losses) on securities, net of reclassification adjustment and net of tax		—			—		—			—			—			(80,290	)		(80,290	)
Unrealized gains on cash flow hedges, net of reclassification adjustment and net of tax		—			—		—			—			—			1,044			1,044

Comprehensive income																			179,951
Common stock issued for acquisitions		13,401			134		382,669			—			—			—			382,803
Treasury stock issued for employee benefit plans		1,980			—		(7,328	)		—			40,349			—			33,021
Treasury stock purchased		(4,417	)		—		—			—			(103,662	)		—			(103,662	)
Distribution of restricted stock		—			—		(950	)		—			1,590			—			640
Cash dividends declared		—			—		—			(80,658	)		—			—			(80,658	)

Balances at September 30, 2003		161,543		$	1,823	$	1,434,169		$	1,447,961			($444,073	)	$	35,700		$	2,475,580

See accompanying notes to unaudited Consolidated Financial Statements.

BANKNORTH GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)


	Nine Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	283,945		$	259,197
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		29,670			31,901
Depreciation of banking premises and equipment		32,845			32,481
Net amortization of premium and discounts		19,027			45,968
Amortization of intangible assets		6,367			6,622
Provision for deferred tax expense		9,600			17,100
Distribution of restricted stock units		312			640
Net (gains) realized from sales of securities and loans		(11,576	)		(39,778	)
Prepayment penalties on borrowings		—			30,490
Net (gains) realized from sales of loans held for sale		(2,682	)		(11,418	)
Increase in cash surrender value of bank owned life insurance		(17,503	)		(16,952	)
Proceeds from sales of loans held for sale		373,211			757,404
Residential loans originated and purchased for sale		(368,672	)		(690,453	)
Net change in other assets		(25,393	)		65,576
Net change in other liabilities		37,004			(100,267	)

Net cash provided by operating activities		366,155			388,511

Cash flows from investing activities:
Proceeds from sales of securities available for sale		2,164,935			2,890,179
Proceeds from maturities and principal repayments of securities available for sale		1,025,960			2,674,338
Purchases of securities available for sale		(3,133,987	)		(5,207,824	)
Proceeds from maturities and principal repayments of securities held to maturity		30,214			74,783
Net increase in loans and leases		(1,103,017	)		(465,465	)
Proceeds from sales of loans		37,097			—
Net additions to premises and equipment		(22,271	)		(13,937	)
Cash paid for acquisitions, net of cash acquired		49,061			48,354

Net cash (used in) provided by investing activities		(952,008	)		428

Cash flows from financing activities:
Net increase in deposits		289,186			207,044
Net increase in short-term borrowings		736,780			95,595
Proceeds from long-term debt		1,692			1,042,874
Payments on long-term debt		(301,183	)		(1,712,455	)
Treasury stock issued for employee benefit plans		55,211			33,021
Purchase of treasury stock		—			(103,662	)
Cash dividends paid to shareholders		(99,893	)		(80,658	)

Net cash provided by (used in) financing activities		681,793			(518,241	)

Increase (Decrease) in cash and cash equivalents		95,940			(129,302	)
Cash and cash equivalents at beginning of period		316,331			717,003

Cash and cash equivalents at end of period	$	412,271		$	587,701

In conjunction with the purchase acquisitions detailed in Note 2 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows:
Fair value of gross assets acquired	$	1,804,697		$	3,036,872
Fair value of liabilities assumed		1,417,597			2,325,526

Interest paid	$	233,017		$	276,928
Income taxes paid		102,118			111,055

See accompanying notes to unaudited Consolidated Financial Statements.

BANKNORTH GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and as noted) (Unaudited)

Note 1 - Basis of Presentation

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

In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited consolidated financial statements have been included herein. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 2004. Certain amounts in the prior periods have been reclassified to conform to the current presentation. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements.

Note 2 – Acquisitions

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


							Transaction-Related Items
			Balance at
			Acquisition Date						Identifiable						Total
	Acquisition								Intangible		Cash		Shares		Purchase
(Dollars and shares in millions)	Date		Assets		Equity		Goodwill		Assets		Paid		Issued		Price
CCBT Financial Companies, Inc.		4/30/2004	$	1,292.9	$	108.5	$	178.2	$	19.4	$	—		9.2	$	298.1
Foxborough Savings Bank		4/30/2004		241.8		22.8		62.1		2.2		88.9		—		88.9
First & Ocean Bancorp		12/31/2003		274.4		15.6		34.9		1.8		49.7		—		49.7
American Financial Holdings, Inc.		2/14/2003		2,690.3		408.2		424.9		9.3		328.5		13.4		711.4
Insurance agency acquisitions		2003-2004		2.2		0.6		7.1		1.7		3.2		0.2		9.4

On April 30, 2004, Banknorth acquired CCBT Financial Companies, Inc. (“CCBT”) and Foxborough Savings Bank (“Foxborough”). The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for CCBT and Foxborough at the date of acquisition. Banknorth expects that some adjustments of the estimated fair values assigned to the assets acquired and liabilities assumed will be recorded in periods after September 30, 2004, although such adjustments are not expected to be significant. It is estimated that none of the goodwill will be deductible for income tax purposes.


Assets:
Investments	$	319,403
Loans held for sale		7,758
Loans and leases, net		1,026,915
Premises and equipment		31,353
Goodwill		240,300
Identifiable intangible assets		21,565
Other assets		157,403

Total assets acquired		1,804,697

Liabilities:
Deposits		1,188,294
Borrowings		210,903
Other liabilities		18,400

Total liabilities assumed		1,417,597

Net assets acquired	$	387,100

Note 3 – Stock Compensation Plans

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Net income, as reported	$	97,771		$	90,278		$	283,945		$	259,197
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(4,141	)		(2,609	)		(12,670	)		(8,398	)

Proforma net income	$	93,630		$	87,669		$	271,275		$	250,799

Earnings per share
Basic - As reported	$	0.56		$	0.56		$	1.68		$	1.61
Proforma	$	0.54		$	0.54		$	1.61		$	1.56
Diluted - As reported	$	0.55		$	0.55		$	1.65		$	1.59
Proforma	$	0.53		$	0.54		$	1.57		$	1.55

On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued the exposure draft “Share-Based Payment, an amendment of FASB Statements No. 123 and 95.” This draft (supplemented by recent FASB deliberations) concluded that all companies should expense the fair value of employee stock options using either the modified prospective or the modified retrospective grant-date measurement approach as defined in SFAS 123. Compensation cost would be recognized in the financial statements over the requisite service period prospectively for interim or annual periods beginning after June 15, 2005, as if all share-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using the fair-value method of accounting. We are still assessing the impact of the proposed statement on our financial statements.

Note 4 – Securities Available for Sale

The following table presents the fair value of investments with continuous unrealized losses for less than one year and those that have been in a continuous unrealized loss position for more than one year as of September 30, 2004.


	Less than one year							More than one year							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		4	$	545,203	($	4,839	)		5	$	1,038,539	($	31,242	)		9	$	1,583,742	($	36,081	)
Tax exempt bonds and notes		—		—		—			—		—		—			—		—		—
Other bonds and notes		7		19,554		(616	)		2		4,389		(88	)		9		23,943		(704	)
Mortgage-backed securities		86		1,816,946		(15,704	)		43		857,672		(15,209	)		129		2,674,618		(30,913	)
Collateralized mortgage obligations		14		182,616		(1,876	)		3		614		(2	)		17		183,230		(1,878	)
Equity securities		2		137		(15	)		2		344		(33	)		4		481		(48	)

		113	$	2,564,456	($	23,050	)		55	$	1,901,558	($	46,574	)		168	$	4,466,014	($	69,624	)

For securities with unrealized losses, the following information was considered in determining that the impairments are not other-than-temporary. U.S. Government securities are backed by the full faith and credit of the United States and therefore bear nominal credit risk. U.S. Government agencies securities are believed by management to have minimal credit risk as they play a vital role in the nation’s financial markets. Other bonds and notes are generally comprised of corporate securities which have a credit rating of at least investment grade by one of the nationally-recognized rating agencies. Mortgage-backed securities or collateralized mortgage obligations are either issued by federal government agencies or by private issuers with minimum security ratings of AA.

See Note 12 for subsequent event regarding the sale of securities in the fourth quarter of 2004.

Note 5 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill and identifiable intangible assets for the nine months ended September 30, 2004 are summarized as follows:


				Indentifiable Intangible Assets
							Other			Total
							Identifiable			Identifiable
				Core Deposit			Intangible			Intangible
	Goodwill			Intangibles			Assets			Assets
Balance, December 31, 2003	$	1,126,639		$	28,165		$	8,250		$	36,415
Recorded during the year		244,842			21,565			1,000			22,565
Amortization expense		—			(4,225	)		(2,142	)		(6,367	)
Reclassification		20			(20	)		—			(20	)
Adjustments of purchase accounting estimates		(2,389	)		—			—			—

Balance, September 30, 2004	$	1,369,112		$	45,485		$	7,108		$	52,593

Estimated amortization expense for the year ending:
Remaining 2004				$	1,762		$	546		$	2,308
2005					6,352			1,591			7,943
2006					5,680			843			6,523
2007					5,213			843			6,056
2008					5,192			473			5,665
thereafter					21,286			1,082			22,368

The components of identifiable intangible assets are as follows:


	September 30, 2004
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
Identifiable intangible assets:
Core deposit intangibles	$	76,218	$	30,733	$	45,485
Other identifiable intangible assets		14,703		7,595		7,108

Total	$	90,921	$	38,328	$	52,593

Note 6 – Short-term Borrowings

Short-term borrowings are all borrowings with an original maturity of one year or less. A summary of short-term borrowings follows:


	September 30, 2004		December 31, 2003
Securities sold under agreements to repurchase - retail	$	1,110,063	$	1,086,900
Securities sold under agreements to repurchase - wholesale		875,813		814,650
Federal funds purchased		167,600		358,000
Treasury, tax and loan notes		751,332		77,397
Federal Home Loan Bank advances		2,800		—

	$	2,907,608	$	2,336,947

Note 7 – Long-term Debt

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


	September 30, 2004		December 31, 2003
Federal Home Loan Bank advances	$	1,477,570	$	1,495,821
Securities sold under agreements to repurchase - wholesale		1,300,000		1,400,000
Junior subordinated debentures issued to affiliated trusts		310,746		—
Capital trust securities		—		295,275
Subordinated debt 7.625%, due 2011		200,000		200,000
Senior notes 3.75%, due 2008		149,796		149,753
Hedge-related basis adjustments on long-term debt		3,678		(1,896	)
Other long-term debt		8,037		6,964

Total	$	3,449,827	$	3,545,917

Callable borrowings amounted to $0.9 billion and $1.8 billion at September 30, 2004 and December 31, 2003, respectively.

