Banknorth Group, Inc., December 31, 2004 10-K

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ALPUgkiXvn/Kk2BSd7kWkIeYGk0EYI6WbBzCO9ZKV4ZVOodvOquptWvCZ7Rpis0+ J9pwxk42zo7+sIUb6AA9ug== 0000950135-05-001088.txt : 20050228 0000950135-05-001088.hdr.sgml : 20050228 20050228172521 ACCESSION NUMBER: 0000950135-05-001088 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050228 DATE AS OF CHANGE: 20050228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKNORTH GROUP INC/ME CENTRAL INDEX KEY: 0000829750 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 010437984 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31251 FILM NUMBER: 05646832 BUSINESS ADDRESS: STREET 1: TWO PORTLAND SQUARE STREET 2: P O BOX 9540 CITY: PORTLAND STATE: ME ZIP: 04112 BUSINESS PHONE: 2077618500 MAIL ADDRESS: STREET 1: P O BOX 9540 CITY: PORTLAND STATE: ME ZIP: 04112-9540 FORMER COMPANY: FORMER CONFORMED NAME: PEOPLES HERITAGE FINANCIAL GROUP INC DATE OF NAME CHANGE: 19920703 10-K 1 b53274bge10vk.htm BANKNORTH GROUP, INC., DECEMBER 31, 2004 10-K Banknorth Group, Inc., December 31, 2004 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


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

For the fiscal year ended December 31, 2004


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

For the transition period from to .

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 Number)


P.O. Box 9540 Two Portland Square Portland, Maine (Address of principal executive offices)		04112-9540 (Zip Code)

Registrant’s telephone number, including area code: (207) 761-8500

Securities registered pursuant to Section 12(b) of the Act:


Title of Class		Name of Each Exchange on Which Registered

Common Stock, $.01 par value Preferred Stock Purchase Rights		New York Stock Exchange, Inc. New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act: Not Applicable

Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

As of June 30, 2004, the aggregate market value of the172,545,567 shares of Common Stock of the Registrant issued and outstanding on such date, excluding the approximately 2,772,906 shares held by all directors and executive officers of the Registrant as a group (which does not include unexercised stock options), was $5.5 billion. This figure is based on the last sale price of $32.48 per share of the Registrant’s Common Stock on June 30, 2004, as reported in The Wall Street Journal on July 1, 2004. Although directors of the Registrant and executive officers of the Registrant and its subsidiaries were assumed to be “affiliates” of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.

Number of shares of Common Stock outstanding as of February 11, 2005: 187,401,308

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated:

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in 2005 are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

BANKNORTH GROUP, INC.

2004 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS


		Page

PART I
Item 1.	BUSINESS		1
	General		1
	Pending Acquisition		1
	Business		1
	Acquisitions		2
	Subsidiaries and Other Equity Investments		2
	Competition		3
	Employees		4
	Supervision and Regulation		4
	Taxation		7
	Statistical Disclosure by Bank Holding Companies		8
	Availability of Information		8
Item 2.	PROPERTIES		9
Item 3.	LEGAL PROCEEDINGS		9
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		9
PART II
Item 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		10
Item 6.	SELECTED FINANCIAL DATA		11
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		54
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		55
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		109
Item 9A.	CONTROLS AND PROCEDURES		109
Item 9B.	OTHER INFORMATION		109
PART III
Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		109
Item 11.	EXECUTIVE COMPENSATION		109
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		110
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		110
Item 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		110

PART IV
Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		110
	SIGNATURES		114
EX-10.(I) Retention Agmt. dated September 30, 2004
EX-10.(J)(2) Retirement Agmt. with William J. Ryan
EX-10.(K)(2) Retirement Agmt. with Peter J. Verrill
EX-10.(L)(4) Retirement Agmt. with John W. Fridlington
EX-10.(M)(2) Amendment to Supplemental Retirement Plan
EX-10(N)(2) Amended Deferred Compensation Plan
EX-10(S)(2) First Amendment to the Amended and Restated 401(k) Plan
EX-21 Subsidiaries of Banknorth Group, Inc.
Ex-23 Consent of Independent Registered Public Accounting Firm
EX-31.1 Section 302 CEO Certification
EX-31.2 Section 302 CFO Certification
EX-32.1 Section 906 CEO Certification
EX-32.2 Section 906 CFO Certification

FORWARD-LOOKING STATEMENTS

In the normal course of business, we, in an effort to help keep our shareholders and the public informed about our operations, may from time to time issue or make certain statements, either in writing or orally, that are or contain forward-looking statements, as that term is defined in the U.S. federal securities laws. Generally, these statements relate to business plans or strategies, projected or anticipated benefits from acquisitions made by or to be made by us, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate” or similar expressions.

Although we believe that the anticipated results or other expectations reflected in our forward-looking statements are based on reasonable assumptions, we can give no assurance that those results or expectations will be attained. Forward-looking statements involve risks, uncertainties and assumptions (some of which are beyond our control), and as a result actual results may differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to, the following, as well as those discussed elsewhere herein:


	•	our investments in our businesses and in related technology could require additional incremental spending, and might not produce expected deposit and loan growth and anticipated contributions to our earnings;

	•	general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan and lease losses or a reduced demand for credit or fee-based products and services;

	•	changes in the domestic interest rate environment could reduce net interest income and could increase credit losses;

	•	the conditions of the securities markets could change, which could adversely affect, among other things, the value or credit quality of our assets, the availability and terms of funding necessary to meet our liquidity needs and our ability to originate loans and leases;

	•	changes in the extensive laws, regulations and policies governing financial holding companies and their subsidiaries could alter our business environment or affect our operations;

	•	the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending;

	•	competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments such as the internet or bank regulatory reform;

	•	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; and

	•	acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States generally and in our principal markets, which could have an adverse effect on our financial performance and that of our borrowers and on the financial markets and the price of our common stock.

You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events except to the extent required by federal securities laws.

PART I.


Item 1.	*Business*

General

We, Banknorth Group, Inc., are a Maine corporation and a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended. We conduct business from our headquarters in Portland, Maine and, as of December 31, 2004, 386 banking offices located in Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut. At December 31, 2004, we had consolidated assets of $28.7 billion and consolidated shareholders’ equity of $3.2 billion. Based on total assets at that date, we are one of the 30 largest commercial banking organizations in the United States.

Our principal asset is all of the capital stock of Banknorth, NA, a national bank which was initially formed as a Maine-chartered savings bank in the mid-19th century. Effective January 1, 2002, we consolidated all eight of our other banking subsidiaries and our trust company subsidiary into Banknorth, NA, which was known as “Peoples Heritage Bank” prior to these consolidations. Banknorth, NA operates under the trade name “Peoples Heritage Bank” in Maine, “Bank of New Hampshire” in New Hampshire and “Evergreen Bank” in New York to take advantage of the strong brand identity associated with the names of these predecessor banks. Banknorth, NA operates under its name elsewhere in our market areas. Through Banknorth, NA we offer a full range of banking services and products to individuals, businesses and governments throughout our market areas, including commercial, consumer and trust and investment services.

Unless the context otherwise requires, the words “Banknorth,” “we,” “our” and “us” herein refer to Banknorth Group, Inc. and its subsidiaries.

Pending Acquisition

Banknorth, Banknorth Delaware Inc., a Delaware corporation and a wholly-owned subsidiary of Banknorth, The Toronto-Dominion Bank (“TD”), a Canadian-chartered bank, and Berlin Merger Co., a Delaware corporation and a wholly-owned subsidiary of TD, are parties to an Amended and Restated Merger Agreement, dated as of August 25, 2004 (the “Merger Agreement”). Subject to the terms and conditions in the Merger Agreement, Banknorth will merge with and into Banknorth Delaware, and immediately thereafter Berlin Merger Co. will merge with and into Banknorth Delaware. Upon completion of the transaction, each Banknorth shareholder will be entitled to receive, in exchange for the shares of Banknorth common stock owned by such shareholder, a package of consideration consisting of (1) a number of TD common shares equal to 0.2351, (2) an amount in cash equal to $12.24 and (3) a number of shares of Banknorth Delaware common stock equal to 0.49, in each case multiplied by the number of shares of Banknorth common stock owned by such shareholder, plus cash in lieu of any fractional share interests. Upon completion of the transaction, TD will hold 51% of the outstanding common stock of Banknorth Delaware, which will change its name to TD Banknorth Inc. The transaction is subject to all required regulatory approvals, approval of the shareholders of Banknorth and other customary conditions. Banknorth’s shareholders approved the Merger Agreement and related proposals at a special meeting of Banknorth shareholders held on February 18, 2005. The transaction is expected to be completed on or about March 1, 2005.

Business

Our principal business consists of attracting deposits from the general public through our banking offices and using these deposits to originate loans secured by first mortgage liens on existing single-family (one-to-four units) residential real estate and existing multi-family (over four units) residential and commercial real estate, construction loans, commercial business loans and leases and consumer loans. We also provide various mortgage banking services and investment management services, as well as, through

subsidiaries of Banknorth, NA, engage in equipment leasing, investment planning, securities brokerage and insurance agency activities. We also invest in investment securities and other permitted investments.

We derive our income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investments. We also increasingly derive income from non-interest sources such as fees received in connection with various lending services, deposit services, wealth management services, investment planning services and merchant and electronic banking services, as well as insurance agency commissions and, from time to time, gains on the sale of assets. Our principal expenses are interest expense on deposits and borrowings, operating expenses, provisions for loan and lease losses and income tax expense. Funds for activities are provided principally by deposits, advances from the Federal Home Loan Bank, securities sold under repurchase agreements, amortization and prepayments of outstanding loans, maturities and sales of investment securities and other sources.

Through Banknorth, NA we provide extensive wealth management services to our customers. We offer employee benefit trust services in which we act as trustee, custodian, administrator and/or investment advisor, among other things, for employee benefit plans and for corporate, self-employed, municipal and not-for-profit employers located throughout our market areas. In addition, we serve as trustee of both living trusts and trusts under wills and in this capacity hold, account for and manage financial assets, real estate and special assets. Custody, estate settlement and fiduciary tax services, among others, also are offered by us. Assets held in a fiduciary capacity by us are not included in our consolidated balance sheet for financial reporting purposes.

We are subject to extensive regulation and supervision under federal and state banking laws. For additional information in this regard, see “Supervision and Regulation” below.

Acquisitions

Our profitability and market share have been enhanced in recent years through internal growth and acquisitions of both financial and nonfinancial institutions. We continually evaluate acquisition opportunities and frequently conduct due diligence in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations frequently take place and future acquisitions involving cash, debt or equity securities can be expected. Acquisitions typically involve the payment of a premium over book and market values, and therefore, some pro forma dilution of our book value and net income per common share may occur in connection with any future transactions. Moreover, acquisitions commonly result in significant one-time charges against earnings, although cost-savings, especially incident to in-market acquisitions, frequently are anticipated, as are revenue enhancements.

Subsidiaries and Other Equity Investments

Our only direct subsidiaries at December 31, 2004 were Banknorth, NA, Northgroup Realty, Inc., an acquired subsidiary which holds certain commercial real estate located in Burlington, Vermont, Northgroup Captive Insurance, Inc. and the financing vehicles Peoples Heritage Capital Trust I, Banknorth Capital Trust I, Banknorth Capital Trust II, Ipswich Statutory Trust I and Cape Cod Capital Trust I. For additional information on these trusts, see Note 12 to the Consolidated Financial Statements included in Item 8 hereof. Northgroup Captive Insurance, Inc. is a subsidiary formed in 2002 to self-insure against certain of our risks.

Set forth below is a brief description of certain of our indirect non-banking subsidiaries and certain other equity investments.

Insurance Agency Activities. We conduct insurance agency activities through Banknorth Insurance Group, which holds all of the outstanding stock of Morse, Payson & Noyes Insurance, the largest insurance agency in Maine. Morse Payson & Noyes Insurance also conducts business in (i) Vermont, (ii) New Hampshire under the trade names A.D. Davis Insurance and Banknorth Insurance Agency, (iii) Massachusetts through Banknorth Insurance Agency, Inc./ MA, a wholly-owned subsidiary of Morse,

Payson & Noyes Insurance, (iv) Connecticut under the trade name Banknorth Insurance Agency and (v) upstate New York under the trade name Community Insurance Agencies.

Investment Planning and Securities Brokerage Activities. We conduct investment planning and securities brokerage activities, as well as offer investments in mutual funds and annuities, throughout our market areas through Bancnorth Investment Group, Inc., an unaffiliated company and a wholly-owned subsidiary of Primevest Financial Services, Inc. (“Primevest”). Through Banknorth NA and Bancnorth Investment Group, Inc., we offer these services to individuals and small businesses from an offices located in Maine, Massachusetts, New Hampshire, Vermont, New York and Connecticut. Insurance and fixed annuities commissions are received through Banknorth NA’s subsidiary Bancnorth Investment Planning Group, Inc. and its subsidiary Bancnorth Investment and Insurance Agency, Inc. Sales professionals at Banknorth, NA and Bancnorth Investment Group, Inc. are registered representatives of Bancnorth Investment Group, Inc., a registered broker/ dealer, and all securities brokerage activities are conducted through Primevest Financial Services, Inc., which also is a registered broker-dealer. The sales professionals receive referrals from our branch offices throughout our market areas.

In addition to the foregoing, Bancnorth Investment Group, Inc. conducts insurance sales activities directly in Maine, New Hampshire, Connecticut, Vermont and New York and Massachusetts. Bancnorth Investment Group, Inc. either directly or through other agencies, offers life insurance and long-term care insurance products in conjunction with the sales of investments and annuities.

Equipment Leasing Activities. We conduct equipment leasing activities through Banknorth Leasing Corp. This company engages in direct equipment leasing activities, primarily involving business and office equipment, in New England, New York and certain other states. At December 31, 2004, Banknorth Leasing Corp. had $90.2 million of leases outstanding.

Investment Activities. Northgroup Asset Management Company is a Maine corporation which was formed for purposes of effectively managing assets and investments for the benefit of Banknorth, NA. Northgroup Asset Management Company employs staff in its offices in Portland, Maine who are engaged in the management of its assets.

Other Equity Investments. We hold certain other equity investments, primarily through Banknorth, NA and Four Eighty-One Corp., a wholly-owned subsidiary of Banknorth, NA. At December 31, 2004, these investments consisted of (i) $61.3 million of interests in limited partnerships formed for the purpose of investing primarily in real estate for lower-income families in our market areas, plus commitments to invest up to an additional $22.7 million in such partnerships, and (ii) an aggregate of $30.2 million of interests in limited partnerships which invest primarily in small business investment companies in our market areas, plus commitments to invest up to an additional $17.1 million in such partnerships. For additional information about these investments see Note 17 to the Consolidated Financial Statements included in Item 8 hereof.

Competition

We are subject to vigorous competition in all aspects and areas of our business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. We also compete with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low-cost or guaranteed loans to certain borrowers. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services than us. Competition from both bank and non-bank organizations will continue.

The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Technological advances are likely to enhance competition by enabling more companies to provide financial resources. As a result, our future success will depend in part on our ability to address our customers’ needs

by using technology. We cannot assure you that we will be able to effectively develop new technology-driven products and services or be successful in marketing these products to our customers. Many of our competitors have far greater resources than we have to invest in technology.

Employees

We had approximately 7,200 full-time equivalent employees as of December 31, 2004. None of these employees is represented by a collective bargaining agent, and we believe that we enjoy good relations with our personnel.

Supervision and Regulation

The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to Banknorth. The regulatory framework is intended primarily for the protection of depositors and the insurance funds administered by the FDIC and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.

General. Banknorth currently is registered as a bank holding company and a financial holding company under the Bank Holding Company Act of 1956, as amended. As such, we are subject to regulation, supervision and examination by the Federal Reserve Board. We also are registered as a Maine financial institution holding company under Maine law and as such are subject to regulation and examination by the Superintendent of Financial Institution of the State of Maine. Banknorth, NA is a national bank subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”), its chartering authority, and by the Federal Deposit Insurance Corporation (“FDIC”), which insures Banknorth, NA’s deposits to the maximum extent permitted by law.

Financial Modernization. The Bank Holding Company Act permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and which are not authorized for bank holding companies. A bank holding company may become a financial holding company if each of its subsidiary banks is “well capitalized” under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the applicable regulations thereunder, is “well managed” and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration with the Federal Reserve Board that the bank holding company seeks to become a financial holding company. Banknorth became a financial holding company effective January 25, 2002.

No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a “satisfactory” Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of “satisfactory” or better.

Bank Acquisitions. Pursuant to the Bank Holding Company Act, we are required to obtain the prior approval of the Federal Reserve Board before acquiring more than 5% of any class of voting stock of any bank that is not already majority owned by us. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company became able to acquire banks in states other than its home state beginning September 29, 1995, without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and less than 30% of such deposits in that state (or such lesser or greater amount set by state law).

The Interstate Banking and Branching Act also authorizes banks to merge across state lines, subject to certain restrictions, thereby creating interstate branches. Pursuant to the Interstate Banking and Branching Act, a bank also may open new branches in a state in which it does not already have banking operations if the state enacts a law permitting such de novo branching.

Capital and Operational Requirements. The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to U.S. banking organizations such as Banknorth and Banknorth, NA. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. “Tier 1 capital” generally consists of common and qualifying preferred stockholders’ equity, less certain intangibles and other adjustments. “Tier 2 capital” and “Tier 3 capital” generally consist of subordinated and other qualifying debt, preferred stock that does not qualify as Tier 1 capital and the allowance for credit losses up to 1.25% of risk-weighted assets.

The sum of Tier 1, Tier 2 and Tier 3 capital, less investments in unconsolidated subsidiaries, represents qualifying “total capital,” at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 capital and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk weights, based primarily on relative credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. At December 31, 2004, our Tier 1 risk-based capital and total risk-based capital ratios under these guidelines were 9.96% and 12.13%, respectively.

The “leverage ratio” requirement is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3%, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3%. At December 31, 2004, our leverage ratio was 7.58%.

Federal bank regulatory agencies require banking organizations that engage in significant trading activity to calculate a capital charge for market risk. Significant trading activity means trading activity of at least 10% of total assets or $1 billion, whichever is smaller, calculated on a consolidated basis for bank holding companies. Federal bank regulators may apply the market risk measure to other banks and bank holding companies as the agency deems necessary or appropriate for safe and sound banking practices. Each agency may exclude organizations that it supervises that otherwise meet the criteria under certain circumstances. The market risk charge will be included in the calculation of an organization’s risk-based capital ratios.

FDICIA identifies five capital categories for insured depository institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and requires the respective U.S. federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding

company under any such guarantee is limited to the lesser of 5% of the bank’s assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness related generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.

The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, Banknorth, NA is considered “well capitalized.”

The Federal bank regulatory agencies also have adopted regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. That evaluation will be made as part of the institution’s regular safety and soundness examination. Banking agencies also have adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance sheet position) in the determination of a bank’s capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. The banking agencies do not intend to establish an explicit risk-based capital charge for interest rate risk but will continue to assess capital adequacy for interest rate risk under a risk assessment approach based on a combination of quantitative and qualitative factors and have provided guidance on prudent interest rate risk management practices.

Distributions. We derive funds for cash distributions to our stockholders primarily from dividends received from our banking subsidiary. Banknorth, NA is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate U.S. federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of the bank or bank/financial holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.

In addition to the foregoing, the ability of us and Banknorth, NA to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. Our right and the rights of our stockholders and creditors to participate in any distribution of the assets or earnings of our subsidiaries is further subject to the prior claims of creditors of such subsidiaries.

“Source of Strength” Policy. According to Federal Reserve Board policy, bank/financial holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank/financial holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC — either as a result of default of a banking or thrift subsidiary of a bank/financial holding company such as Banknorth or related to FDIC assistance provided to a subsidiary in danger of default — the other banking subsidiaries of such bank/financial holding company may be assessed for the FDIC’s loss, subject to certain exceptions.

Community Investment and Consumer Protection Laws. In connection with its lending activities, Banknorth, NA is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the federal Home Mortgage

Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and Community Reinvestment Act.

The Community Reinvestment Act requires insured institutions to define the communities that they serve, identify the credit needs of those communities and adopt and implement a “Community Reinvestment Act Statement” pursuant to which they offer credit products and take other actions that respond to the credit needs of the community. The responsible federal banking regulator must conduct regular Community Reinvestment Act examinations of insured financial institutions and assign to them a Community Reinvestment Act rating of “outstanding,” “satisfactory,” “needs improvement” or “unsatisfactory.” The current Community Reinvestment Act rating, which is from a 2001 examination, of Banknorth, NA is “outstanding.”

Miscellaneous. Banknorth, NA is subject to certain restrictions on loans to Banknorth or its non-bank subsidiaries, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of Banknorth or its non-bank subsidiaries. Banknorth, NA also is subject to certain restrictions on most types of transactions with Banknorth or its non-bank subsidiaries, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms.

Regulatory Enforcement Authority. The enforcement powers available to federal banking regulators is substantial and includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Sarbanes-Oxley Act of 2002. On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the new legislation (i) created a public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts, as well as extended the period during which certain types of lawsuits can be brought against a company or its insiders.

Taxation

We are subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code. Banknorth and its subsidiaries, as members of an affiliated group of corporations within the meaning of Section 1504 of the Internal Revenue Code, file a consolidated federal income tax return, which has the effect of eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income.

We also are subject to various forms of state taxation under the laws of Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut as a result of the business which we conduct in these states. We are also subject to taxation in several states related to business conducted by our leasing company.

Statistical Disclosure by Bank Holding Companies

The following information, included under Items 6, 7 and 8 of this report, is incorporated by reference herein.

Table 2 — Three-Year Average Balance Sheets, which presents average balance sheet amounts, related taxable equivalent interest earned or paid and related average yields earned and rates paid and is included in Item 7;

Table 3 — Changes in Net Interest Income, which presents changes in taxable equivalent interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and is included in Item 7;

Table 12 — Securities Available for Sale and Held to Maturity, which presents information regarding carrying values of investment securities by category of security and is included in Item 7;

Table 13 — Maturities of Securities, which presents information regarding the maturities and weighted average yield of investment securities by category of security and is included in Item 7;

Table 14 — Composition of Loan Portfolio, which presents the composition of loans and leases by category of loan and lease and is included in Item 7;

Table 15 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, 2004, which presents maturities and sensitivities of loans and leases to changes in interest rates and is included in Item 7;

Table 22 — Five Year Schedule of Nonperforming Assets, which presents information concerning non-performing assets and accruing loans 90 days or more overdue and is included in Item 7;

“Credit Risk Management” and Note 1 to the Consolidated Financial Statements, which discuss our policies for placing loans on non-accrual status, as well as in the case of the former potential problem loans, which are included in Items 7 and 8, respectively;

Table 23 — Five-Year Table of Activity in the Allowance for Loan and Lease Losses, included in Item 7;

Table 25 — Allocation of the Allowance for Loan and Lease Losses — Five Year Schedule, included in Item 7;

Table 23 — Net Charge-offs as a Percent of Average Loans and Leases Outstanding, included in Item 7;

Table 2 — Three-Year Average Balance Sheets, which includes average balances of deposits by category of deposit and is included in Item 7;

Table 20 — Maturity of Certificates of Deposit of $100,000 or more at December 31, 2004, included in Item 7;

“Selected Financial Data,” which presents return on assets, return on equity, dividend payout and equity to assets ratios and is included in Item 6; and

Note 11 to the Consolidated Financial Statements, which includes information regarding short-term borrowings and is included in Item 8.

For additional information regarding our business and operations, see “Selected Financial Data” in Item 6 hereof, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 hereof and the Consolidated Financial Statements in Item 8 hereof.

Availability of Information

We make available on our web site, which is located at http://www.banknorth.com, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on the date which we

electronically file these reports with the Securities and Exchange Commission. Investors are encouraged to access these reports and the other information about our business and operations on our web site.


Item 2.	*Properties*

At December 31, 2004, we conducted business from our executive offices at Two Portland Square, Portland, Maine and 386 banking offices located in Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut.

The following table sets forth certain information with respect to our offices as of December 31, 2004.


		Number of
State		Banking Offices		Deposits

				(Dollars in Thousands)
Maine			60	$	2,808,559
New Hampshire			76		4,190,703
Massachusetts			144		6,987,858
Vermont			36		1,672,390
New York			27		1,157,935
Connecticut			43		2,410,136

	Total		386	$	19,227,581

For additional information regarding our premises and equipment and lease obligations, see Notes 7 and 17 respectively, to the Consolidated Financial Statements included in Item 8 hereof.


Item 3.	*Legal Proceedings*

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


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

There were no matters submitted to a vote of our security holders in the fourth quarter of 2004.

PART II.


Item 5.	*Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities*

Market Information and Related Matters. Our common stock is traded on the New York Stock Exchange, Inc (“NYSE”). The following table sets forth the high and low prices of our common stock and the dividends declared per share of common stock for the periods indicated.


	Market Price
					Dividends Declared
2004	High		Low		Per Share

First Quarter	$	34.45	$	30.53	$	0.195
Second Quarter		34.75		30.25		0.195
Third Quarter		36.10		30.49		0.200
Fourth Quarter		36.71		34.49		0.200
2003


First Quarter	$	24.02	$	20.60	$	0.160
Second Quarter		26.68		21.09		0.160
Third Quarter		29.70		25.43		0.190
Fourth Quarter		33.57		27.58		0.190

As of December 31, 2004, there were 179,297,987 shares of common stock outstanding which were held by approximately 19,900 holders of record. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.

We have historically paid quarterly dividends on our common stock and currently intend to continue to do so in the foreseeable future. Our ability to pay dividends depends on a number of factors, however, including restrictions on the ability of Banknorth, NA to pay dividends under federal laws and regulations, and as a result there can be no assurance that dividends will be paid in the future.

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


					Total Number of
					Shares Purchased as		Maximum Number of
	Total Number		Average		Part of Publicly		Shares that May Yet Be
	of Shares		Price Paid		Announced Plans or		Purchased Under the
Period	Purchased		per Share		Programs		Plans or Programs(1)

October 1-31, 2004		—		—		—		2,853,200
November 1-30, 2004		—		—		—		2,853,200
December 1-31, 2004		—		—		—		2,853,200
Total		—		—		—		2,853,200


(1)	An 8,000,000 share repurchase program was approved by the Board of Directors in February 2002. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments” in Item 7.


