Banknorth 10-Q 2003 Q3 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, 2003

OR

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

Commission File Number: 001-31251

BANKNORTH GROUP, INC.

(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, 2003 is:

Common stock, par value $.01 per share	161,657,187
(Class)	(Outstanding)

Available on the Web @ www.banknorth.com

TABLE OF CONTENTS

		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes to Consolidated Financial Statements
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
Part II - Other Information
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-3.(II) BYLAWS
EX-31.1 SECT. 302 CERTIFICATION OF C.E.O.
EX-31.2 SECT. 302 CERTIFICATION OF C.F.O.
EX-32.1 SECT. 906 CERTIFICATION OF C.E.O.
EX-32.2 SECT. 906 CERTIFICATION OF C.F.O.

INDEX
BANKNORTH GROUP, INC. AND SUBSIDIARIES

			PAGE
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets	3
		Consolidated Statements of Income	4
		Consolidated Statements of Changes in Shareholders’ Equity	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
	Item 4.	Controls and Procedures	44
PART II.	OTHER INFORMATION
	Item 1.	Legal proceedings	44
	Item 2.	Changes in securities and use of proceeds	44
	Item 3.	Defaults upon senior securities	44
	Item 4.	Submission of matters to a vote of security holders	44
	Item 5.	Other information	44
	Item 6.	Exhibits and reports on Form 8-K	44
	Signatures		45
	Exhibits		46

2

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

				September 30, 2003			December 31, 2002
Assets
Cash and due from banks				$	559,056		$	690,250
Federal funds sold and other short term investments					31,645			79,753
Securities available for sale, at market value					6,938,938			6,731,467
Securities held to maturity (fair value of $141,049 and $221,571 at September 30, 2003 and December 31, 2002, respectively)					141,626			216,409
Loans held for sale					74,696			128,622
Loans and leases:
	Residential real estate mortgages				2,702,895			2,382,197
	Commercial real estate mortgages				5,310,179			4,792,049
	Commercial business loans and leases				3,265,795			2,968,474
	Consumer loans and leases				4,646,983			3,913,288
		Total loans and leases			15,925,852			14,056,008
	Less: Allowance for loan and lease losses				229,581			208,273
			Net loans and leases		15,696,271			13,847,735
Premises and equipment, net					264,752			271,677
Goodwill					1,094,334			660,684
Identifiable intangible assets					37,340			34,474
Mortgage servicing rights					3,802			3,598
Bank-owned life insurance					482,255			380,405
Other assets					416,222			373,867
	Total assets			$	25,740,937		$	23,418,941
Liabilities and Shareholders’ Equity
Deposits:
	Savings accounts			$	2,473,397		$	1,940,195
	Money market access and NOW accounts				6,922,924			6,091,429
	Certificates of deposit				4,943,292			4,658,778
	Demand deposits				3,444,084			2,974,199
		Total deposits			17,783,697			15,664,601
Short-term borrowings					1,048,499			1,276,467
Long-term debt					3,911,469			4,156,114
Other liabilities					521,692			258,274
	Total liabilities				23,265,357			21,355,456
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 2003 - 182,292,973; Issued 2002 - 168,892,284)					1,823			1,689
Paid-in capital					1,434,169			1,059,778
Retained earnings					1,447,961			1,269,422
Treasury stock, at cost (20,749,748 shares in 2003 and 18,313,517 shares in 2002)					(444,073	)		(382,350	)
Accumulated other comprehensive income					35,700			114,946
	Total shareholders’ equity				2,475,580			2,063,485
		Total liabilities and shareholders’ equity		$	25,740,937		$	23,418,941

See accompanying Notes to unaudited Consolidated Financial Statements.

3

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,
			2003		2002		2003		2002
Interest and dividend income:
	Interest and fees on loans and leases		$	219,215	$	221,534	$	665,309	$	662,298
	Interest and dividends on securities			71,535		91,622		237,246		266,251
		Total interest and dividend income		290,750		313,156		902,555		928,549
Interest expense:
	Interest on deposits			45,164		62,335		147,290		188,642
	Interest on borrowed funds			35,754		49,825		127,722		142,952
		Total interest expense		80,918		112,160		275,012		331,594
		Net interest income		209,832		200,996		627,543		596,955
Provision for loan and lease losses				10,500		10,829		31,901		33,486
		Net interest income after provision for loan and lease losses		199,332		190,167		595,642		563,469
Noninterest income:
	Deposit services			25,167		20,816		71,441		59,712
	Insurance brokerage commissions			10,930		11,670		34,235		31,885
	Merchant and electronic banking income, net			11,115		10,108		31,235		27,267
	Trust and investment management services			8,178		7,791		23,486		24,587
	Bank-owned life insurance			5,785		5,107		16,952		14,477
	Investment planning services			3,761		2,770		10,928		8,452
	Net securities gains			3,573		208		39,778		578
	Other noninterest income			20,147		7,035		54,668		23,109
				88,656		65,505		282,723		190,067
Noninterest expenses:
	Compensation and employee benefits			82,230		79,718		245,170		230,763
	Occupancy			14,520		12,715		44,584		37,999
	Equipment			11,668		9,986		35,344		29,623
	Data processing			10,466		9,763		31,059		30,188
	Advertising and marketing			5,553		4,301		16,569		12,515
	Amortization of identifiable intangible assets			2,320		1,684		6,622		4,422
	Merger and consolidation costs			808		2,168		6,788		11,433
	Prepayment penalties on borrowings			—		—		30,490		—
	Other noninterest expenses			24,082		21,242		68,968		64,322
				151,647		141,577		485,594		421,265
Income before income tax expense				136,341		114,095		392,771		332,271
Applicable income tax expense				46,063		37,233		133,574		110,771
		Net income	$	90,278	$	76,862	$	259,197	$	221,500
Basic earnings per share			$	0.56	$	0.52	$	1.61	$	1.49
Diluted earnings per share			$	0.55	$	0.51	$	1.59	$	1.48
Weighted average shares outstanding:
		Basic		161,517		148,099		160,498		148,208
		Diluted		164,446		149,662		162,789		149,935

See accompanying Notes to unaudited Consolidated Financial Statements.

4

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

		Common
		Shares			Common		Paid-in			Retained
		Outstanding			Stock		Capital			Earnings
Balances at December 31, 2002			150,579		$	1,689	$	1,059,778		$	1,269,422
Net income			—			—		—			259,197
Unrealized loss on available for sale securities, net of tax and reclassification adjustment			—			—		—			—
Unrealized gain on cash flow hedges, net of tax and reclassification adjustment			—			—		—			—
	Comprehensive income
Issuance of stock and options exchanged for acquisitions			13,401			134		382,669			—
Treasury stock issued for employee benefit plans			1,980			—		(7,328	)		—
Treasury stock purchased			(4,417	)		—		—			—
Distribution of restricted stock			—			—		(950	)		—
Cash dividends declared			—			—		—			(80,658	)
Balances at September 30, 2003			161,543		$	1,823	$	1,434,169		$	1,447,961
Balances at December 31, 2001			151,221		$	1,651	$	958,764		$	1,056,678
Net income			—			—		—			221,500
Unrealized gain on available for sales securities, net of tax and reclassification adjustment						—		—			—
Unrealized loss on cash flow hedges, net of tax and reclassification adjustment			—			—		—			—
	Comprehensive income
Issuance of stock and options exchanged for acquisitions			1,052			11		25,810			—
Treasury stock issued for employee benefit plans			1,892			—		(6,895	)		—
Treasury stock purchased			(6,228	)		—		—			—
Distribution of restricted stock			—			—		(893	)		—
Decrease in unearned compensation-ESOP			—			—		5,300			—
Cash dividends declared			—			—		—			(63,748	)
Balances at September 30, 2002			147,937		$	1,662	$	982,086		$	1,214,430

[Additional columns below]

[Continued from above table, first column(s) repeated]

								Accumulated
		Unearned						Other
		Compen-			Treasury			Comprehensive
		sation			Stock			Income (Loss)			Total
Balances at December 31, 2002		$	—		($	382,350	)	$	114,946		$	2,063,485
Net income			—			—			—			259,197
Unrealized loss on available for sale securities, net of tax and reclassification adjustment			—			—			(80,290	)		(80,290	)
Unrealized gain on cash flow hedges, net of tax and reclassification adjustment			—			—			1,044			1,044
	Comprehensive income											179,951
Issuance of stock and options exchanged for acquisitions			—			—			—			382,803
Treasury stock issued for employee benefit plans			—			40,349			—			33,021
Treasury stock purchased			—			(103,662	)		—			(103,662	)
Distribution of restricted stock			—			1,590			—			640
Cash dividends declared			—			—			—			(80,658	)
Balances at September 30, 2003		$	—		($	444,073	)	$	35,700		$	2,475,580
Balances at December 31, 2001		($	1,017	)	($	267,529	)	$	40,568		$	1,789,115
Net income			—			—			—			221,500
Unrealized gain on available for sales securities, net of tax and reclassification adjustment			—			—			67,556			67,556
Unrealized loss on cash flow hedges, net of tax and reclassification adjustment			—			—			(1,478	)		(1,478	)
	Comprehensive income											287,578
Issuance of stock and options exchanged for acquisitions			—			—			—			25,821
Treasury stock issued for employee benefit plans			—			36,569			—			29,674
Treasury stock purchased			—			(151,286	)		—			(151,286	)
Distribution of restricted stock			—			1,719			—			826
Decrease in unearned compensation-ESOP			879			—			—			6,179
Cash dividends declared			—			—			—			(63,748	)
Balances at September 30, 2002		($	138	)	($	380,527	)	$	106,646		$	1,924,159

See accompanying Notes to unaudited Consolidated Financial Statements.

5

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

			Nine Months Ended
			September 30,
			2003			2002
Cash flows from operating activities:
	Net income		$	259,197		$	221,500
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan and lease losses		31,901			33,486
		Depreciation of banking premises and equipment		32,481			26,126
		Net amortization of premium and discounts		45,968			26,262
		Amortization of other intangibles		6,622			4,422
		Provision for deferred tax expense		17,100			8,539
		ESOP expense		—			6,179
		Distribution of restricted stock units		640			826
		Net (gains) realized from sales of securities		(39,778	)		(578	)
		Prepayment penalties on borrowings		30,490			—
		Net (gains) realized from sales of loans held for sale		(11,418	)		(6,330	)
		Increase in cash surrender value of bank owned life insurance		(16,952	)		(14,477	)
		Net decrease in mortgage servicing rights		268			3,489
		Proceeds from sales of loans held for sale		757,404			526,694
		Residential loans originated and purchased for sale		(690,453	)		(481,341	)
		Net decrease (increase) in other assets		65,308			(16,067	)
		Net (decrease) increase in other liabilities		(100,267	)		40,428
Net cash provided by operating activities				388,511			379,158
Cash flows from investing activities:
	Proceeds from sales of securities available for sale			2,890,179			746,317
	Proceeds from maturities and principal repayments of securities available for sale			2,674,338			1,515,446
	Purchases of securities available for sale			(5,207,824	)		(2,879,713	)
	Proceeds from maturities and principal repayments of securities held to maturity			74,783			86,492
	Net (increase) in loans and leases			(465,465	)		(520,100	)
	Net additions to premises and equipment			(13,937	)		(25,438	)
	Purchases of bank owned life insurance			—			(40,000	)
	Cash (paid) for acquisitions, net of cash acquired			48,354			(27,197	)
Net cash provided (used) by investing activities				428			(1,144,193	)
Cash flows from financing activities:
	Net increase in deposits			207,044			351,796
	Net increase in securities sold under repurchase agreements			553,357			347,841
	Proceeds from Federal Home Loan Bank borrowings			1,900			3,555
	Payments on Federal Home Loan Bank borrowings			(1,276,817	)		(316,711	)
	Net (decrease) increase in other borrowings			(1,119	)		49,591
	Issuance of senior notes, net			148,693			—
	Issuance of securities of subsidiary trusts, net			—			190,950
	Issuance of common stock			33,021			29,674
	Purchase of treasury stock			(103,662	)		(151,286	)
	Cash dividends paid to shareholders			(80,658	)		(63,748	)
Net cash (used) provided by financing activities				(518,241	)		441,662
Decrease in cash and cash equivalents				(129,302	)		(323,373	)
Cash and cash equivalents at beginning of period				717,003			871,211
Cash and cash equivalents at end of period			$	587,701		$	547,838
For the nine months ended September 30, 2003 and 2002, interest of $276,928 and $324,901 and income taxes of $111,055 and $59,833 were paid, respectively

See accompanying Notes to unaudited Consolidated Financial Statements.

6

BANKNORTH GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(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 2002 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, 2003 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 2003. 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, 2002. 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						Other						Total
	Acquisition								Identifiable		Cash		Shares		Purchase
(Dollars and shares in millions)	Date		Assets		Equity		Goodwill		Intangibles		Paid		Issued		Price
American Financial Holdings, Inc.		2/14/2003	$	2,690.3	$	408.2	$	426.8	$	9.2	$	328.5		13.4	$	711.3
Insurance agency acquisitions		2003		1.2		0.1		2.4		0.7		3.2		—		3.2
Warren Bancorp, Inc.		12/31/2002		466.1		45.3		91.8		2.7		59.8		2.7		136.6
Bancorp Connecticut, Inc.		8/31/2002		661.7		61.4		97.4		8.7		161.2		—		154.2
Ipswich Bancshares, Inc.		7/26/2002		318.0		13.9		23.1		4.8		19.9		0.9		40.1
Insurance agency acquisition		2002		2.5		—		5.6		2.2		—		0.2		7.4

7

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for American Financial Holdings, Inc. (“American”) at the date of acquisition.