Note 8 - Comprehensive Income

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


	Three Months Ended									Three Months Ended
	September 30, 2004									September 30, 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	$	126,350		($	44,224	)	$	82,126		($	90,449	)	$	31,656		($	58,793	)
Unrealized gain (loss) on cash flow hedges		(1,391	)		487			(904	)		1,819			(636	)		1,183
Reclassification adjustment for (losses) gains realized in net income		(1,949	)		682			(1,267	)		(5,562	)		1,947			(3,615	)

Net change in unrealized gains (losses)	$	123,010		($	43,055	)	$	79,955		($	94,192	)	$	32,967		($	61,225	)


	Nine Months Ended								Nine Months Ended
	September 30, 2004								September 30, 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	($	17,681	)	$	6,189	($	11,492	)	($	83,495	)	$	29,061	($	54,434	)
Unrealized gain (loss) on cash flow hedges		(1,243	)		435		(808	)		(6,018	)		2,106		(3,912	)
Reclassification adjustment for gains (losses) realized in net income		(8,926	)		3,124		(5,802	)		(32,153	)		11,253		(20,900	)

Net change in unrealized gains (losses)	($	27,850	)	$	9,748	($	18,102	)	($	121,666	)	$	42,420	($	79,246	)

Note 9 – Other Noninterest Income

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Loan fee income	$	5,841		$	7,376		$	19,527		$	19,456
Covered call premiums		5,661			7,152			14,039			21,390
Mortgage banking services income		1,913			3,087			5,249			9,328
Venture capital write-downs		(1,664	)		(374	)		(2,189	)		(989	)
Miscellaneous income		2,269			2,906			4,477			5,483

Total	$	14,020		$	20,147		$	41,103		$	54,668

Note 10 – Pension and Other Postretirement Plans

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

Components of net periodic benefit cost


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Qualified Pension
Service cost	$	3,379		$	2,313		$	8,947		$	6,939
Interest cost		2,988			3,042			9,650			9,126
Expected return on plan assets		(5,083	)		(3,586	)		(14,739	)		(10,758	)
Amortization of prior service cost		2			2			6			6
Amortization of transition obligation		(65	)		(64	)		(193	)		(192	)
Amortization of net loss		686			966			2,818			2,898

Net periodic benefit cost		1,907			2,673			6,489			8,019

Nonqualified Pension
Service cost		189			78		$	387		$	234
Interest cost		504			395			1,314			1,185
Amortization of prior service cost		76			43			162			129
Amortization of transition obligation		3			3			9			9
Amortization of net loss		179			31			279			93

Net periodic benefit cost		951			550			2,151			1,650

Total net periodic benefit cost - pensions plans	$	2,858		$	3,223		$	8,640		$	9,669

Other Postretirement Benefits
Service cost	$	40		$	31		$	120		$	93
Interest cost		353			289			1,059			867
Amortization of prior service cost		35			35			105			105
Amortization of transition obligation		98			98			294			294
Amortization of net loss		99			78			297			234

Net periodic benefit cost - other postretirement benefit plans	$	625		$	531		$	1,875		$	1,593

We expect to contribute approximately $17 million to our pension plans in 2004, none of which is required to satisfy minimum funding requirements. The discretionary contribution will be paid entirely in cash and, as in prior years, the entire contribution is anticipated to be paid in December after final review of the 2004 pension obligation.

In December 2003, the Medicare Prescription Drugs, Improvement and Modernization Act (“the Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-2, “Accounting and Disclosure Requirement Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”) we have determined that the benefits we provide are at least actuarially equivalent to Medicare Part D. The effects of the federal subsidy will result in an actuarial gain of approximately $1.7 million. The gain will not have a material effect on our net periodic postretirement cost or on our accumulated postretirement benefit obligation. Therefore, we will incorporate the effects of the Act at the next measurement date, which is January 2005. As a result, we have not reflected the impact of FSP 106-2 in our net periodic postretirement cost or in our accumulated postretirement benefit obligation as of September 30, 2004 but will begin to amortize the benefit of the Act prospectively starting January 1, 2005.

Note 11 - Accounting Changes

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

Accounting for Variable Interest Entities

FASB Interpretation No. 46 (R) “Consolidation of Variable Interest Entities” (“FIN 46R”) establishes the criteria used to identify variable interest entities and to determine whether or not to consolidate a variable interest entity. Pursuant to the criteria established by FIN 46R in 2004, we deconsolidated five affiliated trusts which had been formed for the purposes of issuing capital securities to unaffiliated parties and investing the proceeds in junior subordinated debentures issued by us. Our investment in these affiliated trusts totaled $10 million at September 30, 2004, which funds were also used by the trusts to invest in junior subordinated debentures issued by us. The result of the deconsolidation and the accounting for these entities was to recognize our equity investments in these entities of approximately $10 million in the aggregate as securities available for sale and to increase long-term debt by $10 million. The adoption of FIN 46R did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.

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

Accounting for Certain Loan or Debt Securities Acquired in a Transfer

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, to be recognized at their fair value. This SOP provides that the original excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment of yield, loss accrual or valuation allowance. Any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow is recognized as a valuation allowance and expensed immediately. Valuation allowances cannot be created or “carried over” in the initial accounting for impaired loans acquired. This SOP is effective for impaired loans acquired in fiscal years beginning after December 15, 2004. We anticipate that we will first apply the provisions of SOP 03-3 in the pending acquisition of BostonFed Bancorp, Inc., which is expected to close in the first quarter of 2005.

Note 12 – Subsequent Events

On June 21, 2004, Banknorth entered into a definitive agreement to acquire BostonFed Bancorp, Inc. (“BostonFed”), the parent company of Boston Federal Savings Bank. BostonFed had $1.7 billion of assets and $98.7 million of shareholders’ equity at September 30, 2004. Under terms of the agreement, each outstanding share of BostonFed will be converted into the right to receive 1.241 shares of Banknorth common stock or, at the election of the holder of BostonFed common stock, 1.055 shares of Banknorth common stock and $6.12 in cash, plus, in each case, cash in lieu of any fractional share interest. As a result of this election option, up to approximately 15% (based on a $32.00 per share market price on announcement date for the Banknorth common stock) of the aggregate merger consideration may be comprised of cash. The definitive agreement has been approved by the directors of both Banknorth and BostonFed. The transaction is subject to all required regulatory approvals, approval of the shareholders of BostonFed and other customary conditions. The transaction is expected to close in the first quarter of 2005 with operational integration to follow soon thereafter.

On August 25, 2004, Banknorth entered into an agreement and plan of merger with The Toronto-Dominion Bank (“TD”), a Canadian chartered bank, Berlin Merger Co., a Delaware corporation and a wholly-owned subsidiary of TD, and Banknorth Delaware Inc., a Delaware corporation and a wholly-owned subsidiary of Banknorth (“Banknorth Delaware”). Subject to the terms and conditions in the TD/Banknorth merger agreement, Banknorth will merge with and into Banknorth Delaware, and immediately thereafter Berlin Merger Co. will merge with and into Banknorth Delaware (collectively, the “TD mergers”). Upon completion of the TD mergers, each Banknorth shareholder will be entitled to receive, in exchange for the shares of Banknorth common stock owned by such shareholder, a package of consideration consisting of (1) a number of TD common shares equal to 0.2351, (2) an amount in cash equal to $12.24 and (3) a number of shares of Banknorth Delaware common stock equal to 0.49, in each case multiplied by the number of shares of Banknorth common stock owned by such shareholder, plus cash in lieu of any fractional share interests. Upon consummation of the TD mergers, TD will hold 51% of the outstanding common stock of Banknorth Delaware, which will change its name to TD Banknorth Inc. The transaction is subject to all required regulatory approvals, approval of the shareholders of Banknorth and other customary conditions. The transaction is expected to close in the first quarter of 2005.

In October 2004, as part of a deleveraging strategy approved by the board of directors on October 13, 2004, we sold approximately $1.2 billion of securities and prepaid a similar amount of borrowings, both of which had a duration of approximately 3.5 years. This transaction will result in an after-tax charge of approximately $51.5 million ($79.3 million pre-tax) in the fourth quarter of 2004. The $79.3 million pre-tax charge is comprised of a $17.8 million loss on sale of securities and a $61.5 million charge to prepay borrowings.

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 include the results of the following acquisitions since acquisition date, as summarized below:


			Total Assets
	Date		at Acquisition
Acquisition	Acquired		Date
			(in millions)
CCBT Financial Companies, Inc.		4/30/2004	$	1,292.9
Foxborough Savings Bank		4/30/2004		241.8
First & Ocean Bancorp		12/31/2003		274.4
American Financial Holdings, Inc.		2/14/2003		2,690.3
Insurance agency acquisitions		2003-2004		2.2

Fully diluted earnings per share were $0.55 and $1.65 for the three and nine months ended September 30, 2004, compared to $0.55 and $1.59 for the comparable periods last year. Merger and consolidation costs for the three and nine months ended September 30, 2004 were $5.6 million and $11.4 million, as compared to $0.8 million and $6.8 million for the comparable periods last year. Approximately $3.2 million of current year merger and consolidation costs were incurred in connection with our proposed transaction with The Toronto-Dominion Bank (“TD”).

Annualized return on average equity (“ROE”) and annualized return on average assets (“ROA”) were 13.24% and 1.33%, respectively, for the quarter ended September 30, 2004 and were 14.85% and 1.39%, respectively, for the comparable quarter last year. ROE and ROA were 13.61% and 1.35%, respectively, for the nine months ended September 30, 2004, and 14.45% and 1.36%, respectively, for the nine months ended September 30, 2003. The decline in ROE related primarily to the intangible equity created in the April 2004 acquisition of CCBT.

Our net income increased by $7.5 million in the third quarter ended September 30, 2004 compared to the third quarter last year, an increase of 8%. The following were significant factors related to the results for the third quarter of 2004 compared to the third quarter of 2003.

• Net interest income increased 14% over the third quarter of last year due primarily to a $2.9 billion increase (or 13%) in average earning assets. The net interest margin of 3.68% for the quarter ended September 30, 2004 increased 5 basis points from the third quarter of 2003 as the cost of interest-bearing liabilities fell more than the yield on interest-earning assets. In addition, average noninterest-bearing deposits increased 25%.

• Noninterest income increased 3% over the third quarter last year. Income from deposit services, insurance brokerage commissions, merchant and electronic banking services, trust and investment management services and investment planning services increased by $9 million (or 16%) in the aggregate due in part to acquisitions. Other noninterest income fell by $6.1 million. See Table 4 for details.

• Noninterest expense increased by 15% due primarily to the operating expenses of acquired banks, increased spending on advertising and marketing and higher merger and consolidation costs.

• Total average loans and leases increased 15% during the third quarter of 2004 compared to the third quarter of 2003. Excluding the effects of acquisitions, total average loans and leases

increased 8%, as strong commercial and consumer loan growth was offset by residential loan declines.

• Total average deposits increased 9% during the third quarter of 2004 compared to the third quarter of 2003 primarily due to acquisitions. Excluding the effects of acquisitions, total average deposits increased $217 million, or 1%, as average checking deposits increased 14% and savings and money market deposits increased 4%, while certificates of deposit declined 13%.

• In October 2004, we implemented a deleveraging strategy pursuant to which we sold approximately $1.2 billion of securities with a weighted average yield of 2.76% and prepaid a similar amount of borrowings with a weighted average rate of 4.77%, both of which had a duration of approximately 3.5 years. A $51.5 million after-tax loss will be incurred in the fourth quarter. This transaction, which was approved by the board of directors on October 13, 2004, is expected to improve prospective annual net interest income by approximately $24 million (or approximately $0.09 per diluted share assuming a 34% effective tax rate and 177 million diluted shares outstanding).