Item 6.	*Selected Consolidated Financial Data*


		2004			2003			2002			2001			2000

Condensed Income Statement
Net interest income		$	933,382		$	840,831		$	796,517		$	679,890		$	603,550
Provision for loan and lease losses			40,340			42,301			44,314			41,889			23,819

Net interest income after loan and lease loss provision			893,042			798,530			752,203			638,001			579,731
Noninterest income(1)			339,799			367,159			274,508			240,505			211,188
Noninterest expense(2)			765,101			641,270			579,392			515,317			502,392

Income before income taxes			467,740			524,419			447,319			363,189			288,527
Income tax expense			163,097			173,660			148,681			124,104			96,793
Cumulative effect of change in accounting principle, net of tax			—			—			—			(290	)		—

Net income		$	304,643		$	350,759		$	298,638		$	238,795		$	191,734

Per Common Share
Basic earnings per share		$	1.78		$	2.18		$	2.01		$	1.70		$	1.33
Diluted earnings per share			1.75			2.15			1.99			1.68			1.32
Dividends per share			0.79			0.70			0.58			0.53			0.50
Book value per share at year end			17.71			15.54			13.70			11.83			9.42
Tangible book value per share at year end			9.82			8.37			9.09			8.75			8.11
Stock price:
	High		36.71			33.57			27.22			24.39			21.13
	Low		30.25			20.60			20.44			18.13			10.38
	Close		36.60			32.53			22.60			22.52			19.94
Period end common shares outstanding			179,298			162,188			150,579			151,221			141,245
Weighted average shares outstanding — diluted			174,158			163,520			149,829			141,802			145,194

Financial Ratios
Return on average assets			1.08	%		1.37	%		1.39	%		1.29	%		1.05	%
Return on average equity			10.63			14.51			16.25			16.48			15.69
Net interest margin(3)			3.72			3.66			4.07			3.99			3.60
Net interest rate spread(3)			3.47			3.41			3.69			3.43			3.05
Average equity to average assets			10.17			9.44			8.56			7.82			6.66
Efficiency ratio(4)			60.09			53.09			54.10			55.34			61.67
Noninterest income as a percent of total income			26.69			30.39			25.63			26.13			25.92
Tier 1 leverage capital ratio			7.58			6.65			7.13			7.14			7.02
Tier 1 risk-based capital ratio			9.98			8.96			9.66			9.59			10.56
Total risk-based capital ratio			12.16			11.29			12.15			12.23			11.81
Dividend payout ratio(5)			44.36			31.90			28.76			30.27			36.91

Average Balance Sheet
Assets		$	28,173,424		$	25,616,347		$	21,460,719		$	18,545,709		$	18,343,226
Loans and leases(6)			17,734,537			15,633,207			13,236,803			11,246,007			10,485,289
Deposits			18,877,811			17,302,983			14,566,644			12,529,630			11,891,481
Shareholders’ equity			2,865,540			2,416,926			1,838,064			1,449,353			1,222,378

Year End Balance Sheet Data
Assets		$	28,687,810		$	26,453,735		$	23,418,941		$	21,076,586		$	18,233,810
Loans and leases, net(7)			18,349,842			16,113,675			13,847,735			12,525,493			10,692,112
Securities(8)			6,992,778			7,247,232			6,947,876			6,156,861			5,880,658
Goodwill and identifiable intangible assets			1,416,156			1,163,054			695,158			466,633			185,520
Deposits			19,227,581			17,901,185			15,664,601			14,221,049			12,107,256
Borrowings			5,990,705			5,882,864			5,432,581			4,602,388			4,659,390
Shareholders’ equity			3,176,114			2,520,519			2,063,485			1,789,115			1,330,857
Nonperforming assets(9)			81,103			63,103			68,953			81,227			67,132


(1)	Noninterest income included net securities losses of $17.8 million and gains of $29.2 million in the fourth quarter of 2004 and second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods.

(2)	Noninterest expense included prepayment penalties on borrowings of $61.5 million and $28.5 million in the fourth quarter of 2004 and the second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods.

(3)	Net interest margin represents net interest income divided by average interest-earning assets and net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, in each case calculated on a fully-taxable equivalent basis.

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

(5)	Cash dividends paid divided by net income.

(6)	Includes loans and leases held for sale.

(7)	Excludes loans and leases held for sale.

(8)	Includes securities held to maturity.

(9)	Nonperforming assets consist of nonperforming loans, other real estate owned, repossessed assets and investment securities placed on non-accrual status.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except per share data and as noted)*

The discussion and analysis that follows focuses on the results of operations of Banknorth Group, Inc. during 2004, 2003, and 2002 and its financial condition at December 31, 2004 and 2003. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 2004 have been reclassified to conform to the 2004 presentation.

General

Banknorth Group, Inc. is a Maine corporation and a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2004, we had consolidated assets of $28.7 billion and consolidated shareholders’ equity of $3.2 billion. Based on total assets at that date, we are one of the 30 largest commercial banking organizations in the United States.

Our principal asset is all of the capital stock of Banknorth, NA (the “Bank”), a national bank which was initially formed as a Maine-chartered savings bank in the mid-19th century. Banknorth, NA operates under the trade name “Peoples Heritage Bank” in Maine, “Bank of New Hampshire” in New Hampshire and “Evergreen Bank” in New York. Banknorth, NA operates under its name elsewhere in our market areas. At December 31, 2004, Banknorth, NA had 386 banking offices in these states and we served approximately 1.3 million households and commercial customers. Through the Bank and its subsidiaries, we offer a full range of banking services and products to individuals, businesses and governments throughout our market areas, including commercial banking, consumer banking, investment management, investment planning and insurance agency services.

We are subject to extensive regulation and supervision under federal and state banking laws. See “Regulation and Supervision” under Item 1.


	*Business Strategy*

Our primary business segment is Community Banking, which represents over 90% of our consolidated net income and consolidated assets and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans and leases, commercial real estate loans, residential mortgage loans and a variety of consumer loans. In addition to keeping loans for our own portfolio, we sell residential mortgage loans into the secondary market. We also invest in mortgage-backed securities and securities backed by the United States Government and agencies thereof, as well as other securities. In addition to Community Banking, we have Insurance Agency, Investment Planning and Wealth Management segments, each of which represents less than 5% of our consolidated net income and consolidated assets and in the aggregate represent less than 10% of our consolidated net income and consolidated assets. Our Insurance Agency business earns commissions on insurance agency activities, our investment planning business earns fees on the sales of mutual funds and third party fixed annuities and our Wealth Management business reflects fees from wealth management operations.

Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in New England and upstate New York; developing new financial products, services and delivery channels; closely managing yields on earning assets and rates on interest-bearing liabilities; increasing noninterest income through, among other things, expanded wealth management, investment planning and insurance agency services, controlling the growth of noninterest expenses and maintaining strong asset quality. It is also part of our business strategy to supplement internal growth with targeted acquisitions of other financial institutions and insurance agencies in our current or contiguous market areas. See “Acquisitions” below and under Item 1.

We strive to maintain a diversified loan and deposit mix and strong asset quality. We are focused on improving efficiencies as we integrate all of our acquisitions. We will continue to evaluate our operations

and organizational structure to ensure they are closely aligned with our goal of increasing earnings per share.

Executive Overview

Our net income was $304.6 million in 2004 as compared to $350.8 million in 2003, a decrease of 13%. Our diluted earnings per share was $1.75 in 2004 as compared to $2.15 in 2003, a decrease of $0.40 per diluted share, or 18%. The decline was attributable to costs to implement our balance sheet deleveraging program in the fourth quarter of 2004 ($0.30 per diluted share) and certain merger and consolidation costs ($0.23 per diluted share), including those associated with the pending acquisition of 51% of Banknorth by The Toronto-Dominion Bank (“TD”). Return on average assets and return on average equity were 1.08% and 10.63%, respectively, in 2004 compared to 1.37% and 14.51%, respectively, in 2003. In addition to the impact of the deleveraging, the decline in the return on average equity was also impacted by the intangible equity resulting from our acquisitions. The following were significant factors related to 2004 results as compared to 2003.


	•	In October 2004, we implemented a deleveraging program under which we sold approximately $1.2 billion of securities with a weighted average yield of 2.77% and prepaid a similar amount of borrowings with a weighted average rate of 4.77%, both of which had a duration of approximately 3.5 years. A $51.6 million after-tax loss was incurred in connection with this program in the fourth quarter. This program is expected to improve our annual net interest margin by approximately 28 basis points.

	•	We completed the acquisitions of CCBT Financial Companies, Inc. and Foxborough Savings Bank on April 30, 2004 and an insurance agency on July 1, 2004. Acquisitions continue to be an important part of our long-term strategy for growth.

	•	Net interest income increased 11% in 2004 compared to 2003, primarily due to a $2.1 billion increase in average earning assets. The net interest margin increased by 6 basis points in 2004 versus 2003 primarily due to the 9% increase in earning assets.

	•	Noninterest income from deposit services, insurance agency commissions, merchant and electronic banking services, wealth management services and investment planning services increased by $36.9 million (or 16%) in the aggregate, due in part to acquisitions. This aggregate increase was offset by a decrease in net securities gains of $50.2 million (primarily related to the balance sheet deleveraging program) and a decrease in other noninterest income of $14.5 million. See Table 6 for details.

	•	During 2004, we recorded strong growth in commercial real estate loans, commercial business loans and leases and consumer loans and leases. During the year, commercial business loans and leases increased 20%, commercial real estate loans increased 13% and consumer loans increased 11%. Excluding the effects of acquisitions, total average loans and leases increased 8%.

	•	Asset quality remained strong despite an increase in nonperforming assets of $18 million at December 31, 2004 as compared to December 31, 2003, which was attributable to increases in commercial real estate and commercial business loans and leases.

	•	Total deposits increased by 7% during 2004. Excluding acquisitions, total average deposits increased $554 million, or 3%, as average checking deposits increased 16% and savings and money market deposits increased 6%, while certificates of deposit declined 11%.

Our financial condition and liquidity rating remain strong. The following are important factors in understanding our financial condition and liquidity:


	•	using the definitions of banking regulators, we continue to be “well-capitalized”;

	•	the Moody’s rating of our senior notes was “A3” at December 31, 2004;


	•	we increased our annual dividend by 13% in 2004 compared to 2003; and

	•	our liquidity measures at December 31, 2004 continue to meet our policy guidelines.

Recent Developments

Our board of directors has authorized us to repurchase in the coming months up to 15.3 million shares of Banknorth common stock, or 8% of the outstanding shares (which amount is inclusive of prior authorizations). Approximately 8 million of the repurchased shares will cover shares issued to our employees in the last six months upon the exercise of stock options. Repurchases are authorized to be made by Banknorth from time to time in open-market or privately-negotiated transactions as, in the opinion of management, market and business conditions warrant following completion of the acquisition of a majority interest in us by The Toronto-Dominion Bank. The repurchased shares will be held as treasury stock and may be reserved for issuance pursuant to our stock benefit plans. Shares will be purchased with cash obtained from internal resources.

Our board of directors also has authorized us to take certain actions to reduce our interest rate risk and more effectively use our capital. In this regard, our board has authorized an additional deleveraging program in the first quarter of 2005, pursuant to which we have sold or intend to sell certain medium to long-term assets and prepay certain short-term borrowings with the proceeds from such sales. Specifically, we have sold or intend to sell an aggregate of approximately $3.0 billion of assets, consisting of approximately $500 million of single-family residential loans, approximately $2.0 billion of mortgage-backed securities and approximately $500 million of fixed-rate securities of U.S. federal agencies. We will use the proceeds from the sale of these assets to prepay approximately $3.0 billion of short-term borrowings, consisting of repurchase agreements and FHLB advances.

In addition, in order to hedge the future cash flow of certain variable rate loans with interest rates tied to a designated prime rate or LIBOR, Banknorth, NA intends to enter into interest rate swap agreements which have an aggregate notional amount of $2.2 billion. We will pay a variable rate and receive a fixed rate pursuant to these agreements, which synthetically will convert variable rate assets to fixed-rate assets.

The foregoing actions will reduce the sensitivity of our operations to changes in interest rates because the assets to be sold have primarily fixed-rates and a weighted average duration of approximately 3.8 years and the borrowings to be prepaid have floating rates and are short-term. As a result, the maturities and interest rate sensitivity of our interest-earning assets and interest-bearing liabilities will be better matched. Moreover, we will sell over $2.5 billion of assets which are subject to prepayment risk.

The excess capital from the reduced asset levels resulting from the deleveraging program can be used by us to repurchase shares of Banknorth common stock or to support future growth, both internally and through acquisitions, which could result in a reduction in the capital available for repurchases. Investment securities as a percentage of our assets is expected to be approximately 19% in the first quarter as a result of purchases in the quarter to date, securities acquired in connection with the acquisition of Boston Fed Bancorp, Inc. and normal balance sheet growth.

We will incur a one-time loss of approximately $38 million after tax, or $0.21 per diluted share, in connection with the new deleveraging program, which will be included in our operations for the first quarter of 2005. Because the weighted average yield on the assets to be sold currently is approximately 4.03% and the weighted average rate on the borrowings to be prepaid currently is approximately LIBOR plus 23 basis points, the deleveraging program also will adversely affect our net income in future periods.

We estimate that the net effect of these actions on our diluted earnings per share for 2005 and future periods on an operating basis, exclusive of the one-time loss from the new deleveraging program, will not be significant.

We will remain a “well capitalized” institution for regulatory purposes upon completion of the new deleveraging program and the repurchase of shares pursuant to the new share repurchase program.


	*Acquisitions*

We completed three acquisitions in 2004 and on January 21, 2005, we completed the acquisition of BostonFed Bancorp, Inc. The following table sets forth certain information regarding our bank acquisitions in 2004, 2003 and 2002. All acquisitions were accounted for as purchases and as such, were included in our results of operations from the date of acquisition.

Table 1 — Acquisitions 2002 – 2004


							Transaction-Related Items
			Balance at
			Acquisition Date						Other						Total
	Acquisition								Identifiable		Cash		Shares		Purchase
	Date		Assets		Equity		Goodwill		Intangibles		Paid		Issued		Price

	(Dollars and shares in millions)
CCBT Financial Companies, Inc.		4/30/2004	$	1,292.9	$	108.5	$	178.2	$	19.4	$	—		9.2	$	298.1
Foxbrough Savings Bank		4/30/2004		241.8		22.8		62.2		2.2		88.9		—		88.9
First & Ocean Bancorp		12/31/2003		274.4		15.6		35.1		1.8		49.7		—		49.7
American Financial Holdings, Inc.		2/14/2003		2,690.3		408.2		422.2		9.3		328.5		13.4		711.4
Warren Bancorp, Inc.		12/31/2002		466.1		45.3		90.5		2.7		59.8		2.7		136.6
Bancorp Connecticut, Inc.		8/31/2002		661.7		61.4		96.9		8.7		161.2		—		161.2
Ipswich Bancshares, Inc.		7/26/2002		318.0		13.9		22.0		4.8		19.9		0.9		40.1

In addition to the bank acquisitions in the above table, we acquired four insurance agencies from 2002 to 2004. The total purchase price for these agencies was $16.8 million. For additional information regarding our bank acquisitions, see Note 3 to the Consolidated Financial Statements.


	Results of Operations


	*Comparison of 2004 and 2003*


	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 source of net revenue. Net interest income is affected by changes in interest rates and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities.

Table 2 — Three-Year Average Balance Sheets

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on 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; (v) net interest margin. For purposes of the table 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 securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Information is based on average daily balances during the indicated periods.


	Year Ended December 31,

	2004							2003							2002

	Average					Yield/		Average					Yield/		Average					Yield/
	Balance		Interest			Rate		Balance		Interest			Rate		Balance		Interest			Rate

Loans and leases(1):
Residential real estate mortgages	$	2,997,572	$	150,245			5.01%	$	2,839,969	$	159,215			5.61%	$	2,635,952	$	177,837			6.75%
Commercial real estate mortgages		5,959,510		345,147			5.79%		5,162,413		312,681			6.06%		4,293,816		298,412			6.95%
Commercial business loans and leases		3,686,919		181,437			4.92%		3,153,293		160,761			5.10%		2,665,973		158,260			5.94%
Consumer loans and leases		5,090,536		261,358			5.13%		4,477,532		251,347			5.61%		3,641,062		250,971			6.89%

Total loans and leases		17,734,537		938,187			5.29%		15,633,207		884,004			5.65%		13,236,803		885,480			6.69%
Investment securities		7,501,956		325,199			4.33%		7,464,162		314,701			4.22%		6,403,807		353,576			5.52%
Securities purchased under agreements to resell		419		7			1.75%		—		—			0.00%		—		—			0.00%
Federal funds sold and other short-term investments		9,567		83			0.86%		11,004		160			1.46%		60,257		1,064			1.77%

Total earning assets		25,246,479		1,263,476			5.00%		23,108,373		1,198,865			5.19%		19,700,867		1,240,120			6.30%

Bank-owned life insurance		503,957							465,446							359,994
Noninterest-earning assets		2,422,988							2,042,528							1,399,858

Total assets	$	28,173,424						$	25,616,347						$	21,460,719

Interest-bearing deposits:
Regular savings	$	2,563,838		7,513			0.29%	$	2,399,179		10,994			0.46%	$	1,743,501		15,444			0.89%
Now and money market accounts		7,678,644		62,336			0.81%		6,652,030		59,193			0.89%		5,463,179		79,384			1.45%
Certificates of deposit		4,647,746		91,149			1.96%		5,027,739		118,649			2.36%		4,693,518		149,028			3.18%
Brokered deposits		272		6			2.03%		—		—			0.00%		43,311		792			1.83%

Total interest-bearing deposits		14,890,500		161,004			1.08%		14,078,948		188,836			1.34%		11,943,509		244,648			2.05%
Borrowed funds		6,245,995		162,619			2.60%		5,693,420		163,302			2.87%		4,870,795		193,952			3.98%

Total interest-bearing liabilities		21,136,495		323,623			1.53%		19,772,368		352,138			1.78%		16,814,304		438,600			2.61%

Non-interest bearing deposits		3,987,311							3,224,035							2,623,135
Other liabilities		184,078							203,018							185,216
Shareholders’ equity		2,865,540							2,416,926							1,838,064

Total liabilities and shareholders’ equity	$	28,173,424						$	25,616,347						$	21,460,719

Net earning assets	$	4,109,984						$	3,336,005						$	2,886,563

Net interest income (fully-taxable equivalent)				939,853							846,727							801,520
Less: fully-taxable equivalent adjustments				(6,471	)						(5,896	)						(5,003	)

Net interest income			$	933,382						$	840,831						$	796,517

Net interest rate spread (fully-taxable equivalent)							3.47%							3.41%							3.69%
Net interest margin (fully-taxable equivalent)							3.72%							3.66%							4.07%


(1)	Loans and leases include portfolio loans and leases and loans held for sale.

Table 3 — Changes in Net Interest Income

The following table presents certain information on a fully-taxable equivalent basis regarding changes in our interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate) and (3) changes in rate/volume (change in rate multiplied by change in volume).


		Year Ended December 31, 2004 vs. 2003												Year Ended December 31, 2003 vs. 2002
		Increase (Decrease) Due to												Increase (Decrease) Due to

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

Interest income:
Loans and leases		$	118,725		$	(56,280	)	$	(8,262	)	$	54,183		$	160,319		$	(137,663	)	$	(24,132	)	$	(1,476	)
Investment securities			1,595			8,211			692			10,498			58,532			(83,249	)		(14,158	)		(38,875	)
Securities purchased under agreements to resell			—			—			7			7			—			—			—			—
Federal funds and other short-term investments			(21	)		(66	)		10			(77	)		(872	)		(187	)		155			(904	)

Total interest income			120,299			(48,135	)		(7,553	)		64,611			217,979			(221,099	)		(38,135	)		(41,255	)

Interest expense:
Interest-bearing deposits
	Regular savings		757			(4,079	)		(159	)		(3,481	)		5,836			(7,497	)		(2,789	)		(4,450	)
	NOW and money market accounts		9,137			(5,322	)		(672	)		3,143			17,238			(30,594	)		(6,835	)		(20,191	)
	Certificates of deposit		(8,968	)		(20,111	)		1,579			(27,500	)		10,628			(38,487	)		(2,520	)		(30,379	)
	Brokered deposits		—			—			6			6			(793	)		(793	)		794			(792	)

Total interest-bearing deposits			926			(29,512	)		754			(27,832	)		32,909			(77,371	)		(11,350	)		(55,812	)
Borrowed funds			15,859			(15,372	)		(1,170	)		(683	)		32,740			(54,066	)		(9,324	)		(30,650	)

Total interest expense			16,785			(44,884	)		(416	)		(28,515	)		65,649			(131,437	)		(20,674	)		(86,462	)

Net interest income (fully taxable equivalent)		$	103,514		$	(3,251	)	$	(7,137	)	$	93,126		$	152,330		$	(89,662	)	$	(17,461	)	$	45,207


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

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

Table 4 — Analysis of Net Interest Income


		Year Ended December 31,									Change

		2004			2003			2002			2004-2003			2003-2002

Components of net interest income
	Income on earning assets (fully-taxable equivalent)	$	1,263,476		$	1,198,865		$	1,240,120		$	64,611		$	(41,255	)
	Expenses on interest-bearing liabilities		323,623			352,138			438,600			(28,515	)		(86,462	)

	Net interest income (fully-taxable equivalent)		939,853			846,727			801,520			93,126			45,207
	Less: fully-taxable equivalent adjustments		(6,471	)		(5,896	)		(5,003	)		575			893

	Net interest income, as reported	$	933,382		$	840,831		$	796,517		$	92,551		$	44,314

Average yields and rates paid
	Earning assets yield (fully-taxable equivalent)		5.00	%		5.19	%		6.30	%		(0.19	)%		(1.11	)%
	Rate paid on interest-bearing liabilities		1.53	%		1.78	%		2.61	%		(0.25	)%		(0.83	)%

	Net interest rate spread (fully-taxable equivalent)		3.47	%		3.41	%		3.69	%		0.06	%		(0.28	)%

Net interest margin (fully-taxable equivalent)			3.72	%		3.66	%		4.07	%		0.06	%		(0.41	)%

Average balances
	Loans	$	17,734,537		$	15,633,207		$	13,236,803		$	2,101,330		$	2,396,404
	Investment securities		7,501,956			7,464,162			6,403,807			37,794			1,060,355
	Securities purchased under agreements to resell		419			—			—			419			—
	Fed funds sold and other short term investments		9,567			11,004			60,257			(1,437	)		(49,253	)

	Total earning assets		25,246,479			23,108,373			19,700,867			2,138,106			3,407,506
	Total interest-bearing liabilities		21,136,495			19,772,368			16,814,304			1,364,127			2,958,064

	Net earning assets	$	4,109,984		$	3,336,005		$	2,886,563		$	773,979		$	449,442

Fully-taxable equivalent net interest income for 2004 increased $93.1 million, or 11%, compared to 2003. This increase was primarily attributable to an increase in net earning assets and, to a lesser extent, a decrease in the weighted average rate paid on interest-bearing liabilities. The decrease in funding costs was attributable in part to noninterest-bearing deposits comprising a larger share of the funding base, which allows us to be less reliant on higher-costing certificates of deposit. Together, these factors more than offset the effects of lower prevailing interest rates.

Fully-taxable equivalent interest income increased by $64.6 million in 2004, as compared to 2003, as a result of a $2.1 billion increase in total earning assets. This increase was offset in part by a decrease in the weighted average yield on earning assets from 5.19% in 2003 to 5.00% in 2004, respectively, a decline of 4%. The increases in earning assets, primarily average balances of commercial real estate loans, consumer loans and leases and commercial business loans and leases, resulted from acquisitions and, to a lesser extent, internal growth.

Interest expense decreased by $28.5 million during 2004, as compared to 2003, as a result of a decrease in the weighted average rate paid on interest-bearing liabilities from 1.78% to 1.53% during 2003 and 2004, respectively, a decline of 14%. Year over year, the weighted average cost of deposits declined by 26 basis points and the weighted average cost of borrowings declined by 27 basis points. However, during the last half of 2004, funding costs began to rise. The favorable effect of lower funding costs was offset in part by a $1.4 billion, or 7%, increase in the average balance of interest-bearing liabilities during 2004, as compared to 2003, resulting from acquisitions and, to a lesser extent, internal growth. Average deposits increased by $1.6 billion, of which approximately $1.0 billion came from acquisitions. Excluding acquisitions, average deposits increased by $554 million, or 3%, as growth in demand and money market accounts more than offset a decline in higher-costing certificates of deposit. Average borrowings increased $553 million, or 10%, in 2004 compared to 2003 due, in part, to acquisitions.

Interest rate spread, which represents the difference between the yield earned on our interest-earning assets and the rate on our interest-bearing liabilities, increased to 3.47% from 3.41% on a fully-taxable equivalent basis during 2004 and 2003, respectively, because the 25 basis point decrease in the weighted average rate paid on interest-bearing liabilities was more than the 19 basis point decrease in the weighted average yield on interest-earning assets, reflecting our liability sensitivity during the year. See “Asset-Liability Management” below.

The net interest margin increased six basis points during 2004, of which approximately 2 basis points related to the deleveraging program in the fourth quarter of 2004.

Our net interest margin in 2004 benefited from interest rate swap agreements that synthetically convert fixed rate debt to variable rate debt. At December 31, 2004 and 2003, we had entered into $566.5 million and $216.5 million, respectively, notional amount of interest rate swap agreements on fixed-rate debt, pursuant to which we pay a variable rate (based on LIBOR plus a margin) and receive a fixed rate. The combined effect of these interest rate swap agreements was to lower interest expense by $8.4 million and $6.5 million during 2004 and 2003, respectively. See “Asset-Liability Management” for more detailed discussion.