Assets:
Investments		$	608,291
Loans and leases, net			1,437,279
Premises and equipment			11,764
Mortgage servicing rights			472
Goodwill			426,794
Other intangibles			9,241
Other assets			543,031
	Total assets acquired		3,036,872
Liabilities:
Deposits			1,923,154
Borrowings			399,960
Other liabilities			2,412
	Total liabilities assumed		2,325,526
	Net assets acquired	$	711,346

We expect that some adjustments of the estimated fair values assigned to the assets acquired and liabilities assumed at the acquisition date will be recorded after September 30, 2003, although such adjustments are not expected to be significant.

On February 14, 2003, the date of acquisition of American, we accrued $13.0 million of merger-related costs for severance, contract terminations, and asset write-downs with an offsetting charge to goodwill. Total merger charges related to the American acquisition recorded as an expense by us totaled $5.6 million, of which $4.8 million was recorded in 2003.

Note 3 – Stock Compensation Plans

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the underlying stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock upon exercise of the stock option. We have elected to continue using the intrinsic value method in APB Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted and the effects of our employee stock purchase plan. There were 287,700 and 229,725 stock options granted under our stock option plans during the nine months ended September 30, 2003 and 2002, respectively. Had we determined compensation cost based on the fair value at the grant date for all stock options and recorded expense related to our employee stock purchase plan under SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated as follows:

8

			Three Months Ended September 30,						Nine Months Ended September 30,
			2003			2002			2003			2002
Net income, as reported			$	90,278		$	76,862		$	259,197		$	221,500
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards				(3,833	)		(2,310	)		(12,253	)		(8,561	)
	Less tax effect			1,224			721			3,855			2,572
	Net of related tax effects			(2,609	)		(1,589	)		(8,398	)		(5,989	)
Proforma net income			$	87,669		$	75,273		$	250,799		$	215,511
Earnings per share
	Basic -	As reported	$	0.56		$	0.52		$	1.61		$	1.49
		Proforma	$	0.54		$	0.51		$	1.56		$	1.45
	Diluted -	As reported	$	0.55		$	0.51		$	1.59		$	1.48
		Proforma	$	0.53		$	0.50		$	1.54		$	1.44

On April 22, 2003, the Financial Accounting Standards Board (“FASB”) concluded that all companies should expense the fair value of employee stock options. On May 7, 2003, the FASB concluded that stock-based compensation should be accounted for using the modified grant-date measurement approach as defined in SFAS 123; as a result, compensation cost would be adjusted to reflect actual forfeitures and outcomes of performance conditions. We have used the Black Scholes model to calculate the expense of the fair value of stock options shown above. We have not determined the effect on expense using alternative valuation models. The FASB plans to issue an exposure draft later this year, which could become effective in 2004. Until a new Statement is issued, the provisions of SFAS No. 123 remain in effect.

Note 4 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill and identifiable intangible assets for the nine months ended September 30, 2003 are summarized as follows:

						Indentifiable Intangible Assets
						Core Deposit			Other			Total
						Intangibles			Identifiable			Identifiable
			Goodwill			(“CDI”)			Intangibles			Intangibles
Balance, December 31, 2002			$	660,684		$	28,438		$	6,036		$	34,474
Recorded during the year				429,223			6,443			5,381			11,824
Adjust Warren’s estimated CDI to actual				2,244			(2,244	)		—			(2,244	)
Amortization expense				—			(3,441	)		(3,181	)		(6,622	)
Massachusetts REIT adjustment (see Note 12)				2,473			—			—			—
Other adjustments of purchase accounting estimates				(290	)		—			(92	)		(92	)
Balance, September 30, 2003			$	1,094,334		$	29,196		$	8,144		$	37,340
Estimated amortization expense for the year ending:
	Remaining	2003				$	1,134		$	1,193		$	2,327
		2004					3,841			2,258			6,099
		2005					3,550			1,101			4,651
		2006					3,364			353			3,717
		2007					3,245			353			3,598
		thereafter					14,062			975			15,037

9

The components of identifiable intangible assets are as follows:

		September 30, 2003
		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount
Identifiable intangible assets:
Core deposit intangibles		$	54,781	$	25,585	$	29,196
Other identifiable intangibles			12,405		4,261		8,144
	Total	$	67,186	$	29,846	$	37,340

Note 5 – Short-term Borrowings

A summary of short-term borrowings follows:

	September 30, 2003		December 31, 2002
Securities sold under agreements to repurchase - retail	$	1,045,249	$	1,222,466
Federal funds purchased		3,000		53,000
Treasury, tax and loan notes		250		1,001
	$	1,048,499	$	1,276,467

Note 6 – Long-term Debt

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

	September 30, 2003		December 31, 2002
Federal Home Loan Bank advances	$	1,557,390	$	2,482,582
Securities sold under agreements to repurchase - wholesale		1,692,560		1,171,049
Capital trust securities		295,056		295,056
Subordinated long-term debt 7.625%, due 2011		200,000		200,000
Senior notes 3.75%, due 2008		149,739		—
Hedge-related basis adjustments on long-term debt		9,665		—
Other long-term debt		7,059		7,427
Total	$	3,911,469	$	4,156,114

Callable borrowings amounted to $1.9 billion and $1.0 billion at September 30, 2003 and December 31, 2002, respectively, the majority of which are long-term in nature.

In the first quarter of 2003, we entered into an interest rate swap agreement for $200 million to hedge the fair value of the $200 million subordinated debt (fixed rate of 7.625% due in 2011). The effect of the hedge, which is accounted for as a fair value hedge, was to synthetically convert this fixed rate debt to a variable rate set at 3-month LIBOR plus 3.47%.

On April 30, 2003, we issued $150 million of 3.75% senior notes due May 1, 2008. Interest on the notes is scheduled to be paid semi-annually on May 1 and November 1 of each year and the notes are not redeemable prior to their maturity. There are no sinking fund provisions for the notes. Also on April 30, 2003, we entered into an interest rate swap agreement for $150 million to hedge the fair value of the $150 million senior notes (fixed rate of 3.75% due in 2008). The effect of the hedge, which is accounted for as a fair value hedge, was to synthetically convert this fixed rate debt to a variable rate set at 3-month LIBOR plus 0.41%.

On July 23, 2003, Banknorth entered into interest rate swap agreements for $216.5 million to hedge the fair value of $216.5 million of FHLB advances. The effect of the hedges, which are accounted for as fair value hedges, was to synthetically convert this fixed rate debt to a variable rate set at an average of 1-month

10

LIBOR plus 3.82%. These FHLB advances had a weighted average cost of 5.47% and an average term of 2 years.

Note 7 – Share Repurchases

During the nine months ended September 30, 2003, we repurchased 4.4 million shares of our outstanding common stock at an average price of $23.47. At September 30, 2003, there were a total of 2.9 million shares remaining under existing repurchase authorizations. There were no repurchases during the quarter ended September 30, 2003.

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, 2003									September 30, 2002
	Pre-tax			Tax			Net of			Pre-tax			Tax			Net of
	Amount			Effect			Tax			Amount			Effect			Tax
Unrealized gain (loss) on securities available for sale	($	90,449	)	$	31,656		($	58,793	)	$	48,588		($	17,006	)	$	31,582
Unrealized gain (loss) on cash flow hedges		1,819			(636	)		1,183			(6,492	)		2,272			(4,220	)
Reclassification adjustment for gains (losses) realized in net income		(5,562	)		1,947			(3,615	)		5,202			(1,821	)		3,381
Net change in unrealized gains (losses)	($	94,192	)	$	32,967		($	61,225	)	$	47,298		($	16,555	)	$	30,743

	Nine Months Ended								Nine Months Ended
	September 30, 2003								September 30, 2002
	Pre-tax			Tax		Net of			Pre-tax			Tax			Net of
	Amount			Effect		Tax			Amount			Effect			Tax
Unrealized gain (loss) on securities available for sale	($	83,495	)	$	29,061	($	54,434	)	$	104,511		($	36,579	)	$	67,932
Unrealized gain (loss) on cash flow hedges		(6,018	)		2,106		(3,912	)		(8,177	)		2,862			(5,315	)
Reclassification adjustment for gains (losses) realized in net income		(32,153	)		11,253		(20,900	)		5,325			(1,864	)		3,461
Net change in unrealized gains (losses)	($	121,666	)	$	42,420	($	79,246	)	$	101,659		($	35,581	)	$	66,078

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,
	2003			2002			2003			2002
Covered call premiums	$	7,152		$	1,128		$	21,390		$	5,107
Loan fee income		7,376			5,206			19,456			15,728
Mortgage banking services income (expense)		3,087			(455	)		9,328			1,710
Venture capital write-downs		(374	)		(469	)		(989	)		(2,171	)
Miscellaneous income		2,906			1,625			5,483			2,735
Total	$	20,147		$	7,035		$	54,668		$	23,109

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Note 10 – Earnings Per Share

The computations of basic and diluted earnings per share and weighted average shares outstanding are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2003		2002		2003		2002
Net income	$	90,278	$	76,862	$	259,197	$	221,500
Weighted average basic common shares outstanding		161,517		148,099		160,498		148,208
Effect of dilutive stock options		2,929		1,563		2,291		1,727
Weighted average diluted common shares outstanding		164,446		149,662		162,789		149,935
Basic earnings per share	$	0.56	$	0.52	$	1.61	$	1.49
Diluted earnings per share	$	0.55	$	0.51	$	1.59	$	1.48

Note 11 - New Accounting Standards

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement applies generally to freestanding financial instruments that embody obligations of the issuing entity to redeem the instrument or to settle the obligation by repurchasing its equity shares through the transfer of assets or through issuance of its own shares. Such freestanding instruments must be classified as liabilities or, in some cases, assets. SFAS No. 150 requires that financial instruments containing obligations to repurchase the issuing entity’s equity shares and, under certain circumstances, obligations that are settled by delivery of the issuer’s shares, be classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003 and for contracts in existence at the start of the first interim period beginning after June 15, 2003. The adoption of this standard on July 1, 2003 did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” resulting in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. Implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. The adoption of this standard on July 1, 2003 did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”). FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. FIN 46 is effective immediately for VIEs created after January 31, 2003; this has had no significant impact on our financial condition, results of operations, earnings per share or cash flows. For VIEs created prior to January 31, 2003, we must apply the provisions of FIN 46 by December 31, 2003. At present, we believe that this will not have a significant impact on our financial condition, results of operations, earnings per share or cash flows. However, due to the complexity of the new guidance and the evolving interpretations among accounting professionals, we continue to assess the disclosure requirements of FIN 46 on all of our

12

relationships with variable interest entities. We, as well as other bank holding companies, are currently evaluating whether trusts established prior to the adoption of FIN 46 to issue preferred securities which are included in Tier 1 capital for regulatory purposes may continue to be treated as consolidated subsidiaries under FIN 46 after October 1, 2003. For information regarding an ongoing evaluation of the effects of FIN 46 on the treatment of capital securities issued by consolidated subsidiary trusts for regulatory purposes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital.”

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This Interpretation requires the recording at fair value of the issuance of guarantees which would include the issuance of standby letters of credit. Banknorth adopted the provisions of FASB Interpretation No. 45 beginning January 1, 2003. At September 30, 2003, the approximate fair value of standby letters of credit was $912 thousand, of which $448 thousand was unamortized and included in other liabilities on the balance sheet. Adoption of the Interpretation did not materially affect our financial condition, results of operations, earnings per share or cash flows.

Note 12 – State Tax Assessment

During the second quarter of 2003, we entered into a settlement with the Massachusetts Department of Revenue (“DOR”) concerning the dividends received deduction relating to certain banks that we had acquired prior to 2003. Legislation was enacted on March 5, 2003, which disallowed the dividends-received deduction for dividends received from a Real Estate Investment Trust (“REIT”) retroactive to 1999.

The aggregate assessment of $5.9 million (net of Federal income tax benefit) was recorded in the first quarter of 2003 as an increase to goodwill related to the acquired banks. During the second quarter of 2003, we entered into (and paid) a settlement of $2.5 million, net of Federal income tax benefit, to the DOR, which was part of a global settlement negotiated by approximately 50 similarly-situated financial institutions doing business in Massachusetts with the DOR. Goodwill was reduced to reflect the final settlement.

Note 13 – Pending Acquisition

On September 3, 2003, we entered into a definitive agreement to acquire First & Ocean BanCorp for $51 million in cash. First & Ocean is located in Newburyport, Massachusetts and had $274 million in assets at June 30, 2003. The acquisition is expected to be completed in the fourth quarter of 2003.