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

TABLE 1 - Selected Quarterly Data


			2004									2003
			Third			Second			First			Fourth			Third
*Condensed Income Statement*
Interest income			$	325,361		$	309,146		$	292,652		$	290,414		$	290,750
Interest expense				85,701			79,096			75,043			77,126			80,918

Net interest income	(A	)		239,660			230,050			217,609			213,288			209,832
Provision for loan and lease losses				10,670			9,500			9,500			10,400			10,500

Net interest income after provision for loan and lease losses				228,990			220,550			208,109			202,888			199,332
Noninterest income	(B	)		91,513			89,476			88,217			84,435			88,656
Noninterest expense, excluding merger and consolidation costs	(C	)		168,595			159,691			158,105			154,360			150,839
Merger and consolidation costs	(D	)		5,603			4,135			1,614			1,316			808

Income before income taxes				146,305			146,200			136,607			131,647			136,341
Income tax expense				48,534			50,353			46,280			40,085			46,063

Net income			$	97,771		$	95,847		$	90,327		$	91,562		$	90,278

Weighted average shares outstanding:
Basic				173,271			169,637			162,965			162,149			161,517
Diluted				176,756			173,109			166,657			165,685			164,446
Basic earnings per share			$	0.56		$	0.57		$	0.55		$	0.56		$	0.56
Diluted earnings per share			$	0.55		$	0.55		$	0.54		$	0.55		$	0.55
*Financial Ratios*
Return on average assets (1)				1.33	%		1.36	%		1.37	%		1.39	%		1.39	%
Return on average equity (1)				13.24	%		13.54	%		14.13	%		14.72	%		14.85	%
Net interest margin (fully-taxable equivalent) (1)				3.68	%		3.66	%		3.68	%		3.65	%		3.63	%
Noninterest income as a percent of total income (2)				27.63	%		28.00	%		28.85	%		28.36	%		29.70	%
Efficiency ratio (3)				52.60	%		51.27	%		52.23	%		52.29	%		50.81	%
*Per Share Data*
Book value per share			$	17.50		$	16.61		$	16.26		$	15.54		$	15.32
Dividends per share			$	0.20		$	0.195		$	0.195		$	0.19		$	0.19

(1)		Annualized.

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

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

Net Interest Income

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

Fully-taxable equivalent net interest income for the third quarter of 2004 increased $29.9 million, or 14%, compared to the third quarter of 2003. This increase was primarily attributable to an increase in net earning assets and, to a lesser extent, noninterest-bearing deposits comprising a larger share of the funding base, which allows us to be less reliant on higher-costing certificates of deposit. Together, these factors more than offset the negative effects of lower prevailing interest rates.

Fully-taxable equivalent interest income increased by $34.7 million in the third quarter of 2004, as compared to the third quarter of 2003, as a result of a $2.9 billion increase in total earning assets. This increase was offset in part by a decrease in the weighted average yield on earning assets from 5.02% to 4.98% during the three months ended September 30, 2003 and 2004, respectively. The increases in earning assets, primarily average balances of commercial real estate loans, commercial business loans and leases and consumer loans and leases, resulted from acquisitions and, to a lesser extent, internal growth.

Interest expense increased by $4.8 million in the third quarter of 2004, as compared to the third quarter of 2003, primarily as a result of a $2.1 billion, or 10%, increase in the average balance of interest-bearing liabilities during the third quarter of 2004, as compared to 2003, resulting from acquisitions and, to a lesser extent, internal growth. This increase was offset in part by a decrease in the weighted average rate paid on interest-bearing liabilities from 1.63% to 1.56% during the three months ended September 30, 2003 and 2004, respectively, a decline of 4%. Average deposits increased by $1.7 billion, of which approximately $1.5 billion came from acquisitions. Excluding acquisitions, average deposits increased by $217 million, or 1.1%, as growth in demand and money market accounts more than offset a decline in higher-costing certificates of deposit. Average borrowings increased $1.2 billion, or 23%, in the third quarter of 2004 compared to the third quarter of 2003 due, in part, to acquisitions.

Net interest margin, which represents fully-taxable equivalent net interest income as a percentage of average interest-earning assets, increased to 3.68% in the third quarter of 2004 from 3.63% in the third quarter of 2003 primarily due to a 7 basis point decrease in the cost of funds.

Interest rate spread, which represents the difference between the yield earned on our interest-earning assets and the rate paid on our interest-bearing liabilities, increased to 3.42% from 3.39% on a fully-taxable equivalent basis during the three months ended September 30, 2003 and 2004, respectively, as a 4 basis point decrease in the weighted average yield on interest-earning assets was more than offset by a 7 basis point decrease in the weighted average rate paid on interest-bearing liabilities. See “Asset-Liability Management” below.

Our fully-taxable equivalent net interest income for the nine months ended September 30, 2004 increased $60.2 million compared to the nine months ended September 30, 2003. The net interest margin was 3.67% for the nine months ended September 30, 2004 and 2003, and the fully-taxable equivalent interest rate spread increased from 3.40% to 3.44% during the same period because a 32 basis point decrease in the weighted average yield on interest-earning assets was more than offset by a 36 basis point decrease in the weighted average rate paid on interest-bearing liabilities. Average net earning assets increased $692.2 million in the nine months ended September 30, 2004 as compared to the same period last year as a result of acquisitions and, to a lesser extent, internal growth.

Table 2 shows average balances, net interest income by category and rates for the quarters ended September 30, 2004 and 2003 and for the nine months ended September 30, 2004 and 2003. Table 3 shows the changes in fully-taxable equivalent net interest income by category due to changes in rate and volume. See also “Asset-Liability Management” below.

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

TABLE 2 — Average Balances, Yields and Rates


	2004 Third Quarter								2003 Third Quarter
						Yield/								Yield/
	Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)
Loans and leases (2):
Residential real estate mortgages	$	3,135,400	$	38,768			4.95	%	$	2,852,568	$	38,740			5.43	%
Commercial real estate mortgages		6,158,271		89,116			5.76			5,263,002		77,962			5.88
Commercial business loans and leases		3,827,919		47,550			4.93			3,216,254		40,837			5.04
Consumer loans and leases		5,185,483		66,458			5.10			4,577,421		62,684			5.43

Total loans and leases		18,307,073		241,892			5.26			15,909,245		220,223			5.50
Investment securities (3)		7,822,646		85,126			4.35			7,270,800		72,037			3.96
Federal funds sold and other short-term investments		5,609		22			1.55			16,113		55			1.36

Total earning assets		26,135,328		327,040			4.98			23,196,158		292,315			5.02

Bank-owned life insurance		508,425								478,572
Noninterest-earning assets		2,532,355								2,139,519

Total assets	$	29,176,108							$	25,814,249

Interest-bearing deposits:
Regular savings	$	2,603,474		1,887			0.29		$	2,474,169		2,502			0.40
NOW and money market accounts		7,884,927		15,758			0.80			6,815,603		13,727			0.80
Certificates of deposit		4,672,879		22,475			1.91			5,053,277		28,935			2.27
Brokered deposits		506		2			1.63			—		—			—

Total interest-bearing deposits		15,161,786		40,122			1.05			14,343,049		45,164			1.25
Borrowed funds		6,652,815		45,579			2.73			5,407,580		35,754			2.63

Total interest-bearing liabilities		21,814,601		85,701			1.56			19,750,629		80,918			1.63

Non-interest bearing deposits		4,236,569								3,388,018
Other liabilities		186,203								263,171
Shareholders’ equity		2,938,735								2,412,431

Total liabilities and shareholders’ equity	$	29,176,108							$	25,814,249

Net earning assets	$	4,320,727							$	3,445,529

Net interest income (fully-taxable equivalent)				241,339								211,397
Less: fully-taxable equivalent adjustments				(1,679	)							(1,565	)

Net interest income			$	239,660							$	209,832

Net interest rate spread (fully-taxable equivalent)							3.42	%							3.39	%
Net interest margin (fully-taxable equivalent)							3.68	%							3.63	%

(1)		Annualized.

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

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

TABLE 2 — Average Balances, Yields and Rates


	Nine Months Ended								Nine Months Ended
	September 30, 2004								September 30, 2003
						Yield/								Yield/
	Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)
Loans and leases (2):
Residential real estate mortgages	$	2,950,094	$	111,512			5.04	%	$	2,880,776	$	123,538			5.72	%
Commercial real estate mortgages		5,861,892		251,689			5.74			5,084,858		234,115			6.16
Commercial business loans and leases		3,630,870		131,143			4.82			3,126,338		121,416			5.19
Consumer loans and leases		5,017,428		190,886			5.08			4,410,562		189,007			5.73

Total loans and leases		17,460,284		685,230			5.24			15,502,534		668,076			5.76
Investment securities (3)		7,680,939		246,590			4.28			7,474,971		238,664			4.26
Federal funds sold and other short-term investments		5,562		53			1.27			12,922		134			1.39

Total earning assets		25,146,785		931,873			4.95			22,990,427		906,874			5.27

Bank-owned life insurance		498,736								459,049
Noninterest-earning assets		2,391,826								2,016,447

Total assets	$	28,037,347							$	25,465,923

Interest-bearing deposits:
Regular savings	$	2,562,340		5,655			0.29		$	2,373,161		8,667			0.49
NOW and money market accounts		7,551,311		44,878			0.79			6,540,686		45,342			0.93
Certificates of deposit		4,684,097		67,919			1.94			5,103,328		93,281			2.44
Brokered deposits		170		2			1.63			—		—			—

Total interest-bearing deposits		14,797,918		118,454			1.07			14,017,175		147,290			1.40
Borrowed funds		6,394,319		121,386			2.53			5,710,875		127,722			2.99

Total interest-bearing liabilities		21,192,237		239,840			1.51			19,728,050		275,012			1.87

Non-interest bearing deposits		3,875,740								3,132,825
Other liabilities		182,209								206,378
Shareholders’ equity		2,787,161								2,398,670

Total liabilities and shareholders’ equity	$	28,037,347							$	25,465,923

Net earning assets	$	3,954,548							$	3,262,377

Net interest income (fully-taxable equivalent)				692,033								631,862
Less: fully-taxable equivalent adjustments				(4,714	)							(4,319	)

Net interest income			$	687,319							$	627,543

Net interest rate spread (fully-taxable equivalent)							3.44	%							3.40	%
Net interest margin (fully-taxable equivalent)							3.67	%							3.67	%

(1)		Annualized.

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

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

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

TABLE 3 — Rate /Volume Analysis


	Three Months Ended												Nine Months Ended
	September 30, 2004 vs. September 30, 2003												September 30, 2004 vs. September 30, 2003
	Increase (decrease) due to												Increase (decrease) due to
							Rate and			Total									Rate and			Total
	Volume (1)			Rate			Volume (2)			Change			Volume (1)			Rate			Volume (2)			Change
Interest income:
Loans and leases	$	33,150		($	9,598	)	($	1,883	)	$	21,669		$	84,421		($	60,350	)	($	6,917	)	$	17,154
Investment securities		5,493			7,128			468			13,089			6,569			1,119			238			7,926
Federal funds sold and other short-term investements		(36	)		8			(5	)		(33	)		(77	)		(12	)		8			(81	)

Total interest income		38,607			(2,462	)		(1,420	)		34,725			90,913			(59,243	)		(6,671	)		24,999

Interest expense:
Interest-bearing deposits:
Regular savings		130			(684	)		(61	)		(615	)		694			(3,553	)		(153	)		(3,012	)
NOW and money market accounts		2,150			0			(119	)		2,031			7,036			(6,855	)		(645	)		(464	)
Certificates of deposit		(2,171	)		(4,573	)		284			(6,460	)		(7,658	)		(19,103	)		1,399			(25,362	)
Brokered deposits		0			0			2			2			0			0			2			2

Total interest-bearing deposits		109			(5,257	)		106			(5,042	)		72			(29,511	)		603			(28,836	)
Borrowed funds		8,232			1,359			234			9,825			15,298			(19,667	)		(1,967	)		(6,336	)

Total interest expense		8,341			(3,898	)		340			4,783			15,370			(49,178	)		(1,364	)		(35,172	)

Net interest income (fully taxable equivalent)	$	30,266		$	1,436		($	1,760	)	$	29,942		$	75,543		($	10,065	)	($	5,307	)	$	60,171

(1)		Volume increases include the effects of acquisitions, including the acquisition of Foxborough Savings Bank and CCBT Financial Companies, Inc. on April 30, 2004, First & Ocean Bancorp on December 31, 2003 and American Financial Holdings, Inc. on February 14, 2003.