Provision and Allowance for Loan and Lease Losses

Table 5 — Provision for Loan and Lease Losses


							Change

	Year Ended December 31,						2004-2003						2003-2002

	2004		2003		2002		Amount			Percent			Amount			Percent

Provision for loan and lease losses	$	40,340	$	42,301	$	44,314	$	(1,961	)		(5	)%	$	(2,013	)		(5	)%

The provision for loan and lease losses is recorded to bring the allowance for loan and lease losses to a level deemed appropriate by management based on factors discussed in the “Analysis and Determination of the Allowance for Loan and Lease Losses” in the “Risk Management” section. Although we use judgment in providing for losses, for the reasons discussed under the “Risk Management” section, there can be no assurance that we will not have to increase the amount of our provision for loan and lease losses in future periods. Since 2001, management has implemented numerous procedures to analyze the loan and lease portfolio, including the use of a corporate risk rating migration analysis and a charge-off history analysis, an industry analysis and a stress-testing analysis. As a result, our loan and lease portfolio has performed better with lower classified and criticized asset ratios. The provision in 2004 exceeded net charge-offs of $36.5 million. The provision for loan and lease losses declined slightly from the prior year as charge-offs were lower, asset quality trends remain good and the allowance was trending towards the upper end of the range. The coverage ratio (ratio of the allowance for credit losses to nonperforming loans) was 322% at December 31, 2004 compared to 389% at December 31, 2003. At December 31, 2004 the allowance for credit losses amounted to $249.8 million, or 1.34% of total portfolio loans and leases, as compared to $232.3 million, or 1.42% at December 31, 2003. As shown in Table 22, nonperforming assets amounted to $81.1 million at December 31, 2004 compared to $63.1 million at December 31, 2003.

See “Risk Management” below for further information on the provision for loan and lease losses, net charge-offs, nonperforming assets and other factors we consider in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.

Noninterest Income

Table 6 — Noninterest Income

The following table presents noninterest income for the periods indicated.


														Change

					Year Ended December 31,									2004-2003						2003-2002

					2004			2003			2002			Amount			Percent			Amount			Percent

Noninterest income:
	Deposit services				$	109,321		$	97,323		$	82,139		$	11,998			12	%	$	15,184			18	%
	Insurance brokerage commissions					50,311			45,714			44,439			4,597			10	%		1,275			3	%
	Merchant and electronic banking income, net					50,564			41,778			37,643			8,786			21	%		4,135			11	%
	Wealth management services					39,788			31,956			32,453			7,832			25	%		(497	)		(2	)%
	Bank-owned life insurance					23,282			22,930			20,002			352			2	%		2,928			15	%
	Investment planning services					19,418			15,692			11,572			3,726			24	%		4,120			36	%
	Net securities (losses) gains					(7,701	)		42,460			7,282			(50,161	)		(118	)%		35,178			483	%
	Other noninterest income:
		Covered call option premiums				18,024			27,756			7,279			(9,732	)		(35	)%		20,477			281	%
		Loan fee income				26,453			24,831			21,893			1,622			7	%		2,938			13	%
		Mortgage banking services income				6,562			10,212			8,539			(3,650	)		(36	)%		1,673			20	%
		Venture capital write-downs				(2,880	)		(592	)		(2,753	)		(2,288	)		(386	)%		2,161			78	%
		Miscellaneous income				6,657			7,099			4,020			(442	)		(6	)%		3,079			77	%

			Total other noninterest income			54,816			69,306			38,978			(14,490	)		(21	)%		30,328			78	%

				Total	$	339,799		$	367,159		$	274,508		$	(27,360	)		(7	)%	$	92,651			34	%

Deposit services income increased 12% in 2004, primarily as a result of volume and fee increases in deposit accounts and an increase in the volume of overdraft fees. This increase was partially offset by a decline in service charge income on business accounts resulting from the introduction of “Free Business Checking” in 2004. Acquisitions in 2004 and 2003 accounted for a significant portion of the increased volume.

Insurance agency commissions increased 10% in 2004, primarily as a result of increases in renewals and new business in 2004 as well as from agency acquisitions.

Merchant and electronic banking income represents fees and intercharge income generated by the use of our ATMs and debit cards issued by us, along with charges to merchants for credit card transactions processed, net of third-party costs directly attributable to handling these transactions. Merchant and electronic banking income increased 21% in 2004 due to increases in the volume of transactions processed and increased market share from acquisitions.

Wealth management services income increased 25% in 2004. This increase was primarily due to an increase in assets under management, which increased to $10.3 billion at December 31, 2004 from $8.9 billion at December 31, 2003, an increase of $1.4 billion. Improvement in the stock market performance and the acquisition of CCBT accounted for the increase in assets under management in 2004. The acquisition of CCBT in April 2004 accounted for approximately $4.5 million of the $7.8 million increase in revenue.

Income from bank owned life insurance (“BOLI”) increased $352 thousand during 2004. BOLI represents life insurance on the lives of certain employees who have consented to allowing Banknorth, NA to be the beneficiary of such policies. The cash surrender value of BOLI was $523.1 million at December 31, 2004 compared to $488.8 million at December 31, 2003. The $34.3 million increase was primarily comprised of amounts from acquisitions and increases in the cash surrender value of policies, which were partially offset by death claims. Most of our BOLI is invested in the “general account” of quality insurance companies. Standard and Poors rated all such general account carriers AA- or better at December 31, 2004. The average carrying value of BOLI in 2004 was $504 million, compared to $465 million in 2003.

Investment planning services income increased 24% during 2004. This increase was primarily attributable to commissions earned from increased sales of mutual funds and third party fixed annuities.

Net securities losses amounted to $7.7 million during 2004 and included a $17.8 million loss recorded as part of the deleveraging program related to the sale of $1.2 billion in securities. Net securities gains in 2003 included a $29.2 million gain as part of a deleveraging program related to the sale of $901 million of securities. Gains and losses from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future.

Other noninterest income decreased 21% during 2004. This decrease was primarily due to lower income from covered call option premiums, mortgage banking services income and venture capital investments. Premiums received on covered call options declined by $9.7 million during 2004. The covered call option program is managed in conjunction with the fixed income securities portfolio to provide revenue opportunities in addition to the interest income earned on the securities. Covered call activity will vary from year to year as interest rates, levels of market volatility and our strategic objectives for the fixed income securities portfolio change. Reduced market volatility in 2004 compared to the same period last year reduced the income opportunities related to covered call options. Mortgage banking services income declines were due largely to reduced volumes of residential loan originations and loan sales to the secondary market. Venture capital write-downs increased primarily due to lower earnings of a publicly traded bio-science company included in the portfolio of one of our venture capital funds.

Noninterest Expense

Table 7 — Noninterest Expense

The following table presents noninterest expense during the periods indicated.


											Change

					Year Ended December 31,						2004-2003						2003-2002

					2004		2003		2002		Amount			Percent			Amount			Percent

Noninterest expense Compensation and employee benefits					$	356,611	$	326,621	$	311,385	$	29,990			9	%	$	15,236			5	%
	Occupancy					63,892		59,200		52,422		4,692			8	%		6,778			13	%
	Equipment					48,480		47,459		40,933		1,021			2	%		6,526			16	%
	Data processing					43,141		40,940		40,702		2,201			5	%		238			1	%
	Advertising and marketing					25,550		22,000		17,239		3,550			16	%		4,761			28	%
	Amortization of identifiable intangible assets					8,627		8,946		6,492		(319	)		(4	)%		2,454			38	%
	Merger and consolidation costs					49,635		8,104		14,691		41,531			512	%		(6,587	)		(45	)%
	Prepayment penalties on borrowings					61,546		30,490		—		31,056			102	%		30,490			100	%
	Write-off of branch automation project					—		—		6,170		—			—			(6,170	)		(100	)%
	Other noninterest expense:
		Telephone				14,717		12,858		13,396		1,859			14	%		(538	)		(4	)%
		Office supplies				10,638		10,513		10,736		125			1	%		(223	)		(2	)%
		Postage and freight				10,657		11,187		9,707		(530	)		(5	)%		1,480			15	%
		Miscellaneous loan costs				4,930		5,984		4,290		(1,054	)		(18	)%		1,694			39	%
		Deposits and other assessments				3,756		3,752		3,541		4			0	%		211			6	%
		Collection and carrying costs of non-performing assets				2,717		2,694		2,713		23			1	%		(19	)		(1	)%
		Miscellaneous				60,204		50,522		44,975		9,682			19	%		5,547			12	%

			Total other noninterest expense			107,619		97,510		89,358		10,109			10	%		8,152			9	%

				Total	$	765,101	$	641,270	$	579,392	$	123,831			19	%	$	61,878			11	%

Compensation and employee benefits expense increased 9% during 2004 due primarily to merit increases and the effects of additional employees from acquisitions. The total number of full-time equivalent employees approximated 7,200 at December 31, 2004 compared to 6,700 at December 31, 2003. These increases were slightly offset by reduced expense associated with our self-funded medical plan resulting from a $3.2 million benefit related to favorable claims experience covering the period July 2002 (plan inception) through June 30, 2004. Pension expense (which is included in compensation and employee benefits expense) was $11.4 million and $12.9 million for the years ended December 31, 2004 and 2003, respectively. The decline was primarily due to the increased return on plan assets. The fair value of plan assets as of December 31, 2004 was $263.9 million compared to $237.5 million at December 31, 2003. The increase in plan assets was primarily due to a $47 million contribution in December 2003.

Occupancy expense in 2004 increased 8%. The $4.7 million increase was due primarily to the cost of additional facilities from acquisitions. Equipment expense increased $1.0 million, or 2%, in 2004 primarily due to additional maintenance cost of equipment (including ATMs) and increased security expenses.

Advertising and marketing expense increased 16% in 2004. The $3.6 million increase was primarily attributable to expenses incurred to identify and attract customers who were looking for new banking opportunities following Bank of America Corporation’s acquisition of FleetBoston Financial Corporation. The increases in this expense included additional media campaigns (television and radio), new advertising promotions and corporate sponsorships (such as for the Boston Bruins, “Win a day with Ray” promotions and Tobin Bridge sponsorships), as well as expense associated with the development of a new comprehensive product catalogue for use in all of our branches.

Merger and consolidation costs increased $41.5 million during 2004 primarily due to costs incurred in connection with our proposed transaction with TD and, to a lesser extent, our acquisitions of CCBT and Foxborough in April 2004 and our pending acquisition of BostonFed Bancorp, Inc. Merger and consolidation costs relating to the transaction with TD amounted to $38.9 million in 2004, which was principally comprised of $33.2 million of long-term incentive payments pursuant to the change-in-control provision of our Executive Incentive Plan. These non-refundable payments were paid in December 2004 in advance of completion of this transaction, which constitutes a change-in-control for purposes of the Executive Incentive Plan. For a tabular analysis of our merger and consolidation costs, see Note 10 to the Consolidated Financial Statements.

Other noninterest expense increased $10.1 million, or 10%, in 2004. This increase was largely due to a $3.4 million increase in professional (audit and legal) fees, due in part to additional expense incurred for compliance with Sarbanes-Oxley requirements, a $2.7 million increase in consulting fees and a $2.3 million increase in travel and entertainment expenses.

Taxes

Table 8 — Income Tax Expense


							Change

	Year Ended December 31,						2004-2003						2003-2002

	2004		2003		2002		Amount			Percent			Amount		Percent

Income tax expense	$	163,097	$	173,660	$	148,681	$	(10,563	)		(6	)%	$	24,979		17	%

Our effective tax rate was 35% in 2004 and 33% in 2003. The increase in the effective tax rate to 35% was primarily due to nondeductible compensation and transaction expenses relating to the merger with TD. We expect the effective tax rate to be approximately 35% in 2005.

We are subject to examinations by various federal and state governmental tax authorities from time to time regarding tax returns we have filed. Currently, certain state income tax returns filed by us in recent years are under examination. In June 2004, the Vermont Department of Taxes assessed three Vermont-based banks, previously acquired by us, for taxes, interest and penalties for the years 2000 and 2001 on the basis that subsidiary investment companies established by these banks pursuant to Vermont law should be considered part of our banking subsidiary for purposes of calculating taxes due the State of Vermont. We believe that we have substantial defenses to this assessment and are in the process of appealing it in accordance with administrative procedures. Although not considered reasonably probable, there can be no assurance that Vermont will not ultimately prevail on this matter. Our estimate of the range of reasonably possible exposure above established reserves on this matter is from $0 to $2.0 million, after federal tax benefits.

Comprehensive Income

Table 9 — Comprehensive Income


										Change

	Year Ended December 31,									2004-2003						2003-2002

	2004			2003			2002			Amount			Percent			Amount			Percent

Net income	$	304,643		$	350,759		$	298,638		$	(46,116	)		(13	)%	$	52,121			17	%
Unrealized gains (losses) on securities, net of reclassification adjustment and taxes		(7,231	)		(110,068	)		77,257			102,837			93	%		(187,325	)		(242	)%
Unrealized gains (losses) on cash flow hedges, net net of reclassification adjustment and taxes		146			1,575			(2,054	)		(1,429	)		(91	)%		3,629			177	%
Minimum pension liability, net of tax		(1,079	)		(446	)		(825	)		(633	)		(142	)%		379			46	%

Comprehensive income	$	296,479		$	241,820		$	373,016		$	54,659			23	%	$	(131,196	)		(35	)%

Our available for sale investment portfolio had net unrealized gains of $669 thousand, $11.8 million and $181.3 million ($435 thousand, $7.7 million and $117.5 million net of applicable income tax effects, respectively) at December 31, 2004, 2003 and 2002, respectively. The changes from year to year reflect changes in prevailing interest rates and, to a lesser degree, the size of the available for sale investment portfolio. For additional information, see Note 4 to the Consolidated Financial Statements. 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.

For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the Consolidated Financial Statements.

Segment Reporting

Our primary business segment is Community Banking. During 2004 and 2003, the Community Banking segment represented over 90% of the combined revenues and income of the consolidated group and, thus, this is the only reporting segment as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Insurance Agency, Investment Planning and Wealth Management each represented less than 5% of our combined revenues in 2004 and 2003 and consolidated assets at December 31, 2004 and 2003. Insurance Agency reflects commissions on insurance agency activities, Investment Planning reflects commissions from the sale of third party mutual funds, annuities, stocks and bonds and Wealth Management reflects fees from wealth management operations.

Table 10 — Business Segment Information

The following tables set forth selected operating data for our business segments in 2004 and 2003.


		Year Ended December 31, 2004

		Community			Insurance			Investment			Wealth
		Banking			Agency			Planning			Management			Total

Net interest income (expense)		$	934,244		$	(574	)	$	55		$	(343	)	$	933,382
Provision for loan and lease losses			40,340			—			—			—			40,340

Net interest income (expense) after provision for loan and lease losses			893,904			(574	)		55			(343	)		893,042

Noninterest income			227,787			51,389			19,418			41,205			339,799

Noninterest expense:
Compensation and employee benefits			290,970			32,624			13,269			19,748			356,611
Occupancy and equipment			105,966			4,695			765			946			112,372
Data processing			35,721			492			1,758			5,170			43,141
Advertising and marketing			24,878			275			45			352			25,550
Amortization of intangibles			8,263			364			—			—			8,627
Merger and consolidation costs			49,635			—			—			—			49,635
Other			159,170			5,026			1,601			3,368			169,165

	Total non-interest expense		674,603			43,476			17,438			29,584			765,101

Pre-tax income		$	447,088		$	7,339		$	2,035		$	11,278		$	467,740

Total assets		$	28,536,436		$	77,179		$	7,110		$	67,085		$	28,687,810

Net interest income and noninterest income as a percent of total income			91.3	%		4.0	%		1.5	%		3.2	%		100.0	%
Percent of pre-tax income to total pre-tax income			95.6	%		1.6	%		0.4	%		2.4	%		100.0	%
Percent of assets to total consolidated assets			99.5	%		0.3	%		0.0	%		0.2	%		100.0	%


		Year Ended December 31, 2003

		Community			Insurance			Investment			Wealth
		Banking			Agency			Planning			Management			Total

Net interest income (expense)		$	842,058		$	(367	)	$	10		$	(870	)	$	840,831
Provision for loan and lease losses			42,301			—			—			—			42,301

Net interest income (expense) after provision for loan and lease losses			799,757			(367	)		10			(870	)		798,530

Noninterest income			271,975			46,687			15,692			32,805			367,159

Noninterest expense:
Compensation and employee benefits			271,395			29,506			10,305			15,415			326,621
Occupancy and equipment			100,632			3,755			684			1,588			106,659
Data processing			34,960			473			1,301			4,206			40,940
Advertising and marketing			21,262			448			95			195			22,000
Amortization of intangibles			8,642			304			—			—			8,946
Merger and consolidation costs			8,104			—			—			—			8,104
Other			118,638			5,316			1,173			2,873			128,000

	Total non-interest expense		563,633			39,802			13,558			24,277			641,270

Pre-tax income		$	508,099		$	6,518		$	2,144		$	7,658		$	524,419

Total assets		$	26,352,435		$	69,664		$	4,622		$	27,013		$	26,453,734

Net interest income and noninterest income as a percent of total income			92.3	%		3.8	%		1.3	%		2.6	%		100.0	%
Percent of pre-tax income to total pre-tax income			96.9	%		1.2	%		0.4	%		1.5	%		100.0	%
Percent of assets to total consolidated assets			99.6	%		0.3	%		0.0	%		0.1	%		100.0	%

Fourth Quarter Summary

The following table presents operating results for the quarters ended December 31, 2004 and 2003.

Table 11 — Fourth Quarter Summary


	Three Months Ended
	December 31,						Change

	2004			2003			Amount			Percent

Condensed Income Statement
Net interest income	$	246,063		$	213,288		$	32,775			15	%
Provision for loan and lease losses		10,670			10,400			270			3	%

Net interest income after loan and lease losses provision		235,393			202,888			32,505			16	%
Noninterest income(1)		70,591			84,435			(13,844	)		(16	)%
Noninterest expense(2)		267,359			155,676			111,683			72	%

Income before income taxes		38,625			131,647			(93,022	)		(71	)%
Income tax expense		17,927			40,085			(22,158	)		(55	)%

Net income	$	20,698		$	91,562		$	(70,864	)		(77	)%

Per Common Share
Basic earnings per share	$	0.12		$	0.56		$	(0.45	)		(79	)%
Diluted earnings per share	$	0.12		$	0.55		$	(0.43	)		(78	)%
Financial Ratios
Return on average assets(3)		0.29	%		1.39	%		(1.11	)bp
Return on average equity(3)		2.66	%		14.72	%		(12.06	)bp
Net interest margin (fully-taxable equivalent)(3)		3.87	%		3.65	%		0.22	bp
Noninterest income as a percent of total income		22.29	%		28.36	%		(6.07	)bp
Efficiency ratio(4)		84.43	%		52.29	%		32.14	bp

bp — denotes basis points; 100 bp = 1%


(1)	Noninterest income included net securities losses of $17.8 million in the fourth quarter of 2004 incurred as part of the deleveraging program.

(2)	Noninterest expense included prepayment penalties on borrowings of $61.5 million in the fourth quarter of 2004 incurred as part of the deleveraging program.

(3)	Annualized.

(4)	Represents noninterest expense as a percentage of net interest income and noninterest income.

Results for the fourth quarter of 2004 were impacted by our balance sheet deleveraging program ($0.29 per diluted share) and certain merger and consolidation costs ($0.17 per diluted share) including those associated with the pending acquisition of 51% of Banknorth by TD. The deleveraging included the sale of approximately $1.2 billion of securities with a weighted average yield of 2.77% and prepayment of a similar amount of borrowings with a weighted average rate of 4.77%, both of which had a duration of approximately 3.5 years. As a result, a $51.6 million after-tax loss was incurred. Net interest income increased 15% as a result of acquisitions and, to a lesser extent, internal growth. The net interest margin for the quarter ended December 31, 2004 was 3.87%, an increase of 22 basis points from the fourth quarter last year. This increase was primarily attributable to an increase in net earning assets of $1.0 billion along with an increase of 17 basis points in the interest rate spread.

Noninterest income totaled $70.6 million and $84.4 million for the fourth quarters ended December 31, 2004 and 2003, respectively, which included a loss of $17.8 million and a gain of $2.7 million of net securities gains (losses), respectively. The net securities losses in the fourth quarter of

2004 was part of a deleveraging program mentioned above. Increases in 2004 in deposit services income, merchant and electronic banking income and wealth management services income were partially offset by lower other noninterest income. Included in other noninterest income was $4.0 million and $6.4 million of covered call option premium income and $6.9 million and $5.4 million of loan fee income for the fourth quarters ended December 31, 2004 and 2003, respectively.

Noninterest expense increased by $111.7 million in the fourth quarter of 2004, as compared to the fourth quarter of 2003, due primarily to prepayment penalties on borrowings of $61.5 million and an increase in merger and consolidation costs of $37.0 million. The prepayment penalties were incurred as part of a deleveraging program implemented in the fourth quarter of 2004, and the increase in merger and consolidation costs was attributable to costs incurred in connection with the pending transaction with TD, in each case as discussed above. The efficiency ratio was 84.43% in the fourth quarter of 2004 compared to 52.32% in the comparable period last year. See Note 24 in the Consolidated Financial Statements for selected quarterly data for the years ended December 31, 2004 and 2003.

The effective tax rate was 46% in the fourth quarter of 2004 compared to 30% in the fourth quarter of 2003. The increase in 2004 in the tax rate was primarily attributable to nondeductible compensation and transaction expenses relating to the transaction with TD. The 30% effective tax rate in the fourth quarter of 2003 was lower than the annual effective tax rate of 33% due primarily to a favorable IRS audit settlement occurring in the fourth quarter. We expect the tax rate to be approximately 35% in 2005.

Annualized return on average equity and return on average assets were 2.66% and .029%, respectively, for the quarter ended December 31, 2004 and were 14.72% and 1.39%, respectively, for the comparable quarter last year. The declines in the ratios were attributable to the lower net income resulting from the balance sheet deleveraging and additional merger and consolidation costs mentioned above.

Comparison of 2003 and 2002

Our consolidated total assets increased by $3.0 billion, or 13%, from $23.4 billion at December 31, 2002 to $26.5 billion at December 31, 2003. This increase was primarily attributable to two banking acquisitions and two insurance agency acquisitions in 2003. Shareholders’ equity totaled $2.5 billion and $2.1 billion at December 31, 2003 and 2002, respectively. The increase was primarily attributable to net income and the issuance of our stock for acquisitions in 2003.

We reported net income of $350.8 million during 2003, or $2.15 per diluted share, compared with net income of $298.6 million, or $1.99 per diluted share, for 2002. Return on average assets and return on average equity were 1.37% and 14.51%, respectively, for 2003 and 1.39% and 16.25%, respectively, for 2002.

Net interest income on a fully taxable-equivalent basis totaled $846.7 million during 2003, as compared with $801.5 million in 2002. The $45.2 million, or 6%, increase in 2003 was primarily attributable to the combined effects of increases in the average balances of our interest-earning assets and interest-bearing liabilities as well as an $86.5 million, or 20%, decrease in interest expense on interest-bearing liabilities as a result of decreases in interest rates in a declining interest rate environment. In 2003, the net interest margin decreased 41 basis points to 3.66% from to 4.07% in 2002.

The provision for loan and lease losses amounted to $42.3 million in 2003 compared to $44.3 million in 2002. The decline in the provision for loan and lease losses of $2.0 million was due to lower net charge-offs, a higher coverage ratio of the allowance to nonperforming loans and leases and lower delinquency ratios. Nonperforming assets decreased $5.9 million from $69.0 million at December 31, 2002 to $63.1 million at December 31, 2003. The ratio of the allowance to nonperforming loans at December 31, 2003 was 389% compared to 319% at December 31, 2002. The allowance for loan and lease losses represented 1.42% of total loans at December 31, 2003 compared to 1.48% at December 31, 2002.

Noninterest income amounted to $367.2 million and $274.5 million in 2003 and 2002, respectively. The $92.7 million increase was primarily due to increases of $15.2 million in deposit services income, $35.2 million in net securities gains and $20.5 million in covered call option premium income. Deposit

services income of $97.3 million reflected 18% growth from 2002 as a result of increased volume, due in part to acquisitions. Net securities gains included $29.2 million recorded as part of a deleveraging program implemented in the second quarter of 2003, which included the sale of $901 million in securities. The increase in covered call option premium income was primarily due to the increased volume of call options written, as well as historically high premium rates related to high interest rate volatility.

Noninterest expense amounted to $641.3 million in 2003 compared with $579.4 million in 2002. The $61.9 million increase included $30.5 million of prepayment penalties on borrowings incurred as part of the deleveraging program in 2003 and was offset by a related gain on the sale of securities of $29.2 million recorded in noninterest income. The remaining $31.4 million increase in noninterest expense in 2003 was primarily due to increases in compensation and employee benefits expense, occupancy expense and equipment expense. The efficiency ratio improved to 53.09% during 2003 from 54.10% in 2002 primarily as a result of the integration of recent acquisitions, as well as internal operating improvements.

Our comprehensive income amounted to $241.8 million and $373.0 million during 2003 and 2002, respectively. Comprehensive income differed from our net income in 2003 primarily because of a $110.1 million net unrealized loss on securities, a $1.6 million net unrealized loss on cash flow hedges and an $446 thousand unrealized loss on a minimum pension liability. For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the Consolidated Financial Statements.

Financial Condition

Our consolidated total assets increased by $2.2 billion, or 8%, from $26.5 billion at December 31, 2003 to $28.7 billion at December 31, 2004. Total average assets were $28.2 billion and $25.6 billion in 2004 and 2003, respectively. These increases were primarily due to acquisitions in 2004 and 2003. See “General — Acquisitions” above and Note 3 to the Consolidated Financial Statements. Total liabilities increased by $1.6 billion in 2004, primarily due to acquisitions. The increases in assets and liabilities were offset in part by the deleveraging program in 2004, under which $1.2 billion of securities were sold and a similar amount of borrowings were prepaid. Shareholders’ equity totaled $3.2 billion and $2.5 billion at December 31, 2004 and 2003, respectively.