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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)

OVERVIEW

Our financial statements for the three and nine months ended September 30, 2003 reflect the acquisition of American Financial Holdings, Inc. (“American”) from the date of acquisition on February 14, 2003. American had total assets of $2.7 billion at the date of acquisition. We also had two insurance agency acquisitions in the third quarter of 2003 with annual premium revenues of approximately $1.6 million. In addition, the financial statements reflect the acquisitions of Community Insurance Agencies, Inc. (“Community”), which closed on July 2, 2002, Ipswich Bancshares, Inc. (“Ipswich”), which closed on July 26, 2002, Bancorp Connecticut, Inc. (“Bancorp”), which closed on August 31, 2002, and Warren Bancorp (“Warren”), which closed on December 31, 2002. These 2002 acquisitions increased total assets (including intangible assets) by $1.7 billion. All of these mergers were accounted for under the purchase method of accounting and, as a result, the assets and liabilities of these companies and their results of operations have been included in our financial statements since the date of acquisition.

In April 2003, we completed a deleveraging program which benefited our net interest margin, mitigated interest rate risk and reduced the level of assets subject to prepayment risk. Under this deleveraging program, we sold $901 million of investment securities (which had a weighted average yield of 5.05%) and used the proceeds to prepay $853 million of borrowings (which had a weighted average rate of 4.49%). The gain on sale of these securities totaled $29.2 million, while the prepayment charges on the borrowings which were prepaid totaled $28.5 million. The reduction in assets freed up approximately $54 million of Tier 1 capital, which was used to repurchase shares of our common stock in the open market. These stock repurchases had the effect of making the reduction in net interest income resulting from the deleveraging program neutral in terms of our earnings per share.

SUMMARY

Consolidated net income was $90.3 million, or $0.55 per diluted share, for the third quarter of 2003 as compared with $76.9 million, or $0.51 per diluted share, for the third quarter of 2002, a per share increase of 8%. Our growth in net income for the quarter ended September 30, 2003 over the same quarter last year was due in part to acquisitions completed in 2003 and 2002. Results were diminished by the effect of merger and consolidation costs of $808 thousand for the three months ended September 30, 2003 and $2.2 million for the three months ended September 30, 2002.

Annualized return on average equity (“ROE”) and return on average assets (“ROA”) were 14.85% and 1.39%, respectively, for the quarter ended September 30, 2003 and were 16.25% and 1.40%, respectively, for the comparable quarter last year. The decline in ROE related primarily to the intangible equity created in the acquisition of American in February 2003.

Results for the third quarter of 2003 improved over the third quarter of 2002 due primarily to strong fee income and expense control. Net interest income increased by $8.8 million (or 4%) over the third quarter of last year as increased volume more than offset a 40 basis point decline in net interest margin. Noninterest income was $88.7 million and $65.5 million for the quarters ended September 30, 2003 and 2002, respectively, a 35% increase. The increase in noninterest income was mostly attributable to increases in deposit services income, net securities gains and other noninterest income. Noninterest expenses totaled $151.6 million and $141.6 million for the quarters ended September 30, 2003 and 2002, respectively, an increase of 7%. Acquisitions in 2003 and 2002 were factors in the increased noninterest income and noninterest expense. The efficiency ratio was 50.81% in the third quarter of 2003 compared to 53.12% in the comparable period last year. For a description of the methodology we use to calculate the efficiency ratio, see Note 3 to Table 1.

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For the nine months ended September 30, 2003, consolidated net income was $259.2 million, or $1.59 per diluted share, as compared with $221.5 million, or $1.48 per diluted share, for the same period in the prior year, a per share increase of 7%. Results in each period were diminished by the effect of merger and consolidation costs, which totaled $6.8 million for the nine months ended September 30, 2003 and $11.4 million for the nine months ended September 30, 2002. (See Table 6 for merger and consolidation costs detail for the nine months ended September 30, 2003 and 2002).

ROE and ROA were 14.45% and 1.36%, respectively, for the nine months ended September 30, 2003, and 16.46% and 1.41% for the nine months ended September 30, 2002. The decline in ROE related primarily to the intangible equity created in the acquisition of American in February 2003.

Net interest income for the nine months ended September 30, 2003 increased by $30.6 million or 5% from the same period last year. The increase was primarily attributable to increases in the volume of interest-earning assets, primarily due to acquisitions, which more than offset the effects of decreases in interest rates. The provision for loan and lease losses for the nine months ended September 30, 2003 decreased $1.6 million over the same period last year, primarily due to lower levels of net charge-offs and a higher coverage ratio of the allowance to non-performing loans and leases (see Table 4). Noninterest income was $282.7 million and $190.1 million for the nine months ended September 30, 2003 and 2002, respectively, a 49% increase. The increase in noninterest income for the nine months ended September 30, 2003 was primarily attributable to $39.8 million of gains from the sale of securities, of which $29.2 million related to our deleveraging program in the second quarter, an increase of $16.3 million in income from covered call premiums, an increase of $11.7 million in deposit services income related to both new accounts (including those of acquired banks) and increased transactions and an increase of $7.6 million in mortgage banking services income. Noninterest expenses totaled $485.6 million and $421.3 million for the nine months ended September 30, 2003 and 2002, respectively, an increase of 15%. The increase in noninterest expense was primarily due to $28.5 million of prepayment penalties on borrowings related to our deleveraging program in the second quarter and compensation and employee benefits and occupancy expenses related to acquisitions, which were mitigated by lower merger and consolidations costs and incentive expense.

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

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TABLE 1 - Selected Quarterly Data

				2003
				Third			Second			First
Net interest income		(A	)	$	209,832		$	211,574		$	206,137
Provision for loan and lease losses					10,500			10,500			10,901
Net interest income after loan and lease loss provision					199,332			201,074			195,236
Noninterest income		(B	)		88,656			115,828			78,238
Noninterest expenses		(C	)		151,647			184,039			149,908
Income before income taxes					136,341			132,863			123,566
Income tax expense					46,063			45,338			42,173
Net income				$	90,278		$	87,525		$	81,393
Weighted average shares outstanding:
	Basic				161,517			162,312			157,667
	Diluted				164,446			164,559			159,328
Basic earnings per share:				$	0.56		$	0.54		$	0.52
Diluted earnings per share:				$	0.55		$	0.53		$	0.51
Return on average assets (1)					1.39	%		1.38	%		1.32	%
Return on average equity (1)					14.85	%		14.24	%		14.26	%
Net interest margin (fully-taxable equivalent) (1)					3.63	%		3.71	%		3.66	%
Noninterest income as a percent of total income (2)					29.70	%		35.38	%		27.51	%
Efficiency ratio (3)					50.81	%		56.21	%		52.71	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

		2002
		Fourth			Third			Second			First
Net interest income		$	199,563		$	200,996		$	199,473		$	196,486
Provision for loan and lease losses			10,829			10,829			10,829			11,828
Net interest income after loan and lease loss provision			188,734			190,167			188,644			184,658
Noninterest income			84,441			65,504			62,986			61,576
Noninterest expenses			158,126			141,577			136,791			142,897
Income before income taxes			115,049			114,094			114,839			103,337
Income tax expense			37,911			37,232			38,680			34,859
Net income		$	77,138		$	76,862		$	76,159		$	68,478
Weighted average shares outstanding:
	Basic		148,226			148,099			147,233			149,347
	Diluted		149,389			149,662			149,064			151,116
Basic earnings per share:		$	0.52		$	0.52		$	0.52		$	0.46
Diluted earnings per share:		$	0.52		$	0.51		$	0.51		$	0.45
Return on average assets (1)			1.35	%		1.40	%		1.46	%		1.36	%
Return on average equity (1)			15.75	%		16.25	%		17.45	%		15.73	%
Net interest margin (fully-taxable equivalent) (1)			3.86	%		4.03	%		4.18	%		4.23	%
Noninterest income as a percent of total income (2)			29.73	%		24.58	%		24.00	%		23.86	%
Efficiency ratio (3)			55.68	%		53.12	%		52.12	%		55.37	%

(1)	Annualized.
(2)	Represents noninterest income as a percentage of net interest income and noninterest income. Noninterest income as a percent of total income is calculated as (B) divided by (A+B).
(3)	Represents noninterest expenses as a percentage of net interest income and noninterest income. Efficiency ratio is calculated as (C) divided by (A+B).

RESULTS OF OPERATIONS

Net Interest Income

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

Fully-taxable equivalent net interest income for the third quarter of 2003 increased $9.2 million, or 5%, compared to the third quarter of 2002. This increase was primarily attributable to increases in the volume of interest-earning assets and interest-bearing liabilities. Average earning assets increased $3.2 billion, or 16%, for the three months ended September 30, 2003 compared to the same period in the prior year, primarily as a result of acquisitions. Average loans and leases increased by $2.5 billion, or 19%, compared to the third quarter of 2002 due primarily to acquisitions and, to a lesser extent, internal loan growth. Average loans as a percent of average earning assets was 69% and 67% for the quarters ended September 30, 2003 and 2002, respectively. Net interest margin, which represents fully-taxable equivalent net interest income as a percentage of average interest-earning assets, decreased from 4.03% to 3.63% during the three months ended September 30, 2002 and 2003, respectively, a decline of 10% (or 40 basis points). The primary reasons for this margin compression were the effects of acquisitions (18 basis points, including cash paid and lower margins at acquired banks), a heavier weighting of U. S. agency securities in our investment portfolio versus mortgage-backed securities (11 basis points) and the impact of prepayments and repricing on loans, securities, deposits and borrowings in a declining rate environment (11 basis points). The change in the investment portfolio from mortgage-backed securities to U.S. agency securities was to reduce the exposure to the loan prepayments inherent in mortgage-related assets. Interest rate spread, which represents the difference between the yield earned on our interest-earning assets and the rate paid on our interest-bearing liabilities, decreased from 3.64% to 3.39% on a fully-taxable equivalent basis during the three months ended September 30, 2002 and 2003, respectively, primarily due to a 123 basis point decrease in interest rates earned on interest-earning assets compared to a 98 basis point decrease in rates paid on interest-bearing liabilities.

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Our net interest margin benefited from interest rate swap agreements that synthetically converted fixed rate debt to variable rate debt. From March 2003 to July 2003 we entered into $566.5 million of notional amount swap agreements on fixed rate debt, where we are paying variable (based on LIBOR plus a margin) and receiving a fixed rate. The combined effect of these interest rate swaps was to lower interest expense by $2.5 million in the third quarter of 2003. See “Other Funding Sources” for more detailed discussion.

Our fully-taxable equivalent net interest income for the nine months ended September 30, 2003 increased $31.1 million compared to the nine months ended September 30, 2002. The net interest margin decreased from 4.14% for the nine months ended September 30, 2002 to 3.67% for the nine months ended September 30, 2003, and the fully-taxable equivalent interest rate spread decreased from 3.75% to 3.40% during the same period, respectively, primarily due to a 116 basis point decrease in interest rates earned on interest-earning assets compared to an 81 basis point decrease in rates paid on interest-bearing liabilities. Average net earning assets increased $440.2 million from the nine months ended September 30, 2002 compared to the nine months ended September 30, 2003, primarily as a result of acquisitions. The margin compression was mitigated somewhat by the positive impact of the deleveraging program completed in the second quarter of 2003. Table 2 shows average balances, net interest income by category and rates for each of the quarters in 2003 and 2002 and for the nine months ended September 30, 2003 and 2002. Table 3 shows the changes in fully-taxable equivalent net interest income by category due to changes in rate and volume. See also “Asset-Liability Management” below.

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

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TABLE 2 - Average Balances, Yields and Rates

					2003 Third Quarter								2003 Second Quarter
										Yield/								Yield/
					Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)
Loans and leases (2):
	Residential real estate mortgages				$	2,852,568	$	38,740			5.43	%	$	2,996,485	$	43,147			5.76	%
	Commercial real estate mortgages					5,263,002		77,962			5.88			5,074,540		78,342			6.19
	Commercial business loans and leases					3,216,254		40,837			5.04			3,154,085		41,105			5.23
	Consumer loans and leases					4,577,421		62,684			5.43			4,463,057		64,145			5.76
				Total loans and leases		15,909,245		220,223			5.50			15,688,167		226,739			5.79
Investment securities (3)						7,270,800		72,037			3.96			7,280,880		77,177			4.24
Federal funds sold and other short-term investments						16,113		55			1.36			18,077		54			1.20
		Total earning assets				23,196,158		292,315			5.02			22,987,124		303,970			5.30
Bank owned life insurance						478,572								472,853
Noninterest-earning assets						2,139,519								2,040,703
		Total assets			$	25,814,249							$	25,500,680
Interest-bearing deposits:
	Regular savings				$	2,474,169	$	2,502			0.40		$	2,468,244		3,089			0.50
	NOW and money market accounts					6,815,603		13,727			0.80			6,582,004		15,908			0.97
	Certificates of deposit					5,053,277		28,935			2.27			5,243,908		31,737			2.43
	Brokered deposits					—		—			—			—		—			0.00
			Total interest-bearing deposits			14,343,049		45,164			1.25			14,294,156		50,734			1.42
Borrowed funds						5,407,580		35,754			2.63			5,459,725		40,170			2.95
			Total interest-bearing liabilities			19,750,629		80,918			1.63			19,753,881		90,904			1.85
Non-interest bearing deposits						3,388,018								3,099,420
Other liabilities						263,171								181,765
Shareholders’ equity						2,412,431								2,465,614
		Total liabilities and shareholders’ equity			$	25,814,249							$	25,500,680
Net earning assets					$	3,445,529							$	3,233,243
Net interest income (fully-taxable equivalent)							$	211,397								213,066
Less: fully-taxable equivalent adjustments								(1,565	)							(1,492	)
		Net interest income					$	209,832							$	211,574
Net interest rate spread (fully-taxable equivalent)											3.39	%							3.45	%
Net interest margin (fully-taxable equivalent)											3.63	%							3.71	%