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

Provision and Allowance for Loan and Lease Losses

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

We provided $10.7 million and $10.5 million for loan and lease losses in the quarters ended September 30, 2004 and 2003, respectively, and $29.7 million and $31.9 million for the nine months ended September 30, 2004 and 2003, respectively. Net charge-offs totaled $8.8 million in the third quarter of 2004 compared to $8.2 million in the third quarter of 2003. The coverage ratio (ratio of the allowance for loan and lease losses to nonperforming loans) was 378% at September 30, 2004, as compared to 389% at December 31, 2003 and 344% at September 30, 2003. At September 30, 2004, the allowance for credit losses amounted to $249.5 million, or 1.36% of total portfolio loans and leases, as compared to $232.3 million, or 1.42%, at December 31, 2003 and $229.6 million, or 1.44% at September 30, 2003. See “Risk Management” below for further information on the provision for loan and lease losses, net charge-

offs, nonperforming assets and other factors we consider in assessing the credit quality of our loan and lease portfolio and establishing the allowance for loan and lease losses.

Noninterest Income

The following table presents noninterest income for the periods indicated.

Table 4 — Noninterest Income


	Three Months Ended												Nine Months Ended
	September 30,						Change						September 30,						Change
	2004			2003			Amount			Percent			2004			2003			Amount			Percent
Noninterest income:
Deposit services	$	27,583		$	25,167		$	2,416			10	%	$	80,995		$	71,441		$	9,554			13	%
Insurance brokerage commissions		12,417			10,930			1,487			14	%		38,431			34,235			4,196			12	%
Merchant and electronic banking income, net		13,723			11,115			2,608			23	%		37,196			31,235			5,961			19	%
Trust and investment management services		10,280			8,178			2,102			26	%		29,300			23,486			5,814			25	%
Bank-owned life insurance		5,732			5,785			(53	)		(1	%)		17,503			16,952			551			3	%
Investment planning services		4,634			3,761			873			23	%		14,619			10,928			3,691			34	%
Net securities gains		3,124			3,573			(449	)		(13	%)		10,060			39,778			(29,718	)		(75	%)
Other noninterest income
Covered call premiums		5,661			7,152			(1,491	)		(21	%)		14,039			21,390			(7,351	)		(34	%)
Loan fee income		5,841			7,376			(1,535	)		(21	%)		19,527			19,456			71			0	%
Mortgage banking services income		1,913			3,087			(1,174	)		(38	%)		5,249			9,328			(4,079	)		(44	%)
Venture capital write-downs		(1,664	)		(374	)		(1,290	)		(345	%)		(2,189	)		(989	)		(1,200	)		(121	%)
Miscellaneous income		2,269			2,906			(637	)		(22	%)		4,477			5,483			(1,006	)		(18	%)

Total other noninterest income		14,020			20,147			(6,127	)		(30	%)		41,103			54,668			(13,565	)		(25	%)

Total noninterest income	$	91,513		$	88,656		$	2,857			3	%	$	269,207		$	282,723		($	13,516	)		(5	%)

Deposit services income for the three months ended September 30, 2004 increased $2.4 million, or 10%, compared to the same period last year, primarily due to volume and fee increases in deposit accounts and an increase in overdraft fees. This increase was partially offset by a decline in service charge income on business accounts resulting from the introduction of “Free Business Checking” in 2004. For the nine months ended September 30, 2004, deposit services income increased $9.6 million, or 13%, compared to the same period last year, primarily due to volume and fee increases on deposit accounts and an increase in overdraft fees. Acquisitions comprised a portion of the increased number of deposit accounts, increased overdraft fees and increased service charges.

Insurance brokerage commissions in the three months ended September 30, 2004 increased $1.5 million, or 14%, compared to the same period last year. In the nine months ended September 30, 2004, insurance brokerage commissions increased $4.2 million, or 12%, compared to the same period last year. These increases were primarily as a result of increases in renewals and new business in 2004 as well as from agency acquisitions in 2004 and 2003.

Merchant and electronic banking income represents fees and interchange income generated by the use of our ATMs and debit cards issued by us, along with charges to merchants for credit card transactions processed, net of third-party costs directly attributable to handling these transactions. Merchant and electronic banking income in the three months ended September 30, 2004 increased $2.6 million, or 23%, compared to the same period last year and increased $6.0 million, or 19%, in the nine months ended September 30, 2004 compared to the same period last year. These increases were primarily due to increases in the volume of transactions processed and increased market share from acquisitions.

Trust and investment management services income increased $2.1 million, or 26%, in the three months ended September 30, 2004 and $5.8 million, or 25%, in the nine months ended September 30, 2004 compared to the same respective periods last year. These increases were primarily due to an increase in assets under management, which

increased to $9.9 billion at September 30, 2004 from $8.7 billion at September 30, 2003, an increase of $1.2 billion. The acquisition of CCBT in April 2004 accounted for $773 million of the increase in trust assets under management.

Income from bank-owned life insurance (“BOLI”) for the three months ended September 30, 2004 was essentially unchanged form the same period last year but increased $551 thousand, or 3%, in the nine months ended September 30, 2004 compared to the same respective period last year. Income from BOLI represents the increase in the cash surrender value of life insurance policies on the lives of certain employees who have consented to allowing Banknorth, NA, our wholly-owned banking subsidiary, to be the beneficiary of such policies. The cash surrender value of our BOLI was $517.4 million at September 30, 2004 compared to $488.8 million at December 31, 2003. The $28.6 million increase was primarily comprised of amounts from acquisitions and increases in the cash surrender value of policies, which were partially offset by death claims. Most of our BOLI is invested in the ‘general account’ of quality insurance companies. Standard and Poors rated all such general account carriers AA- or better at September 30, 2004. Investment in BOLI provides us a means to mitigate increasing employee benefit costs. For the third quarter of 2004, the average carrying value of BOLI was $508 million compared to $479 million for the third quarter of 2003.

Investment planning services income increased $873 thousand, or 23%, in the three months ended September 30, 2004 and $3.7 million, or 34%, in the nine months ended September 30, 2004 compared to the same respective periods last year. These increases were primarily due to commissions earned from increased sales of third party fixed annuities. The CCBT acquisition generated approximately $300 thousand of investment planning revenues for the three months ended September 30, 2004.

Net securities gains decreased $449 thousand, or 13%, in the three months ended September 30, 2004 and $29.7 million, or 75%, in the nine months ended September 30, 2004 compared to the same respective periods last year. The 2003 results included $29.2 million of gains recorded as part of the deleveraging program related to the sale of $901 million in securities in the second quarter of 2003. Gains from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future.

Other noninterest income decreased $6.1 million, or 30%, in the three months ended September 30, 2004 and $13.6 million, or 25%, in the nine months ended September 30, 2004 compared to the same respective periods last year. These decreases were primarily due to lower income from covered calls, loan fees, mortgage banking and venture capital investments. Premiums received on covered call options declined by $1.5 million and $7.4 million during the three and nine months ended September 30, 2004, respectively. The covered call option program is managed in conjunction with the fixed income securities portfolio to provide revenue opportunities in addition to the interest income earned on the securities. Covered call activity will vary from quarter to quarter as interest rates, levels of market volatility and our strategic objectives of the fixed income securities portfolio change. Reduced market volatility in the nine months ended September 30, 2004 compared to the same period last year reduced the income opportunities related to covered call options. Loan fees for the three-month period declined primarily due to lower commercial loan swap fees received on fewer brokered swaps. Mortgage banking services income declines were due largely to reduced volumes of residential loan originations and loan sales in the secondary market.

Noninterest Expense

The following table presents noninterest expense during the periods indicated.

Table 5 — Noninterest Expense


	Three Months Ended										Nine Months Ended
	September 30,				Change						September 30,				Change
	2004		2003		Amount			Percent			2004		2003		Amount			Percent
Noninterest expense:
Compensation and employee benefits	$	91,935	$	82,230	$	9,705			12	%	$	266,473	$	245,170	$	21,303			9	%
Occupancy		15,866		14,520		1,346			9	%		47,274		44,584		2,690			6	%
Equipment		12,074		11,668		406			3	%		35,777		35,344		433			1	%
Data processing		11,118		10,466		652			6	%		31,573		31,059		514			2	%
Advertising and marketing		6,278		5,553		725			13	%		20,105		16,569		3,536			21	%
Amortization of identifiable intangible assets		2,379		2,320		59			3	%		6,367		6,622		(255	)		(4	%)
Merger and consolidation costs		5,603		808		4,795			593	%		11,351		6,788		4,563			67	%
Prepayment penalties on borrowings		—		—		—			—			—		30,490		(30,490	)		(100	%)
Other noninterest expense:
Telephone		3,829		3,666		163			4	%		10,893		9,729		1,164			12	%
Office supplies		2,829		2,611		218			8	%		7,823		7,928		(105	)		(1	%)
Postage and freight		2,742		2,246		496			22	%		7,887		8,543		(656	)		(8	%)
Miscellaneous loan costs		1,405		1,729		(324	)		(19	%)		3,190		4,240		(1,050	)		(25	%)
Deposits and other assessments		963		963		—			—			2,811		2,836		(25	)		(1	%)
Collection and carrying costs of non-performing assets		628		709		(81	)		(11	%)		1,944		1,964		(20	)		(1	%)
Miscellaneous		16,549		12,158		4,391			36	%		44,274		33,728		10,546			31	%

Total other noninterest expense		28,945		24,082		4,863			20	%		78,822		68,968		9,854			14	%

Total noninterest expense	$	174,198	$	151,647	$	22,551			15	%	$	497,742	$	485,594	$	12,148			3	%

Noninterest expense increased $22.6 million, or 15%, in the third quarter of 2004 and $12.1 million, or 3%, in the nine months ended September 30, 2004 compared to the same respective periods last year. The nine months ended September 30, 2003 results included $30.5 million of prepayment penalties, $28.5 million of which related to a deleveraging program implemented in that period. The increases in 2004 were primarily due to the operating costs of acquired banks (staff and facilities costs), advertising and marketing costs, merger and consolidation costs and miscellaneous expenses.

Compensation and employee benefits expense increased $9.7 million, or 12%, in the third quarter of 2004 and $21.3 million, or 9%, in the nine months ended September 30, 2004 compared to the same respective periods last year. These increases were primarily due to increased salaries and benefit costs, primarily due to acquisitions and merit increases. The nine-month increase was partially offset by reduced expense associated with our self-funded health plan resulting from a $3.2 million benefit in the second quarter of 2004 related to favorable claims experience covering the period July 2002 (plan inception) through June 30, 2004.

Advertising and marketing expense increased $725 thousand, or 13%, in the third quarter of 2004 and $3.5 million, or 21%, in the nine months ended September 30, 2004 compared to the same respective periods last year. The increase in the third quarter of 2004 compared to the same period last year was due to a 2004 summer campaign of promotional L.L. Bean bags as well as increased media advertising in the Massachusetts and Connecticut markets. The increase for the nine months ended September 30, 2004 compared to the same period last year was primarily due to expenses incurred to identify and attract customers who were looking for new banking opportunities following Bank of America Corporation’s acquisition of FleetBoston Financial Corporation. The increases in expense included new advertising promotions and corporate sponsorships (such as for the Boston Bruins, “Win a day with Ray” promotions and Tobin Bridge sponsorships), as well as expense associated with the development of a new comprehensive product catalogue for use in all of our branches.

Merger and consolidation costs increased $4.8 million in the third quarter of 2004 and increased $4.6 million in the nine months ended September 30, 2004 compared to the same respective periods last year due to costs incurred in connection with our proposed transaction with TD and our acquisitions of CCBT Financial Companies, Inc. and Foxborough Savings Bank in April 2004. The following table summarizes merger and consolidation costs for the three and nine months ended September 30, 2004 and 2003.