	*Investment Securities*

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

The average balance of the securities portfolio, which consists of securities available for sale and securities held to maturity, was $7.5 billion in 2004 and 2003. The securities portfolio consists primarily of mortgage-backed securities and collateralized mortgage obligations which include securitized residential real estate loans held in a REMIC. Other securities in the portfolio are U.S. Government and agency securities and other bonds and notes. Included in U.S. Government and federal agency securities at December 31, 2004 were $475.1 million of Federal National Mortgage Association and Federal Home Loan Mortgage Corp. securities. The majority of securities available for sale are rated AAA or equivalently rated. Mortgage-backed securities and collateralized mortgage obligations comprised 83% of the securities available for sale at December 31, 2004 compared to 58% at December 31, 2003. The average yield on securities was 4.33% during 2004, compared 4.22% during 2003.

Table 12 — Investment Securities

The following table sets forth our investment securities at the dates indicated.


		December 31,

		2004						2003						2002

					% of						% of						% of
		Amount			Total			Amount			Total			Amount			Total

Securities available for sale:
U.S. Government and federal agencies		$	528,973			7.66	%	$	2,359,347			33.18	%	$	1,539,447			23.50	%
Tax-exempt bonds and notes			166,901			2.42	%		138,280			1.94	%		95,332			1.46	%
Other bonds and notes			285,742			4.14	%		365,109			5.13	%		356,551			5.44	%
Mortgage-backed securities			5,130,478			74.30	%		3,834,958			53.93	%		3,659,334			55.86	%
Collateralized mortgage obligations			599,304			8.68	%		264,545			3.72	%		581,357			8.88	%

	Total debt securities		6,711,398			97.20	%		6,962,239			97.90	%		6,232,021			95.14	%

Federal Home Loan Bank stock			116,904			1.69	%		104,397			1.47	%		275,768			4.21	%
Federal Reserve Bank stock			60,338			0.87	%		37,666			0.53	%		35,250			0.54	%
Other equity securities			16,456			0.24	%		6,868			0.10	%		7,177			0.11	%

	Total equity securities		193,698			2.80	%		148,931			2.10	%		318,195			4.86	%

Total securities available for sale			6,905,096			100.00	%		7,111,170			100.00	%		6,550,216			100.00	%
Net unrealized gain			669						11,822						181,251

Fair value of securities available for sale		$	6,905,765					$	7,122,992					$	6,731,467

Securities held to maturity:
Collateralized mortgage obligations		$	87,013					$	124,240					$	216,409

Amortized cost of securities held to maturity		$	87,013					$	124,240					$	216,409

Fair value of securities held to maturity		$	87,507					$	124,344					$	221,571

Excess of fair value over recorded value		$	494					$	104					$	5,162

Fair value as a % of amortized cost			100.6	%					100.1	%					102.4	%

Table 13 — Maturities of Debt Securities

The following table sets forth the contractual maturities and fully-taxable equivalent weighted average yields on our debt securities at December 31, 2004. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized Cost Maturing in

	Less Than								More than 5 to				More than
	1 Year				1 to 5 Years				10 Years				10 Years				Total

	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield

Available for Sale:
U.S. Government and federal agencies	$	15,157		5.03%	$	463,816		3.08%	$	50,000		3.40%	$	—		0.00%	$	528,973		3.16%
Tax-exempt bonds and notes		89,036		1.89%		8,386		4.24%		11,538		4.44%		57,941		4.42%		166,901		3.06%
Other bonds and notes		49,195		5.54%		45,315		4.91%		8,382		6.18%		182,850		5.97%		285,742		5.74%
Mortgage-backed securities		38		5.86%		35,589		5.63%		306,335		5.76%		4,788,516		4.60%		5,130,478		4.68%
Collateralized mortgage obligations		—		0.00%		3,773		6.35%		13,994		4.06%		581,537		4.27%		599,304		4.28%

Total	$	153,426		3.37%	$	556,879		3.43%	$	390,249		5.37%	$	5,610,844		4.61%	$	6,711,398		4.53%

Held to Maturity:
Collateralized mortgage obligations	$	118		7.23%	$	5,315		6.53%	$	26,703		6.22%	$	54,877		5.98%	$	87,013		6.09%

Securities available for sale are carried at fair value and had net unrealized gains of $669 thousand at December 31, 2004 and $11.8 million at December 31, 2003. See Note 4 to the Consolidated Financial Statements. These unrealized gains and losses do not impact net income or regulatory capital but are recorded as adjustments to shareholders’ equity, net of deferred income taxes. Unrealized gains and losses, net of related deferred income taxes, are a component of our Comprehensive Income. See the Consolidated Statement of Changes in Shareholders’ Equity in the Consolidated Financial Statements.


	*Loans*

Total loans and leases (including loans held for sale) averaged $17.7 billion during 2004 compared to $15.6 billion during 2003, an increase of $2.1 billion, or 13%. Excluding acquisitions, total loans and leases increased $1.3 billion. Average loans as a percent of average earning assets amounted to 70% and 68% in 2004 and 2003, respectively.

Table 14 — Composition of Loan and Lease Portfolio

The following table presents the composition of our loan and lease portfolio at the dates indicated.


		December 31,

		2004					2003					2002					2001					2000

				% of					% of					% of					% of					% of
		Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans

Residential real estate loans		$	3,081,217		16.57	%	$	2,710,483		16.58	%	$	2,382,197		16.95	%	$	2,627,125		20.66	%	$	2,248,714		20.73	%
Commercial real estate loans:
	Permanent first mortgage loans		5,297,812		28.49	%		4,696,428		28.73	%		4,151,674		29.54	%		3,509,311		27.60	%		2,663,775		24.56	%
	Construction and development loans		951,701		5.12	%		832,434		5.09	%		640,375		4.55	%		584,728		4.60	%		291,388		2.69	%

	Total		6,249,513		33.61	%		5,528,862		33.82	%		4,792,049		34.09	%		4,094,039		32.20	%		2,955,163		27.25	%

Commercial business loans and leases
	Commercial business loans		3,838,366		20.64	%		3,188,504		19.51	%		2,865,617		20.39	%		2,353,933		18.51	%		2,244,648		20.70	%
	Commercial business leases		90,228		0.49	%		98,590		0.60	%		102,857		0.73	%		108,720		0.86	%		64,256		0.59	%

	Total		3,928,594		21.13	%		3,287,094		20.11	%		2,968,474		21.12	%		2,462,653		19.37	%		2,308,904		21.29	%

Consumer loans and leases
	Consumer loans		5,333,448		28.69	%		4,816,217		29.47	%		3,898,638		27.74	%		3,494,979		27.48	%		3,251,268		29.98	%
	Consumer leases		222		0.00	%		3,306		0.02	%		14,650		0.10	%		36,534		0.29	%		81,613		0.75	%

	Total		5,333,670		28.69	%		4,819,523		29.49	%		3,913,288		27.84	%		3,531,513		27.77	%		3,332,881		30.73	%

Total loans receivable		$	18,592,994		100.00	%	$	16,345,962		100.00	%	$	14,056,008		100.00	%	$	12,715,330		100.00	%	$	10,845,662		100.00	%

Table 15 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, 2004

The following table sets forth the scheduled contractual amortization of our construction and development loans and commercial business loans and leases at December 31, 2004, as well as the amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates.


		Commercial
		Real Estate
		Construction		Commercial
		and Development		Business Loans
		Loans		and Leases		Total

Amounts due:
	Within one year	$	370,026	$	2,046,306	$	2,416,332
	After one year through five years		345,650		1,393,134		1,738,784
	Beyond five years		236,025		489,154		725,179

	Total	$	951,701	$	3,928,594	$	4,880,295

Interest rate terms on amounts due after one year:
	Fixed	$	55,808	$	691,938	$	747,746
	Adjustable		525,867		1,190,350		1,716,217

Table 16 — Average Loans and Leases

The following table presents average loans and leases during the periods indicated.


		Year Ended December 31,				Change

		2004		2003		Amount		Percent

Residential real estate mortgages		$	2,997,572	$	2,839,969	$	157,603		6	%
Commercial real estate mortgages			5,959,510		5,162,413		797,097		15	%
Commercial business loans and leases			3,686,919		3,153,293		533,626		17	%
Consumer loans and leases			5,090,536		4,477,532		613,004		14	%

	Total average loans and leases	$	17,734,537	$	15,633,207	$	2,101,330		13	%

Residential real estate loans (including loans held for sale) averaged $3.0 billion and $2.8 billion in 2004 and 2003, respectively. Excluding acquisitions, average residential loans decreased approximately $138 million, or 4%, as a result of continued refinancing activity and prepayments in a low interest rate environment. The weighted average yield on residential real estate loans decreased from 5.61% in 2003 to 5.01% in 2004, primarily due to the repricing of adjustable-rate loans, the refinancing of fixed-rate loans at lower rates and prepayments.

Residential mortgage loans held for sale amounted to $51.7 million and $41.7 million at December 31, 2004 and 2003, respectively. We are currently selling substantially all 30-year conforming fixed-rate loans that we originate.

Commercial real estate loans averaged $6.0 billion in 2004 and $5.2 billion in 2003, a 15% increase. Excluding acquisitions, average commercial real estate loans increased $461 million, or 8%, in 2004. Most of our markets reflected increases, with the largest increases in Massachusetts and Connecticut. The average yield on commercial real estate loans during 2004 was 5.79%, as compared to 6.06% in 2003, a decrease of 27 basis points. The lower yield reflects the effect of the competitive pricing for variable-rate loans, the refinancing of fixed-rate loans at lower rates and the origination of new loans at the lower prevailing rates.

Commercial business loans and leases averaged $3.7 billion in 2004 and $3.2 billion in 2003, an increase of 17%. Excluding acquisitions, average commercial business loans and leases increased $447 million, or 14%, in 2004. Massachusetts reflected the strongest growth. The yield on commercial business loans and leases decreased to 4.92% in 2004 from 5.10% in 2003. The decrease in the yield was primarily due to lower rates on new loans and the repricing of variable-rate loans.

Table 17 — Commercial Loans by State

The following table presents commercial loans by geographical area at the dates indicated.


		Commercial Real Estate Loans									Commercial Business Loans and Leases

		December 31,				Change					December 31,				Change

		2004		2003		Amount		Percent			2004		2003		Amount			Percent

Massachusetts		$	3,085,278	$	2,565,064	$	520,214		20	%	$	1,569,911	$	1,173,803	$	396,108			34	%
Maine			933,677		885,791		47,886		5	%		787,822		658,902		128,920			20	%
New Hampshire			767,590		732,249		35,341		5	%		564,604		494,811		69,793			14	%
Vermont			664,063		645,608		18,455		3	%		433,055		438,483		(5,428	)		(1	)%
Connecticut			583,907		504,624		79,283		16	%		412,601		332,749		79,852			24	%
New York			214,998		195,526		19,472		10	%		160,601		188,346		(27,745	)		(15	)%

	Total	$	6,249,513	$	5,528,862	$	720,651		13	%	$	3,928,594	$	3,287,094	$	641,500			20	%

Consumer loans and leases averaged $5.1 billion in 2004 and $4.5 billion in 2003, an increase of 14%. Acquisitions accounted for approximately $110 million, or 18%, of the $613 million increase. The growth in consumer loans was primarily in home equity loans and indirect automobile loans. The average yield on

consumer loans and leases decreased to 5.13% in 2004 from 5.61% in 2003 due to lower rates on new loans and the repricing of adjustable rate loans.

Table 18 — Composition of Consumer Loans and Leases

The following table presents the composition of consumer loans and leases at the dates indicated.


		December 31,										Change

		2004					2003					2004-2003

				% of					% of
		Amount		Total			Amount		Total			Amount			Percent

Home equity		$	3,123,525		58.55	%	$	2,472,471		51.31	%	$	651,054			26.33	%
Automobile			1,678,817		31.48	%		1,596,504		33.13	%		82,313			5.16	%
Mobile home			111,874		2.10	%		141,407		2.93	%		(29,533	)		(20.89	)%
Vision, dental, and orthodontia fee plan			49,934		0.94	%		120,694		2.50	%		(70,760	)		(58.63	)%
Education			159,314		2.99	%		234,226		4.86	%		(74,912	)		(31.98	)%
Other			210,206		3.94	%		254,221		5.27	%		(44,015	)		(17.31	)%

	Total	$	5,333,670		100.00	%	$	4,819,523		100.00	%	$	514,147			10.67	%


	*Deposits*

Total deposits averaged $18.9 billion during 2004 compared to $17.3 billion during 2003, an increase of 9%. Acquisitions accounted for approximately $1.0 billion of the $1.6 billion increase. Money market and NOW accounts and noninterest-bearing accounts showed the largest increases. The ratio of loans to deposits was 97% and 91% at December 31, 2004 and 2003, respectively.

Included within the deposit categories are government banking deposits, which averaged $1.7 billion in 2004 and $1.2 billion in 2003. 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.

Table 19 — Change in Average Deposit Balances by Category of Deposit

The following table presents the changes in the average balances of deposits during the periods indicated.


			Year Ended December 31,				Change

			2004		2003		Amount			Percent

Noninterest-bearing deposits			$	3,987,311	$	3,224,035	$	763,276			24	%
Interest-bearing deposits:
	Money market/ NOW accounts			7,678,644		6,652,030		1,026,614			15	%
	Savings accounts			2,563,838		2,399,179		164,659			7	%
	Certificates of deposit			4,647,746		5,027,739		(379,993	)		(8	)%
	Brokered deposits			272		—		272			100	%

		Total interest-bearing deposits		14,890,500		14,078,948		811,552			6	%

		Total average deposits	$	18,877,811	$	17,302,983	$	1,574,828			9	%

Average noninterest-bearing deposits increased 24% in 2004 to $4.0 billion from $3.2 billion in 2003. Acquisitions accounted for approximately $203 million, or 27%, of the $763 million increase.

Average interest-bearing deposits increased $812 million during 2004 to $14.9 billion. Excluding acquisitions, average savings, money market and NOW deposits increased $593 million, while average certificates of deposit and brokered deposits declined $599 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 total interest-bearing deposits decreased by 26 basis points from 1.34% in 2003 to 1.08% in 2004, reflecting the decline in prevailing interest rates and run-off of higher-costing certificates of deposit.

Table 20 — Maturity of Certificates of Deposits of $100,000 or more

The following table presents the scheduled maturities of certificates of deposits of $100,000 or more at the date indicated.


	December 31, 2004

	Balance		Percent

3 months or less	$	320,776		28	%
Over 3 to 6 months		236,327		21	%
Over 6 to 12 months		236,136		21	%
More than 12 months		336,121		30	%

	$	1,129,360		100	%


	*Other Funding Sources*

We use both short-term and long-term borrowings to balance earning asset growth vis-à-vis deposit growth.

Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and borrowings from the U.S. Treasury and the Federal Home Loan Bank (“FHLB”), amounted to $3.8 billion at December 31, 2004, up $1.5 billion, or 63% from $2.3 billion at December 31, 2003. See Note 11 to the Consolidated Financial Statements.

At December 31, 2004, we also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. We did not draw on this line during 2004, and in January 2005, we replaced this line of credit with a line of credit from TD with similar terms. We also have additional borrowing capacity as more fully described under “Liquidity” below.

Long-term debt includes FHLB advances, senior notes, subordinated notes, junior subordinated debentures, wholesale securities sold under agreements to repurchase, capital lease obligations and other debt obligations, each with original terms greater than one year. Long-term debt amounted to $2.2 billion at December 31, 2004, down from $3.5 billion at December 31, 2003. The decrease in long-term debt was due in part to the prepayment of approximately $1.2 billion in debt as part of the deleveraging program in 2004. See Note 12 to the Consolidated Financial Statements.

At December 31, 2004 and 2003, FHLB borrowings amounted to $429 million and $1.5 billion, respectively. FHLB collateral consists primarily of first mortgage loans secured by single-family properties, certain unencumbered securities and other qualified assets. These borrowings had an average cost of 4.04% during 2004 as compared to 4.36% during 2003.

At December 31, 2004 and 2003, we had $150 million of 5-year senior notes carrying a fixed rate of 3.75%. These securities, which were issued in April 2003 for general corporate purposes, including share repurchases, were rated A3 by Moody’s at December 31, 2004.

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

At December 31, 2004 and 2003, long-term wholesale securities sold under repurchase agreements amounted to $1.1 billion and $1.4 billion, respectively, and were collateralized by mortgage-backed securities and U.S. Government obligations. See Note 12 to the Consolidated Financial Statements.

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

Off-Balance Sheet Arrangements

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, commitments to invest in real estate limited partnerships, standby letters of credit, recourse arrangements on serviced loans, forward commitments to sell loans, foreign currency forward contracts and interest rate swaps. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. For forward commitments to sell loans, the contract or notional amounts do not represent exposure to credit loss. We control the credit risk of our forward commitments to sell loans through credit approvals, limits and monitoring procedures. See Note 17 to the Consolidated Financial Statements for more information regarding the nature, business purpose and the importance of off-balance sheet arrangements.

Table 21 — Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations, other commitments and derivative financial instruments at December 31, 2004.


				Payments Due By Period

				Less than						After
Contractual Obligations(1)		Total		1 Year		1-3 Years		4-5 Years		5 Years

Long-term debt		$	1,086,162	$	278,516	$	32,600	$	158,819	$	616,227
Capital lease obligations			6,720		62		471		1,281		4,906
Repurchase agreements — wholesale			1,100,000		350,000		750,000		—		—

	Total long-term debt		2,192,882		628,578		783,071		160,100		621,133
Operating lease obligations			123,862		24,396		38,531		26,702		34,233
Pension plan contribution(2)			20,000		20,000		—		—		—
Other benefit plan payments — estimated			46,875		4,318		9,055		12,602		20,900
Other vendor obligations			25,683		10,290		10,290		5,103		—

	Total contractual obligations	$	2,409,302	$	687,582	$	840,947	$	204,507	$	676,266


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

(2)	Funding requirements for pension benefits after 2005 are excluded due to the significant variability in the assumptions required to project the timing of future cash contributions.


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

Unused portions on lines of credit		$	4,857,077	$	1,334,860	$	304,656	$	57,889	$	3,159,672
Standby letters of credit			464,299		115,737		89,087		82,479		176,996
Commercial letters of credit			23,094		18,378		1,656		304		2,756
Commitments to originate loans			1,924,832		1,180,640		391,645		37,071		315,476
Other commitments			263,199		12,378		7,668		2,684		240,469

	Total commitments	$	7,532,501	$	2,661,993	$	794,712	$	180,427	$	3,895,369


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

Interest rate swaps (notional amount):
	Commercial loan swap program:
		Interest rate swaps with commercial borrowers(1)	$	690,856	$	2,000	$	28,858	$	141,350	$	518,648
		Interest rate swaps with dealers(2)		690,856		2,000		28,858		141,350		518,648
	Interest rate swaps on borrowings(3)			566,500		216,500		—		150,000		200,000
Forward commitments to sell loans				83,016		83,016		—		—		—
Foreign currency rate contracts(4):
		Forward contracts with customers		33,575		26,760		6,815		—		—
		Forward contracts with dealers		33,747		26,913		6,834		—		—
		Foreign exchange options to purchase		35,713		25,716		9,997		—		—
		Foreign exchange options to sell		35,713		25,716		9,997		—		—
Rate-locked loan commitments				35,961		35,961		—		—		—


(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.

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 on a regular basis to the Board Risk Management Committee.

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 access 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 “Analysis and Determination of the Allowance for Loan and Lease Losses” below and Note 1 to the Consolidated Financial Statements. See Table 15 for information about the scheduled contractual amortization of certain parts of our loan portfolio at December 31, 2004.

Our residential loan portfolio accounted for 16% and 17% of the total loan portfolio at December 31, 2004 and 2003, respectively. 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 December 31, 2004, 0.25% of our residential loans was nonperforming, as compared to 0.26% at December 31, 2003. Nonperforming residential real estate loans increased by $689 thousand in 2004, while the total residential loan portfolio increased by $370.7 million.

Our commercial real estate loan portfolio accounted for 34% of the total loan portfolio at December 31, 2004 and 2003. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate. These loans generally are secured by properties located in the New England states and upstate New York. Generally, the investment-based real estate mortgages are diversified among various property types with somewhat higher concentration in multi-family, office and retail properties. At December 31, 2004, 0.48% of our commercial real estate loans was nonperforming, as compared to 0.36% at December 31, 2003.

Our commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at December 31, 2004 compared to 20% at December 31, 2003. Commercial business loans and leases are generally made to small to medium size businesses located within our market areas. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England and upstate New York. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to businesses in the form of lines of credit. Through a subsidiary, we also offer direct equipment leases, which amounted to $90.2 million at December 31, 2004. From time to time we purchase participations in syndicated commercial loans. At December 31, 2004, we had $428 million of outstanding participations in syndicated commercial loans and had an additional $337 million of unfunded commitments related to these participations. At December 31, 2004, 0.83% of our commercial business loans and leases were nonperforming, as compared to 0.74% at December 31, 2003. See Table 17 for the geographic distribution of our commercial loans and leases at December 31, 2004 and 2003.

Consumer loans and leases accounted for 29% of our total loan portfolio at December 31, 2004 and December 31, 2003. In the fourth quarter of 2003, we ceased originating vision, dental and orthodontia fee plan loans and mobile home loans. The decrease in these loan types during 2004 reflect the run-off of these loans. At December 31, 2004, 0.14% of our consumer loans was nonperforming, as compared to

0.18% at December 31, 2003. See Table 18 for a breakdown of our consumer loan and lease portfolio by type of loan and lease at December 31, 2004 and 2003.


	*Nonperforming Assets*

Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue), other real estate owned, repossessed assets and certain securities available for sale. Total nonperforming assets as a percentage of total assets amounted to 0.28% at December 31, 2004 and 0.24% at December 31, 2003. Total nonperforming assets as a percentage of total loans and other nonperforming assets amounted to 0.44% and 0.39% at December 31, 2004 and 2003, respectively. The increase from December 31, 2003 was due to a $10 million increase in nonperforming commercial real estate loans, as well as an $8 million increase in nonperforming commercial business loans and leases. The $18 million increase was due to two credit relationships.

Table 22 — Five-Year Schedule of Nonperforming Assets

The following table presents a summary of nonperforming assets at the dates indicated.


			December 31,

			2004			2003			2002			2001			2000

Nonaccrual loans
	Residential real estate loans		$	7,846		$	7,157		$	5,781		$	8,311		$	9,894
	Commercial real estate loans			29,948			19,700			17,649			17,124			12,155
	Commercial business loans and leases			32,421			24,412			32,693			40,341			32,583
	Consumer loans and leases			7,344			8,493			9,194			9,470			6,329

		Total nonaccrual loans		77,559			59,762			65,317			75,246			60,961
	Troubled debt restructurings			—			—			—			—			673

		Total nonperforming loans		77,559			59,762			65,317			75,246			61,634

Other nonperforming assets:
	Other real estate owned, net of related reserves			1,878			529			100			1,861			4,074
	Repossessions, net of related reserves			1,666			2,812			3,536			2,016			1,424
	Securities available for sale			—			—			—			2,104			—

		Total		3,544			3,341			3,636			5,981			5,498

Total nonperforming assets			$	81,103		$	63,103		$	68,953		$	81,227		$	67,132

Accruing loans 90 days or more overdue			$	5,254		$	4,915		$	3,373		$	6,227		$	5,973

Total nonperforming loans as a percentage of total loans				0.42	%		0.37	%		0.46	%		0.59	%		0.57	%
Total nonperforming assets as a percentage of total assets				0.28	%		0.24	%		0.29	%		0.39	%		0.37	%
Total nonperforming assets as a percentage of total loans and other nonperforming assets				0.44	%		0.39	%		0.49	%		0.64	%		0.62	%

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

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 lines of credit in the process of foreclosure are placed on nonaccrual status. Consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. We generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due, unless secured by sufficient cash or other assets immediately convertible to cash, on nonaccrual status. At December 31, 2004, we had $5.3 million of accruing loans which were 90 days or more delinquent, as compared to $4.9 million of such loans at December 31, 2003. We also may place loans on nonaccrual and, therefore, nonperforming status which are currently less than 90 days past due or performing in accordance with their terms but which in our judgment are likely to present future principal and/or interest repayment problems and which thus ultimately would be classified as nonperforming.


	*Net Charge-offs*

Net charge-offs amounted to $36.5 million in 2004, as compared to $37.3 million in 2003. Net charge-offs represented 0.21% and 0.24% of average loans and leases outstanding in 2004 and 2003, respectively.

Table 23 — Five-Year Table of Activity in the Allowance for Loan and Lease Losses

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


			Year Ended December 31,

			2004			2003		2002			2001		2000

Allowance at the beginning of period			$	232,287		$	208,273	$	189,837		$	153,550	$	155,048
Additions due to acquisitions				13,665			19,008		12,794			31,277		—
Charge-offs:
	Residential real estate mortgages			613			197		(138	)		626		1,828
	Commercial real estate mortgages			17			577		1,290			2,267		3,566
	Commercial business loans and leases			20,159			16,272		24,455			20,899		7,790
	Consumer loans and leases			29,898			32,563		26,395			21,860		21,508

		Total loans and leases charged off		50,687			49,609		52,002			45,652		34,692

Recoveries:
	Residential real estate mortgages			2,741			64		122			241		107
	Commercial real estate mortgages			54			1,761		117			222		2,371
	Commercial business loans and leases			6,452			6,367		8,972			4,800		2,334
	Consumer loans and leases			4,900			4,122		4,119			3,510		4,563

		Total loans and leases recovered		14,147			12,314		13,330			8,773		9,375

		Net charge-offs		36,540			37,295		38,672			36,879		25,317
Transfer for off-balance sheet loan commitments				(6,600	)		—		—			—		—
Provision for loan and lease losses				40,340			42,301		44,314			41,889		23,819

Allowance at the end of the period			$	243,152		$	232,287	$	208,273		$	189,837	$	153,550

Total allowances for credit losses:
	Allowance for loan and lease losses		$	243,152
	Liability for unfunded credit commitments			6,600

	Total allowances for credit losses		$	249,752


		Year Ended December 31,

		2004			2003			2002			2001			2000

Ratio of net charge-offs to average loans and leases outstanding			0.21	%		0.24	%		0.29	%		0.33	%		0.24	%
Ratio of allowance for credit losses to total portfolio loans and leases at end of period			1.34	%		1.42	%		1.48	%		1.49	%		1.42	%
Ratio of allowance for credit losses to nonperforming loans and leases at end of period			322.02	%		388.69	%		318.86	%		252.29	%		249.13	%
Ratio of net chargeoffs (recoveries) as a percent of outstanding average loans and leases(1)
	Residential real estate mortgages		(0.07	)%		0.00	%		(0.01	)%		0.02	%		0.08	%
	Commercial real estate mortgages		0.00	%		(0.02	)%		0.03	%		0.06	%		0.04	%
	Commercial business loans and leases		0.37	%		0.31	%		0.58	%		0.69	%		0.26	%
	Consumer loans and leases		0.49	%		0.64	%		0.61	%		0.54	%		0.54	%
Total portfolio loans and leases at end of period		$	18,592,994		$	16,345,962		$	14,056,008		$	12,715,330		$	10,845,662
Total nonperforming loans and leases at end of period			77,559			59,762			65,317			75,246			61,634
Average loans and leases outstanding (excluding loans held for sale)			17,697,737			15,574,078			13,182,785			11,173,723			10,449,753


(1)	Excludes residential real estate loans held for sale

Table 24 — Foregone Interest

The following table presents the amount of foregone interest on nonperforming loans for the periods indicated.