(1)	Annualized.
(2)	Loans and leases include loans held for sale.
(3)	Includes securities available for sale and held to maturity

18

TABLE 2 – Average Balances, Yields and Rates

					2003 First Quarter								2002 Fourth Quarter
										Yield/								Yield/
					Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)
Loans and leases (2):
	Residential real estate mortgages				$	2,792,615	$	41,652			5.97	%	$	2,641,957	$	42,420			6.42	%
	Commercial real estate mortgages					4,913,188		77,810			6.42			4,504,625		76,131			6.71
	Commercial business loans and leases					3,006,370		39,475			5.32			2,844,994		39,940			5.57
	Consumer loans and leases					4,186,917		62,178			6.02			3,830,542		62,237			6.45
				Total loans and leases		14,899,090		221,115			6.00			13,822,118		220,728			6.35
Investment securities (3)						7,879,925		89,449			4.54			6,896,813		86,959			5.04
Federal funds sold and other short-term investments						4,535		25			2.21			22,576		88			1.54
		Total earning assets				22,783,550		310,589			5.50			20,741,507		307,775			5.91
Bank owned life insurance						425,136								376,857
Noninterest-earning assets						1,858,791								1,527,324
		Total assets			$	25,067,477							$	22,645,688
Interest-bearing deposits:
	Regular savings				$	2,173,771		3,075			0.57		$	1,835,068		3,213			0.69
	NOW and money market accounts					6,217,880		15,707			1.02			5,889,603		18,944			1.28
	Certificates of deposit					5,012,351		32,609			2.64			4,624,776		33,753			2.90
	Brokered deposits					—		—			0.00			22,431		96			1.70
			Total interest-bearing deposits			13,404,002		51,391			1.55			12,371,878		56,006			1.80
Borrowed funds						6,272,657		51,799			3.34			5,296,244		51,000			3.83
			Total interest-bearing liabilities			19,676,659		103,190			2.13			17,668,122		107,006			2.41
Non-interest bearing deposits						2,905,737								2,837,369
Other liabilities						170,732								196,567
Shareholders’ equity						2,314,349								1,943,630
		Total liabilities and shareholders’ equity			$	25,067,477							$	22,645,688
Net earning assets					$	3,106,891							$	3,073,385
Net interest income (fully-taxable equivalent)								207,399								200,769
Less: fully-taxable equivalent adjustments								(1,262	)							(1,206	)
		Net interest income					$	206,137							$	199,563
Net interest rate spread (fully-taxable equivalent)											3.37	%							3.50	%
Net interest margin (fully-taxable equivalent)											3.66	%							3.86	%

(1)	Annualized.
(2)	Loans and leases include loans held for sale.
(3)	Includes securities available for sale and held to maturity

19

TABLE 2 - Average Balances, Yields and Rates

					2002 Third Quarter								2002 Second Quarter
										Yield/								Yield/
					Average Balance		Interest			Rate (1)			Average Balance		Interest			Rate (1)
Loans and leases (2):
	Residential real estate mortgages				$	2,657,333	$	44,205			6.65	%	$	2,569,964	$	43,946			6.84	%
	Commercial real estate mortgages					4,347,508		75,210			6.86			4,216,766		74,347			7.07
	Commercial business loans and leases					2,754,430		40,327			5.81			2,595,548		39,333			6.08
	Consumer loans and leases					3,662,187		62,624			6.78			3,530,040		62,158			7.06
				Total loans and leases		13,421,458		222,366			6.58			12,912,318		219,784			6.82
Investment securities (3)						6,487,448		91,518			5.64			6,276,523		90,804			5.79
Federal funds sold and other short-term investments						118,281		510			1.71			25,856		52			0.81
		Total earning assets				20,027,187		314,394			6.25			19,214,697		310,640			6.48
Bank owned life insurance						371,552								366,488
Noninterest-earning assets						1,399,012								1,309,697
		Total assets			$	21,797,751							$	20,890,882
Interest-bearing deposits:
	Regular savings				$	1,773,402		4,207			0.94		$	1,716,942		4,061			0.95
	NOW and money market accounts					5,608,231		21,649			1.53			5,246,053		19,897			1.52
	Certificates of deposit					4,736,817		36,307			3.04			4,652,499		37,273			3.21
	Brokered deposits					37,000		173			1.85			50,741		235			1.86
			Total interest-bearing deposits			12,155,450		62,336			2.03			11,666,235		61,466			2.11
Borrowed funds						4,885,461		49,825			4.05			4,784,197		48,448			4.06
			Total interest-bearing liabilities			17,040,911		112,161			2.61			16,450,432		109,914			2.68
Non-interest bearing deposits						2,684,263								2,520,968
Other liabilities						196,573								168,403
Shareholders’ equity						1,876,004								1,751,079
		Total liabilities and shareholders’ equity			$	21,797,751							$	20,890,882
Net earning assets					$	2,986,276							$	2,764,265
Net interest income (fully-taxable equivalent)								202,233								200,726
Less: fully-taxable equivalent adjustments								(1,237	)							(1,253	)
		Net interest income					$	200,996							$	199,473
Net interest rate spread (fully-taxable equivalent)											3.64	%							3.80	%
Net interest margin (fully-taxable equivalent)											4.03	%							4.18	%

(1)	Annualized.
(2)	Loans and leases include loans held for sale.
(3)	Includes securities available for sale and held to maturity

20

TABLE 2 - Average Balances, Yields and Rates

					2002 First Quarter
										Yield/
					Average Balance		Interest			Rate (1)
Loans and leases (2):
	Residential real estate mortgages				$	2,675,415	$	47,265			7.07	%
	Commercial real estate mortgages					4,101,873		72,724			7.19
	Commercial business loans and leases					2,464,378		38,661			6.36
	Consumer loans and leases					3,539,213		63,952			7.33
				Total loans and leases		12,780,879		222,602			7.04
Investment securities (3)						5,943,057		84,296			5.68
Federal funds sold and other short-term investments						72,107		415			2.33
		Total earning assets				18,796,043		307,313			6.59
Bank owned life insurance						324,376
Noninterest-earning assets						1,347,407
		Total assets			$	20,467,826
Interest-bearing deposits:
	Regular savings				$	1,646,822		3,964			0.98
	NOW and money market accounts					5,099,310		18,895			1.50
	Certificates of deposit					4,762,399		41,694			3.55
	Brokered deposits					63,594		288			1.84
			Total interest-bearing deposits			11,572,125		64,841			2.27
Borrowed funds						4,511,945		44,679			4.01
			Total interest-bearing liabilities			16,084,070		109,520			2.76
Non-interest bearing deposits						2,446,539
Other liabilities						171,449
Shareholders’ equity						1,765,768
		Total liabilities and shareholders’ equity			$	20,467,826
Net earning assets					$	2,711,973
Net interest income (fully-taxable equivalent)								197,793
Less: fully-taxable equivalent adjustments								(1,307	)
		Net interest income					$	196,486
Net interest rate spread (fully-taxable equivalent)											3.83	%
Net interest margin (fully-taxable equivalent)											4.23	%

(1)	Annualized.
(2)	Loans and leases include loans held for sale.
(3)	Includes securities available for sale and held to maturity

21

TABLE 2 - Average Balances, Yields and Rates

					Nine Months Ended								Nine Months Ended
					September 30, 2003								September 30, 2002
										Yield/									Yield/
					Average Balance		Interest			Rate (1)			Average Balance		Interest				Rate (1)
Loans and leases (2):
	Residential real estate mortgages				$	2,880,776	$	123,538			5.72	%	$	2,634,050	$	135,417				6.85	%
	Commercial real estate mortgages					5,084,858		234,115			6.16			4,222,861		222,281				7.04
	Commercial business loans and leases					3,126,338		121,416			5.19			2,605,746		118,320				6.07
	Consumer loans and leases					4,410,562		189,007			5.73			3,577,483		188,734				7.05
				Total loans and leases		15,502,534		668,076			5.76			13,040,140		664,752				6.81
Investment securities (3)						7,474,971		238,664			4.26			6,237,668		266,617				5.70
Federal funds sold and other short-term investments						12,922		134			1.39			72,133		977				1.81
		Total earning assets				22,990,427		906,874			5.27			19,349,941		932,346				6.43
																		��
Bank owned life insurance						459,049								354,311
Noninterest earning assets						2,016,447								1,356,848
		Total assets			$	25,465,923								21,061,100
Interest-bearing deposits:
	Regular savings				$	2,373,161		8,667			0.49		$	1,712,748		12,232				0.95
	NOW and money market accounts					6,540,686		45,342			0.93			5,319,602		60,441				1.52
	Certificates of deposit					5,103,328		93,281			2.44			4,716,914		115,274				3.27
	Brokered deposits					—		—			0.00			50,348		696				1.85
			Total interest-bearing deposits			14,017,175		147,290			1.40			11,799,612		188,643				2.14
Borrowed funds						5,710,875		127,722			2.99			4,728,125		142,951				4.04
			Total interest-bearing liabilities			19,728,050		275,012			1.87			16,527,737		331,594				2.68
Non-interest bearing deposits						3,132,825								2,551,397
Other liabilities						206,378								182,536
Shareholders’ equity						2,398,670								1,799,430
		Total liabilities and shareholders’ equity			$	25,465,923							$	21,061,100
Net earning assets					$	3,262,377							$	2,822,204
Net interest income (fully-taxable equivalent)								631,862								600,752
Less: fully-taxable equivalent adjustments								(4,319	)							(3,797	)
		Net interest income					$	627,543							$	596,955
Net interest rate spread (fully-taxable equivalent)											3.40	%								3.75	%
Net interest margin (fully-taxable equivalent)											3.67	%								4.14	%

(1)	Annualized.
(2)	Loans and leases include loans held for sale.
(3)	Includes securities available for sale and held to maturity

22

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
		September 30, 2003 vs. September 30, 2002
		Increase (decrease) due to
								Rate and			Total
		Volume (1)			Rate			Volume (2)			Change
Interest income:
Loans and leases		$	41,260		($	36,536	)	($	6,867	)	($	2,143	)
Investment securities			11,136			(27,471	)		(3,146	)		(19,481	)
Federal funds sold and other short-term investements			(440	)		(104	)		89			(455	)
Total interest income			51,956			(64,111	)		(9,924	)		(22,079	)
Interest expense:
Interest-bearing deposits:
	Regular savings		1,660			(2,414	)		(951	)		(1,705	)
	NOW and money market accounts		4,656			(10,319	)		(2,259	)		(7,922	)
	Certificates of deposit		2,425			(9,193	)		(604	)		(7,372	)
	Brokered deposits		(173	)		(173	)		173			(173	)
Total interest-bearing deposits			8,568			(22,099	)		(3,641	)		(17,172	)
Borrowed funds			5,330			(17,486	)		(1,915	)		(14,071	)
Total interest expense			13,898			(39,585	)		(5,556	)		(31,243	)
Net interest income (fully taxable equivalent)		$	38,058		($	24,526	)	($	4,368	)	$	9,164

[Additional columns below]

[Continued from above table, first column(s) repeated]

		Nine Months Ended
		September 30, 2003 vs. September 30, 2002
		Increase (decrease) due to
								Rate and			Total
		Volume (1)			Rate			Volume (2)			Change
Interest income:
Loans and leases		$	125,422		($	102,410	)	($	19,688	)	$	3,324
Investment securities			52,750			(67,182	)		(13,521	)		(27,953	)
Federal funds sold and other short-term investements			(802	)		(227	)		186			(843	)
Total interest income			177,370			(169,819	)		(33,023	)		(25,472	)
Interest expense:
Interest-bearing deposits:
	Regular savings		4,693			(5,893	)		(2,365	)		(3,565	)
	NOW and money market accounts		13,882			(23,475	)		(5,506	)		(15,099	)
	Certificates of deposit		9,451			(29,282	)		(2,162	)		(21,993	)
	Brokered deposits		(697	)		(697	)		698			(696	)
Total interest-bearing deposits			27,329			(59,347	)		(9,335	)		(41,353	)
Borrowed funds			29,696			(37,132	)		(7,793	)		(15,229	)
Total interest expense			57,025			(96,479	)		(17,128	)		(56,582	)
Net interest income (fully taxable equivalent)		$	120,345		($	73,340	)	($	15,895	)	$	31,110

(1)	Volume increases include the effects of acquisitions, including the acquisition of Ipswich on July 26, 2002, Bancorp on August 31, 2002, Warren on December 31, 2002 and American on February 14, 2003.
(2)	Includes changes in interest income and expense not due solely to volume or rate changes.

Provision and Allowance for Loan and Lease Losses

We provided $10.5 million and $10.8 million for loan and lease losses in the quarters ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, we provided $31.9 million and $33.5 million for loan and lease losses, respectively. The lower provisions were due to lower levels of net-charge-offs, a higher coverage ratio of the allowance to non-performing loans and leases and lower delinquency ratios. As shown in Table 12, nonperforming assets amounted to $70.4 million at September 30, 2003 compared to $68.8 million at September 30, 2002. At September 30, 2003, the allowance for loan and lease losses amounted to $229.6 million, or 1.44% of total portfolio loans and leases, as compared to $208.3 million, or 1.48%, at December 31, 2002. The 4 basis point decrease in this ratio was primarily attributable to allowance for loan and lease losses established by acquired banks. The ratio of the allowance for loan and lease losses to nonperforming loans was 344% at September 30, 2003, as compared to 319% at December 31, 2002 and 311% at September 30, 2002.