Table 6 — Merger and consolidation costs


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004			2003
The Toronto-Dominion Bank Merger Charges
Investment banker fees and other professional costs	$	3,190	$	—	$	3,190		$	—

		3,190		—		3,190			—

Foxborough Savings Bank Merger Charges
Personnel costs		275		—		492			—
Systems conversion and integration/customer communications		688		—		1,227			—
Other costs		223		—		301			—

		1,186		—		2,020			—

CCBT Financial Companies, Inc. Merger Charges
Personnel costs		393		—		1,296			—
Systems conversion and integration/customer communications		247		—		2,426			—
Other costs		271		—		1,233			—

		911		—		4,955			—

BostonFed Bancorp, Inc. Merger Charges
Systems conversion and integration/customer communications		169		—		169			—
Other costs		44		—		46			—

		213		—		215			—

Other Costs
American merger charges		70		432		257			4,779
First & Ocean Bancorp merger charges		30		—		1,142			—
Warren Bancorp, Inc. merger charges		—		345		29			2,399
Bancorp Connecticut and Ipswich Bancshares, Inc. merger charges		3		16		11			121
Andover Bancorp, Inc./MetroWest Bank merger charges		—		15		—			6
Reverse auto lease reserves (Banknorth - Vermont)		—		—		(470	)		(615	)
Other costs		—		—		2			98

		103		808		971			6,788

Total merger and consolidation costs	$	5,603	$	808	$	11,351		$	6,788

The following table summarizes activity in the accrual account for merger and consolidation costs from December 31, 2003 through September 30, 2004.

Table 7 — Merger and Consolidation Costs — Activity in the Accrual Account


			Purchase Accounting		Merger and						Non-cash Write
	Balance		Adjustments		Consolidation			Cash			Downs and Other			Balance
	12/31/03		at Acquisition		Costs			Payments			Adjustments			9/30/04
The Toronto-Dominion Bank Merger	$	—	$	—	$	3,190		($	2,567	)	$	—		$	623
Boston Fed Merger		—		—		215			(215	)		—			—
Foxborough Merger		—		1,196		2,020			(2,645	)		(87	)		484
CCBT Financial Companies, Inc. Merger		—		10,407		4,955			(12,829	)		(370	)		2,163
First & Ocean Bancorp Merger		250		1,715		1,143			(2,856	)		—			252
American Financial Holdings, Inc. Merger		266		—		257			(257	)		(266	)		—
Warren Bancorp Merger		27		—		29			(29	)		(27	)		—
Bancorp Connecticut Merger		466		—		12			(445	)		—			33
Andover / MetroWest Mergers		84		—		—			(5	)		—			79
Other merger and consolidation costs		4		—		(470	)		(2	)		468			—

Total	$	1,097	$	13,318	$	11,351		($	21,850	)	($	282	)	$	3,634

Other noninterest expense increased $4.9 million, or 20%, in the third quarter of 2004 and $9.9 million, or 14%, for the nine months ended September 30, 2004 compared to the same respective periods last year. These increases were largely due to increased professional (audit and legal) fees, consulting fees, travel and telephone costs.

Taxes

The effective tax rate was 33% and 34% for the three months and nine months ended September 30, 2004, respectively. The slight decline to 33% related to lower than previously estimated non-deductible interest expense related to carrying tax-exempt securities. The effective tax rate was 34% for the three months and nine months ended September 30, 2003, respectively. Excluding the effects of merger related charges and the deleveraging transaction, the effective tax rate is expected to return to 34% in the fourth quarter.

We are subject to examinations by various federal and state governmental tax authorities from time to time regarding tax returns we have filed. Currently, federal and certain state income tax returns filed by us in recent years are under examination. In June 2004, the Vermont Department of Taxes assessed three Vermont-based banks, previously acquired by us, for taxes, interest and penalties for the years 2000 and 2001 on the basis that subsidiary investment companies established by these banks pursuant to Vermont law should be considered part of our banking subsidiary for purposes of calculating taxes due the State of Vermont. We believe that we have substantial defenses to this assessment and are in the process of appealing it in accordance with administrative procedures. Although not considered probable, there can be no assurance that Vermont will not ultimately prevail on this matter. Our estimate of the range of possible exposure above established reserves on this matter is from $0 to $2.1 million, after federal tax benefits.

There can be no assurance that we will not receive additional assessments from state tax authorities in the future. Any such assessment resolved in excess of established reserves could have a material adverse effect on our consolidated results of operations in a future reporting period. However, based on currently available information, advice of counsel and tax advisors and established reserves, we believe the amounts accrued for income taxes are adequate.

Comprehensive Income

Our comprehensive income (loss) amounted to $178 million and $29 million in the third quarters of 2004 and 2003, respectively and $265.8 million and $180.0 million in the nine months ended September 30, 2004 and 2003, respectively. Comprehensive income differed from our net income as a result of changes in the amount of unrealized gains and losses on our portfolio of securities available for sale and, to a much lesser extent, on our derivative contracts that are accounted for as cash flow hedges. For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in, and Note 8 to, the unaudited Consolidated Financial Statements.

Our available for sale investment portfolio had net unrealized gains (losses) of ($15.8) million, $11.8 million and $57.6 million (($10.3) million, $7.7 million and $37.4 million net of applicable income tax effects, respectively) at September 30, 2004, December 31, 2003 and September 30, 2003, respectively. The changes from period to period were primarily due to changes in prevailing interest rates and, to a lesser degree, the size of the available for sale investment portfolio. The change in fair value of our interest-bearing liabilities, which tends to offset the change in fair value of available for sale securities, is not included in other comprehensive income.

FINANCIAL CONDITION

Our consolidated total assets increased by $2.5 billion, or 10%, from $26.5 billion at December 31, 2003 to $29.0 billion at September 30, 2004. Total average assets were $29.2 billion and $25.8 billion for the three months ended September 30, 2004 and 2003, respectively, and $28.0 billion and $25.5 billion for the nine months ended September 30, 2004 and 2003, respectively. The increase in total average assets was largely due to acquisitions, which increased average assets by approximately $1.8 billion and $1.1 billion in the three and nine months ended

September 30, 2004, respectively, as compared to the same periods of 2003. Total liabilities increased by $2.0 billion since year-end 2003, primarily due to acquisitions and increases in borrowings. Shareholders’ equity totaled $3.0 billion at September 30, 2004 and $2.5 billion at December 31, 2003.

Securities

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

The securities portfolio (including securities classified as held to maturity) averaged $7.8 billion during the third quarter of 2004, as compared to $7.3 billion in the third quarter of 2003. The net increase in the securities portfolio resulted primarily from acquisitions. The securities portfolio is held in and managed by Northgroup Asset Management Company, a wholly-owned subsidiary of Banknorth, NA, and consists primarily of mortgage-backed securities and U.S. Government and agency securities. Other securities in the portfolio are collateralized mortgage obligations, which include securitized residential real estate loans held in a REMIC, and asset-backed securities. Substantially all securities available for sale were AAA or equivalently rated at September 30, 2004. The average yield on securities was 4.35% for the quarter ended September 30, 2004 compared to 3.96% for the quarter ended September 30, 2003. With the exception of securitized residential real estate loans held in a REMIC that were classified as held to maturity and carried at cost, all of our securities are classified as available for sale and carried at market value. Securities available for sale had an after-tax unrealized gain (loss) of ($10.3) million and $7.7 million at September 30, 2004 and December 31, 2003, respectively. These unrealized gains (losses) do not impact net income or regulatory capital but are recorded as adjustments to shareholders’ equity, net of related deferred income taxes. Unrealized gains (losses), net of related deferred income taxes, are a component of “Accumulated Other Comprehensive Income (Loss)” contained in the unaudited Consolidated Statement of Changes in Shareholders’ Equity. Subsequent to September 30, 2004, we sold approximately $1.2 billion of securities as part of a deleverging program. See Note 12 to the consolidated financial statements.

Loans and Leases

Total loans and leases (including loans held for sale) averaged $18.3 billion during the third quarter of 2004, an increase of $2.4 billion, or 15%, from the third quarter of 2003. This increase was primarily attributable to growth in commercial loans and, to a lesser extent, consumer loans. Excluding acquisitions, average loans for the quarter ended September 30, 2004 were $1.3 billion, or 8%, higher than the comparable period in 2003. Average loans and leases as a percent of average earning assets was 70% during the quarter ended September 30, 2004 compared to 69% during the quarter ended September 30, 2003.

Average residential real estate loans (which include mortgage loans held for sale) of $3.1 billion during the third quarter of 2004 increased $282.8 million from the average amount of such loans during the third quarter of last year. Excluding acquisitions, average residential loans decreased approximately $114 million, or 4%, as a result of continued refinancing activity and prepayments in a low interest rate environment. The weighted average yield on residential real estate loans decreased from 5.43% to 4.95% during the quarters ended September 30, 2003 and 2004, respectively, primarily due to the repricing of adjustable-rate loans and the refinancing of fixed-rate loans at lower rates.

Mortgage loans held for sale amounted to $47.5 million and $41.7 million at September 30, 2004 and December 31, 2003, respectively. We are currently selling substantially all of the conforming 30-year fixed-rate loans we originate.

Commercial real estate loans averaged $6.2 billion during the third quarter of 2004, an increase of $895 million, or 17%, from the third quarter of last year. Excluding acquisitions, average commercial real estate loans increased $428 million, or 7%, during this period. Most of our markets posted increases, with the largest increases in

Massachusetts and Connecticut. The weighted average yield on commercial real estate loans during the third quarter of 2004 was 5.76%, as compared to 5.88% in the third quarter of 2003, a decrease of 12 basis points. The lower yield reflects the effect of the competitive pressures of variable-rate loans, the refinancing of fixed-rate loans at lower rates and the origination of new loans at the lower prevailing rates.

Commercial business loans and leases averaged $3.8 billion during the third quarter of 2004, an increase of $612 million, or 19%, over the third quarter of 2003. Excluding acquisitions, average commercial business loans and leases increased $498 million, or 15%. Massachusetts reflected the strongest growth. The weighted average yield on commercial business loans and leases decreased to 4.93% in the third quarter of 2004 from 5.04% in the third quarter of 2003. The decrease in the yield was primarily due to lower rates on new loans and the repricing of variable-rate loans.

Consumer loans and leases averaged $5.2 billion during the third quarter of 2004, an increase of $608 million, or 13%, from the third quarter of 2003. Excluding acquisitions, average consumer loans and leases increased $462 million or 10%. The growth in consumer loans was primarily in home equity loans and indirect automobile loans. The weighted average yield on consumer loans and leases decreased to 5.10% in the third quarter of 2004 from 5.43% in the third quarter of 2003. For a description of the types of loans and leases in our consumer portfolio and a breakdown of our consumer loans and leases, see “Credit Risk.”

Deposits

Total deposits averaged $19.4 billion during the third quarter of 2004, an increase of $1.7 billion from the third quarter of 2003; approximately $1.5 billion of this increase related to acquisitions. Money market and NOW accounts and noninterest-bearing accounts showed the largest increases. The ratio of loans to deposits was 95% at September 30, 2004 and 91% at December 31, 2003.

Average noninterest-bearing deposits totaled $4.2 billion during the third quarter of 2004, an increase of $849 million, or 25%, from the third quarter of 2003. Excluding acquisitions, average noninterest-bearing deposits increased $530 million, or 14%.

Average interest-bearing deposits of $15.2 billion during the third quarter of 2004 increased $819 million from the third quarter of 2003. Excluding acquisitions, average savings, money market and NOW accounts increased $363 million, or 4%, while certificates of deposits declined by 13%. The decline in certificates of deposit resulted from our decision to allow certain deposits priced above alternate funding costs to run off. The average rates paid on all interest-bearing deposits decreased by 20 basis points from 1.25% in the third quarter of 2003 to 1.05% in the third quarter of 2004, reflecting the decline in prevailing interest rates and run-off of higher-costing certificates of deposit.