	Year Ended
	December 31,

	2004			2003

Interest income that would have been recognized at original contractual terms	$	7,424		$	4,748
Amount recognized as interest income on a cash basis		(3,291	)		(2,746	)

Foregone interest	$	4,133		$	2,002


	*Potential Problem Loans*

In addition to the nonperforming loans discussed under “Credit Risk Management” above, we also have loans that are 30 to 89 days delinquent and still accruing. These loans amounted to $138 million and $142 million at December 31, 2004 and 2003, respectively. These loans and delinquency trends, along with accruing loans which are 90 days or more past due and performing loans which are less than 90 day past due or performing in accordance on their terms which we have placed on nonaccrual status, are considered in the evaluation of the allowance for loan and lease losses and the related determination of the provision for loans and lease losses.


	*Analysis and Determination of the Allowance for Loan and Lease Losses*

The allowance for loan and lease losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to income and by recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment and is determined based on management’s ongoing evaluation. As discussed under “Critical Accounting

Policies,” we believe that the methods used by us in determining the allowance for loan and lease losses constitute a critical accounting policy. Although we utilize judgment in providing for losses, for the reasons discussed under “Critical Accounting Policies” and “Credit Risk Management — Nonperforming Assets,” there can be no assurance that we will not have to increase the amount of our provision for loan and lease losses in future periods. Management determined that the allowance for loan and lease losses was adequate at December 31, 2004.

The allowance for loan and lease losses amounted to $243.2 million at December 31, 2004, as compared to $232.3 million at December 31, 2003. The $10.9 million increase was net of a transfer of $6.6 million to other liabilities related to reserves for off-balance sheet loan commitments. The increase was also impacted by $13.7 million from acquired banks and the effect of the provision for loan and lease losses exceeding net charge-offs during 2004. The ratio of the allowance for credit losses to total portfolio loans and leases at December 31, 2004 and 2003 was 1.34% and 1.42%, respectively. The ratio of the allowance for credit losses to nonperforming loans was 322% at December 31, 2004 and 389% at December 31, 2003. Nonperforming assets amounted to $81.1 million, or 0.28% of total assets, at December 31, 2004 as compared to $63.1 million, or 0.24% of total assets at December 31, 2003. The $18 million increase in nonperforming assets from December 31, 2003 to December 31, 2004 was primarily attributable to an increase in nonperforming commercial real estate loans and commercial business loans and leases. Accruing loans 90 days or more past due amounted to $5.3 million at December 31, 2004, as compared to $4.9 million at December 31, 2003, an increase of $339 thousand.

Table 25 — Allocation of the Allowance for Loan and Lease Losses — Five-Year Schedule

The following table sets forth the allocation of the allowance for loan and lease losses at the dates indicated.


	December 31,

	2004					2003					2002					2001					2000

			Percent of					Percent of					Percent of					Percent of					Percent of
			Loans in Each					Loans in Each					Loans in Each					Loans in Each					Loans in Each
			Category to					Category to					Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans

Residential real estate loans	$	6,705		16.57	%	$	6,850		16.58	%	$	5,800		16.95	%	$	5,000		20.66	%	$	7,600		20.73	%
Commercial real estate loans		103,530		33.61	%		115,333		33.82	%		102,294		34.09	%		98,271		32.20	%		73,423		27.25	%
Commercial business loans and leases		87,483		21.13	%		70,383		20.11	%		63,940		21.12	%		58,090		19.37	%		50,486		21.29	%
Consumer loans and leases		45,434		28.69	%		39,721		29.49	%		36,239		27.84	%		28,476		27.77	%		22,038		30.73	%

	$	243,152		100.00	%	$	232,287		100.00	%	$	208,273		100.00	%	$	189,837		100.00	%	$	153,547		100.00	%

For purposes of determining our allowance for loan and lease losses, we specifically evaluate commercial business and commercial real estate loans rated substandard and are in excess of $300 thousand. We evaluate all other loans by loan type on a pooled basis.

Table 26 — Composition of Allowance for Loan and Lease Losses

The following table presents the amount for allowance for loan and lease losses which is attributable to specifically evaluated loans and all other loans by loan type on a pooled basis.


	December 31,

	2004		2003		2002

Residential real estate loans	$	6,705	$	6,850	$	5,800
Specifically evaluated commercial loans		44,671		41,800		27,000
Other commercial loans		146,342		143,916		139,234
Consumer loans and leases		45,434		39,721		36,239

	$	243,152	$	232,287	$	208,273

Asset-Liability Management

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


	*Interest Rate Risk*

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

In addition to directly impacting mortgage asset and deposit cash flows, interest rate changes could affect (i) the amount of loans originated and sold by us, (ii) the level and composition of deposits, (iii) the ability of borrowers to repay adjustable or variable rate loans, (iv) the average maturity of loans and investments, (v) the rate of amortization of premiums paid on securities, capitalized mortgage

servicing rights, deferred fees and purchase accounting adjustments, (vi) the fair value of our saleable assets, the amount of unrealized gains and losses on securities available for sale per SFAS No. 115, and the resultant ability to realize gains on the sale of such securities and (vii) per SFAS Nos. 133 and 138, the fair value of derivatives carried on our balance sheet, derivative hedge effectiveness testing and the amount of ineffectiveness recognized in earnings.


	*Assessment and Measurement*

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

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


	*Net Interest Income Sensitivity*

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

As indicated in table 27, assuming a gradual 100 and 200 basis point increase in interest rates starting on December 31, 2004, we estimate that our net interest income in the following 12 months would decrease by 0.68% and 2.13%, respectively. This is because in the event of an upward shift in rates, the simulated increase in interest income would be less than the simulated increase in interest expense because total adjustable rate interest-earning assets generally will reprice less quickly than will total interest-bearing liabilities. Also as indicated in Table 27, assuming a gradual 100 and 200 basis point decrease in interest rates starting on the same date, we estimate that our net interest income in the following 12 months would increase by 0.20% and decrease by 1.51%. These results are dependent on material assumptions such as interest rate movements, product pricing and customer behavior.

Table 27 — Sensitivity of Net Interest Income

The following table sets forth the estimated sensitivity of our net interest income for the 12 months following the dates indicated.


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

December 31, 2004		(2.13	)%		(0.68	)%		0.20	%		(1.51	)%

December 31, 2003		(0.26	)%		0.24	%		(0.71	)%		N/M

NM Not meaningful.

Our asset-liability management policy on interest rate risk simulation specifies that if market interest rates were to shift gradually up or down 200 basis points, estimated net interest income for the subsequent 12 months should decline by less than 5%. All interest rate risk measures were within compliance guidelines at December 31, 2004 and 2003.

For additional information regarding our interest rate sensitivity, see “Recent Developments” above.

Derivative Instruments


	*Purpose and Benefits*

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

Certain derivatives are used to hedge certain wholesale funding activities and the mortgage origination pipeline. These instruments are designated as hedges at inception in accordance with SFAS No. 133. At December 31, 2004, our designated hedging activities consisted of $83 million forward commitments related to hedging our mortgage banking operations, a $150 million notional amount interest rate swap at 3-month LIBOR plus 0.41% that hedged $150 million of 3.75% fixed-rate senior notes maturing on May 1, 2008, a $200 million notional amount interest rate swap at 3-month LIBOR plus 3.47% that hedged $200 million of 7.625% fixed-rate subordinated debt issued by Banknorth, NA which matures on June 15, 2011, and five interest rate swaps with an aggregate notional amount of $216.5 million and a weighted average rate of 1-month LIBOR plus 3.82%, which hedge $216.5 million of FHLB advances with a weighted average cost of 5.47% that mature throughout 2005.

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

For the year ended December 31, 2004, higher mortgage rates contributed to a decline in residential mortgage loan originations.

Table 28 — Mortgage Loans Held for Sale and Related Hedges

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


	Year Ended
	December 31,

	2004		2003

Residential mortgage loans held for sale	$	48,567	$	79,878
Rate-locked loan commitments		50,710		88,492
Forward sales contracts		86,149		155,698

Interest rate derivatives, primarily interest rate swaps, offered to commercial borrowers through our hedging program are designated as speculative under SFAS 133. However, we believe that our exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an identical dealer transaction. The commercial customer hedging program allows us to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. For the year ended December 31, 2004, we recorded a total notional amount of $408.8 million of new interest rate swaps with commercial borrowers and an equal notional amount of dealer transactions. It is anticipated that over time, customer interest rate derivatives will reduce the interest rate risk inherent in our longer-term, fixed-rate commercial business and real estate loans. The customer-related positions summarized in the table below include both the customer and offsetting dealer transactions.


	*Foreign Exchange or Market Risk*

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

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

Table 29 — Derivative Positions

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

Asset-Liability Management Positions


		Notional Amount Maturing
														Fair
December 31, 2004		2005		2006		2007		2008		Thereafter		Total		Value

Interest rate contracts
	Pay variable, receive fixed	$	216,500	$	—	$	—	$	150,000	$	200,000	$	566,500	$	(4,420	)
Forward commitments to sell loans			83,016		—		—		—		—		83,016		(149	)

Customer-related Positions


		Notional Amount Maturing

December 31, 2004		2005		2006		2007		2008		Thereafter		Total		Fair Value

Interest rate contracts
	Receive fixed, pay variable	$	2,000	$	13,250	$	15,608	$	49,489	$	610,510	$	690,857	$	17,836
	Pay fixed, receive variable		2,000		13,250		15,608		49,489		610,510		690,857		(17,836	)
Foreign currency rate contracts
	Forward contracts with customers		26,760		6,815		—		—		—		33,575		3,307
	Forward contracts with dealers		26,913		6,834		—		—		—		33,747		(3,056	)
	Foreign exchange options to purchase		25,716		9,997		—		—		—		35,713		1,727
	Foreign exchange options to sell		25,716		9,997		—		—		—		35,713		(1,727	)
Rate-locked loan commitments(1)			35,961		—		—		—		—		35,961		147


(1)	No value has been assigned to potential mortgage servicing rights related to rate-locked loan commitments.


	*2004 Asset Liability Management Actions*

The most significant factors affecting market risk exposure of net interest income during the year ended December 31, 2004 were (i) changes in the shape of the U.S. Government securities and interest rate swap yield curves, (ii) changes in the prepayment speeds of mortgage assets, (iii) the reduction in deposit interest expense and (iv) the above-described $1.2 billion investment portfolio and wholesale borrowing deleveraging program in 2004.

The targeted federal funds rate ended 2004 at 2.25%, which was 0.50% higher than at September 30, 2004 and 1.25% higher than at December 31, 2003. Long-term interest rates at December 31, 2004 were relatively unchanged, with 10-year U.S. Treasury yields up approximately 10 basis points for the quarter ended December 31, 2004, as compared to the quarter ended September 30, 2004, and down less than 4 basis points as compared to December 31, 2003. Mortgage rates remained level in the fourth quarter, with our 30-year conforming single-family residential mortgage rate below 6%. As a result, the yield curve used to measure interest income sensitivity has flattened considerably. Table 27 incorporates the estimated net impact of these changes, as well as planned 2005 activity, the deleveraging program in the fourth quarter of 2004 and the acquisition of BostonFed on January 21, 2005, on our net interest income assuming various changes in interest rates.

For additional information regarding our interest rate sensitivity, see “Recent Developments” above.

Liquidity

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

On a parent-only basis, our commitments and debt service requirements at December 31, 2004 consisted primarily of $310.7 million of junior subordinated debentures and $150 million of 3.75% senior notes due May 1, 2008. See “Capital” and Notes 13 and 22 to the Consolidated Financial Statements. 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 from public and private sources, including draws on our $110 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. At December 31, 2004 our subsidiary bank had $736.8 million available for dividends that could be paid without prior regulatory approval. In addition, the parent company had $250 million in cash or cash equivalents at December 31, 2004. See also “Financial Condition — Other Funding Sources” above. For information on restrictions on the payment of dividends by our banking subsidiary, see Note 14 to the Consolidated Financial Statements.

For a discussion of a contribution of capital we made in 2003 to our banking subsidiary to enhance its liquidity and capital for regulatory purposes, see “Capital”.


	*Banking Subsidiary*

For the Bank, liquidity represents the ability to fund asset growth, accommodate deposit withdrawals and meet other contractual obligations and commercial commitments. See “Table 17 — Contractual Obligations and Commitments” above. Liquidity is measured by the ability to raise cash when needed at a reasonable cost. Many factors affect a bank’s ability to meet its 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, the Bank has various other liquidity sources, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and borrowed funds such as FHLB advances, reverse repurchase agreements and brokered deposits.

We continually monitor and forecast our liquidity position. There are several interdependent methods used by us for this purpose, including daily review of fed funds positions, monthly review of balance sheet changes, and monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans.

At December 31, 2004, the Bank had in the aggregate $4.4 billion of “immediately accessible liquidity,” defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represented 22% of deposits, as compared to a policy minimum of 10% of deposits.

Also at December 31, 2004, the Bank had in the aggregate “potentially volatile funds” of $3.1 billion. These are funds that might flow out of the Bank over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources.

At December 31, 2004, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 139%, compared to 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 liquidity is sufficient to meet current and future funding requirements. For additional information regarding off-balance sheet risks and commitments, see Note 17 to the Consolidated Financial Statements.

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

In addition, at December 31, 2004, we also had an $110 million unsecured line of credit available to us. This line was replaced in January 2005 with a line of credit from TD with similar terms and conditions.

Capital

We are committed to managing capital for shareholder benefit and maintaining protection for depositors and creditors. At December 31, 2004 and 2003, our shareholders’ equity totaled $3.2 billion and $2.5 billion, respectively, or 11.07% and 9.53% of total assets, respectively.

The increase in shareholders’ equity in 2004 was attributable to our $304.6 million net income in 2004 and our issuance of our common stock with an aggregate value of $304.3 million in connection with acquisitions in 2004. These increases were partially offset by $135.1 million in dividends to shareholders and a $7.2 million net change in unrealized loss on securities available for sale.

In February 2002, our board authorized 8 million shares to be repurchased in the open market. We did not repurchase any shares in 2004. During the year ended December 31, 2003, we repurchased 4.5 million shares at an average price of $23.53. At December 31, 2004, a total of 2.9 million shares were available for repurchase under the existing Board authorization.

Capital guidelines issued by the Federal Reserve Board require us to maintain certain ratios. We maintain capital ratios to exceed “well capitalized” capital levels in accordance with capital guidelines approved by our board of directors. Our Tier 1 Capital, as defined by the Federal Reserve Board, was $2.1 billion or 7.58% of average assets at December 31, 2004, compared to $1.7 billion or 6.65% of average assets at December 31, 2003. We also are required to maintain capital ratios based on the level or our assets, as adjusted to reflect their perceived level of risk. Our regulatory capital ratios currently exceed all applicable requirements. See Note 13 to Consolidated Financial Statements.

The Bank is also subject to federal regulatory capital requirements. At December 31, 2004, the Bank was deemed to be “well capitalized” under the regulations of the Office of the Comptroller of Currency of the United States and in compliance with applicable capital requirements. See Note 13 to the Consolidated Financial Statements.

In 2003, we contributed $70 million to our banking subsidiary in advance of the acquisition of American Financial Holdings, Inc. (“American”), which closed on February 14, 2003 and was financed with 50% stock and 50% cash. The $70 million capital contribution from us to our subsidiary bank was required to maintain our subsidiary bank’s capital ratios above “well-capitalized” levels after the acquisition of American. When evaluating the issuance of long-term debt at the holding company level versus receiving dividends from its subsidiaries, management first considers the regulatory capital ratios of the banking subsidiary and the proforma impact of potential acquisitions on these capital ratios. Company policy is to maintain capital ratios at the bank and holding company at levels in excess of “well-

capitalized” levels — specifically a Tier 1 leverage capital ratio between 5.50% and 6.00% (compared to 5.00% needed to be considered “well-capitalized”) and total risk-based capital ratio of 10.50% (compared to 10.00% needed to be considered “well-capitalized”). Although the bank has considerable capital that it can dividend to the holding company without prior regulatory approval, its policy is to maintain capital in excess of the “well-capitalized” thresholds to support changes in the composition of its assets and growth, including by acquisition.

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

Table 30 — Capital Securities

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


							Junior
	Issuance		Capital		Common		Subordinated		Stated		Maturity
Name	Date		Securities		Securities		Debentures(1)		Rate		Date

Peoples Heritage Capital Trust I		1/31/1997	$	61,775	$	3,093	$	64,868		9.06%		2/1/2027
Banknorth Capital Trust I		5/1/1997		30,000		928		30,928		10.52%		5/1/2027
Ipswich Statutory Trust I		2/22/2001		3,500		109		3,609		10.20%		2/22/2031
CCBT Statutory Trust I		7/31/2001		5,000		155		5,155		5.74%		7/31/2031
Banknorth Capital Trust II		2/22/2002		200,000		6,186		206,186		8.00%		4/1/2032

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


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

At December 31, 2004, trust capital securities amounted to 14.6% of Banknorth’s Tier 1 capital. Although pursuant to FIN 46(R), the trusts which issued capital securities are no longer consolidated with Banknorth and these securities therefore are no longer considered a minority interest in consolidated subsidiary for accounting purposes, pursuant to a supervisory letter sent by the Federal Reserve Board to all bank holding companies in July 2003, Banknorth has continued to include trust preferred securities in its Tier 1 capital. On May 6, 2004, the Federal Reserve Board issued a proposed regulation which proposed to permit bank holding companies to continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative and qualitative standards. Under the proposed regulation, commencing on March 31, 2007, the aggregate amount of restricted core capital elements (which include qualifying trust preferred securities, as well as qualifying cumulative perpetual preferred stock and Class B and Class C minority interests in consolidated subsidiaries, as defined) may not exceed 25% (15% for internationally active bank holding companies) of a bank holding company’s core capital elements (which consist of qualifying common stockholders’ equity, qualifying non-cumulative preferred stock and Class A minority interest in subsidiaries, as defined), net of goodwill. This test is more restrictive than the current limit for trust preferred securities, which does not deduct goodwill prior to calculating the 25% limit or explicitly include minority interests in consolidated subsidiaries, and is likely to reduce the ability of some bank holding companies, particularly those that have completed significant purchase acquisitions, to include trust preferred securities in Tier 1 capital. In addition, the proposed rule would limit the amount of qualifying trust preferred securities and Class C minority interests in excess of the restricted core capital

limit that can be included in Tier 2 capital by providing that the amount of such elements, together with subordinated debt and limited life preferred stock, that may be included in Tier 2 capital would be limited to 50% of Tier 1 capital. The proposed rule also would provide that during the last five years prior to maturity of the underlying subordinated note or debentures, trust preferred securities must be treated as limited-life preferred stock, excluding it from Tier 1 capital and amortizing it out of Tier 2 capital at the rate of 20% per year. If the proposed capital regulation were adopted as proposed, we believe that we would continue to qualify as “well capitalized” under Federal Reserve Board regulations. There can be no assurance that the proposed capital regulation will be adopted as proposed or at all.

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

Banking regulators have also established guidelines as to the level of investments in BOLI. These guidelines are expressed in terms of a percentage of Tier 1 capital plus loan loss reserves. Our guideline (which is consistent with regulatory guidelines) is that BOLI should not exceed 25% of our Tier 1 capital plus loan loss reserves, which we monitor monthly. The ratio of BOLI to Tier 1 capital plus loan loss reserves was 22.6% at December 31, 2004 and 25.9% at December 31, 2003. We currently do not anticipate any additional purchases or sales of BOLI.

Critical Accounting Policies

We consider the following to be 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.


	*Allowance for Loan and Lease Losses*

We maintain an allowance for loan and lease losses at a level which we believe is sufficient to cover potential charge-offs on loans and leases deemed to be uncollectible based on continuous review of a variety of factors. These factors consist of the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors. The primary means of adjusting the level of this allowance is through provisions for loan and lease losses, which are established and charged to income on a quarterly basis. Although we use available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because our estimates of the potential losses in our loan and lease portfolio are susceptible to change as a result of changes in the factors noted above. Any such increases would adversely affect our results of operations. At December 31, 2004, our allowance for loan and lease losses amounted to $243.2 million, and during 2004, 2003, and 2002 our provisions for loan and lease losses amounted to $40.3 million, $42.3 million, and $44.3 million, respectively. See also “Credit Risk Management” above.

For the commercial business loans and leases and the commercial real estate loans portfolios, we formally evaluate specific commercial and commercial real estate loans rated “substandard” or worse in excess of $300 thousand. On an ongoing basis, an independent loan review department reviews classified loans to ensure the accuracy of the loan classifications. Estimated reserves for each of these credits are determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. In addition, the appraisal function reviews the reasonableness of the third party appraisals related to these loans. Provisions for losses on the remaining commercial loans are based on pools of similar loans using a combination of historical loss experience and migration analysis, which considers the probability of a loan moving from one risk rating category to another over the passage of time and qualitative adjustments.

For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months.

Using the determined mid-point of the range, management uses various quantitative and qualitative factors to determine the appropriate point above or below the range mid-point. This process is supported by objective factors including:


	•	historical loss experience;

	•	trends in delinquency and nonperforming loans;

	•	changes in product offerings or loan terms;

	•	changes in underwriting and/or collections policies;

	•	changes in management of underwriting and collection departments; and

	•	regional and national economic conditions and trends.


	*Accounting for Acquisitions and Review of Goodwill and Other Intangible Assets*

In connection with acquisitions of other companies, we generally record as assets on our financial statements both goodwill and identifiable intangible assets such as core deposits intangibles, non-compete agreements and customer lists. Due to a change in an accounting standard, since January 1, 2002 we no longer amortize the amount of our goodwill through a charge to expense over the period of its expected life. Instead, we regularly evaluate whether the carrying value of our goodwill has become impaired, in which case we reduce its carrying value through a charge to our earnings. Goodwill is evaluated for impairment at the reporting unit level, and there is goodwill recorded in the following reporting units: Community Banking, Insurance Agency and Wealth Management. Core deposit and other identifiable intangible assets are amortized to expense over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The valuation techniques used by us to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Any change in the estimates which we use to determine the carrying value of our goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives would adversely affect our results of operations. At December 31, 2004, our goodwill and identifiable intangible assets amounted to $1.4 billion and $50.4 million, respectively, and during 2004, 2003, and 2002 our amortization expense amounted to $8.6 million, $8.9 million, and $6.5 million, respectively. There was no impairment recorded in 2004, 2003 or 2002.


	*Accounting for Pension Plans*

We use a December 31 measurement date to determine our pension expense and related financial disclosure information. In accordance with SFAS No. 87, we set the discount rate for our retirement plans by reference to investment grade bond yields. We use Moody’s published AA yield for long-term corporate bonds as of December 31st as an index, and our discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.01% for December 2003 to 5.66% for December 2004. Similarly, we evaluate the expected long-term rate of return on the assets held in our defined benefit pension plan based on market and economic conditions, the plan’s asset allocation and other factors. As a consequence of our most recent annual review, we reduced the discount rate for all of our employee benefit plans from 6.25% as of December 31, 2003 to 5.75% as of December 31, 2004. Our expected rate of return on our pension plan assets was 8.5% for 2004 and is the same for 2005.

Pension expense is sensitive to changes in the expected return on assets. For example, adjusting the expected rate of return by 25 basis points (while holding other assumptions constant) would increase or decrease the forecasted 2005 expense for our defined benefit plan by approximately $650 thousand.

Pension expense is also sensitive to changes in the discount rate. For example, adjusting the discount rate by 25 basis points (while holding other assumptions constant) would increase or decrease the forecasted 2005 expense for our defined benefit plan by approximately $1.6 million.

As with the computations on pension expense, cash contribution requirements to the pension plan are sensitive to changes in the assumed discount rate and the assumed rate of return on plan assets. We have traditionally contributed the maximum tax-deductible amount to our pension plan each year.


	*Accrued Income Taxes*

We estimate income taxes payable based on the amount we expect to owe various tax authorities. Taxes are discussed in more detail in Note 9 to the Consolidated Financial Statements. Accrued income taxes represent the net estimated amount due to or to be received from taxing authorities. In estimating accrued income taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. We also rely on tax opinions, recent state audits and historical experience. Although we use available information to record accrued income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws influencing our overall tax position.

Accounting Changes

For information on the impact of new accounting standards, see Note 2 to the 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 federal securities laws. See “Forward Looking Statements” at the beginning of this report.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset Liability Management” in Item 7 hereof is incorporated herein by reference.


Item 8.	*Financial Statements and Supplementary Data*

BANKNORTH GROUP, INC.