23

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. We believe that the methods used by us in determining the allowance for loan and lease losses constitute a critical accounting policy. Although we utilize judgment in providing for losses, for the reasons discussed under “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.

TABLE 4 - Allowance for Loan and Lease Losses

			2003 Third			2003 Second			2003 First			2002 Fourth
			Quarter			Quarter			Quarter			Quarter
Allowance at beginning of period			$	227,240		$	226,677		$	208,273		$	201,689
Additions due to acquisitions				—			—			16,346			4,972
Charge-offs:
Residential real estate mortgages				63			53			55			(263	)
Commercial real estate mortgages				27			202			262			459
Commercial business loans and leases				3,011			5,754			3,205			5,060
Consumer loans and leases				8,782			6,959			7,609			7,597
	Total loans and leases charged off			11,883			12,968			11,131			12,853
Recoveries:
Residential real estate mortgages				5			22			22			12
Commercial real estate mortgages				296			676			534			70
Commercial business loans and leases				2,493			1,286			689			2,628
Consumer loans and leases				930			1,047			1,043			927
	Total loans and leases recovered			3,724			3,031			2,288			3,637
Net charge-offs				8,159			9,937			8,843			9,216
Provision for loan and lease losses				10,500			10,500			10,901			10,828
Allowance at end of period			$	229,581		$	227,240		$	226,677		$	208,273
Average loans and leases outstanding during the period (1)			$	15,841,521		$	15,634,071		$	14,829,108		$	13,750,316
Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (1)				0.20	%		0.25	%		0.24	%		0.27	%
Ratio of allowance to total loans and leases at end of period (1)				1.44	%		1.44	%		1.46	%		1.48	%
Ratio of allowance to nonperforming loans and leases at end of period				344	%		374	%		288	%		319	%
Ratio of net charge-offs (recoveries) as a percent of average outstanding loans and leases, annualized (1):
Residential real estate mortgages				0.008	%		0.004	%		0.005	%		(0.042	%)
		Commercial real estate mortgages		(0.020	%)		(0.037	%)		(0.022	%)		0.034	%
		Commercial business loans and leases		0.064	%		0.568	%		0.339	%		0.339	%
		Consumer loans and leases		0.681	%		0.531	%		0.636	%		0.691	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

			2002 Third			2002 Second			2002 First
			Quarter			Quarter			Quarter
Allowance at beginning of period			$	193,444		$	190,890		$	189,837
Additions due to acquisitions				7,822			—			—
Charge-offs:
Residential real estate mortgages				56			201			(134	)
Commercial real estate mortgages				(76	)		273			635
Commercial business loans and leases				8,703			5,319			5,374
Consumer loans and leases				5,922			5,834			7,042
	Total loans and leases charged off			14,605			11,627			12,917
Recoveries:
Residential real estate mortgages				65			21			23
Commercial real estate mortgages				(7	)		27			27
Commercial business loans and leases				3,108			2,136			1,101
Consumer loans and leases				1,033			1,168			991
	Total loans and leases recovered			4,199			3,352			2,142
Net charge-offs				10,406			8,275			10,775
Provision for loan and lease losses				10,829			10,829			11,828
Allowance at end of period			$	201,689		$	193,444		$	190,890
Average loans and leases outstanding during the period (1)			$	13,375,980		$	12,871,386		$	12,723,083
Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (1)				0.31	%		0.26	%		0.34	%
Ratio of allowance to total loans and leases at end of period (1)				1.47	%		1.48	%		1.50	%
Ratio of allowance to nonperforming loans and leases at end of period				311	%		289	%		268	%
Ratio of net charge-offs (recoveries) as a percent of average outstanding loans and leases, annualized (1):
Residential real estate mortgages				(0.001	%)		(0.029	%)		(0.024	%)
		Commercial real estate mortgage		(0.006	%)		0.023	%		0.060	%
		Commercial business loans and leases		0.806	%		0.492	%		0.703	%
		Consumer loans and leases		0.530	%		0.530	%		0..693	%

(1) Excludes residential real estate loan held for sale.

Noninterest Income

Noninterest income for the third quarter ended September 30, 2003 totaled $88.7 million, an increase of $23.2 million, or 35%, from the third quarter of 2002. The increase was primarily due to increases in deposit services income, net securities gains and other noninterest income (primarily covered call premium income and mortgage banking services income). Noninterest income, including net securities gains, as a percent of total income was 30% and 25% for the quarters ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, noninterest income amounted to $282.7 million and $190.1 million, respectively, an increase of 49%. Included in this increase was $29.2 million of gains from the sale of securities related to the deleveraging program in the second quarter of 2003.

Deposit services income amounted to $25.2 million for the third quarter of 2003 compared to $20.8 million for the same period in 2002, an increase of $4.4 million, or 21%. For the nine months ended September 30, 2003 and 2002, deposit services income amounted to $71.4 million and $59.7 million, respectively, an increase of 20%. These increases were primarily attributable to an increased number of deposit accounts and an increase in cash

24

management and overdraft fees. Acquisitions in 2002 and 2003 comprised a significant portion of the increased number of deposit accounts and increased overdraft fees.

Insurance brokerage commissions income amounted to $10.9 million for the third quarter of 2003 compared to $11.7 million for the same period in 2002, a decrease of 6%. The decline was due to increased competition and market pressures on policy renewals in all of our market areas. For the nine months ended September 30, 2003 and 2002, insurance brokerage commissions amounted to $34.2 million and $31.9 million, respectively, an increase of 7%. This year to date increase was mostly attributable to the insurance acquisitions in the third quarter of 2002 and 2003 and higher annual bonus and profit sharing commissions from carriers recorded in 2003 compared to 2002.

Merchant and electronic banking income was $11.1 million for the third quarter of 2003 compared to $10.1 million for the third quarter of 2002, an increase of 10%. For the nine months ended September 30, 2003 and 2002, merchant and electronic banking income amounted to $31.2 million and $27.3 million, respectively, an increase of 15%. This 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. The increases were due primarily to increases in the volume of transactions processed and increased market share from acquisitions.

Trust and investment management services income amounted to $8.2 million for the quarter ended September 30, 2003 compared to $7.8 million for the third quarter of 2002, an increase of 5%. For the nine months ended September 30, 2003 and 2002, trust and investment management services income amounted to $23.5 million and $24.6 million, respectively, a decrease of 4%. Assets under management increased to $8.7 billion at September 30, 2003 from $7.8 billion at September 30, 2002, an increase of $849 million primarily due to improvements in the financial markets and new accounts. Trust and investment management services income is largely based on the market value of assets under management which increased modestly as the market performance improved in the second and third quarters of 2003.

Bank-owned life insurance (“BOLI”) income was $5.8 million for the third quarter of 2003, compared to $5.1 million for the same period in 2002, an increase of 13%. For the nine months ended September 30, 2003 and 2002, BOLI income amounted to $17.0 million and $14.5 million, respectively, an increase of 17%. The increase related to BOLI purchased in 2002 and $85.6 million of BOLI acquired in the American merger in the first quarter of 2003. Income from BOLI represents the increase in the cash surrender value of life insurance policies on the lives of certain employees who have provided a consent allowing the Bank to be the beneficiary of such policies. Most of the 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, 2003. The BOLI investment provides a means to mitigate increasing employee benefit costs. For the third quarter of 2003, the average carrying value of BOLI was $479 million compared to $372 million for the third quarter of 2002.

Investment planning services income in the third quarter of 2003 amounted to $3.8 million compared to $2.8 million in the third quarter of 2002, an increase of $991 thousand, or 36%. For the nine months ended September 30, 2003 and 2002, investment planning services income amounted to $10.9 million and $8.5 million, respectively, an increase of 29%. These increases were primarily attributable to commissions earned from increased sales of third party mutual funds and annuities resulting from our acquisition of American in 2003.

Net securities gains amounted to $3.6 million and $208 thousand during the quarters ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, net securities gains were $39.8 million and $578 thousand, respectively. During the second quarter of 2003, we sold $901 million in securities as part of the deleveraging program discussed above. The gains on sales of these securities amounted to $29.2 million, which were substantially offset by prepayment penalties of $28.5 million related to borrowings which were prepaid in connection with the deleveraging program. 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.

The following table presents the detail of other noninterest income for the periods indicated:

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Table 5 - Other noninterest income

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
Covered call premiums	$	7,152		$	1,128		$	21,390		$	5,107
Loan fee income		7,376			5,206			19,456			15,728
Mortgage banking services income (expense)		3,087			(455	)		9,328			1,710
Venture capital write-downs		(374	)		(469	)		(989	)		(2,171	)
Miscellaneous income		2,906			1,625			5,483			2,735
Total	$	20,147		$	7,035		$	54,668		$	23,109

Other noninterest income amounted to $20.1 million and $7.0 million for the quarters ended September 30, 2003 and 2002. For the nine months ended September 30, 2003 and 2002, other noninterest income amounted to $54.7 million and $23.1 million, respectively. These increases were mostly due to increases in covered call premium income resulting from call options written on securities we own as well as securities we had committed to buy. Loan fee income included $1.8 million and $3.8 million of fees to arrange for pass-through swaps between commercial borrowers and third parties for the three and nine months ended September 30, 2003, respectively. We did not have a commercial loan swap program during the nine months ended September 30, 2002. Mortgage banking income, which consist primarily of gains from sale of loans, also contributed to the increase in other income as a result of higher levels of mortgage refinancings driven by lower interest rates.

Noninterest Expense

Noninterest expense was $151.6 million and $141.6 million for the quarters ended September 30, 2003 and 2002, respectively, which represented an increase of $10.0 million, or 7%. This increase included higher compensation and employee benefits expense ($2.5 million), occupancy expense ($1.8 million) and equipment expense ($1.7 million). For the nine months ended September 30, 2003 and 2002, noninterest expenses amounted to $485.6 million and $421.3 million, respectively. Included in this increase was $28.5 million of prepayment penalties on borrowings related to the aforementioned deleveraging program in the second quarter. This amount represented 44% of the total increase of $64.3 million. The remaining increases in noninterest expense for the quarter and nine months ended September 30, 2003 over the comparable periods last year were primarily attributable to acquisitions.

Compensation and employee benefits expense of $82.2 million for the quarter ended September 30, 2003 increased $2.5 million, or 3%, from the same quarter of last year. For the nine months ended September 30, 2003 and 2002, compensation and employee benefits expense amounted to $245.2 million and $230.8 million, respectively. These increases were primarily due to additional employees from acquisitions and increased benefit costs, which were partially offset by lower incentive expense. The total number of full-time equivalent employees was approximately 6,700 at September 30, 2003 compared to 6,500 at September 30, 2002. Pension expense under the defined benefit pension plan (which is included in compensation and employee benefits expense) was $3.3 million and $1.2 million for the three months ended September 30, 2003 and 2002, respectively, and increased primarily due to a lower discount rate and a lower expected rate of return on plan assets. The fair value of plan assets as of September 30, 2003 was $179.8 million as compared to $154.9 million at December 31, 2002.

Data processing expense amounted to $10.5 million and $9.8 million for the quarters ended September 30, 2003 and 2002, respectively, an increase of $703 thousand, or 7%. The increase was primarily due to increased transaction volume (core processing and data lines) and other expenses related to acquisitions and software licensing costs. The increase was partially offset by lower bank card expenses due to lower fees charged by a new third-party processor. For the nine months ended September 30, 2003 and 2002, data processing expense amounted to $31.1 million and $30.2 million, respectively. Beginning in July 2002, check processing was insourced and the primary costs are now

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recorded in compensation and employee benefits. Previously, a third-party vendor handled check processing and its charges were recorded as data processing costs.

Occupancy expense of $14.5 million during the three months ended September 30, 2003 increased $1.8 million, or 14%, from the same quarter in 2002, primarily due to the cost of a new back-office facility in West Falmouth, Maine and the cost of facilities assumed in acquisitions. For the nine months ended September 30, 2003 and 2002, occupancy expense amounted to $44.6 million and $38.0 million, respectively, an increase of 17%.

Equipment expense of $11.7 million during the three months ended September 30, 2003 increased $1.7 million, or 17%, from the third quarter of last year. For the nine months ended September 30, 2003 and 2002, equipment expense amounted to $35.3 million and $29.6 million, respectively. These increases were primarily due to depreciation expense on new technology equipment and software (e.g., check imaging and e-commerce) and depreciation/maintenance of equipment obtained through acquisitions.

Advertising and marketing expense amounted to $5.6 million and $4.3 million for the three months ended September 30, 2003 and 2002, respectively. The $1.3 million, or 29%, increase was largely due to new advertising promotions and corporate sponsorships and additional expenses for the introduction of our products in new market areas. For the nine months ended September 30, 2003 and 2002, advertising and marketing expense amounted to $16.6 million and $12.5 million, respectively, an increase of 32% primarily for the same reasons described above.