Included within the deposit categories above are government banking deposits, which averaged $1.7 billion in the third quarter of 2004 and $1.3 billion in the third quarter of 2003. Government banking deposits include deposits received from state and local governments, school districts, colleges/universities, utility districts, public housing authorities and court systems in our market area. Many of these deposits exceed the FDIC insurance coverage amounts and require us to pledge specific collateral or maintain private insurance.

Other Funding Sources

We use both short-term and long-term borrowings to balance earning asset growth. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and borrowings from the U. S. Treasury, amounted to $2.9 billion and $2.3 billion at September 30, 2004 and December 31, 2003, respectively, an increase of $571 million. This increase was due primarily to debt assumed in acquisitions and lower long-term debt.

At September 30, 2004, we had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. There were no drawdowns on this line in either the nine months

ended September 30, 2004 or 2003. We also have additional borrowing capacity as more fully described under “Liquidity” below.

Long-term debt includes FHLB advances, senior notes, subordinated notes, junior subordinated debentures, wholesale securities sold under agreements to repurchase, capital lease obligations and other debt with original maturities greater than one year. Long-term debt amounted to $3.5 billion at September 30, 2004 and $3.5 billion at December 31, 2003.

At September 30, 2004 and December 31, 2003, FHLB borrowings amounted to $1.5 billion and were collateralized primarily with first mortgage loans secured by single-family properties. These borrowings had an average cost of 4.16% during the three months ended September 30, 2004 as compared to 4.23% during the three months ended September 30, 2003.

At September 30, 2004 and December 31, 2003, we had $150 million of 5-year senior notes carrying a fixed rate of 3.75%. These securities, which were issued in April 2003, are rated A3 by Moody’s Investor Services.

At September 30, 2004 and December 31, 2003, subordinated debt consisted of $200 million of 7.625% subordinated notes due 2011 issued by our banking subsidiary in 2001. The notes qualify as Tier 2 capital for regulatory purposes.

At September 30, 2004 and December 31, 2003, we had outstanding $310.7 million and $305.6 million, respectively, of junior subordinated debentures issued by us to affiliated trusts. See “Capital” below.

At September 30, 2004 and December 31, 2003, long-term wholesale securities sold under repurchase agreements amounted to $1.3 billion and $1.4 billion, respectively, and were collateralized by mortgage-backed securities and U.S. Government obligations.

Shareholders’ Equity

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

CONTRACTUAL OBLIGATIONS

The following tables summarize our contractual cash obligations, other commitments and derivative financial instruments at September 30, 2004.

Table 8 — Contractual Obligations and Other Commitments
Contractual Obligations (1)


			Payments Due By Period
			Less than		1 - 3		4 -5		After 5
	Total		1 Year		Years		Years		Years
Long-term debt	$	2,143,084	$	311,736	$	516,523	$	307,224	$	1,007,601
Capital lease obligations		6,743		56		360		1,245		5,082
Repurchase agreements — wholesale		1,300,000		350,000		850,000		—		100,000

Total long-term debt		3,449,827		661,792		1,366,883		308,469		1,112,683
Off balance sheet obligations:
Operating lease obligations		143,061		25,422		43,036		31,868		42,735
Pension plan contribution		17,100		17,100		—		—		—
Other benefit plan payments		35,022		3,130		6,196		5,955		19,741
Other vendor obligations		28,168		10,251		17,917		—		—

Total contractual obligations	$	3,673,178	$	717,695	$	1,434,032	$	346,292	$	1,175,159

(1) Other liabilities which are short term in nature are not included in this table.

Other Commitments


			Amount of Commitment Expiration - Per Period
	Total
	Amounts		Less than		1 - 3		4 -5		After 5
	Committed		1 Year		Years		Years		Years
Unused portions on lines of credit	$	4,791,772	$	1,385,511	$	244,936	$	34,692	$	3,126,633
Standby letters of credit		447,856		130,516		82,175		79,482		155,683
Commercial letters of credit		22,024		14,830		5,077		—		2,117
Commitments to originate loans		2,058,277		1,373,507		374,351		34,046		276,373
Other commitments		281,996		6,757		13,611		2,684		258,944

Total commitments	$	7,601,925	$	2,911,121	$	720,150	$	150,904	$	3,819,750

Derivative Financial Instruments


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

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

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

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

(4)		Forward contracts for customer accommodations.

RISK MANAGEMENT

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

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

CREDIT RISK MANAGEMENT

General

The Board Risk Management Committee monitors our credit risk management. Our strategy for credit risk management includes centralized policies and uniform underwriting criteria for all loans. The strategy also includes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management review of large loans and loans with a deterioration of credit quality. We maintain an internal rating system that provides a mechanism to regularly monitor the credit quality of our loan portfolio. The rating system is intended to

identify and measure the credit quality of lending relationships. For consumer loans, we utilize standard credit scoring systems to assess consumer credit risks and to price consumer products accordingly. We strive to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels. See “Results of Operations — Provision and Allowance for Loan and Lease Losses.”

Our residential loan portfolio accounted for 17% of the total loan portfolio at September 30, 2004 and December 31, 2003. Our residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless the excess is protected by mortgage insurance. At September 30, 2004, 0.23% of our residential loans were nonperforming, as compared to 0.26% at December 31, 2003 and 0.34% at September 30, 2003.

Our commercial real estate loan portfolio accounted for 33% of the total loan portfolio at September 30, 2004 and December 31, 2003. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate. These loans generally are secured by properties located in the New England states and upstate New York. At September 30, 2004, 0.54% of our commercial real estate loans were nonperforming, as compared to 0.36% at December 31, 2003 and 0.51% at September 30, 2003.

Our commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at September 30, 2004 and 20% at December 31, 2003. Commercial business loans and leases are generally made to small to medium size businesses located within our market areas. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England and upstate New York. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to businesses in the form of lines of credit. Through a subsidiary, we also offer direct equipment leases, which amounted to $86.5 million at September 30, 2004. We do not emphasize the purchase of participations in syndicated commercial loans. At September 30, 2004, we had $372.4 million of outstanding participations in syndicated commercial loans and had an additional $288.0 million of unfunded commitments related to these participations. At September 30, 2004, 0.48% of our commercial business loans were nonperforming, as compared to 0.74% at December 31, 2003 and 0.70% at September 30, 2003.

The following table presents the geographic distribution of our commercial loans and leases at September 30, 2004 and December 31, 2003.

Table 9 — Commercial Loans and Leases by State


	Commercial Real Estate Loans									Commercial Business Loans and Leases

	September 30,		December 31,		Change					September 30,		December 31,		Change
	2004		2003		Amount		Percent			2004		2003		Amount			Percent
Massachusetts	$	3,055,752	$	2,565,064	$	490,688		19.13	%	$	1,479,242	$	1,173,803	$	305,439			26.02	%
Maine		917,752		885,791		31,961		3.61	%		786,994		658,902		128,092			19.44	%
New Hampshire		759,295		732,249		27,046		3.69	%		535,064		494,811		40,253			8.14	%
Vermont		667,047		645,608		21,439		3.32	%		435,761		438,483		(2,722	)		-0.62	%
Connecticut		569,152		504,624		64,528		12.79	%		425,806		332,749		93,057			27.97	%
New York		213,837		195,526		18,311		9.36	%		193,429		188,346		5,083			2.70	%

Total	$	6,182,835	$	5,528,862	$	653,973		11.83	%	$	3,856,296	$	3,287,094	$	569,202			17.32	%

Consumer loans and leases accounted for 29% of our total loan portfolio at September 30, 2004 and at December 31, 2003. In the fourth quarter of 2003, we ceased originating vision, dental and orthodontia fee plan loans and mobile home loans. The decrease in these loan types during the first half of 2004 reflects the run-off of these loans. At September 30, 2004, 0.13% of our consumer loans were nonperforming, as compared to 0.18% at December 31, 2003 and 0.16% at September 30, 2003.

The following table presents our consumer loans and leases by type at September 30, 2004 and December 31, 2003.

Table 10 — Composition of Consumer Loans and Leases


	September 30,					December 31,
	2004					2003					Change
			% of					% of
	Amount		Total			Amount		Total			Amount			Percent
Home equity	$	3,043,885		57.71	%	$	2,472,471		51.30	%	$	571,414			23.11	%
Automobile		1,701,002		32.25	%		1,596,504		33.13	%		104,498			6.55	%
Mobile home		118,393		2.24	%		141,407		2.93	%		(23,014	)		(16.28	%)
Vision, dental, and orthodontia fee plan		62,888		1.19	%		120,694		2.50	%		(57,806	)		(47.89	%)
Education		129,906		2.46	%		234,226		4.86	%		(104,320	)		(44.54	%)
Other		218,847		4.15	%		254,221		5.28	%		(35,374	)		(13.91	%)

Total	$	5,274,921		100.00	%	$	4,819,523		100.00	%	$	455,398			9.45	%

Nonperforming Assets

Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue), other real estate owned, repossessed assets and certain securities available for sale. Total nonperforming assets as a percentage of total assets amounted to 0.23% at September 30, 2004, 0.24% at December 31, 2003 and 0.27% at September 30, 2003. Total nonperforming assets as a percentage of total loans and total other nonperforming assets amounted to 0.37% at September 30, 2004, 0.39% at December 31, 2003 and 0.44% at September 30, 2003. See Table 11 for a summary of nonperforming assets for the last five quarters. On a dollar basis, our nonperforming assets decreased from $70.4 million at September 30, 2003 to $68.0 million at September 30, 2004, but increased $4.9 million from $63.1 million at December 31, 2003. The increase from December 31, 2003 was due to a $13.6 million increase in nonperforming commercial real estate loans.

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

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

TABLE 11 — Nonperforming Assets


	2004									2003
	September 30			June 30			March 31			December 31			September 30
Nonaccrual loans and leases:
Residential real estate loans	$	7,274		$	7,870		$	7,990		$	7,157		$	9,135
Commercial real estate loans		33,249			27,951			24,619			19,700			27,069
Commercial business loans and leases		18,573			23,636			28,978			24,412			22,857
Consumer loans and leases		6,827			5,685			6,267			8,493			7,664

Total nonaccrual loans and leases		65,923			65,142			67,854			59,762			66,725
Other nonperforming assets:
Other real estate owned, net of related reserves		698			398			389			529			921
Repossessions, net of related reserves		1,358			1,627			2,311			2,812			2,711

Total other nonperforming assets		2,056			2,025			2,700			3,341			3,632

Total nonperforming assets	$	67,979		$	67,167		$	70,554		$	63,103		$	70,357

Accruing loans and leases which are 90 days or more overdue	$	5,018		$	4,142		$	7,929		$	4,915		$	3,163

Total nonperforming loans as a percentage of total loans and leases(1)		0.36	%		0.36	%		0.41	%		0.37	%		0.42	%
Total nonperforming assets as a percentage of total assets		0.23	%		0.23	%		0.26	%		0.24	%		0.27	%
Total nonperforming assets as a percentage of total loans and leases (1) and total other nonperforming assets		0.37	%		0.37	%		0.42	%		0.39	%		0.44	%

(1)

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

Residential real estate loans are generally placed on nonaccrual when they become 120 days past due or are in the process of foreclosure. All closed-end consumer loans 90 days or more past due, unless well secured and in the process of collection, and any equity lines of credit in the process of foreclosure are placed on nonaccrual status. Consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. We generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. At September 30, 2004, we had $5.0 million of accruing loans which were 90 days or more delinquent, as compared to $4.9 million at December 31, 2003 and $3.2 million at September 30, 2003. We may also place loans which are less than 90 days past due on nonaccrual (and, therefore, nonperforming) status when in our judgment these loans are likely to present future principal and/or interest repayment problems and ultimately would be classified as nonperforming.