CONSOLIDATED BALANCE SHEETS


			December 31,

			2004			2003

Assets
Cash and due from banks			$	541,994		$	669,686
Federal funds sold and other short-term investments				2,312			4,645
Securities available for sale, at market value				6,905,765			7,122,992
Securities held to maturity, market value $87,507 in 2004 and $124,344 in 2003				87,013			124,240
Loans held for sale, market value $52,936 in 2004 and $42,801 in 2003				51,693			41,696
Loans and leases:
	Residential real estate mortgages			3,081,217			2,710,483
	Commercial real estate mortgages			6,249,513			5,528,862
	Commercial business loans and leases			3,928,594			3,287,094
	Consumer loans and leases			5,333,670			4,819,523

		Total loans and leases		18,592,994			16,345,962
	Less: Allowance for loan and lease losses			243,152			232,287

		Net loans and leases		18,349,842			16,113,675

Premises and equipment, net				300,120			264,818
Goodwill				1,365,780			1,126,639
Identifiable intangible assets				50,376			36,415
Bank-owned life insurance				523,129			488,756
Other assets				509,786			460,173

		Total assets	$	28,687,810		$	26,453,735

Liabilities and Shareholders’ Equity
Deposits:
	Savings accounts		$	2,546,018		$	2,460,522
	Money market and NOW accounts			7,907,513			7,130,534
	Certificates of deposit (including certificates of $100 thousand or more of $1,129,360 in 2004 and $998,546 in 2003)			4,484,370			4,733,104
	Brokered deposits			576			—
	Noninterest-bearing deposits			4,289,104			3,577,025

		Total deposits		19,227,581			17,901,185
Short-term borrowings				3,797,823			2,336,947
Long-term debt				2,192,882			3,545,917
Other liabilities				293,410			149,167

		Total liabilities		25,511,696			23,933,216

Commitments and contingencies
Shareholders’ equity:
	Preferred stock, par value $0.01; 5,000,000 shares authorized, none issued			—			—
	Common stock, par value $0.01; 400,000,000 and 200,000,000 shares authorized, 191,672,502 issued in 2004 and 182,292,973 issued in 2003			1,917			1,823
	Paid-in capital			1,763,572			1,435,005
	Retained earnings			1,677,802			1,508,292
	Treasury stock at cost (12,374,515 shares in 2004 and 20,105,254 shares in 2003)			(265,020	)		(430,608	)
	Accumulated other comprehensive (loss) income			(2,157	)		6,007

		Total shareholders’ equity		3,176,114			2,520,519

		Total liabilities and shareholders’ equity	$	28,687,810		$	26,453,735

See accompanying notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME


			Year Ended December 31,

			2004			2003		2002

Interest and dividend income:
	Interest and fees on loans and leases		$	933,833		$	880,185	$	882,190
	Interest and dividends on securities			323,172			312,784		352,927

		Total interest and dividend income		1,257,005			1,192,969		1,235,117

Interest expense:
	Interest on deposits			161,004			188,836		244,648
	Interest on borrowed funds			162,619			163,302		193,952

		Total interest expense		323,623			352,138		438,600

		Net interest income		933,382			840,831		796,517
Provision for loan and lease losses				40,340			42,301		44,314

		Net interest income after provision for loan and lease losses		893,042			798,530		752,203

Noninterest income:
	Deposit services			109,321			97,323		82,139
	Insurance agency commissions			50,311			45,714		44,439
	Merchant and electronic banking income, net			50,564			41,778		37,643
	Wealth management services			39,788			31,956		32,453
	Bank-owned life insurance			23,282			22,930		20,002
	Investment planning services			19,418			15,692		11,572
	Net securities (losses) gains			(7,701	)		42,460		7,282
	Other noninterest income			54,816			69,306		38,978

				339,799			367,159		274,508

Noninterest expense:
	Compensation and employee benefits			356,611			326,621		311,385
	Occupancy			63,892			59,200		52,422
	Equipment			48,480			47,459		40,933
	Data processing			43,141			40,940		40,702
	Advertising and marketing			25,550			22,000		17,239
	Amortization of identifiable intangible assets			8,627			8,946		6,492
	Merger and consolidation costs			49,635			8,104		14,691
	Prepayment penalties on borrowings			61,546			30,490		—
	Write-off of branch automation project			—			—		6,170
	Other noninterest expense			107,619			97,510		89,358

				765,101			641,270		579,392

Income before income tax expense				467,740			524,419		447,319
Applicable income tax expense				163,097			173,660		148,681

		Net income	$	304,643		$	350,759	$	298,638

Basic earnings per share			$	1.78		$	2.18	$	2.01
Diluted earnings per share			$	1.75		$	2.15	$	1.99
Weighted average shares outstanding:
	Basic			170,766			160,914		148,213
	Dilutive effect of stock options			3,392			2,606		1,616

	Diluted			174,158			163,520		149,829

See accompanying notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


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

Balances at December 31, 2001			151,221		$	1,651	$	958,764		$	1,056,678		$	(1,017	)	$	(267,529	)	$	40,568		$	1,789,115
Net income			—			—		—			298,638			—			—			—			298,638
Unrealized gains on securities, net of reclassification adjustment and taxes			—			—		—			—			—			—			77,257			77,257
Unrealized losses on cash flow hedges, net of reclassification adjustment and taxes			—			—		—			—			—			—			(2,054	)		(2,054	)
Minimum pension liability, net of tax			—			—		—			—			—			—			(825	)		(825	)

	Comprehensive income																						373,016

Treasury stock issued for employee benefit plans			1,939			—		(6,989	)		—			—			37,395			—			30,406
Treasury stock purchased			(6,350	)		—		—			—			—			(154,054	)		—			(154,054	)
Distribution of restricted stock			—			—		(963	)		—			—			1,838			—			875
Common stock issued for acquisitions			3,769			38		102,829			—			—			—			—			102,867
Decrease in unearned compensation — ESOP			—			—		6,137			—			1,017			—			—			7,154
Cash dividends declared			—			—		—			(85,894	)		—			—			—			(85,894	)

Balances at December 31, 2002			150,579			1,689		1,059,778			1,269,422			—			(382,350	)		114,946			2,063,485
Net income			—			—		—			350,759			—			—			—			350,759
Unrealized losses on securities, net of reclassification adjustment net of tax			—			—		—			—			—			—			(110,068	)		(110,068	)
Unrealized gains on cash flow hedges, net of reclassification adjustment net of tax			—			—		—			—			—			—			1,575			1,575
Minimum pension liability, net of tax			—			—		—			—			—			—			(446	)		(446	)

	Comprehensive income																						241,820

Treasury stock issued for employee benefit plans			2,674			—		(6,546	)		—			—			55,223			—			48,677
Treasury stock purchased			(4,466	)		—		—			—			—			(105,071	)		—			(105,071	)
Distribution of restricted stock			—			—		(896	)		—			—			1,590			—			694
Common stock issued for acquisitions			13,401			134		382,669			—			—			—			—			382,803
Cash dividends declared			—			—		—			(111,889	)		—			—			—			(111,889	)

Balances at December 31, 2003			162,188			1,823		1,435,005			1,508,292			—			(430,608	)		6,007			2,520,519
Net income			—			—		—			304,643			—			—			—			304,643
Unrealized losses on securities, net of reclassification adjustment net of tax			—			—		—			—			—			—			(7,231	)		(7,231	)
Unrealized gains on cash flow hedges, net of reclassification adjustment net of tax			—			—		—			—			—			—			146			146
Minimum pension liability, net of tax			—			—		—			—			—			—			(1,079	)		(1,079	)

	Comprehensive income																						296,479

Treasury stock issued for employee benefit plans, net of tax of $40.7 million			7,729			—		24,797			—			—			164,837			—			189,634
Distribution of restricted stock			—			—		(386	)		—			—			751			—			365
Common stock issued for acquisitions			9,381			94		304,156			—			—			—			—			304,250
Cash dividends declared			—			—		—			(135,133	)		—			—			—			(135,133	)

Balances at December 31, 2004			179,298		$	1,917	$	1,763,572		$	1,677,802		$	—		$	(265,020	)	$	(2,157	)	$	3,176,114

See accompanying notes to Consolidated Financial Statements.

BANKNORTH GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


		Year Ended December 31,

		2004			2003			2002

Cash flows from operating activities:
Net income		$	304,643		$	350,759		$	298,638
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan and lease losses		40,340			42,301			44,314
	Depreciation of banking premises and equipment		44,199			43,368			36,360
	Net amortization of premium and discounts		23,082			56,135			37,230
	Write-off of branch automation project		—			—			6,170
	Amortization of intangible assets		8,627			8,946			6,492
	Provision for deferred tax expense		16,498			26,073			12,522
	ESOP expense		—			—			7,154
	Distribution of restricted stock units		365			694			875
	Net losses (gains) realized from sales of securities and loans		6,190			(42,460	)		(9,456	)
	Prepayment penalties on borrowings		61,546			30,490			—
	Net (gains) realized from sales of loans held for sale		(3,660	)		(12,483	)		(12,577	)
	Increase in cash surrender value of bank owned life insurance		(22,188	)		(22,930	)		(20,002	)
	Net decrease in mortgage servicing rights		1,287			1,287			5,487
	Proceeds from sales of loans held for sale		512,700			923,811			863,560
	Residential loans originated and purchased for sale		(511,053	)		(821,870	)		(865,068	)
	Net change in other assets		(55,329	)		29,195			(70,583	)
	Net change in other liabilities		18,481			(119,348	)		63,619

Net cash provided by operating activities			445,728			493,968			404,735

Cash flows from investing activities:
	Proceeds from sales of securities available for sale		3,380,300			3,392,506			1,001,605
	Proceeds from maturities and principal repayments of securities available for sale		1,303,648			3,066,107			2,263,728
	Purchases of securities available for sale		(4,067,304	)		(6,370,761	)		(4,110,201	)
	Proceeds from maturities and principal repayments of securities held to maturity		37,227			92,169			123,214
	Net increase in loans and leases		(1,300,987	)		(690,512	)		(582,280	)
	Proceeds from sales of loans		37,097			—			104,366
	Net additions to premises and equipment		(47,805	)		(20,901	)		(43,503	)
	Purchases of bank owned life insurance		—			—			(40,000	)
	Proceeds from policy coverage on bank owned life insurance		1,725			182			—
	Cash (paid) for acquisitions, net of cash acquired		49,061			10,903			(12,074	)

Net cash (used in) provided by investing activities			(607,038	)		(520,307	)		(1,295,145	)

Cash flows from financing activities:
	Net increase in deposits		148,206			95,039			380,379
	Net increase in short-term borrowings		1,200,876			755,480			182,248
	Proceeds from long-term debt		1,570			885,400			1,335,642
	Payments on long-term debt		(1,633,868	)		(1,941,969	)		(952,525	)
	Treasury stock issued for employee benefit plans		189,634			48,677			30,406
	Purchase of treasury stock		—			(105,071	)		(154,054	)
	Cash dividends paid to shareholders		(135,133	)		(111,889	)		(85,894	)

Net cash (used) provided by financing activities			(228,715	)		(374,333	)		736,202

(Decrease) increase in cash and cash equivalents			(390,025	)		(400,672	)		(154,208	)
Cash and cash equivalents at beginning of year			316,331			717,003			871,211

Cash and cash equivalents at end of period		$	(73,694	)	$	316,331		$	717,003


Interest paid		$	325,614		$	358,555		$	434,685
Income taxes paid			90,298			145,600			104,810

In conjunction with the purchase acquisitions detailed in Note 3 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows:
	Fair value of assets acquired	$	1,807,186		$	3,347,137		$	1,693,715
	Less liabilities assumed		1,420,086			2,586,080			1,355,197

See accompanying notes to Consolidated Financial Statements.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts expressed in thousands, except per share data)


1.	Summary of Significant Accounting Policies

The accounting and reporting policies of Banknorth Group, Inc. (“Banknorth”) and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. Banknorth’s principal business activity is retail and commercial banking and, to a lesser extent, wealth management, investment planning and insurance brokerage services, and are conducted through Banknorth’s direct and indirect subsidiaries located in Maine, New Hampshire, Massachusetts, Connecticut, Vermont and New York. Banknorth and its subsidiaries are subject to regulation of, and periodic examination by, the Office of the Comptroller of Currency and the Federal Reserve Board and the Superintendent of the Maine Bureau of Financial Regulations, among other agencies. The following is a description of the more significant accounting policies.


	*Financial Statement Presentation*

The Consolidated Financial Statements include the accounts of Banknorth and its subsidiaries. Banknorth’s principal operating subsidiary is Banknorth, NA (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Assets held in a fiduciary capacity are not assets of Banknorth and, accordingly, are not included in the Consolidated Balance Sheets.

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan and lease losses, accounting for acquisitions, subsequent review of goodwill and intangible assets for impairment, accounting for pension plans and accrued income taxes.


	*Cash and Cash Equivalents*

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and other short-term investments with maturities less than 90 days minus federal funds purchased. Generally, federal funds are sold or purchased for one-day periods.

Banknorth is required to comply with various laws and regulations of the Federal Reserve Board which require that Banknorth maintain certain amounts of cash on deposit and is restricted from investing those amounts.


	*Securities*

Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and reflected at amortized cost.

Investments not classified as “held to maturity” are classified as “available for sale.” Securities available for sale consist of debt and equity securities that are available for sale in order to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are carried at market value. Changes in market value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders’ equity and comprehensive income. When a decline in market value of a security is considered other than temporary, the cost basis of the individual security is written down to market value

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

as the new cost basis and the loss is charged to net securities gains (losses) in the consolidated statements of income as a writedown. Banknorth does not have a trading portfolio.

Premiums and discounts are amortized and accreted over the term of the securities on a method that approximates the interest method. Gains and losses on the sale of securities are recognized at the time of the sale using the specific identification method.


	*Loans and Leases*

Loans are carried at the principal amounts outstanding adjusted by partial charge-offs and net deferred loan costs or fees. Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in 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. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Commercial real estate and commercial business loans are considered impaired when it is probable that Banknorth will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value.

Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield using methods that approximate the level yield method over the estimated lives of the related loans.

Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method.


	*Allowance for Loan and Lease Losses*

The allowance for loan and lease losses is maintained at a level determined to be adequate by management and approved by the Board Risk Committee to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense, by recoveries on loans previously charged off, and by allowances acquired in acquisitions and reduced by charge-offs on loans and leases.

Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors.

For the commercial business loan and lease and the commercial real estate loan portfolios, we formally evaluate specific commercial and commercial real estate loans rated “substandard” or worse in excess of $300 thousand. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

migration analysis (which considers the probability of a loan moving from one risk rating category to another over time), transition matrix and qualitative adjustments.


	•	Historical loss experience;

	•	Trends in delinquency and nonperforming loans;

	•	Changes in product offerings or loan terms;

	•	Changes in underwriting and/or collections policies;

	•	Changes in management of underwriting and collection departments;

	•	Regional and national economic conditions and trends.

Although management uses available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because estimates are susceptible to change as a result of changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Banknorth’s allowance for loan and lease losses. Such agencies may require Banknorth to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.


	*Bank-Owned Life Insurance*

Bank-owned life insurance (“BOLI”) represents life insurance on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other noninterest income, and are not subject to income taxes. The cash value is included in assets. Banknorth reviews the financial strength of the insurance carrier prior to the purchase of BOLI and annually thereafter, and BOLI with any individual carrier is limited to 10% of capital plus reserves.


	*Premises and Equipment*

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of related assets; generally 25 to 40 years for premises and 3 to 7 years for furniture and equipment. Leasehold improvements are generally amortized over the lesser of the estimated life or the remaining term of the lease including the first renewal option.

Costs of software developed for internal use, such as those related to software licenses, programming, testing, configuration, direct materials and integration, are capitalized and included in premises and equipment. Included in the capitalized costs are those costs related to both Company personnel and third party consultants involved in the software development and installation. Once placed in service, the capitalized asset is amortized on a straight-line basis over its estimated useful life, generally three to five years. Capitalized costs of software developed for internal use are reviewed periodically for impairment.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

Significant judgment is exercised in these impairment reviews including the periodic evaluation of the cost/benefit analyses of software projects under development and the determination of the remaining useful life of completed software projects.


	*Goodwill and Identifiable Intangible Assets*

The price paid over the net fair value of the acquired businesses (“goodwill”) is not amortized. Goodwill is evaluated for impairment at least quarterly using several fair value techniques, including market capitalization, discounted future cash flows and multiples of revenues/earnings. The valuation techniques contain estimates such as discount rate, projected future cash flows and time period in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets. Goodwill is recorded and evaluated for impairment in the following reporting units: Community Banking, Insurance Brokerage and Wealth Management.

Identifiable intangible assets consists of core deposit intangibles, noncompete agreements and customer lists and are amortized over their estimated useful lives on a method that approximates the amount of economic benefits to Banknorth. They are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The ranges of useful life are shown below:


Core deposit intangibles		7 – 10 years
Noncompete agreements		1 – 4 years
Customer lists		estimated life of the list


	*Impairment of Long-Lived Assets Other than Goodwill*

Banknorth reviews long-lived assets, including premises and equipment and other intangible assets for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. Banknorth performs undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.


	*Mortgage Banking and Loans Held for Sale*

Residential mortgage loans originated for sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or estimated market value. Market value is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Forward commitments to sell residential real estate mortgages are contracts that Banknorth enters into for the purpose of reducing the market risk associated with originating loans for sale should interest rates change. Forward commitments to sell are recorded at fair value and are included with loans held for sale and changes in fair value are included in other comprehensive income and are reclassified into mortgage banking income when the related transaction affects earnings. Commitments to originate rate-locked loans are also accounted for at fair value and are classified in other assets. Gains and losses related to commitments to originate rate-locked loans are included in earnings with mortgage banking income.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

Gains and losses on sales of mortgage loans are determined using the specific identification method and recorded as mortgage sales income, a component of mortgage banking services income. The gains and losses resulting from the sales of loans with servicing retained are adjusted to recognize the present value of future servicing fee income over the estimated lives of the related loans. Residential real estate loans originated for sale and the related servicing rights are generally sold on a flow basis.

Retained mortgage servicing rights are amortized on a method that approximates the estimated weighted average life of the underlying loans serviced for others. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking services income. Banknorth’s assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted quarterly to reflect current circumstances. In evaluating the realizability of the carrying values of mortgage servicing rights, Banknorth obtains third party valuations based on loan level data including note rate, type and term on the underlying loans.

Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to noninterest expense when incurred.


	*Derivative Financial Instruments*

Banknorth recognizes all derivatives on the balance sheet at fair value. On the date the derivative is entered into, Banknorth designates whether the derivative is part of a hedging relationship (cash flow or fair value hedge). Banknorth formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. Banknorth also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.

From time to time Banknorth may use certain hedging strategies which include the use of derivative financial instruments. The primary objective of Banknorth’s hedging strategies is to reduce net interest rate exposure arising from Banknorth’s asset and liability structure and mortgage banking activities. Banknorth uses forward delivery contracts to reduce interest rate risk on residential mortgage loans held for sale (which are included in loans held for sale on our balance sheet) and rate-locked loans expected to be closed and held for sale (which are included in other assets on our balance sheet). Banknorth also purchases mortgage-backed security options (which are included in other assets on our balance sheet at fair value) to modify its forward mortgage commitments. Changes in fair value of the options are included in other noninterest income.

Changes in fair value of a derivative that is highly effective and that qualifies as a cash flow hedge are recorded in other comprehensive income and are reclassified into earnings when the related forecasted transaction affects earnings, generally within 60 to 90 days. For fair value hedges that are fully effective, the gain or loss on the hedge would exactly offset the loss or gain on the hedged item attributable to the hedged risk. Any difference that does arise would be the result of hedge ineffectiveness, which is recognized in earnings. Banknorth discontinues hedge accounting when it is determined that the derivative is no longer effective in offsetting changes in the hedged risk of the hedge item, because it is unlikely that the forecasted transaction will occur, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.

Banknorth offers commercial customers interest rate swap and cap products to enable these customers to synthetically fix the interest rate on variable interest rate loans. These pay variable, receive fixed interest

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

rate swaps are offset by entering into simultaneous pay fixed, receive variable rate swaps with a third party broker/ dealer. Both of these swap products are marked to market and are included with other assets and other liabilities on our balance sheet at fair value. Changes in the fair value of the commercial interest rate swaps are included in net interest income.

Banknorth has also entered into interest rate swap agreements in order to synthetically convert certain fixed-rate debt to variable-rate debt tied to 1-month or 3-month LIBOR. These swaps are accounted for as fair value hedges and included with long-term debt on our balance sheet. Changes in the fair value of the swap agreements are included in net interest income.

Foreign exchange rate contracts are contracts and options that Banknorth enters into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these customers, Banknorth generally sets aside a percentage of their available line of credit until the foreign currency contract is settled. Generally, Banknorth enters into foreign exchange rate contracts with approved reputable dealers. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting Banknorth’s exposure to the replacement value of the contracts rather than the notional principal or contract amounts. The foreign exchange contracts outstanding at December 31, 2004 all mature within two years. The foreign exchange rate contracts with customers and dealers are carried at fair value in other assets and other liabilities. The changes in the fair value of the foreign exchange rate contracts and the associated fees are included in other noninterest income.


	*Pension, 401(k), and Other Employee Benefit Plans*

Banknorth has a qualified non-contributory defined benefit pension plan that covers most employees. The benefits are based on years of service and the employee’s career average earnings. Banknorth has historically made cash contributions to the defined benefit pension plan for the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.

In addition to the qualified plan, Banknorth has adopted supplemental retirement plans for certain key officers. These plans, which are unfunded and nonqualified, were designed to offset the impact of changes in the pension plans that limit the benefits for highly-paid employees under qualified pension plans.

Banknorth and its subsidiaries sponsor limited post-retirement benefit programs which provide medical coverage and life insurance benefits to a closed group of employees and directors who meet minimum age and service requirements. Banknorth and its subsidiaries recognize costs related to post-retirement benefits under the accrual method, which recognizes costs over the employee’s period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty-year period beginning January 1, 1993.

Banknorth uses a December 31 measurement date to determine its pension expense and related financial disclosure information. In accordance with SFAS No. 87, the discount rate is set for the retirement plans by reference to investment grade bond yields. Banknorth uses Moody’s published AA yield for long-term corporate bonds for the month of December as an index, and the discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.01% for December 2003 to 5.66% for December 2004. Similarly, we evaluated the expected long-term rate of return on the assets held in our defined benefit pension plan based on market and economic conditions, the Plan’s asset allocation and other factors. As a consequence of the most recent annual review, the discount rate for all of our employee benefit plans was reduced from 6.25% as of December 31, 2003 to 5.75% as of December 31, 2004 and the

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

expected long-term rate of return on the pension plan assets was 8.5% for 2004 and will be the same for 2005. Pension expense is very sensitive to changes in the discount rate and the expected return on assets. Continued volatility in pension expense is expected as assumed investment returns vary from actual.

In December 2003, the Medicare Prescription Drugs, Improvement and Modernization Act (“the Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-2, “Accounting and Disclosure Requirement Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”) we have determined that the benefits we provide are at least actuarially equivalent to Medicare Part D. The effects of the federal subsidy will result in an actuarial gain of approximately $1.7 million. The gain will not have a material effect on our net periodic postretirement cost or on our accumulated postretirement benefit obligation. Therefore, we will incorporate the effects of the Act at the next measurement date, which is January 2005. As a result, we have not reflected the impact of FSP 106-2 in our net periodic postretirement cost or in our accumulated postretirement benefit obligation as of December 31, 2004 but will begin to amortize the benefit of the Act prospectively starting January 1, 2005 over a period of approximately 10 years.

Banknorth maintains Section 401(k) savings plans for substantially all of its employees. Employees are eligible to participate in the 401(k) Plan on the first day of the month following their date of hire. Under the plans, Banknorth makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee’s annual salary. The plans allow for supplementary profit sharing contributions by Banknorth, at its discretion, for the benefit of participating employees.


	*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 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. Banknorth has elected to continue with the accounting methodology in 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 the Employee Stock Purchase Plan. Had Banknorth determined cost based on the fair value at the grant date for its stock options and expense related to the

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

employee stock purchase plan under SFAS No. 123, its net income and earnings per share data would have been reduced to the pro forma amounts indicated as follows:


				Year Ended December 31,

				2004			2003			2002

Net Income, as reported				$	304,643		$	350,759		$	298,638
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects					(16,089	)		(12,723	)		(8,354	)

Proforma net income				$	288,554		$	338,036		$	290,284

Earnings per share
	Basic — As reported			$	1.78		$	2.18		$	2.01
		Proforma		$	1.69		$	2.10		$	1.96
	Diluted — As reported			$	1.75		$	2.15		$	1.99
			Proforma	$	1.67		$	2.08		$	1.94


	*Investments in Limited Partnerships*

Banknorth has investments in both tax advantaged and small business investment limited partnerships. The tax advantaged limited partnerships are primarily involved in approved low income housing investment tax credit projects in Banknorth’s market area while the small business investment limited partnerships are primarily providing seed money to small businesses also in Banknorth’s market area. These investments are included in other assets and are not required to be consolidated under FIN 46. Investments in the tax advantaged limited partnerships are amortized over the same period the tax benefits are expected to be received. The investments in small business investment limited partnerships, for which Banknorth has the ability to exercise significant influence (generally, a 3% or greater ownership interest), are reviewed and adjusted quarterly based on the equity method. If Banknorth does not exercise significant influence, Banknorth’s investment is accounted for under the cost method and the carrying value is periodically evaluated for other than temporary impairment. Except for fixed capital or loan commitments agreed to in advance, the partnerships have no recourse to Banknorth.


	*Income Taxes*

Banknorth uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. Management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. Management also relies on tax opinions, recent state audits and historical experience. These judgments and estimates are reviewed on a regular basis as regulatory and business factors change.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. Summary of Significant Accounting Policies — (Continued)

Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes.


	*Earnings Per Share*

Earnings per share have been computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution and adjusted to exclude the weighted average number of unallocated shares held by the ESOP. Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if the potential common shares were converted into common stock using the treasury stock method.


	*Segment Reporting*

An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. Banknorth’s primary business is community banking, which provided approximately 91% of its total revenues and 96% of its pre-tax income for the year ended December 31, 2004 and approximately 92% of its total revenues and 97% of its pre-tax income in 2003. Accordingly, disaggregated segment information is not presented in the notes to the financial statements.

2. Accounting Changes

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


	*Consolidations*

FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“VIE’s”) (“FIN 46R”) establishes the criteria used to identify VIE’s and to determine whether or not to consolidate a VIE. VIE’s are those entities in which the total equity investment at risk does not provide the holders of that investment with the characteristics of a controlling financial interest. Pursuant to the criteria established by FIN 46R in 2004, we deconsolidated five affiliated trusts which had been formed for the purposes of issuing capital securities to unaffiliated parties and investing the proceeds in junior subordinated debentures issued by us. Our investment in these affiliated trusts totaled $10.5 million at December 31, 2004, which funds were also used by the trusts to invest in junior subordinated debentures issued by us. The result of the deconsolidation and the accounting for these entities was to recognize our equity investments in these entities of approximately $10.5 million in the aggregate as securities available for sale and to increase long-term debt by $10.5 million. The adoption of FIN 46R did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.