Amortization of identifiable intangible assets of $2.3 million during the three months ended September 30, 2003 increased $636 thousand from the third quarter of last year. This increase was primarily due to amortization of core deposit intangibles and other identifiable intangibles recorded in connection with acquisitions. For the nine months ended September 30, 2003 and 2002, amortization of identifiable intangible assets amounted to $6.6 million and $4.4 million, respectively. For additional information, see Note 4 to the unaudited Consolidated Financial Statements included herein.

Merger and consolidation costs amounted to $808 thousand and $2.2 million for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, merger and consolidation costs amounted to $6.8 million and $11.4 million, respectively. The following table summarizes merger and consolidation costs for the three and nine months ended September 30, 2003 and 2002.

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Table 6 - Merger and Consolidation Costs

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
American Merger Charges
Personnel costs	$	24		$	—		$	1,068		$	—
Systems conversion and integration/customer communications		413			—			2,318			—
Other costs		(5	)		1			1,393			1
		432			1			4,779			1
Warren Merger Charges
Personnel costs		61			—			898			—
Systems conversion and integration/customer communications		268			—			1,138			—
Other costs		16			5			363			5
		345			5			2,399			5
Bancorp Connecticut Merger Charges
Personnel costs		4			5			(10	)		42
Systems conversion and integration/customer communications		—			500			24			536
Other costs		12			227			107			233
		16			732			121			811
Ipswich Merger Charges
Personnel costs		—			78			14			102
Systems conversion and integration/customer communications		—			913			—			1,486
Other costs		—			181			127			219
		—			1,172			141			1,807
Andover/MetroWest Merger Charges
Personnel costs		—			—			1			635
Systems conversion and integration/customer communications		—			90			—			3,142
Other costs		15			63			5			1,921
		15			153			6			5,698
Charter Consolidation Costs
Personnel costs		—			—			—			770
Branch signage		—			143			—			872
Customer notices		—			24			—			591
Forms and documents		—			2			—			578
Other costs		—			1			—			781
		—			170			—			3,592
Other Costs
Branch decommissioning costs		—			16			—			82
Reverse auto lease reserves (Banknorth - Vermont)		—			—			(615	)		—
Other costs		—			(81	)		(43	)		(563	)
		—			(65	)		(658	)		(481	)
Total Merger and Consolidation Costs	$	808		$	2,168		$	6,788		$	11,433

The following table summarizes activity in the accrual account for merger and consolidation costs from December 31, 2002 through September 30, 2003.

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

											Non-cash Write
	Balance		Accrued					Cash			Downs and Other			Balance
	12/31/02		at Acquisition		Charges			Payments			Adjustments			9/30/03
American Merger	$	—	$	13,600	$	4,779			($16,978	)		($1,135	)	$	266
Warren Merger		2,052		—		2,399			(4,641	)		221			31
Bancorp Connecticut Merger		3,097		—		122			(791	)		(1,798	)		630
Ipswich Merger		—		—		141			(141	)		—			—
Andover / MetroWest Mergers		321		—		6			(52	)		(189	)		86
Other Merger and Consolidation Costs		84		—		(659	)		(25	)		615			15
Total	$	5,554	$	13,600	$	6,788			($22,628	)		($2,286	)	$	1,028

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Prepayment penalties on borrowings amounted to $30.5 million for the nine months ended September 30, 2003, $28.5 million of which was incurred in connection with the above-discussed deleveraging program in the second quarter, and $2.0 million of which was incurred in connection with the early payoff of other borrowings. There were no prepayment penalties during the third quarter.

Other noninterest expenses amounted to $24.1 million and $21.2 million during the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, other noninterest expenses amounted to $69.0 million and $64.3 million, respectively. The following table summarizes the principal components of other noninterest expenses for the periods indicated.

TABLE 8 - Other Noninterest Expenses

	2003						2002
	Third		Second		First		Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter
Telephone	$	3,666	$	2,595	$	3,468	$	3,600	$	3,276	$	3,332	$	3,189
Office supplies		2,611		2,523		2,794		2,594		2,726		2,597		2,819
Postage and freight		2,246		3,223		3,074		2,490		2,402		2,206		2,609
Miscellaneous loan costs		1,729		1,563		948		1,178		239		1,706		1,167
Deposits and other assessments		963		974		899		871		969		901		799
Collection and carrying costs of non-performing assets		709		947		308		595		662		807		649
Other		12,158		11,689		9,880		13,698		10,968		10,518		9,791
Total	$	24,082	$	23,514	$	21,371	$	25,026	$	21,242	$	22,067	$	21,023

	Nine Months Ended
	9/30/2003		9/30/2002
Telephone	$	9,729	$	9,797
Office supplies		7,928		8,142
Postage and freight		8,543		7,217
Miscellaneous loan costs		4,240		3,112
Deposits and other assessments		2,836		2,669
Collection and carrying costs of non-performing assets		1,964		2,118
Other		33,728		31,267
Total	$	68,968	$	64,322

Taxes

The effective tax rate was 34% and 33% for the three months ended September 30, 2003 and 2002, respectively and 34% and 33% for the nine months ended September 30, 2003 and 2002, respectively. The increase in the effective tax rates was primarily the result of an increase in state taxes during 2003.

Comprehensive Income

Comprehensive income amounted to $29.1 million and $107.6 million during the three months ended September 30, 2003 and 2002, respectively and $180.0 million and $287.6 million for the nine months ended September 30, 2003 and 2002, respectively. Comprehensive income was different from our net income during the respective periods as a result of changes in the amount of unrealized gains and losses on our portfolio of securities available for sale and on our derivative contracts (primarily forward sales commitments related to loans held for sale) that are accounted for as cash flow hedges. For additional information, see Note 8 to the unaudited Consolidated Financial Statements.

Our available for sale investment portfolio had net unrealized gains, net of applicable income tax effects, of $37.4 million, $118.0 million and $108.2 million at September 30, 2003, December 31, 2002 and September 30, 2002,

29

respectively. At September 30, 2003, the net unrealized gains of $57.6 million, before related tax effect, represented 1% of securities available for sale. We attempt to balance the interest rate risk of interest-earning assets and interest-bearing liabilities (see “Interest Rate Risk and Asset Liability Management”). However, the change in fair value of our interest-bearing liabilities which would tend to offset the change in fair value of available for sale securities is not included in “other comprehensive income.”

FINANCIAL CONDITION

Our consolidated total assets amounted to $25.7 billion and $23.4 billion at September 30, 2003 and December 31, 2002, respectively. Total average assets were $25.8 billion and $21.8 billion for the three months ended September 30, 2003 and 2002, respectively. These increases were largely due to the acquisitions in 2003 and 2002, which added $4.7 billion in assets. Shareholders’ equity totaled $2.5 billion at September 30, 2003 and $2.1 billion at December 31, 2002.

Securities

The securities portfolio (including securities classified as held to maturity) averaged $7.3 billion during the third quarter of 2003, as compared to $6.5 billion in the third quarter of 2002. The net increase in the securities portfolio resulted from the acquisitions in 2003 and 2002. The securities portfolio consists primarily of mortgage-backed securities and U.S. Government and agency securities. Other securities in the portfolio are collateralized mortgage obligations, which included securitized residential real estate loans held in a REMIC, and asset-backed securities. The majority of securities available for sale were rated AAA or equivalently rated at September 30, 2003. At September 30, 2003 and December 31, 2002, we had $614.7 million and $830.1 million of securities available for sale with call provisions. The average yield on securities was 3.96% for the quarter ended September 30, 2003 and 5.64% for the quarter ended September 30, 2002. With the exception of securitized residential real estate loans held in a REMIC that were classified as held to maturity and carried at cost, all of our securities are classified as available for sale and carried at market value. Securities available for sale had an after-tax unrealized gain of $37.4 million and $118.0 million at September 30, 2003 and December 31, 2002, respectively. These unrealized gains do not impact net income or regulatory capital but are recorded as adjustments to shareholders’ equity, net of related deferred income taxes. Unrealized gains, net of related deferred income taxes, are a component of “Comprehensive Income” contained in the unaudited Consolidated Statement of Changes in Shareholders’ Equity.

Loans and Leases

Total loans and leases (including loans held for sale) averaged $15.9 billion during the third quarter of 2003, an increase of $2.5 billion, or 19%, from the third quarter of 2002. This increase was primarily attributable to acquisitions. Average loans and leases as a percent of average earning assets was 69% during the quarter ended September 30, 2003 compared to 67% during the quarter ended September 30, 2002.

Average residential real estate loans (which include mortgage loans held for sale) of $2.9 billion during the third quarter of 2003 increased $195 million from the average amount of such loans during the third quarter of last year. Excluding acquisitions, average residential loans decreased approximately $892 million, or 24%, as a result of increased refinancing activity and prepayments in a lower interest rate environment. Mortgage loans held for sale amounted to $74.7 million and $128.6 million at September 30, 2003 and December 31, 2002, respectively. We are currently selling substantially all of the conforming 30-year fixed-rate loans we originate.

Average commercial real estate loans of $5.3 billion increased $915 million, or 21%, from the third quarter of last year. Excluding acquisitions, average commercial real estate loans increased $605 million or 13%. While most of our markets reflected increases, the largest increases were in Massachusetts and Connecticut. The average yield on commercial real estate loans during the third quarter of 2003 was 5.88%, as compared to 6.86% in the third quarter of 2002, a decrease of 98 basis points. The lower yield reflects the effect of the downward repricing of variable-rate loans, the refinancing of fixed-rate loans at lower rates and the origination of new loans at the lower prevailing rates.

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Commercial business loans and leases averaged $3.2 billion during the third quarter of 2003, an increase of $462 million, or 17%, over the third quarter of 2002. Excluding acquisitions, average commercial business loans and leases increased $329 million or 11%. Massachusetts reflected the greatest amount of growth. The yield on commercial business loans and leases decreased to 5.04% in the third quarter of 2003 from 5.81% in the third quarter of 2002. The decrease in the yield was primarily due to lower rates on new loans and the repricing of variable-rate loans.

Consumer loans and leases averaged $4.6 billion during the third quarter of 2003, an increase of $915 million, or 25%, from the third quarter of 2002. Acquisitions accounted for approximately $506 million of the increase, while internal loan growth accounted for approximately $409 million of the increase. Internal growth was primarily in home equity loans and indirect auto loans. The average yield on consumer loans and leases decreased to 5.43% in the third quarter of 2003 from 6.78% in the third quarter of 2002. For a description of the types of loans and leases in our loan and lease portfolio and a breakdown of our consumer loans, see “Credit Risk.”

Deposits

Total deposits averaged $17.7 billion during the third quarter of 2003, an increase of $2.9 billion from the third quarter of 2002. Excluding acquisitions, average core deposits (deposits excluding certificates of deposit and brokered deposits) increased $1.4 billion from the third quarter of last year, or 12%. Excluding acquisitions, the average balances of certificates of deposit and brokered deposits decreased $788.5 million from the third quarter of 2002, or 13%. The ratio of loans to deposits was 90% at September 30, 2003 and December 31, 2002.

Average noninterest-bearing deposits totaled $3.4 billion during the third quarter of 2003, an increase of $704 million, or 26%, from the third quarter of 2002. This increase was largely due to strong growth in existing market areas as well as $151 million of average noninterest-bearing deposits acquired in acquisitions.

Average interest-bearing deposits of $14.3 billion during the third quarter of 2003 increased $2.2 billion from the third quarter of 2002. Excluding acquisitions, average money market and NOW deposits increased by $583 million and average regular savings deposits increased $224 million, while average certificates of deposit and brokered deposits declined by $788.5 million in the aggregate. The decline in certificates of deposits resulted from our decision to allow deposits priced above alternate funding costs to run off. The average rates paid on NOW and money market accounts decreased 73 basis points from 1.53% in the third quarter of 2002 to 0.80% in the third quarter of 2003 due largely to lower prevailing interest rates. The average rates paid on all deposit types decreased by 78 basis points from 2.03% in the third quarter of 2002 to 1.25% in the third quarter of 2003, reflecting the decline in prevailing interest rates.

Included within the deposit categories above are government banking deposits, which averaged $1.3 billion in the third quarter of 2003 and $1.2 billion in the third quarter of 2002. Government banking deposits include deposits received from state and local governments, school districts, public colleges/universities, utility districts, public housing authorities and court systems in our market area. Many of these deposits exceed the FDIC insurance coverage amounts and require us to pledge specific collateral or maintain private insurance.

Other Funding Sources

We use both short-term and long-term borrowings to fund the growth of earning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, retail securities sold under agreements to repurchase and other short-term borrowings, amounted to $1.05 billion and $1.28 billion at September 30, 2003 and December 31, 2002, respectively, a decrease of $228 million, or 18%.

At September 30, 2003, we also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. There were no drawdowns on this line in 2003.

Long-term debt includes FHLB advances, senior notes, subordinated notes, capital trust securities, wholesale securities sold under agreements to repurchase, capital lease obligations and other debt with terms greater than one

31

year. Long-term debt amounted to $3.6 billion and $3.9 billion at September 30, 2003 and December 31, 2002, respectively. The decrease in long-term debt was primarily due to the prepayment of $853 million of borrowings in connection with our deleveraging program in the second quarter of 2003, which was partially offset by the issuance of $150 million of senior notes in the second quarter of 2003 and $400 million of borrowings assumed in acquisitions.