Net Charge-offs

Net charge-offs amounted to $8.8 million during the three months ended September 30, 2004, as compared to $8.2 million during the three months ended September 30, 2003. Net charge-offs represented 0.19% and 0.20% of average loans and leases outstanding for the quarters ended September 30, 2004 and 2003, respectively.

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

TABLE 12 — Allowance for Credit Losses


	2004 Third			2004 Second			2004 First			2003 Fourth			2003 Third
	Quarter			Quarter			Quarter			Quarter			Quarter
Allowance for loan and lease losses at beginning of period	$	247,620		$	233,297		$	232,287		$	229,581		$	227,240
Additions due to acquisitions		—			13,665			—			2,661			—
Charge-offs:
Residential real estate mortgages (1)		101			(25	)		(55	)		25			63
Commercial real estate mortgages		4			172			221			87			27
Commercial business loans and leases		4,458			5,460			2,711			4,302			3,011
Consumer loans and leases		7,566			7,434			8,405			9,212			8,782

Total loans and leases charged off		12,129			13,041			11,282			13,626			11,883

Recoveries:
Residential real estate mortgages		15			17			17			15			5
Commercial real estate mortgages		534			835			667			255			296
Commercial business loans and leases		1,519			2,073			926			1,900			2,493
Consumer loans and leases		1,256			1,274			1,182			1,101			930

Total loans and leases recovered		3,324			4,199			2,792			3,271			3,724

Net charge-offs		8,805			8,842			8,490			10,355			8,159
Transfer for off-balance sheet loan commitments (2)		(6,600	)		—			—			—			—
Provision for loan and lease losses		10,670			9,500			9,500			10,400			10,500

Allowance for loan and lease losses at end of period (2)	$	242,885		$	247,620		$	233,297		$	232,287		$	229,581

Total Allowances for Credit Losses:
Allowance for loan and lease losses	$	242,885
Liability for unfunded credit commitments (2)		6,600

Total Allowances for Credit Losses	$	249,485

Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (3)		0.19	%		0.20	%		0.21	%		0.26	%		0.20	%
Ratio of allowance for credit losses to total loans and leases at end of period (2)		1.36	%		1.37	%		1.40	%		1.42	%		1.44	%
Ratio of allowance for credit losses to nonperforming loans and leases at end of period		378	%		380	%		344	%		389	%		344	%
Ratio of net charge-offs (recoveries) as a percent of average outstanding loans and leases, annualized (3):
Residential real estate mortgages		0.011	%		(0.006	%)		(0.011	%)		0.001	%		0.008	%
Commercial real estate mortgages		(0.034	%)		(0.045	%)		(0.032	%)		(0.012	%)		(0.020	%)
Commercial business loans and leases		0.305	%		0.370	%		0.211	%		0.295	%		0.064	%
Consumer loans and leases		0.483	%		0.496	%		0.593	%		0.688	%		0.681	%
Total portfolio loans and leases at end of period (3)		18,410,791			18,110,312			16,623,612			16,345,962			15,925,852
Total nonperforming loans and leases at end of period		65,923			65,142			67,854			59,762			66,725
Average loans and leases outstanding during the period (3)		18,263,613			17,484,997			16,511,538			15,976,068			15,841,521

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

(2)		During the third quarter of 2004, we reclassified the portion of our allowance for credit losses related to unfunded credit commitments from the allowance for loan and lease losses to a separate liability account. The liability for unfunded credit commitments previously included in the allowance for loan and and lease losses was $5.4 million, $5.1 million, $5.6 million and $5.1 million as of June 30, 2004, March 31, 2004, December 31, 2003, and September 30, 2003, respectively.

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

Potential Problem Loans

In addition to the nonperforming loans discussed under “Credit Risk Management” above, we also have loans that are 30 to 89 days delinquent and still accruing. These loans amounted to $147 million at September 30, 2004 and $142 million at December 31, 2003. These loans and related delinquency trends are considered in the evaluation of the allowance for loan and lease losses and the determination of the provision for loan and lease losses.

Analysis and Determination of the Allowance for Loan and Lease Losses

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

The allowance for loan and lease losses amounted to $242.9 million at September 30, 2004 and $232.3 million at December 31, 2003. The $10.6 million increase is net of a transfer of $6.6 million to other liabilities related to reserves for off-balance sheet loan commitments. The increase was also impacted by $13.7 million from acquired banks and the effect of the provision for loan and lease losses exceeding net charge-offs during 2004. The ratio of the allowance for credit losses to nonperforming loans was 378% at September 30, 2004 and 389% at December 31, 2003. The ratio of the allowance for credit losses to total portfolio loans and leases at September 30, 2004 was 1.36% compared to 1.42% at December 31, 2003.

ASSET-LIABILITY MANAGEMENT

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

Interest Rate Risk

Interest rate risk is the risk of loss to future earnings or long-term value resulting from changes in interest rates and is by far the most significant non-credit risk to which we are exposed. This risk arises directly from our core lending and deposit gathering activities and is predominantly concentrated in our mortgage-related assets, as well as in our non-maturity deposits. Mortgage-related assets typically give borrowers the option to prepay at any time without penalty. Principal cash flows that come from these assets are highly interest rate sensitive. As interest rates fall, borrowers are more likely to pay off their existing mortgages, which results in higher cash flows that we must in turn reinvest. Replacing these higher-rate mortgage assets with lower-rate mortgage assets has the potential to reduce our net interest income unless we can also reduce either our wholesale or retail funding costs. In the low interest rate environment, bank deposits can increase, especially if the market risk premium is not sufficient to adequately compensate investors. Consequently, under such circumstances, we can have even more cash to reinvest in low yielding assets. Conversely, rising rates tend to have the opposite effect on both mortgage assets and non-maturity

deposits. Higher rates make borrowers less likely to refinance existing debt, resulting in lower cash flows for us to reinvest. And if the market risk premium is sufficiently high, depositors could be enticed to take additional investment risk and move deposits from banks into riskier assets, such as equity securities. This in turn could result in less cash to invest or even require us to use wholesale funding market sources more actively. In the case of higher interest rates, our funding sources could reprice faster than our assets and at higher rates, thereby reducing our interest rate spread and net interest margin. The degree to which future earnings or long-term value is subject to interest rate risk depends on how closely the characteristics of our interest-earning assets match those of our interest-bearing liabilities.

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

Assessment and Measurement

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

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

Net Interest Income Sensitivity

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

The following table sets forth information regarding estimated changes in net interest income for the 12 months following the indicated dates. Assuming a downward shift in rates, because most deposit accounts have implied interest rate floors, it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest

income would be less than the simulated increase in interest expense because total adjustable rate interest-earning assets generally will reprice less quickly than will total interest-bearing liabilities. These results are dependent on material assumptions such as interest rate movements, product pricing and customer behavior.

Table 13 — Sensitivity of Net Interest Income


	200 Basis Point			100 Basis Point			100 Basis Point
	Rate Increase			Rate Increase			Rate Decrease
September 30, 2004		(1.61	%)		(0.52	%)		(0.09	%)

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

Our asset-liability management policy on interest rate risk simulation specifies that if market interest rates were to shift gradually up or down 2%, estimated net interest income for the subsequent 12 months should decline by less than 5%. All interest rate risk measures were within compliance guidelines at September 30, 2004 and December 31, 2003.

Derivative Instruments

Purpose and Benefits

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

Certain derivatives are used to hedge certain wholesale funding activities and the mortgage origination pipeline. These instruments are designated as hedges at inception in accordance with SFAS No. 133. At September 30, 2004, our designated hedging activities consisted of forward commitments related to hedging our mortgage banking operations, a $150 million notional amount interest rate swap at 3-month LIBOR plus 0.41% that hedged $150 million of 3.75% fixed-rate senior notes maturing on May 1, 2008, a $200 million notional amount interest rate swap at 3-month LIBOR plus 3.47% that hedged $200 million of 7.625% fixed-rate subordinated debt issued by Banknorth, NA which matures on June 15, 2011, and five interest rate swaps with an aggregate notional amount of $216.5 million and a weighted average rate of 1-month LIBOR plus 3.82%, which hedge $216.5 million of FHLB advances with a weighted average cost of 5.47% that mature throughout 2005.

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

For the quarter and nine months ended September 30, 2004, higher mortgage rates contributed to a decline in residential mortgage loan originations.

The following table summarizes the average balances of residential mortgage loans held for sale and related hedge positions during the periods indicated.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Residential mortgage loans held for sale	$	41,913	$	101,528	$	47,081	$	90,808
Rate-locked loan commitments		50,421		85,551		52,363		104,632
Forward sales commitments		77,839		178,361		86,020		181,739

Interest rate derivatives, primarily interest rate swaps, offered to commercial borrowers through our hedging program are designated as speculative under SFAS 133. However, we believe that our exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an identical dealer transaction. The commercial customer hedging program allows us to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. For the nine months ended September 30, 2004, we recorded a total notional amount of $264.1 million of interest rate swaps with commercial borrowers and an equal notional amount of dealer transactions. It is anticipated that over time, customer interest rate derivatives will reduce the interest rate risk inherent in our longer-term, fixed-rate commercial business and real estate loans. The customer-related positions summarized in the table below include both the customer and offsetting dealer transactions.

Foreign Exchange or Market Risk

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

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

The following table summarizes our derivative positions at September 30, 2004.

Table 15 — Derivative Positions

Asset-Liability Management Positions


	Notional Amount Maturing												Fair
September 30, 2004	2004		2005		2006		2007		Thereafter		Total		Value
Interest rate contracts
Pay variable, receive fixed	$	—	$	216,500	$	—	$	—	$	350,000	$	566,500	$	3,678

Forward commitments to sell loans		85,996		—		—		—		—		85,996		(476	)

Customer-related Positions


	Notional Amount Maturing												Fair
September 30, 2004	2004		2005		2006		2007		Thereafter		Total		Value
Interest rate contracts
Receive fixed, pay variable	$	—	$	—	$	—	$	14,059	$	534,671	$	548,730	$	19,159
Pay fixed, receive variable		—		—		—		14,059		534,671		548,730		(19,159	)

Foreign currency forward contracts
Forward contracts with customers		9,605		15,581		1,306		—		—		26,492		2,586
Forward contracts with dealers		9,696		16,159		1,311		—		—		27,166		(2,430	)

Foreign exchange options
Options purchased		1,350		33,750		7,875		—		—		42,975		1,724
Options to sell		1,350		33,750		7,875		—		—		42,975		(1,724	)

Rate-locked loan commitments (1)		54,389		—		—		—		—		54,389		416

(1)

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

2004 Asset Liability Management Actions

The most significant factors affecting market risk exposure of net interest income in the third quarter of 2004 were (i) changes in the shape of the U.S. Government securities and interest rate swap yield curves, (ii) changes in the prepayment speeds of mortgage assets and (iii) the reduction of deposit interest expenses.

The Federal Reserve Board increased the federal funds target rate to 1.50% on August 10, 2004 and again to 1.75% on September 21, 2004. However, long-term interest rates fell in the third quarter, with 10-year U. S. Treasury yields down approximately 47 basis points quarter over quarter and down approximately 18 basis points over year-end. Mortgage rates also fell in the third quarter, which resulted in an increase in residential mortgage loan activity. As a result, the yield curve used to measure interest income sensitivity has flattened considerably. The above net interest income table (Table 13) reflects the estimated net impact of these changes. The falling interest rate scenario remains asset sensitive, albeit to a lesser degree than at year-end and our rising rate scenarios are now slightly liability sensitive. Without further actions, our model projects net interest income to increase if the yield curve becomes steeper and to decline slightly if short and long interest rates move symmetrically higher. However, this projected decline may be mitigated or offset by the lag of deposit rates increases versus market rates.