Banknorth’s trust preferred securities are included in its Tier 1 capital for regulatory purposes. On May 6, 2004, the Federal Reserve Board issued a proposed regulation which proposed to permit bank holding companies to continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative and qualitative standards. For information about this proposed regulation and its possible effect on Banknorth, see Note 12.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2. Accounting Changes — (Continued)


	*Accounting for Share-Based Payments*

In December 2004, the FASB issued FASB Statement No. 123 (Revised 2004), “Share-Based Payment” (“FAS 123R”) which requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees, including employee stock purchase plans. Current disclosure provisions under FAS 123 are still applicable (see Note 1). In addition to stock option awards granted after July 1, 2005, compensation expense on unvested equity-based awards that were granted prior to the effective date must be recognized in the income statement. FAS 123R is effective for interim or annual periods beginning after June 15, 2005. The adoption of FAS 123R is expected to decrease earnings per share by $.03 in 2005. FAS 123 R will no effect on our financial condition, or cash flows.


	*Accounting for Certain Loan or Debt Securities Acquired in a Transfer*

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


	*Loan Commitments*

In March 2004, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan Commitments,” which provided guidance on accounting for loan commitments at fair value that meet the definition of a derivative. SAB 105 is effective for commitments entered into after March 31, 2004. The guidance clarifies that expected future cash flows related to the servicing of the loan may be recognized only when the servicing asset has been contractually separated from the underlying loan by sale with servicing retained. SAB 105 did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.


	*Guidance on “Other-Than-Temporary Impairment”*

In 2003, the Emerging Issues Task Force reached a consensus on EITF 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provided application guidance to assess whether there have been any events or economic circumstance to indicate that a security is impaired on an other-than-temporary basis. Factors to consider include the length of time the security has had a market value less that the cost basis, the intent and ability of the company to hold the security for a period time sufficient for a recover in value, recent events specific to the issuer or industry and for debt securities, external credit rating and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2. Accounting Changes — (Continued)

In December 2004, the FASB announced that it will reconsider in its entirety all guidance on disclosing, measuring and recognizing other-than-temporary impairments of debt and equity securities. Until new guidance is issued, companies must continue to comply with the disclosure requirements of EITF 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” and all relevant measurement and recognition requirements in other accounting literature. Companies evaluating whether an impairment is other-than-temporary under existing requirements should continue to consider the length of time a security has been impaired, the severity of the impairment and the financial condition and near-term prospects of the issue of the security.


	*Business Combinations*

In October 2004, the EITF issued EITF 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination.” The Task Force determined that a business combination between two parties that have a preexisting relationship is a multiple-element transaction with one element being the business combination and the other element being the settlement of the preexisting relationship. This guidance is applicable to business combinations consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004. The application of this EITF did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.


3.	Acquisitions

Acquisitions are an important part of Banknorth’s strategic plans. The following table summarizes bank 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

CCBT Financial Companies, Inc.		4/30/2004	$	1,292.9	$	108.5	$	178.2	$	19.4	$	—		9.2	$	298.1
Foxbrough Savings Bank		4/30/2004		241.8		22.8		62.2		2.2		88.9		—		88.9
First & Ocean Bancorp		12/31/2003		274.4		15.6		35.1		1.8		49.7		—		49.7
American Financial Holdings, Inc.		2/14/2003		2,690.3		408.2		422.2		9.3		328.5		13.4		711.4
Warren Bancorp, Inc.		12/31/2002		466.1		45.3		90.5		2.7		59.8		2.7		136.6
Bancorp Connecticut, Inc.		8/31/2002		661.7		61.4		96.9		8.7		161.2		—		161.2
Ipswich Bancshares, Inc.		7/26/2002		318.0		13.9		22.0		4.8		19.9		0.9		40.1

In addition, Banknorth acquired four insurance agencies from 2002 to 2004. The total cost of these agencies was $16.8 million.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Acquisitions — (Continued)

On April 30, 2004, Banknorth acquired CCBT Financial Companies, Inc. (“CCBT”) and Foxborough Savings Bank (“Foxborough”). The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for CCBT and Foxborough at the date of acquisition. Banknorth expects that some adjustments of the estimated fair values assigned to the assets acquired and liabilities assumed will be recorded in periods after December 31, 2004, although such adjustments are not expected to be significant. It is estimated that none of the goodwill will be deductible for income tax purposes.


Assets:
Investments		$	319,403
Loans held for sale			7,758
Loans and leases, net			1,026,915
Premises and equipment			31,508
Other assets			159,610

	Assets acquired		1,545,194

Liabilities:
Deposits			1,188,294
Borrowings			210,903
Other liabilities			20,889

	Liabilities assumed		1,420,086

	Net assets acquired		125,108
Goodwill			240,427
Identifiable intangible assets			21,565

	Total purchase price	$	387,100

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


4.	Securities Available for Sale and Held to Maturity

A summary of the amortized cost and market values of securities available for sale and held to maturity follows:


					Gross		Gross
			Amortized		Unrealized		Unrealized			Market
			Cost		Gains		Losses			Value

Available for Sale
	December 31, 2004:
	U.S. Government obligations and obligations of U.S. Government agencies and corporations		$	528,973	$	181	$	(12,722	)	$	516,432
	Tax-exempt bonds and notes			166,901		3,045		(148	)		169,798
	Other bonds and notes			285,742		10,674		(644	)		295,772
	Mortgage-backed securities			5,130,478		33,081		(31,641	)		5,131,918
	Collateralized mortgage obligations			599,304		1,748		(3,129	)		597,923

		Total debt securities		6,711,398		48,729		(48,284	)		6,711,843
	Federal Home Loan Bank stock			116,904		—		—			116,904
	Federal Reserve Bank stock			60,338		—		—			60,338
	Other equity securities			16,456		247		(23	)		16,680

		Total equity securities		193,698		247		(23	)		193,922

		Total securities available for sale	$	6,905,096	$	48,976	$	(48,307	)	$	6,905,765

	December 31, 2003:
	U.S. Government obligations and obligations of U.S. Government agencies and corporations		$	2,359,347	$	1,993	$	(41,165	)	$	2,320,175
	Tax-exempt bonds and notes			138,280		3,191		(21	)		141,450
	Other bonds and notes			365,109		16,279		(886	)		380,502
	Mortgage-backed securities			3,834,958		50,167		(21,747	)		3,863,378
	Collateralized mortgage obligations			264,545		4,138		(648	)		268,035

		Total debt securities		6,962,239		75,768		(64,467	)		6,973,540
	Federal Home Loan Bank stock			104,397		—		—			104,397
	Federal Reserve Bank stock			37,666		—		—			37,666
	Other equity securities			6,868		521		—			7,389

		Total equity securities		148,931		521		—			149,452

		Total securities available for sale	$	7,111,170	$	76,289	$	(64,467	)	$	7,122,992

Held to Maturity:
	December 31, 2004:
	Collateralized mortgage obligations		$	87,013	$	494	$	—		$	87,507

		Total securities held to maturity	$	87,013	$	494	$	—		$	87,507

	December 31, 2003:
	Collateralized mortgage obligations		$	124,240	$	104	$	—		$	124,344

		Total securities held to maturity	$	124,240	$	104	$	—		$	124,344

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Securities Available for Sale and Held to Maturity — (Continued)

Included in securities in U.S. Government obligations and obligations of U.S. Government agencies and corporations at December 31, 2004 were $475.1 million of Federal National Mortgage Association and Federal Home Loan Mortgage Corp. securities.

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


	Less than 1 year							More than 1 year							Total

	Number of		Fair		Unrealized			Number of		Fair		Unrealized			Number of		Fair		Unrealized
Available for Sale:	Investments		Value		Losses			Investments		Value		Losses			Investments		Value		Losses

U.S. Government obligations and obligations of U.S. Government agencies and corporations		6	$	140,522	$	(1,108	)		5	$	345,432	$	(11,614	)		11	$	485,954	$	(12,722	)
Tax-exempt bonds and notes		54		83,367		(148	)		—		—		—			54		83,367		(148	)
Other bonds and notes		10		20,990		(616	)		2		4,434		(28	)		12		25,424		(644	)
Mortgage-backed securities		99		2,125,235		(16,495	)		41		947,126		(15,146	)		140		3,072,361		(31,641	)
Collateralized mortgage obligations		18		377,830		(3,128	)		2		540		(1	)		20		378,370		(3,129	)
Equity securities		1		5		(10	)		1		95		(13	)		2		100		(23	)

		188	$	2,747,949	$	(21,505	)		51	$	1,297,627	$	(26,802	)		239	$	4,045,576	$	(48,307	)

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

The amortized cost and market values of debt securities at December 31, 2004 by contractual maturities are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2004, Banknorth had $393.6 million of securities available for sale with call provisions.


		Available for Sale				Held to Maturity

		Amortized Cost		Market Value		Amortized Cost		Market Value

December 31, 2004:
Due in one year or less		$	153,426	$	153,931	$	118	$	119
Due after one year through five years			556,879		547,852		5,315		5,345
Due after five years through ten years			390,249		400,335		26,703		26,854
Due after ten years			5,610,844		5,609,725		54,877		55,189

	Total debt securities	$	6,711,398	$	6,711,843	$	87,013	$	87,507

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Securities Available for Sale and Held to Maturity — (Continued)

A summary of realized gains and losses on securities available for sale for the years ended December 31, 2004, 2003 and 2002 follows:


	Realized

	Gains		Losses		Net

2004	$	10,230	$	17,931	$	(7,701	)
2003		44,744		2,284		42,460
2002		9,823		2,541		7,282


5.	Loans and Leases

Banknorth’s lending activities are conducted principally in New England and upstate New York. The principal categories of loans in Banknorth’s portfolio are residential real estate loans, which are secured by single-family (one to four units) residences; commercial real estate loans, which are secured by multi-family (five or more units) residential and commercial real estate; commercial business loans and leases; and consumer loans and leases. A summary of loans and leases follows:


		December 31,

		2004		2003

Residential real estate loans
	Permanent first mortgage loans	$	3,024,799	$	2,681,925
	Construction and development		56,418		28,558

			3,081,217		2,710,483
Commercial real estate loans:
	Permanent first mortgage loans		5,297,812		4,696,428
	Construction and development		951,701		832,434

			6,249,513		5,528,862
Commercial business loans and leases
	Commercial business loans		3,838,366		3,188,504
	Commercial business leases		90,228		98,590

			3,928,594		3,287,094
Consumer loans and leases
	Consumer loans		5,333,448		4,816,217
	Consumer leases		222		3,306

			5,333,670		4,819,523

	Total loans and leases	$	18,592,994	$	16,345,962

Loans and leases include net deferred charges of $23.0 million at December 31, 2004 and $21.8 million at December 31, 2003. Deferred charges include deferred loan origination costs, net of deferred loan origination fees and unearned discounts.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Loans and Leases — (Continued)

Nonperforming Loans

The following table sets forth the information regarding nonperforming loans and accruing loans 90 days or more overdue at the dates indicated:


		December 31,

		2004		2003

Nonaccrual loans
	Residential real estate mortgages	$	7,846	$	7,157
	Commercial real estate loans		29,948		19,700
	Commercial business loans and leases		32,421		24,412
	Consumer loans and leases		7,344		8,493

Total nonperforming loans		$	77,559	$	59,762

Accruing loans which are 90 days or more overdue		$	5,254	$	4,915

Impaired loans are commercial and commercial real estate loans which Banknorth believes will probably not result in the collection of all amounts due according to the contractual terms of the loan agreement. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. All commercial and commercial real estate nonaccrual loans are impaired, but not all impaired loans are on nonaccrual. Accrual of interest on commercial and commercial real estate loans is generally discontinued when collectibility of principal or interest is uncertain or on which payments of principal or interest have become contractually past due 90 days. Banknorth may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility. The amount of reserves for impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral less cost to sell.

The following table sets forth information on impaired loans at the dates indicated:


		At or For the Year Ended December 31,

		2004				2003

		Recorded		Valuation		Recorded		Valuation
		Investment		Allowance		Investment		Allowance

Impaired loans
	Valuation allowance required	$	51,620	$	13,805	$	28,781	$	4,662
	No valuation allowance required		10,749		—		15,331		—

Total impaired loans		$	62,369	$	13,805	$	44,112	$	4,662

Average balance of impaired loans during the year		$	53,580			$	48,917

Interest income recognized on a cash basis on impaired loans during the year		$	2,501			$	1,675

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.	Allowance for Loan and Lease Losses

A summary of changes in the allowance for loan and lease losses follows:


	Year Ended December 31,

	2004			2003			2002

Balance at beginning of period	$	232,287		$	208,273		$	189,837
Allowance related to business combinations		13,665			19,008			12,794
Provisions charged to income		40,340			42,301			44,314
Transfer for off-balance sheet loan commitments		(6,600	)		—			—
Charge-offs		(50,687	)		(49,609	)		(52,002	)
Recoveries		14,147			12,314			13,330

Balance at end of period	$	243,152		$	232,287		$	208,273

During 2004, a portion of the allowance for credit losses related to unfunded credit commitments was reclassified from the allowance for loan and lease losses to a separate liability account. The liability for unfunded credit commitments previously included in the allowance for loans and lease losses was $5.6 million and $3.3 million at December 31, 2003 and 2002, respectively.


7.	Premises and Equipment

A summary of premises and equipment follows:


	December 31,

	2004			2003

Land	$	34,143		$	27,558
Buildings and leasehold improvements		299,712			268,444
Capital leases on buildings		24,275			23,475
Furniture, fixtures and equipment		316,833			274,480

		674,963			593,957
Accumulated depreciation and amortization		(371,030	)		(326,922	)
Accumulated amortization on capital leases		(3,813	)		(2,217	)

Net book value	$	300,120		$	264,818

Details for internally developed software (consisting of software and dedicated hardware which is included with furniture, fixtures and equipment in the above table) is presented as follows as of the dates indicated.


	December 31,

	2004			2003

Internally developed software in use — cost	$	41,129		$	32,367
Internally developed software in use — amortization		(25,386	)		(15,420	)
Internally developed software in development		11,933			4,350

	$	27,676		$	21,297

Amortization of the asset held under the capital lease is included with depreciation expense.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


8.	Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill and other intangibles for the years ended December 31, 2004 and 2003 were as follows:


								Other			Total
					Core Deposit			Identifiable			Identifiable
		Goodwill			Intangibles			Intangibles			Intangibles

Balance, December 31, 2002		$	660,684		$	28,438		$	6,036		$	34,474
Recorded during the year			462,531			6,807			6,861			13,668
Adjust Warren’s estimated CDI to actual			2,244			(2,244	)		—			(2,244	)
Amortization expense			—			(4,574	)		(4,372	)		(8,946	)
Massachusetts REIT adjustment			2,473			—			—			—
Other adjustment of purchase accounting estimates			(1,293	)		(262	)		(275	)		(537	)

Balance, December 31, 2003			1,126,639			28,165			8,250			36,415
Recorded during the year			245,930			21,566			1,042			22,608
Amortization expense			—			(5,988	)		(2,639	)		(8,627	)
Reclassification			—			—			—			—
Other adjustment of purchase accounting estimates			(6,789	)		(20	)		—			(20	)

Balance, December 31, 2004		$	1,365,780		$	43,723		$	6,653		$	50,376

Estimated Annual Amortization Expense:
	2005		—		$	6,350		$	1,492		$	7,842
	2006		—			5,679			745			6,424
	2007		—			5,194			745			5,939
	2008		—			5,190			375			5,565
	2009		—			5,190			375			5,565
	Thereafter		—			16,120			484			16,604

The components of identifiable intangible assets follow:


		December 31, 2004

		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Identifiable intangible assets:
Core deposit intangibles		$	57,858	$	14,135	$	43,723
Other identifiable intangibles			14,746		8,093		6,653

	Total	$	72,604	$	22,228	$	50,376

There was no impairment recorded in 2004 and 2003 based on the valuations at December 31, 2004 and 2003.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	Income Taxes

The current and deferred components of income tax expense follow:


		Year Ended December 31,

		2004		2003		2002

Current
	Federal	$	131,542	$	138,722	$	128,523
	State		15,057		8,865		7,636
Deferred
	Federal		16,393		25,138		12,419
	State		105		935		103

		$	163,097	$	173,660	$	148,681

The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense.


	Year Ended December 31,

	2004			2003			2002

Computed federal tax expense	$	163,709		$	183,547		$	156,561
State income tax, net of federal benefits		9,855			6,370			5,030
Benefit of tax-exempt income		(5,046	)		(3,412	)		(3,494	)
Low income/rehabilitation credits		(4,270	)		(2,700	)		(1,540	)
Increase in cash surrender value of life insurance		(8,149	)		(8,026	)		(7,000	)
Nondeductible compensation		6,931			—			—
Other, net		67			(2,119	)		(876	)

Recorded income tax expense	$	163,097		$	173,660		$	148,681

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	Income Taxes — (Continued)

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities, which are included in Other Assets and Other Liabilities, respectively, at December 31, 2004 and 2003 follow:


			December 31,

			2004		2003

Deferred tax assets
	Allowance for loan and lease losses		$	86,505	$	83,061
	Compensation and employee benefits			20,268		18,597
	Loans distributed from subsidiary			6,616		13,017
	Book reserves not yet realized for tax purposes			405		1,304
	Intangible assets			5,696		2,435
	Other			2,023		1,643

		Total gross deferred tax assets		121,513		120,057

Deferred tax liabilities
	Pension plan			35,194		31,035
	Leases			7,488		7,820
	Premises and equipment			24,930		26,563
	Partnership investments			12,090		8,630
	Loan basis difference			11,439		12,819
	Purchase accounting			21,870		12,927
	Unrealized appreciation on securities and hedging			105		3,920
	Other			760		1,148

		Total gross deferred tax liabilities		113,876		104,862

Net deferred tax asset			$	7,637	$	15,195

Banknorth has determined that a valuation allowance is not required for any of its deferred tax assets since it is more likely than not that these assets will be realized principally through carryback to taxable income in prior years and future reversals of existing taxable temporary differences and by offsetting other future taxable income.


	*State Tax Assessment*

We are subject to examinations by various federal and state governmental tax authorities from time to time regarding tax returns we have filed. Currently, certain state income tax returns filed by us in recent years are under examination. In June 2004, the Vermont Department of Taxes assessed three Vermont-based banks, previously acquired by us, for taxes, interest and penalties for the years 2000 and 2001 on the basis that subsidiary investment companies established by these banks pursuant to Vermont law should be considered part of our banking subsidiary for purposes of calculating taxes due the State of Vermont. We believe that we have substantial defenses to this assessment and are in the process of appealing it in accordance with administrative procedures. Although not considered probable, there can be no assurance that Vermont will not ultimately prevail on this matter. Our estimate of the range of reasonably possible exposure above established reserves on this matter is from $0 to $2.0 million, after federal tax benefits.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


10.	Merger and Consolidation Costs

Merger and consolidation costs include merger-related, charter consolidation, asset write-downs and branch closing expenses. The following table summarizes merger and consolidation costs for the years ended December 31, 2004, 2003 and 2002.


	Year-Ended December 31,

	2004			2003			2002

The Toronto-Dominion Bank Merger Charges
Personnel costs	$	34,986		$	—		$	—
Other costs		3,890			—			—

		38,876			—			—

Foxborough Savings Bank Merger Charges
Personnel costs		611			—			—
Systems conversion and integration/customer communications		1,274			1			—
Other costs		348			—			—

		2,233			1			—

CCBT Financial Companies, Inc. Merger Charges
Personnel costs		1,795			—			—
Systems conversion and integration/customer communications		2,720			—			—
Other costs		1,324			—			—

		5,839			—			—

BostonFed Bancorp, Inc. Merger Charges
Personnel costs		26
Systems conversion and integration/customer communications		1,297			—			—
Other costs		114			—			—

		1,437			—			—

Other
American Financial Holdings, Inc. merger charges		400			5,358			855
First & Ocean Bancorp merger charges		1,342			458			—
Warren Bancorp, Inc. merger charges		29			2,424			240
Bancorp Connecticut merger charges		49			363			2,746
Ipswich Bancshares merger charges		—			143			1,900
Andover Bancorp, Inc./MetroWest Bank merger charges		—			12			5,830
Banknorth Group, Inc. (Vermont) reverse reserves for auto lease residuals		(570	)		(615	)		(574	)
Charter consolidation costs		—			—			3,601
Branch Closings		—			(40	)		93

		1,250			8,103			14,691

Total Merger and Consolidation Costs	$	49,635		$	8,104		$	14,691

Merger-related personnel costs on business combinations accounted for under the purchase method of accounting includes the costs of maintaining duplicate employees at the acquired bank during the systems integration period and related employee benefits and outplacement services. For business combinations accounted for under the purchase method of accounting, severance costs are accrued at merger date (and

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


10.	Merger and Consolidation Costs — (Continued)

are included in the determination of goodwill) for those employees identified to be severed at the time of closing. In 2004, personnel costs for the pending transaction with The Toronto-Dominion Bank (“TD”) included $33.2 million of long-term incentive payments pursuant to the change-in-control provision of the Executive Incentive Plan. These nonrefundable amounts were paid in anticipation of completion of this transaction, which constitutes a change in control for purposes of the Executive Incentive Plan.

The following table presents the approximate number of employees that were severed in each of the banking acquisitions in 2004, 2003 and 2002.


	Number of
	Terminated
Acquisition	Employees

CCBT Financial Companies, Inc.		155
Foxborough Savings Bank		25
First & Ocean Bancorp		60
American Financial Holdings, Inc.		330
Warren Bancorp, Inc.		85
Bancorp Connecticut, Inc.		90
Ipswich Bancshares, Inc.		60

Systems conversions and integration costs and customer communications costs are recorded as incurred and are associated with the costs of converting the accounts, records and data processing equipment of the acquired companies to the systems maintained by Banknorth, as well as the costs of required notices to customers of the acquired bank concerning the acquisition and conversion of their accounts to Banknorth systems.

Other costs include asset write-downs/facility costs relating primarily to facility closings. The costs represent lease termination costs and impairment of assets for redundant office space, closed branches and equipment to be disposed of or abandoned.

Charter consolidation costs represent costs incurred to consolidate the charters of the Company’s eight national bank subsidiaries to a single national bank charter effective January 1, 2002.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


10.	Merger and Consolidation Costs — (Continued)

The following table presents activity in the accrual account for merger and consolidation costs for the years ended December 31, 2004 and 2003, respectively.


			Purchase								Non-cash
			Accounting		Merger and						Write Downs
	Balance		Adjustments at		Consolidation			Cash			and Other			Balance
	12/31/03		Acquisition		Costs			Payments			Adjustments			12/31/04

The Toronto-Dominion Bank Merger	$	—	$	623	$	38,879		$	(39,070	)	$	—		$	432
BostonFed Bancorp, Inc. Merger		—		—		1,436			(1,436	)		—			—
Foxborough Savings Bank Merger		—		1,196		2,232			(2,880	)		(87	)		461
CCBT Financial Companies, Inc. Merger		—		10,407		5,837			(13,908	)		(370	)		1,966
First & Ocean Bancorp Merger		250		1,715		1,342			(3,101	)		—			206
American Financial Holdings, Inc. Merger		266		—		400			(400	)		(266	)		—
Warren Bancorp, Inc. Merger		27		—		29			(29	)		(27	)		—
Bancorp Connecticut, Inc. Merger		466		—		50			(516	)		—			—
Andover/ MetroWest Merger		84		—		—			(6	)		—			78
Other merger and consolidation costs		4		—		(570	)		(2	)		568			—

Total	$	1,097	$	13,941	$	49,635		$	(61,348	)	$	(182	)	$	3,143


			Purchase								Non-cash
			Accounting		Merger and						Write Downs
	Balance		Adjustments at		Consolidation			Cash			and Other			Balance
	12/31/02		Acquisition		Costs			Payments			Adjustments			12/31/03

First & Ocean Bancorp Merger	$	—	$	585	$	458		$	(793	)	$	—		$	250
American Financial Holdings, Inc. Merger		—		13,600		5,358			(17,257	)		(1,435	)		266
Warren Bancorp, Inc. Merger		2,052		—		2,424			(4,670	)		221			27
Bancorp Connecticut, Inc. Merger		3,097		—		363			(1,196	)		(1,798	)		466
Ipswich Bancshares, Inc. Merger		—		—		143			(143	)		—			—
Andover/ MetroWest Merger		321		—		12			(60	)		(189	)		84
Other Merger and Consolidation Costs		84		—		(654	)		(37	)		611			4

Total	$	5,554	$	14,185	$	8,104		$	(24,156	)	$	(2,590	)	$	1,097

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


11.	Short-term Borrowings

A summary of short-term borrowings follows:


			December 31,

			2004					2003					2002

			Amount		Rate			Amount		Rate			Amount		Rate

At year-end
	Securities sold under agreements to repurchase — retail		$	1,234,476		1.29	%	$	1,086,900		0.59	%	$	1,222,466		1.22	%
	Securities sold under agreements to repurchase — wholesale			—		—			814,650		0.52	%		—		—
	Federal funds purchased			618,000		2.22	%		358,000		0.94	%		53,000		1.16	%
	Treasury, tax and loan notes			375,347		2.16	%		77,397		0.69	%		1,001		0.91	%
	Federal Home Loan Bank Advances			1,570,000		2.25	%		—		—			—		—

		Total Short-term borrowings	$	3,797,823				$	2,336,947				$	1,276,467

Average for the year
	Securities sold under agreements to repurchase — retail		$	1,094,309		0.99	%	$	1,059,077		0.90	%	$	955,887		1.40	%
	Securities sold under agreements to repurchase — wholesale			948,711		1.07	%		295,618		0.60	%		—		—
	Federal funds purchased			609,218		1.44	%		264,062		1.20	%		95,568		1.71	%
	Treasury, tax and loan notes			143,529		1.74	%		10,207		1.07	%		13,036		1.61	%
	Federal Home Loan Bank Advances			225,985		1.92	%		—		—			—		—
Maximum month-end balance
	Securities sold under agreements to repurchase — retail		$	1,277,965				$	1,167,325				$	1,200,524
	Securities sold under agreements to repurchase — wholesale			1,764,729					814,650					—
	Federal funds purchased			947,000					655,000					256,000
	Treasury, tax and loan notes			1,196,423					89,287					94,354
	Federal Home Loan Bank Advances			1,570,000					—					—

Retail securities sold under repurchase agreements generally have maturities of 365 days or less and are collateralized by mortgage-backed securities and U.S. Government obligations.