At September 30, 2003 and December 31, 2002, FHLB borrowings amounted to $1.6 billion. FHLB collateral consists primarily of first mortgage loans secured by single-family properties, certain unencumbered securities and other qualified assets. Our additional borrowing capacity with the FHLB at September 30, 2003 was approximately $2.6 billion. These borrowings had an average cost of 4.23% during the three months ended September 30, 2003 as compared to 4.48% during the three months ended September 30, 2002. On July 23, 2003, we entered into interest rate swap agreements for $216.5 million to hedge the fair value of $216.5 million of FHLB advances. The effect of the hedges, which are accounted for as fair value hedges, was to synthetically convert this fixed rate debt to a variable rate set at an average of 1-month LIBOR (1.12% at September 30, 2003) plus 3.82%. These FHLB advances had a weighted average cost of 5.47% and an average term of 2 years.

In April 2003, we issued $150 million of 5-year senior notes carrying a fixed rate of 3.75%. We simultaneously entered into a $150 million interest rate swap agreement pursuant to which we receive a fixed rate of 3.75% and pay a variable rate based on 3-month LIBOR (1.16% at September 30, 2003) plus 0.41%. This swap is accounted for as a fair value hedge of the notes. The proceeds from the notes offering were used for general corporate purposes.

At September 30, 2003 and December 31, 2002, 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. In the first quarter of 2003, we entered into an interest rate swap for $200 million to hedge the fair value of the $200 million of subordinated debt. The effect of the hedge, which is accounted for as a fair value hedge, was to synthetically convert this fixed rate debt to a variable rate set at 3-month LIBOR plus 3.47%.

At September 30, 2003 and December 31, 2002, through subsidiary trusts, we had outstanding $295.1 million of capital securities which currently qualify as Tier 1 capital for regulatory purposes. See the “Capital” section below.

At September 30, 2003 and December 31, 2002, wholesale securities sold under repurchase agreements amounted to $1.7 billion and $1.2 billion, respectively, and were collateralized by mortgage-backed securities and U.S. Government obligations.

We have a shelf registration on file with the Securities and Exchange Commission which allows us to sell up to $1.0 billion of debt securities, preferred stock, depository shares, common stock and warrants and which allows subsidiary trusts to sell capital securities. We had $650 million of remaining authority under this shelf registration statement as of September 30, 2003.

At September 30, 2003 and December 31, 2002, other liabilities totaled $521.7 million and $258.3 million, respectively. The increase in other liabilities was primarily attributable to $361 million of amounts due to brokers for securities transactions that settled in October 2003.

CONTRACTUAL OBLIGATIONS

We have entered into numerous contractual obligations and commitments. The following tables summarize our contractual cash obligations, other commitments and derivative financial instruments at September 30, 2003.

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TABLE 9 - Contractual Obligations

Contractual Obligations (1)

				Payments Due By Period
				Less than		1 - 3		4 - 5		After 5
		Total		1 Year		Years		Years		Years
Long-term debt		$	2,212,865	$	73,441	$	826,933	$	180,560	$	1,131,931
Capital lease obligations			6,044		50		182		757		5,055
Repurchase agreements - wholesale			1,692,560		392,560		1,200,000		—		100,000
	Total long-term debt		3,911,469		466,051		2,027,115		181,317		1,236,986
Operating lease obligations			133,813		23,429		38,523		28,177		43,684
Total contractual obligations		$	4,045,282	$	489,480	$	2,065,638	$	209,494	$	1,280,670

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

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	$	4,119,340	$	291,224	$	218,591	$	44,214	$	3,565,311
Standby letters of credit		395,552		101,556		83,555		84,969		125,472
Commitments to originate loans		1,718,545		1,250,967		236,939		34,388		196,251
Other commitments		45,645		9,127		9,530		2,165		24,823
Total commitments	$	6,279,082	$	1,652,874	$	548,615	$	165,736	$	3,911,857

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)	$	297,907	$	13,577	$	8,290	$	53,562	$	222,478
		Interest rate swaps with dealers (2)		297,907		13,577		8,290		53,562		222,478
	Interest rate swaps on borrowings (3)			566,500		—		216,500		150,000		200,000
Forward commitments to sell loans				127,520		127,520		—		—		—
Foreign currency forward contracts (4)				25,582		14,403		11,179		—		—

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

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Our board of directors has established the overall strategic direction for Banknorth. It 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, 2003 and at December 31, 2002. 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, 2003, 0.34% of our residential loans were nonperforming, as compared to 0.24% at December 31, 2002 and 0.25% at September 30, 2002. Net charge-offs to average residential loans outstanding for the three months ended September 30, 2003 was .01%.

Our commercial real estate loan portfolio accounted for 33% of the total loan portfolio at September 30, 2003 and 34% at December 31, 2002. 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, 2003, 0.51% of our commercial real estate loans were nonperforming, as compared to 0.37% at December 31, 2002 and 0.38% at September 30, 2002. Net charge-offs (recoveries) to average commercial real estate loans outstanding for the three months ended September 30, 2003 was (0.02%).

Our commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at September 30, 2003 and December 31, 2002. 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 $95.6 million at September 30, 2003. We do not emphasize the purchase of participations in syndicated commercial loans. At September 30, 2003, we had $297 million of outstanding participations in syndicated commercial loans and had an additional $312 million of unfunded commitments related to these participations. At September 30, 2003, 0.70% of our commercial business loans were nonperforming, as compared to 1.10% at December 31, 2002 and 1.15% at September 30, 2002. Net charge-offs to average commercial business loans and leases outstanding for the three months ended September 30, 2003 was 0.06%.

The following table presents the geographic distribution of our commercial loans and leases at September 30, 2003 and December 31, 2002.

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Table 10 - Commercial Loans and Leases by State

		Commercial				Commercial Business				Total Commercial
		Real Estate Loans				Loans and Leases				Loans and Leases
		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
		2003		2002		2003		2002		2003		2002
Massachusetts		$	2,430,249	$	2,174,534	$	1,111,621	$	982,078	$	3,541,870	$	3,156,612
Maine			873,759		868,091		678,979		640,258		1,552,738		1,508,349
New Hampshire			725,103		703,743		504,173		461,079		1,229,276		1,164,822
Vermont			629,101		594,849		423,383		419,291		1,052,484		1,014,140
Connecticut			468,910		286,658		345,853		265,503		814,763		552,161
New York			183,057		164,174		201,786		200,265		384,843		364,439
	Total	$	5,310,179	$	4,792,049	$	3,265,795	$	2,968,474	$	8,575,974	$	7,760,523

Consumer loans and leases accounted for 29% of our total loan portfolio at September 30, 2003 and 28% at December 31, 2002. At September 30, 2003, 0.16% of our consumer loans were nonperforming, as compared to 0.23% at December 31, 2002 and 0.22% at September 30, 2002. Net charge-offs to average consumer loans outstanding for the three months ended September 30, 2003 was 0.68%. The following table lists our consumer loans by type as of September 30, 2003 and December 31, 2002:

Table 11 - Composition of Consumer Loans

	September 30,					December 31,
	2003					2002
			% of					% of
	Amount		Total			Amount		Total
Home equity lines	$	2,228,295		47.95	%	$	1,572,816		40.19	%
Automobile and other vehicle loans and leases		1,590,691		34.23	%		1,478,228		37.77	%
Mobile home loans		148,376		3.19	%		171,715		4.39	%
Vision, dental, and orthodontia fee plan loans		143,240		3.08	%		172,861		4.42	%
Education loans		118,357		2.55	%		135,386		3.46	%
Other		418,024		9.00	%		382,282		9.77	%
Total	$	4,646,983		100.00	%	$	3,913,288		100.00	%

Nonperforming Assets

Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue), other real estate owned, repossessed assets and certain securities available for sale. Total nonperforming assets as a percentage of total assets were 0.27% at September 30, 2003, 0.29% at December 31, 2002 and 0.31% at September 30, 2002. Total nonperforming assets as a percentage of total loans and total other nonperforming assets was 0.44% at September 30, 2003, 0.49% at December 31, 2002 and 0.50% at September 30, 2002. See Table 12 for a summary of nonperforming assets for the last seven quarters. On a dollar basis, our nonperforming assets increased from $68.8 million at September 30, 2002 to $70.4 million at September 30, 2003. Acquisitions contributed to our increased nonperforming assets in recent periods. See Table 13 for the nonperforming assets of acquired banks at date of acquisition.

We continue to focus on asset quality 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 reductions of nonperforming asset levels, 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.

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

TABLE 12 - Nonperforming Assets

		2003									2002
		September 30			June 30			March 31			December 31			September 30			June 30			March 31
Nonaccrual loans and leases:
Residential real estate loans		$	9,135		$	9,827		$	9,828		$	5,781		$	6,733		$	7,075		$	7,689
Commercial real estate loans			27,069			19,139			22,990			17,649			16,762			20,254			20,812
Commercial business loans and leases			22,857			24,577			38,562			32,693			33,014			33,573			34,481
Consumer loans and leases			7,664			7,192			7,457			9,194			8,364			6,008			8,183
	Total nonaccrual loans and leases		66,725			60,735			78,837			65,317			64,873			66,910			71,165
Other nonperforming assets:
Other real estate owned, net of related reserves			921			814			541			100			92			1,212			1,262
Repossessions, net of related reserves			2,711			2,911			3,276			3,536			3,807			1,964			2,251
Securities available for sale			—			—			—			—			—			2,104			2,104
	Total other nonperforming assets		3,632			3,725			3,817			3,636			3,899			5,280			5,617
Total nonperforming assets		$	70,357		$	64,460		$	82,654		$	68,953		$	68,772		$	72,190		$	76,782
Accruing loans and leases which are 90 days or more overdue		$	3,163		$	2,995		$	3,349		$	3,373		$	2,407		$	2,680		$	5,430
Total nonperforming loans as a percentage of total loans and leases(1)			0.42	%		0.39	%		0.51	%		0.46	%		0.47	%		0.51	%		0.56	%
Total nonperforming assets as a percentage of total assets			0.27	%		0.25	%		0.31	%		0.29	%		0.31	%		0.34	%		0.37	%
Total nonperforming assets as a percentage of total loans and leases (1) and total other nonperforming assets			0.44	%		0.41	%		0.53	%		0.49	%		0.50	%		0.55	%		0.60	%

(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 and any equity line in the process of foreclosure are placed on nonaccrual status. Unsecured 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, 2003, we had $3.2 million of accruing loans which were 90 days or more delinquent, as compared to $3.4 million at December 31, 2002 and $2.4 million at September 30, 2002.

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.

Over the past seven quarters, nonperforming assets ranged from $64.4 million to $82.7 million. The increase from December 31, 2002 to March 31, 2003 largely related to $6.2 million of nonperforming assets, primarily residential real estate loans, resulting from the acquisition of American, as reflected in Table 13 below. The decrease from March 31, 2003 to June 30, 2003 was primarily due to the return of several commercial loans to performing status. The increase from June 30, 2003 to September 30, 2003 was primarily due to an increase in nonperforming commercial real estate loans, which was primarily attributable to one credit relationship which is well secured. This increase is not believed to be a trend.

The following table presents certain information regarding the nonperforming assets acquired by us in connection with the indicated acquisitions.

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TABLE 13 - Nonperforming Assets of Acquired Banks at Acquisition Date

		American		Warren		Bancorp		Ipswich
Acquisition date		02/14/2003		12/31/2002		08/31/2002		07/26/2002
Nonaccrual loans and leases:
Residential real estate loans		$	6,044	$	—	$	125	$	—
Commercial real estate loans			—		738		—		—
Commercial business loans and leases			—		84		580		167
Consumer loans and leases			—		—		108		—
	Total nonperforming loans and leases		6,044		822		813		167
Other nonperforming assets:
Other real estate owned			202		—		—		—
	Total other nonperforming assets		202		—		—		—
Total nonperforming assets		$	6,246	$	822	$	813	$	167

Net Charge-offs

Net charge-offs were $8.2 million for the three months ended September 30, 2003, as compared to $10.4 million for the three months ended September 30, 2002. Net charge-offs represented 0.20% and 0.31% of average loans and leases outstanding for the quarters ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, net charge-offs were $26.9 million and $29.5 million, respectively. Net charge-offs represented 0.23% and 0.30% of average loans and leases outstanding for the nine months ended September 30, 2003 and 2002, respectively.

Potential Problem Loans

In addition to the nonperforming loans discussed above, we also have loans that are 30 to 89 days delinquent and still accruing. These loans amounted to $135 million at September 30, 2003 compared to $139 million at December 31, 2002. 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.

ASSET-LIABILITY MANAGEMENT

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

Market Risk

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

Interest-rate risk, including mortgage prepayment risk, is by far the most significant non-credit risk to which we are exposed. Interest-rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, our primary source of revenue. This risk arises directly from our core banking activities - lending and deposit gathering. In addition to directly impacting net interest income, changes in the level of interest rates can also affect (i) the amount of loans

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originated and sold by us, (ii) the ability of borrowers to repay adjustable or variable rate loans, (iii) the average maturity of loans, (iv) the rate of amortization of premiums paid on securities and capitalized mortgage servicing rights, (v) the fair value of our saleable assets, the amount of unrealized gains and losses on securities available for sale per SFAS No. 115, and the resultant ability to realize gains and (vi) 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.