LIQUIDITY

Our Board Risk Management Committee establishes policies and analyzes and manages liquidity to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. Liquidity management is viewed from a long-term and a short-term perspective, as well as from an asset and liability perspective. We monitor

liquidity through a regular review of loan and deposit maturities, yield and rate scenarios and loan and deposit forecasts to minimize funding risk. Other factors affecting our ability to meet liquidity needs include variations in the markets served and general economic conditions. We have various funding sources available to us on a parent-only basis as well as through our banking subsidiary, as outlined below.

Parent Company

On a parent-only basis at September 30, 2004, our debt service requirements consisted primarily of $310.7 million junior subordinated debentures issued by us to affiliated trusts and $150 million of 3.75% senior notes due May 1, 2008. The junior subordinated debentures were issued by us or acquired entities to five affiliated trusts in connection with their issuance of capital securities to unaffiliated parties. These obligations mature starting in 2027, have interest rates ranging from 4.75% to 10.52% and annual debt service payments of $26.2 million. The senior notes have annual debt service payments of $5.6 million.

The principal sources of funds for us to meet parent-only obligations are dividends from our banking subsidiary, which are subject to regulatory limitations, income from investment securities and borrowings, including draws on a $110 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. At September 30, 2004, our subsidiary bank had $689.3 million available for dividends that could be paid without prior regulatory approval. In addition, the parent company had $184.1 million in cash or cash equivalents at September 30, 2004.

Banking Subsidiary

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

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

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

At September 30, 2004, Banknorth, NA had in the aggregate $4.3 billion of “immediately accessible liquidity,” defined as cash that could be raised within 1-3 days through collateralized borrowings or sales of securities. This represented 22% of retail deposits, as compared to a current policy minimum of 10% of deposits.

Also at September 30, 2004, Banknorth, NA had in the aggregate “potentially volatile funds” of $2.9 billion. These are funds that might flow out of the bank over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources.

At September 30, 2004, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 146%, which substantially exceeded our policy minimum of 100%.

In addition to the liquidity sources discussed above, we believe that our residential and consumer loan portfolios provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales or securitizations. We believe we also have significant untapped access to the national brokered deposit market.

These sources are contemplated as secondary liquidity in our contingent funding plan. We believe that the level of our liquidity is sufficient to meet current and future funding requirements.

We have a shelf registration statement on file with the Securities and Exchange Commission which allows us to sell up to $1.0 billion of debt securities, preferred stock, depository shares, common stock and warrants and which allows affiliated trusts to sell capital securities. We had $650 million of remaining authority under this shelf registration statement at September 30, 2004.

CAPITAL

At September 30, 2004, shareholders’ equity amounted to $3.0 billion, or 10.51% of total assets. At December 31, 2003, shareholders’ equity amounted to $2.5 billion, or 9.53% of total assets.

We paid a cash dividend of $0.20 per share on our common stock during the third quarter of 2004 compared to $0.19 per share in the third quarter last year.

We have a stock repurchase program that was approved by the Board in 2002 and has a total of 2.9 million shares available for repurchase at September 30, 2004. There were no repurchases to date in 2004.

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of the Currency of the United States (“OCC”) respectively require us and our banking subsidiary to maintain certain capital ratios, set forth below. At September 30, 2004, Banknorth Group, Inc. and Banknorth, NA were deemed to be “well capitalized” under the regulations of the Federal Reserve Board and the OCC, respectively, and in compliance with applicable capital requirements.

Table 16 — Capital Ratios


	Actual					Capital Requirements					Excess
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2004
Banknorth Group, Inc.
Total capital (to risk-weighted assets)	$	2,385,570		11.62	%	$	1,643,039		8.00	%		$742,531		3.62	%
Tier 1 capital (to risk weighted assets)		1,935,686		9.42	%		821,519		4.00	%		1,114,167		5.42	%
Tier 1 leverage capital ratio (to average assets)		1,935,686		6.95	%		1,113,291		4.00	%		822,395		2.95	%
Banknorth, NA
Total capital (to risk-weighted assets)		2,327,560		11.37	%		1,638,244		8.00	%		689,316		3.37	%
Tier 1 capital (to risk-weighted assets)		1,880,921		9.19	%		819,122		4.00	%		1,061,799		5.19	%
Tier 1 leverage capital ratio (to average assets)		1,880,921		6.77	%		1,111,011		4.00	%		769,910		2.77	%

December 31, 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 $20.5 billion and $18.5 billion at September 30, 2004 and December 31, 2003, respectively, for Banknorth Group, Inc. and Banknorth, NA.

At September 30, 2004, we operated five affiliated trusts for the purpose of issuing to unaffiliated parties capital securities and investing the proceeds from the sale thereof in junior subordinated debentures issued by us. All of the proceeds from the issuance of the capital securities and the common securities issued by the trusts are invested in our junior subordinated debentures, which represent the sole assets of the trusts. The capital securities pay cumulative cash distributions quarterly at the same rate as the junior subordinated debentures held by the trusts. We own all of the outstanding common securities of the trusts and effectively are the guarantor of the obligations of the trusts.

The following table provides information on each of our affiliated trusts and the outstanding capital securities of such trusts and the related junior subordinated debentures issued by us at September 30, 2004.

Table 17 — Affiliated Trusts


							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
CCBT Statutory Trust I		7/31/2001		5,000		155		5,155		5.27	%		7/31/2031
Banknorth Capital Trust II		2/22/2002		200,000		6,186		206,186		8.00	%		4/1/2032

			$	300,275	$	10,471	$	310,746

(1)

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

At September 30, 2004, trust preferred securities amounted to 16.1% of Banknorth’s Tier 1 capital. Although pursuant to FIN 46(R), the trusts which issued capital securities are no longer consolidated with Banknorth and these securities therefore are no longer considered a minority interest in consolidated subsidiary for accounting purposes, pursuant to a supervisory letter sent by the Federal Reserve Board to all bank holding companies in July 2003, Banknorth has continued to include trust preferred securities in its Tier 1 capital. On May 6, 2004, the Federal Reserve Board issued a proposed regulation which proposed to permit bank holding companies to continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative and qualitative standards. Under the proposed regulation, commencing on March 31, 2007, the aggregate amount of restricted core capital elements (which include qualifying trust preferred securities, as well as qualifying cumulative perpetual preferred stock and Class B and Class C minority interests in consolidated subsidiaries, as defined) may not exceed 25% (15% for internationally active bank holding companies) of a bank holding company’s core capital elements (which consist of qualifying common stockholders’ equity, qualifying non-cumulative preferred stock and Class A minority interest in subsidiaries, as defined), net of goodwill. This test is more restrictive than the current limit for trust preferred securities, which does not deduct goodwill prior to calculating the 25% limit or explicitly include minority interests in consolidated subsidiaries, and is likely to reduce the ability of some bank holding companies, particularly those that have completed significant purchase acquisitions, to include trust preferred securities in Tier 1 capital. In addition, the proposed rule would limit the amount of qualifying trust preferred securities and Class C minority interests in excess of the restricted core capital limit that can be included in Tier 2 capital by providing that the amount of such elements, together with subordinated debt and limited life preferred stock, that may be included in Tier 2 capital would be limited to 50% of Tier 1 capital. The proposed rule also would provide that during the last five years prior to maturity of the underlying subordinated note or debentures, trust preferred securities must be treated as limited-life preferred stock, excluding it from Tier 1 capital and amortizing it out of Tier 2 capital at the rate of 20% per year. If the proposed capital regulation were adopted as proposed, we believe that we would continue to qualify as “well capitalized” under Federal Reserve Board regulations. There can be no assurance that the proposed capital regulation will be adopted as proposed or at all.

At September 30, 2004 and December 31, 2003, we also had $200 million of 7.625% subordinated notes due in 2011 issued by our banking subsidiary, which qualify as Tier 2 capital for regulatory purposes.

Banking regulators have also established guidelines as to the level of investments in BOLI. These guidelines are expressed in terms of a percentage of Tier 1 capital plus loan loss reserves. Our guideline (which is consistent with regulatory guidelines) is that BOLI should not exceed 25% of our Tier 1 capital plus loan loss reserves, which we monitor monthly. The ratio of BOLI to Tier 1 capital plus loan loss reserves was 23.68% at September 30, 2004.

CRITICAL ACCOUNTING POLICIES

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

IMPACT OF NEW ACCOUNTING STANDARDS

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

FORWARD LOOKING STATEMENTS

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

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

Part II — Other Information

Item 1. Legal Proceedings

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) – (b) Not applicable.

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

Total Number 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)

July 1-31, 2004

—

2,853,200

August 1-31, 2004

—

2,853,200

September 1-30, 2004

—

2,853,200

(1)

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

Item 3. Defaults Upon Senior Securities – not applicable.

Item 4. Submission of Matters to a Vote of Security Holders – not applicable.

Item 5. Other Information – not applicable.

Item 6. Exhibits.

The following exhibits are filed as part of this report.


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

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

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

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


			PAGE
PART I.	FINANCIAL INFORMATION PAGE
	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		15
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		45
	Item 4.	Controls and Procedures		45
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		45
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45
	Item 3.	Defaults Upon Senior Securities		46
	Item 4.	Submission of Matters to a Vote of Security Holders		46
	Item 5.	Other Information		46
	Item 6.	Exhibits		45
	Signatures			47
	Exhibits			48
EX-31.1 Section 302 CEO Certification
EX-31.2 Section 302 CFO Certification
EX-32.1 Section 906 CEO Certification
EX-32.2 Section 906 CFO Certification

	•		Net interest income increased 14% over the third quarter of last year due primarily to a $2.9 billion increase (or 13%) in average earning assets. The net interest margin of 3.68% for the quarter ended September 30, 2004 increased 5 basis points from the third quarter of 2003 as the cost of interest-bearing liabilities fell more than the yield on interest-earning assets. In addition, average noninterest-bearing deposits increased 25%.

	•		Noninterest income increased 3% over the third quarter last year. Income from deposit services, insurance brokerage commissions, merchant and electronic banking services, trust and investment management services and investment planning services increased by $9 million (or 16%) in the aggregate due in part to acquisitions. Other noninterest income fell by $6.1 million. See Table 4 for details.

	•		Noninterest expense increased by 15% due primarily to the operating expenses of acquired banks, increased spending on advertising and marketing and higher merger and consolidation costs.

	•		Total average loans and leases increased 15% during the third quarter of 2004 compared to the third quarter of 2003. Excluding the effects of acquisitions, total average loans and leases

			increased 8%, as strong commercial and consumer loan growth was offset by residential loan declines.

	•		Total average deposits increased 9% during the third quarter of 2004 compared to the third quarter of 2003 primarily due to acquisitions. Excluding the effects of acquisitions, total average deposits increased $217 million, or 1%, as average checking deposits increased 14% and savings and money market deposits increased 4%, while certificates of deposit declined 13%.

	•		In October 2004, we implemented a deleveraging strategy pursuant to which we sold approximately $1.2 billion of securities with a weighted average yield of 2.76% and prepaid a similar amount of borrowings with a weighted average rate of 4.77%, both of which had a duration of approximately 3.5 years. A $51.5 million after-tax loss will be incurred in the fourth quarter. This transaction, which was approved by the board of directors on October 13, 2004, is expected to improve prospective annual net interest income by approximately $24 million (or approximately $0.09 per diluted share assuming a 34% effective tax rate and 177 million diluted shares outstanding).


	BANKNORTH GROUP, INC.

Date: November 8, 2004	By:	/s/ William J. Ryan

		William J. Ryan
		Chairman, President and
		Chief Executive Officer

Date: November 8, 2004	By:	/s/ Stephen J. Boyle

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