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

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

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

We manage the interest-rate risk inherent in our core banking operations using non-derivative and derivative instruments. Some non-derivative instruments sometimes contain embedded options, mainly fixed-rate investment securities and borrowed funds that can be prepaid or called away. When appropriate, we use derivative instruments such as interest-rate swaps, interest rate floors, interest rate caps and interest rate corridor agreements, among other instruments. Derivatives used for hedging are designated at inception. At September 30, 2003, our designated hedging activities were limited to forward commitments of $127.5 million related to hedging our mortgage banking operations and interest rate swaps of $566.5 million notional amount tied to fixed rate debt.

Swaps and caps are offered to commercial borrowers through our commercial borrower derivative hedging program. While these derivatives are designated as speculative per SFAS No. 133, we believe that our exposure to commercial customer derivatives is limited because these contracts are matched with a mirrored fixed-rate swap transaction at inception. The program allows us to retain variable-rate commercial loans while allowing the commercial borrowers to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. We entered into $241 million of interest rate swaps with commercial borrowers during the nine months ended September 30, 2003. and an equal amount of mirrored transactions with swap dealers. At September 30, 2003, we had $297.9 million of such interest rate swaps outstanding. 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 commercial real estate loans.

We manage the interest-rate risk inherent in our mortgage banking operations by entering into forward sales contracts and, to a lesser extent, by using purchased mortgage-backed security options. An increase in market interest rates between the time we commit to terms on a loan and the time we ultimately sell the loan in the secondary market will have the effect of reducing the gain (or increasing the loss) we record on the sale. We attempt to mitigate this risk by entering into forward sales commitments in amounts sufficient to cover 70 to 90% of all

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loans which are currently closed or are anticipated to close. Purchased mortgage-backed security options are also used to hedge rate-locked loans.

The average balances for the three months and nine months ended September 30, 2003 and 2002 of residential mortgage loans held for sale and related hedge positions are summarized in the table below:

     TABLE 14 - Mortgage Loans Held for Sale and Related Hedges

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2003		2002		2003		2002
Residential mortgage loans held for sale	$	101,528	$	72,676	$	90,808	$	58,647
Rate-locked loan commitments		85,551		110,650		104,632		73,725
Forward sales contracts		178,361		160,092		181,739		123,307
Purchased mortgage-backed security options		—		5,000		2,222		6,667

Our policy on interest-rate risk simulation specifies that if interest rates were to shift gradually up or down 2%, estimated net interest income for the subsequent 12 months should decline by less than 5%. The gradual 2% falling rate scenario was slightly outside guidelines at December 31, 2002. The ALCO voted to approve the December 31, 2002 guidelines exception because a gradual 2% decreasing rate scenario was deemed unlikely based on the current level of interest rates. However, all interest rate risk measures were within compliance guidelines as of September 30, 2003. The ALCO currently is more focused on the gradual decreasing 1% rate scenario than on the gradual decreasing 2% scenario and on strategies that prove beneficial to income should rates decline or the yield curve flatten.

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

     TABLE 15 - Interest Rate Sensitivity

	200 Basis Point			100 Basis Point			100 Basis Point			200 Basis Point
	Rate Decrease			Rate Decrease			Rate Increase			Rate Increase
September 30, 2003		(4.21	)%		(1.47	)%		1.02	%		1.52	%
December 31, 2002		(6.22	)%		(2.64	)%		2.15	%		3.40	%

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

The most significant factors affecting market risk exposure of net interest income during the nine months ended September 30, 2003 were (i) changes in the shape of the U.S. Government securities and interest rate swap yield curve, (ii) changes in the composition of the investment portfolio, including a deleveraging strategy completed in the second quarter whereby approximately $901 million in investments yielding approximately 5.05% were sold, (iii) changes in the composition of mortgage assets and prepayment speeds of mortgage assets, (iv) reduction of deposit interest expense and (v) changes in the wholesale borrowings portfolio structure, including $853 million costing

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approximately 4.49% that were prepaid related to the deleveraging program. Interest rates were about 30 basis points lower across the Treasury curve at September 30, 2003 compared to interest rates at December 31, 2002. However, mortgage rate changes during the nine-month period ended September 30, 2003 resulted in significant mortgage loan activity. With higher rates in the third quarter, projected mortgage loan prepayments are forecasted to slow and prepay at a slower constant prepayment rate (CPR) than in the third quarter. Because of historically low rates and increased loan cash inflows, effective duration estimates for loans and mortgage-backed securities are shorter than normal, thus increasing asset sensitivity. Asset and liability management actions were implemented during 2003 to reduce asset sensitivity. Among other things, we purchased securities which are less susceptible to prepayments, replaced approximately $700 million of existing borrowings, some of which were callable, hedged $200 million of fixed rate subordinated debt, $150 million of fixed rate senior notes and $216.5 million of FHLB fixed rate borrowings, and implemented the deleveraging strategy discussed above. The above table reflects the net impact of these changes. We remain asset sensitive and project net interest income to increase if short and long interest rates move symmetrically higher.

Mortgage servicing rights as of September 30, 2003 had a fair value of approximately $5.0 million versus a book value of $3.8 million. The book value of mortgage servicing rights represented 0.71% of the underlying balance of loans serviced for others at September 30, 2003. New mortgage servicing rights from originations are sold quarterly. As a result, future earnings exposure to changes in the value of mortgage servicing rights is not expected to be material.

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

LIQUIDITY

Parent Company

On a parent-only basis at September 30, 2003, our debt service requirements consisted primarily of $295 million junior subordinated debentures and $150 million of 3.75% senior notes due May 1, 2008. The junior subordinated debentures were issued to four subsidiaries in connection with their issuance of capital securities. These obligations mature starting in 2027, have interest rates ranging from 8% to 10.52% and annual debt service payments of $25.1 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, 2003, our subsidiary bank had $467.7 million available for dividends that could be paid without prior regulatory approval. In addition, the parent company had $202.7 million in cash or cash equivalents at September 30, 2003.

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.

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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 contingent funding plans. As of September 30, 2003, Banknorth, NA had in the aggregate $4.5 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 25% of retail deposits, as compared to a current policy minimum of 10% of deposits.

Also as of September 30, 2003, Banknorth, NA had in the aggregate “potentially volatile funds” of $2.2 billion. These are funds that might flow out of the bank over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources.

As of September 30, 2003, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 206%, versus a policy minimum of 100%.

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

CAPITAL

At September 30, 2003, shareholders’ equity amounted to $2.5 billion, or 9.62% of total assets. Tangible equity amounted to $1.3 billion or 5.46% of tangible assets.

We paid a cash dividend of $0.19 per share on our common stock during the third quarter of 2003 compared to $0.15 per share in the third quarter of 2002. In October 2003, our Board authorized a $0.19 per share dividend on our common stock payable in November 2003. In February 2002, our Board authorized 8 million shares to be repurchased in the open market. During the nine months ended September 30, 2003, we repurchased 4.4 million shares at an average price of $23.47. As of September 30, 2003, a total of 2.9 million shares were available for repurchase under existing repurchase authorizations.

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of Currency of the United States (“OCC”) respectively require us and our banking subsidiary to maintain certain ratios, set forth in Table 16. At September 30, 2003, 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.

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Table 16 - Capital Ratios

		Actual					Capital Requirements					Excess
		Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2003
Banknorth Group, Inc.
	Total capital (to risk weighted assets)	$	2,039,658		11.27	%	$	1,447,481		8.00	%	$	592,177		3.27	%
	Tier 1 capital (to risk weighted assets)		1,613,447		8.92	%		723,741		4.00	%		889,706		4.92	%
	Tier 1 leverage capital ratio (to average assets)		1,613,447		6.54	%		986,638		4.00	%		626,809		2.54	%
Banknorth, NA
	Total capital (to risk weighted assets)	$	1,969,369		10.91	%	$	1,444,552		8.00	%	$	524,817		2.91	%
	Tier 1 capital (to risk weighted assets)		1,545,527		8.56	%		722,276		4.00	%		823,251		4.56	%
	Tier 1 leverage capital ratio (to average assets)		1,545,527		6.28	%		984,526		4.00	%		561,001		2.28	%
As of December 31, 2002
Banknorth Group, Inc.
	Total capital (to risk weighted assets)	$	1,960,869		12.15	%	$	1,291,616		8.00	%	$	669,253		4.15	%
	Tier 1 capital (to risk weighted assets)		1,558,974		9.66	%		645,808		4.00	%		913,166		5.66	%
	Tier 1 leverage capital ratio (to average assets)		1,558,974		7.13	%		874,180		4.00	%		684,794		3.13	%
Banknorth, NA
	Total capital (to risk weighted assets)	$	1,822,307		11.31	%	$	1,288,562		8.00	%	$	533,745		3.31	%
	Tier 1 capital (to risk weighted assets)		1,421,995		8.83	%		644,281		4.00	%		777,714		4.83	%
	Tier 1 leverage capital ratio (to average assets)		1,421,995		6.52	%		871,830		4.00	%		550,165		2.52	%

Net risk weighted assets were $18.1 billion and $16.1 billion at September 30, 2003 and December 31, 2002, respectively, for Banknorth Group, Inc. and Banknorth, NA.

At September 30, 2003 and December 31, 2002, we had outstanding $295.1 million of capital securities issued by subsidiary trusts. The following table sets forth our capital trust securities which are classified as long-term debt.

TABLE 17 - Capital Trust Securities

	Issuance				Stated			Maturity
Name	Date		Amount		Rate			Date
Peoples Heritage Capital Trust I		1/31/1997	$	61,556		9.06	%		2/1/2027
Banknorth Capital Trust I		5/1/1997		30,000		10.52	%		5/1/2027
Ipswich Statutory Trust I		2/22/2001		3,500		10.20	%		2/22/2031
Banknorth Capital Trust II		2/22/2002		200,000		8.00	%		4/1/2032
			$	295,056

The regulatory capital treatment of capital securities issued by subsidiary trusts of bank holding companies is currently under review by the banking regulators with respect to FIN 46. The capital securities are currently included in the Tier 1 capital of Banknorth and, at September 30, 2003, amounted to 18.3% of its Tier 1 capital. Depending on the future determination of banking regulators, capital securities issued by certain subsidiary trusts may no longer qualify for Tier 1 capital treatment, but instead may qualify for Tier 2 capital treatment. Outstanding capital securities may or may not be grandfathered by the Federal Reserve Board for treatment as Tier 1 capital for regulatory purposes. On July 2, 2003, the Federal Reserve Board issued a Supervision and Regulation Letter requiring that bank holding companies continue to follow the current instructions for reporting capital securities in their regulatory reports. The effect of the letter is that we will continue to report our capital securities in Tier 1 capital until further notice from the Federal Reserve Board. As noted above, at September 30, 2003, Banknorth was classified as “well capitalized” for regulatory purposes, the highest classification. We believe that Banknorth’s classification would have remained “well-capitalized” were the capital securities issued by subsidiary trusts included in its Tier 2 capital and not in Tier 1 capital. If our trust capital securities were no longer allowed to be included in Tier 1 capital as a result of accounting and regulatory developments, we would be permitted to redeem the capital securities, which bear interest from 8.00% to 10.52%, without penalty. If capital securities issued by subsidiary

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trusts were not granted Tier 2 status, we believe that Banknorth would remain in compliance with existing minimum capital requirements.

At September 30, 2003 and December 31, 2002, 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 bank owned life insurance (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 26.2% at September 30, 2003 and 21.5% at December 31, 2002. This increase was the result of the $85.6 million of BOLI acquired in the merger with American on February 14, 2003. We currently do not anticipate any additional purchases or sales of BOLI.

CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies comply with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The preparation of financials statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding reported results. Management has discussed the development and the selection of critical accounting policies with the Audit Committee of our board of directors. As discussed in our 2002 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 goodwill and other intangible assets, and accounting for pension plans. 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 policies have not changed since December 31, 2002.

IMPACT OF NEW ACCOUNTING STANDARDS

For information on the impact of new accounting standards, see Note 11 to the unaudited Consolidated Financial Statements.

FORWARD LOOKING STATEMENTS

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

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

No change in our internal control 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

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

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

Item 3. Defaults Upon Senior Securities - not applicable.

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

Item 5. Other Information

Our Bylaws were revised to conform to the changes in the Maine Business Corporation Act and are included as Exhibit 3 (ii).

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

(a)	The following exhibits are filed as part of this report.
	Exhibit 3 (ii) Bylaws.
	Exhibit 31.1 Certification of Chief Executive Officer under Rules 13a-14 and 15d-14.
	Exhibit 31.2 Certification of Chief Financial Officer under Rules 13a-14 and 15d-14.
	Exhibit 32.1 Certification of Chief Executive Officer Under 18 U.S.C. § 1350.
	Exhibit 32.2 Certification of Chief Financial Officer Under 18 U.S.C. § 1350.
(b)	We filed a Current Report on Form 8-K or 8-K/A on July 21, 2003, September 2, 2003, September 5, 2003 and September 16, 2003.

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SIGNATURES

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

	BANKNORTH GROUP, INC.
Date: November 4, 2003	By:	/s/ William J. Ryan
		William J. Ryan Chairman, President and Chief Executive Officer
Date: November 4, 2003	By:	/s/ Stephen J. Boyle
		Stephen J. Boyle Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

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EXHIBIT INDEX

Exhibit 3 (ii) Bylaws.

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, dated November 4, 2003.

Exhibit 32.2 Certification of Chief Financial Officer, dated November 4, 2003.

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