At December 31, 2004, Banknorth 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%. Banknorth did not utilize the line of credit in 2004.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. Long-term Debt

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


	December 31,

	2004			2003

Federal Home Loan Bank advances	$	428,825		$	1,495,821
Securities sold under agreements to repurchase — wholesale		1,100,000			1,400,000
Junior subordinated debentures issued to affiliated trusts		310,746			—
Capital trust securities		—			295,275
Subordinated long-term debt 7.625%, due 2011		200,000			200,000
Senior notes 3.75%, due 2008		149,810			149,753
Hedge-related basis adjustments on long-term debt		(4,420	)		(1,896	)
Other long-term debt		7,921			6,964

Total	$	2,192,882		$	3,545,917

The following table presents the maturities of long-term debt outstanding at the dates indicated:


December 31, 2004							December 31, 2003

Maturity		Principal					Maturity		Principal
Dates		Amounts		Interest Rates			Dates		Amounts		Interest Rates

	2005	$	723,843		3.21 – 7.45	%		2004	$	1,879,358		0.17 – 8.09	%
	2006		769,726		2.77 – 6.39	%		2005		625,744		1.72 – 7.45	%
	2007		8,079		3.45 – 8.04	%		2006		291,063		2.24 – 6.39	%
	2008		149,585		3.75 – 6.42	%		2007		9,934		2.70 – 8.04	%
	2009		2,515		6.97 – 6.97	%		2008		151,253		3.07 – 6.42	%
	2010 – 2032		539,134		1.00 – 10.52	%		2009 – 2032		588,565		1.00 – 10.52	%

		$	2,192,882						$	3,545,917

Callable borrowings of $105.0 million are shown in their respective periods assuming that the callable debt is redeemed at the initial call date while all other borrowings are shown in the periods corresponding to their scheduled maturity date.

Borrowings from the Federal Home Loan Bank, which consist of both fixed and adjustable rate borrowings, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. Long-term Debt — (Continued)

The following is a summary of the junior subordinated debentures outstanding as of December 31, 2004:


							Junior
	Issuance		Capital		Common		Subordinated		Stated		Maturity
Name	Date		Securities		Securities		Debentures(1)		Rate		Date

Peoples Heritage Capital Trust I		1/31/1997	$	61,775	$	3,093	$	64,868		9.06%		2/1/2027
Banknorth Capital Trust I		5/1/1997		30,000		928		30,928		10.52%		5/1/2027
Ipswich Statutory Trust I		2/22/2001		3,500		109		3,609		10.20%		2/22/2031
CCBT Statutory Trust I		7/31/2001		5,000		155		5,155		5.74%		7/31/2031
Banknorth Capital Trust II		2/22/2002		200,000		6,186		206,186		8.00%		4/1/2032

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


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

There were issuance costs associated with the issuance of the capital trust securities. The average cost of the securities, including the amortization of the issuance costs was 8.55%, 8.64% and 8.72% for the years ended December 31, 2004, 2003 and 2002, respectively.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. Long-term Debt — (Continued)

Other long-term debt includes the net obligation under a capital lease of $6.0 million as of December 31, 2004. Although the gross obligation under capital lease obligation is $21.9 million, the Bank provided funding for the construction of the leased asset. Accordingly, the loan balance of $15.9 million has been reclassified to net down the capital lease obligation.


13.	Regulatory Matters

Banknorth, NA must maintain noninterest-bearing cash balances on reserve with the Federal Reserve Bank (“FRB”). In the years ended December 31, 2004 and 2003, the average required reserve balances were $99.4 million and $79.5 million, respectively.

Banking regulators adopted quantitative measures which assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements (risk-based capital ratios.) Banks are required to have core capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital consists principally of shareholders’ equity, including qualified perpetual preferred stock but excluding unrealized gains and losses on securities available for sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitations. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. The regulations also define well-capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively. At December 31, 2004 and 2003, Banknorth and its depository subsidiary were “well-capitalized”, as defined, and in compliance with all applicable regulatory capital requirements. There are no conditions or events since December 31, 2004 that management believes would cause a change in Banknorth’s well-capitalized status.

The following table summarizes Banknorth’s and its depository subsidiary’s regulatory capital requirements at December 31, 2004 and December 31, 2003.


		Actual				Capital Requirements				Excess

		Amount		Ratio		Amount		Ratio		Amount		Ratio

As of December 31, 2004
Banknorth Group, Inc.
	Total capital (to risk weighted assets)	$	2,510,570		12.13%	$	1,655,428		8.00%	$	855,142		4.13%
	Tier 1 capital (to risk weighted assets)		2,060,335		9.96%		827,714		4.00%		1,232,621		5.96%
	Tier 1 leverage capital ratio (to average assets)		2,060,335		7.58%		1,087,190		4.00%		973,145		3.58%
Banknorth NA
	Total capital (to risk weighted assets)		2,387,678		11.57%		1,650,894		8.00%		736,784		3.57%
	Tier 1 capital (to risk weighted assets)		1,941,151		9.41%		825,447		4.00%		1,115,704		5.41%
	Tier 1 leverage capital ratio (to average assets)		1,941,151		7.16%		1,084,507		4.00%		856,644		3.16%

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13. Regulatory Matters — (Continued)


		Actual				Capital Requirements				Excess

		Amount		Ratio		Amount		Ratio		Amount		Ratio

As of December 31, 2003
Banknorth Group, Inc.
	Total capital (to risk weighted assets)	$	2,088,061		11.29%	$	1,479,352		8.00%	$	608,709		3.29%
	Tier 1 capital (to risk weighted assets)		1,656,848		8.96%		739,676		4.00%		917,172		4.96%
	Tier 1 leverage capital ratio (to average assets)		1,656,848		6.65%		996,777		4.00%		660,071		2.65%
Banknorth NA
	Total capital (to risk weighted assets)		1,970,705		10.67%		1,477,591		8.00%		493,114		2.67%
	Tier 1 capital (to risk weighted assets)		1,539,814		8.34%		738,796		4.00%		801,018		4.34%
	Tier 1 leverage capital ratio (to average assets)		1,539,814		6.18%		995,893		4.00%		543,921		2.18%


14.	Shareholders’ Equity

In 2004 and 2003, Banknorth issued 9.4 million and 13.4 million of shares of common stock in connection with acquisitions, respectively. In February 2002, Banknorth’s Board of Directors authorized the repurchase of up to 8 million shares, or approximately 6% of the then outstanding Company common stock in addition to the 13 million share repurchase program authorized in 2001. There were no repurchases in 2004 and there were 4.5 million shares and 6.3 million shares repurchased in 2003 and 2002, respectively. At December 31, 2004, Banknorth was authorized to purchase 2.9 million shares under the 8 million share repurchase program authorized in February 2002 and no shares under the 13 million share repurchase program authorized in 2001.


	*Dividend Limitations*

Dividends paid by subsidiaries are the primary source of funds available to Banknorth for payment of dividends to its shareholders. Banknorth’s banking subsidiary is subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the banking subsidiary to Banknorth. At December 31, 2004, Banknorth, NA had $736.8 million available for dividends that could be paid without prior regulatory approval.


	*Stockholder Rights Plan*

In 1989, Banknorth’s Board of Directors adopted a Stockholder Rights Plan declaring a dividend of one preferred Stock Purchase Right for each outstanding share of Company common stock. The rights will remain attached to the Common Stock and are not exercisable except under limited circumstances relating to the acquisition of, the right to acquire beneficial ownership of, or tender offer for 15% or more of the outstanding shares of Company common stock. The rights have no voting or dividend privileges and, until they become exercisable, have no dilutive effect on the earnings of Banknorth. On July 27, 1999 the Board of Directors amended and restated the Stockholder Rights Plan to, among other things, extend the expiration date of the rights to September 25, 2009. On July 25, 2000, Banknorth again amended and

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14. Shareholders’ Equity — (Continued)

restated the Stockholder Rights Plan to reflect its acquisition of Banknorth (Vermont). The Stockholder Rights Plan was amended in 2004 to exclude the merger agreement between Banknorth and TD and the transactions contemplated thereby from its terms.


15.	Accumulated Other Comprehensive Income, Net

The following table presents the reconciliation of transactions affecting Accumulated Other Comprehensive Income included in shareholder’s equity for the periods indicated.


	Pre-tax
	Amount			Tax Effect			Net of Tax

For the Year Ended December 31, 2004
Unrealized (loss) on securities available for sale	$	(18,826	)	$	6,589		$	(12,237	)
Unrealized (loss) on cash flow hedges		(1,929	)		675			(1,254	)
Minimum pension liability		(1,660	)		581			(1,079	)
Reclassification adjustment for net losses realized in net income		9,855			(3,449	)		6,406

Net change in unrealized (losses)	$	(12,560	)	$	4,396		$	(8,164	)

For the Year Ended December 31, 2003
Unrealized (loss) on securities available for sale	$	(126,873	)	$	44,405		$	(82,468	)
Unrealized (loss) on cash flow hedges		(6,226	)		2,179			(4,047	)
Minimum pension liability		(687	)		241			(446	)
Reclassification adjustment for net (gains) realized in net income		(33,812	)		11,834			(21,978	)

Net change in unrealized (losses)	$	(167,598	)	$	58,659		$	(108,939	)

For the Year Ended December 31, 2002
Unrealized gain on securities available for sale	$	126,028		$	(44,038	)	$	81,990
Unrealized (loss) on cash flow hedges		(9,590	)		3,355			(6,235	)
Minimum pension liability		(1,270	)		445			(825	)
Reclassification adjustment for net (gains) realized in net income		(850	)		298			(552	)

Net change in unrealized gains	$	114,318		$	(39,940	)	$	74,378


16.	Derivative Instruments

In the ordinary course of business, Banknorth enters into derivative transactions to manage its interest rate and prepayment risk and to accommodate the business of its customers. Banknorth uses various types of interest rate derivative contracts to protect against changes in the fair value of its fixed-rate assets and liabilities due to fluctuations in interest rates. Banknorth also uses these contracts to protect against changes in the cash flows of its variable-rate assets and liabilities, and anticipated transactions. In 2004 and 2003, nothing was excluded from the assessment of fair value and cash flow hedge effectiveness. Banknorth did not recognize any amounts in the consolidated statements of income related to ineffectiveness of fair value or cash flow hedges in 2004 and 2003. At December 31, 2004 and 2003, there were no hedging positions where it was probable that forecasted transactions would not occur within the originally designated time period.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16. Derivative Instruments — (Continued)

For cash flow hedges, gains and losses on derivative contracts reclassified from accumulated other comprehensive income to current period earnings are included consistently in the consolidated statements of income with the respective hedged item and in the same period the hedge item affects earnings. During the next 12 months, net losses on derivative instruments included in accumulated other comprehensive income of approximately $58 thousand (after-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease income on the respective hedge items.


17.	Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks

Banknorth is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, commitments to invest in real estate limited partnerships, standby letters of credit, recourse arrangements on serviced loans, forward commitments to sell loans, foreign currency forward contracts and commercial loan interest rate swaps. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement Banknorth has in particular classes of financial instruments.

Banknorth’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. Banknorth uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Banknorth controls the credit risk of its forward commitments to sell loans through credit approvals, limits and monitoring procedures.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued)

Financial instruments with off-balance sheet risk at December 31, 2004 and 2003:


			Contract or Notional Amount
			at December 31,

			2004		2003

Financial instruments with notional or contract amounts which represent credit risk:
	Commitments to originate loans, unused lines, standby letters of credit and unadvanced portions of construction loans		$	7,269,302	$	6,245,086
	Commitments to invest in real estate limited partnerships			22,729		24,971
	Commitments to invest in small business investments limited partnerships			17,137		17,663
	Loans serviced with recourse			223,333		5,569
Financial instruments with notional or contract amounts which exceed the amount of credit risk:
	Commercial loan swap program:
		Interest rate swaps with commercial borrowers		690,856		325,023
		Interest rate swaps with dealers		690,856		325,023
	Interest rate swaps on borrowings			566,500		566,500
	Forward commitments to sell loans			83,016		61,000
	Foreign currency rate contracts:
		Forward contracts with customers		33,575		23,438
		Forward contracts with dealers		33,747		23,438
		Foreign exchange options to purchase		35,713		—
		Foreign exchange options to sell		35,713		—
	Rate-locked loan commitments			35,961		30,779

Commitments to originate loans, unused lines of credit and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Banknorth evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Banknorth upon extension of credit, is based on a credit evaluation of the borrower. Loan origination and commitment fees are generally deferred and amortized as an adjustment of the related loan’s yield in interest income.

Standby letters of credit are conditional commitments issued by Banknorth to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Fees received for the standby letters of credit are included in other noninterest income.

At December 31, 2004, Banknorth had $61.3 million of investments in tax advantaged limited partnerships primarily involved in approved low income housing investment tax credit projects in Banknorth’s market area and commitments to invest up to an additional $22.7 million in such partnerships. At December 31, 2004, Banknorth had $30.2 million invested in small business limited partnerships which primarily provide seed money to businesses in Banknorth’s market area and commitments to invest up to

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued)

an additional $17.1 million in such partnerships. Investments in both of the foregoing categories of assets are included under other assets. Income or losses related to the limited partnerships are included in other noninterest income.

Loans serviced with recourse represent potential obligations under certain loan servicing agreements. In the event of foreclosure on a serviced loan, Banknorth is obligated to repay the investor to the extent of the investor’s remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while Banknorth cannot project future losses, the fair value of this recourse obligation is deemed to be likewise insignificant.

Commercial loan swaps enable customers to synthetically convert variable interest rate loans to fixed rate loans. These pay variable, receive fixed interest rate swaps on our books are offset by entering into simultaneous pay fixed, receive variable rate swaps with a third party broker/ dealer. Both of these swap products are marked to market and carried on our balance sheet as assets and liabilities at fair value. Changes in the fair value of the commercial interest rate swaps (which largely offset) are included in net interest income.

Interest rate swap agreements on borrowings synthetically convert fixed-rate debt to variable-rate debt tied to 1-month or 3-month LIBOR. These swaps are accounted for as fair value hedges. Changes in the fair value of these swap agreements are included in net interest income.

Forward commitments to sell residential mortgage loans are contracts which Banknorth enters into for the purpose of reducing the market risk associated with originating loans for sale. Risks may arise from the possible inability of Banknorth to originate loans to fulfill the contracts, in which case Banknorth would normally purchase loans from correspondent banks or in the open market to deliver against the contract. Gains and losses related to commitments to originate rate-locked loans are included in earnings with mortgage banking income.

Foreign currency forward contracts are contracts that Banknorth enters into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these customers, Banknorth generally sets aside a percentage of their available line of credit until the foreign currency contract is settled. Generally, Banknorth enters into forward foreign contracts with approved reputable dealers. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting Banknorth’s exposure to the replacement value of the contracts rather than the notional principal or contract amounts. The foreign exchange contracts outstanding at December 31, 2004 all mature within two years. The foreign currency forward contracts are carried on our balance sheet at fair value. The changes in the fair value of the foreign currency contracts and the associated fees are included in other noninterest income.


	*Legal Proceedings*

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued)

action will not have a material adverse effect on Banknorth’s consolidated results of operations in any future reporting period.


	*Operating Lease Obligations*

Banknorth leases certain properties and equipment used in operations under terms of operating leases which include renewal options. Rental expense under these leases approximated $22.2 million, $20.3 million and $20.9 million for the years ended 2004, 2003 and 2002, respectively.

The following table sets forth the approximate future minimum lease payments over the remaining terms of the non-cancelable leases as of December 31, 2004.


2005	$	24,396
2006		21,361
2007		17,170
2008		14,192
2009		12,510
2010 and after		34,233

	$	123,862


18.	Other Noninterest Income

The following table presents other noninterest income during the periods indicated.


		Year Ended December 31,

		2004			2003			2002

Loan fee income		$	26,453		$	24,831		$	21,893
Covered call premiums			18,024			27,756			7,279
Mortgage banking services income			6,562			10,212			8,539
Venture capital write-downs			(2,880	)		(592	)		(2,753	)
Miscellaneous income			6,657			7,099			4,020

	Total	$	54,816		$	69,306		$	38,978

The following table presents the significant components of mortgage banking income during the periods indicated.


		Year Ended December 31,

		2004		2003			2002

Residential mortgage sales/fee income
	Gains on sales and fee income	$	5,358	$	9,577		$	11,371
	Net effect of derivatives		10		107			33

			5,368		9,684			11,404
Residential mortgage servicing income			1,194		725			(15	)
Impairment charge on mortgage servicing rights			—		(197	)		(2,850	)

		$	6,562	$	10,212		$	8,539

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


19.	Stock-Based Compensation Plans


	*Stock Option Plans*

As part of its employee and director compensation programs, Banknorth may grant certain stock awards under the provisions of the existing stock option and compensation plans. Banknorth has stock options outstanding under various plans at December 31, 2004, including plans assumed in acquisitions. The plans provide for grants of options to purchase shares of common stock generally at the stock’s fair market value at the date of grant. In addition, the plans provide for grants of shares of common stock that are subject to forfeiture if certain vesting requirements are not met, among other stock-based awards.

Banknorth and its shareholders have adopted various stock option plans for key employees. These plans include a stock option plan adopted in 2003 (the “2003 Equity Incentive Plan”) and in 1996 (the “1996 Equity Incentive Plan”). The 2003 Equity Incentive Plan authorizes grants of options and other stock awards covering up to 8,100,000 shares of Banknorth common stock. The 1996 Equity Incentive Plan, as amended, authorizes grants of options and other stock awards covering up to 13,000,000 shares of Banknorth common stock. Stock options are granted with an exercise price equal to the stock’s fair market value at the date of the grant and expire 10 years from the date of the grant. At December 31, 2004, there were 4,202,895 additional shares available for grant under the 2003 Equity Incentive Plan and 2,225,622 additional shares available for grant under the 1996 Equity Incentive Plan.

Banknorth and its shareholders also have adopted a stock option plan for non-employee directors. The maximum number of shares of Banknorth common stock which may be issued under this plan, as amended, is 1,060,000 shares, of which 411,750 shares had been issued upon exercise of the stock options granted pursuant to this plan through December 31, 2004. Options to purchase 109,500 shares were granted in 2004 at an exercise price of $31.57 per share, options to purchase 112,500 shares were granted in 2003 at an exercise price of $23.37 per share and options to purchase 113,500 shares were granted in 2002 at $26.34 per share. At December 31, 2004, there were 243,000 shares available for future grants under this plan.

The per share weighted-average fair value of all stock options granted by Banknorth during 2004, 2003 and 2002 was $8.47, $7.15 and $7.09 on the date of the grants using the Black Scholes option-pricing model with the following weighted average assumptions:


	2004			2003			2002

Expected dividend yield		2.39	%		2.65	%		2.36	%
Risk-free interest rate		3.52			3.31			3.82
Expected life		5.00	years		5.00	years		5.00	years
Volatility		32.22	%		32.22	%		36.26	%

Award authority under stock incentive plans of acquired companies is generally terminated at the merger closing dates. In stock acquisitions, option holders under such plans generally receive options to buy Banknorth common stock based on the conversion terms of the applicable merger agreement. The terms of such options are governed by the stock incentive plan of the acquired company under which they were issued.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


19.	Stock-Based Compensation Plans — (Continued)

Activity for all stock option plans during the years ended December 31, 2004, 2003 and 2002 is summarized as follows:


		2004					2003					2002

					Weighted					Weighted					Weighted
		Number of			Average		Number of			Average		Number of			Average
		Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price

Outstanding at beginning of year			16,379,053		$	21.23		12,488,419		$	19.23		9,655,231		$	16.90
	Granted		119,075			31.63		4,185,340			27.84		3,898,047			23.45
	Granted in purchase acquisition		329,403			21.24		2,402,938			13.92		714,798			12.51
	Exercised		(7,483,628	)		19.26		(2,441,520	)		15.11		(1,684,671	)		12.58
	Cancelled and forfeited		(263,447	)		25.84		(256,124	)		23.45		(94,986	)		20.71

Outstanding at end of year			9,080,456		$	22.87		16,379,053		$	21.23		12,488,419		$	19.23

Options exercisable at year end			5,237,604		$	20.29		8,947,350		$	17.64		6,729,062		$	16.46

The range of per share exercise prices for outstanding and exercisable stock options at December 31, 2004 was as follows:


	Options Outstanding						Options Exercisable

	Number		Weighted Average				Number
Range of	Outstanding		Remaining		Weighted Average		Outstanding		Weighted Average
Exercise Prices	at 12/31/2004		Contractual Life		Exercise Price		at 12/31/2004		Exercise Price

up to $12.99		195,858		1.8 years	$	9.89		195,858	$	9.89
$13.00 – $16.24		1,066,532		5.1		13.69		1,066,532		13.69
$16.25 – $19.49		754,488		4.6		17.27		754,488		17.27
$19.50 – $22.74		1,294,929		6.2		20.86		1,144,929		20.93
$22.75 – $25.98		2,417,297		7.7		23.40		1,218,260		23.38
$25.99 – $29.23		3,256,352		8.7		28.11		772,877		27.94
$29.24 – $32.48		95,000		9.3		31.65		84,660		31.58

		9,080,456		7.2		22.87		5,237,604		20.29


	*401(k) Plan*

Banknorth and its subsidiaries have 401(k) Plans covering substantially all permanent employees. Banknorth matches employee contributions based on a predetermined formula and may make additional discretionary contributions. The total expense for these plans in 2004, 2003 and 2002 was $9.6 million, $9.2 million and $7.5 million, respectively.


	*Employee Stock Purchase Plan*

Banknorth and its shareholders have adopted an Employee Stock Purchase Plan that is available to employees with one year of service. Under the plan, shares of Banknorth common stock may be purchased at six-month intervals at 85% of the lower of the fair market value on the first or the last business day of each six-month period, subject to limitations set forth in the plan. Employees have the right to authorize

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19. Stock-Based Compensation Plans — (Continued)

payroll deductions up to 10% of their salary. During 2004, 2003 and 2002, employees purchased 171,764 shares, 201,307 shares and 180,955 shares at average prices of $27.28, $20.67 and $19.24 per share, respectively. The maximum number of shares which may be issued under the Employee Stock Purchase Plan, as amended, is 2,852,000 shares. At December 31, 2004, 1,800,075 shares had been issued under this plan and 1,051,925 shares remain to be issued. The proforma expense included in the SFAS No. 123 calculation disclosed in Note 1 to the Consolidated Financial Statements approximated $1.2 million, $1.6 million and $933 thousand for 2004, 2003 and 2002, respectively.


	*Restricted Stock Plan*

Banknorth and its shareholders have adopted a Restricted Stock Plan under which up to $10,000 of the annual fee payable to each non-employee Director of Banknorth and participating subsidiaries is payable solely in shares of Company common stock. Shares issued under this plan totaled 3,991, 8,869 and 5,599 in 2004, 2003 and 2002, respectively.


	*Incentive Plans*

Banknorth and its shareholders have adopted an Incentive Plan covering all full and part-time employees, other than executive officers. Incentives are earned based on Banknorth’s, department or individual performance as measured against targets set in connection with the annual budget. Each employee’s incentive potential is a fixed percentage of their base pay and, for a significant number of employees, can be modified up or down based on actual performance versus target.

Banknorth and its shareholders have also adopted an Executive Incentive Plan under which Banknorth may pay cash awards to officers and other employees. Incentives payments may be short-term or long-term in nature and based on corporate performance as measured against performance targets which are established in connection with the preparation of the annual budget. As noted in Note 10, in December 2004 Banknorth paid $33.2 million of incentive awards pursuant to the change-in-control provision of the Executive Incentive Plan in anticipation of completion of the pending transaction between Banknorth and TD, which constitutes a change-in-control as defined in this plan.


20.	Retirement and Other Benefit Plans


	*Pension Plans*

Banknorth has a noncontributory defined benefit retirement plan covering most permanent, full-time employees. Employees are fully vested after five years of service. Benefits are based on career average earnings and length of service. Banknorth has historically made cash contributions to the defined benefit pension plan for the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Banknorth contributed $17.1 million to the plan in 2004 and estimates that the 2005 contribution will be approximately $20 million.

Banknorth has adopted supplemental retirement plans for certain key officers. These plans, which are unfunded and nonqualified, were designed to offset the impact of changes in the pension plans that limit the benefits for highly-paid employees under qualified pension plans.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


20.	Retirement and Other Benefit Plans — (Continued)


	*Post-Retirement Benefits Other Than Pensions*

Banknorth and its subsidiaries recognize costs related to post-retirement benefits under the accrual method, which recognizes costs over the employee’s period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty-year period beginning January 1, 1993.

The following tables set forth the funded status and amounts recognized in Banknorth’s Consolidated Balance Sheets at December 31, 2004 and 2003 for the pension plans (defined benefit and supplemental executive retirement plans) and other post-retirement benefit plans:


													Other Postretirement
	Qualified Pension						Nonqualified Pension						Benefits

	2004			2003			2004			2003			2004			2003

Change in Benefit Obligation
Benefit obligation at beginning of year	$	204,409		$	147,666		$	26,264		$	21,288		$	18,329		$	15,813
Service cost		12,326			9,251			576			311			195			123
Interest cost		12,639			12,168			1,736			1,580			1,463			1,155
Assumption changes		17,825			14,916			(70	)		(2,406	)		2,307			517
Plan amendment		—			—			957			—			—			—
Actuarial loss		1,867			7,408			3,369			4,111			(800	)		653
Acquisitions		91			21,698			(1,343	)		2,289			5,570			1,566
Benefits paid		(9,212	)		(8,268	)		(1,408	)		(909	)		(1,431	)		(1,498	)
Expenses paid		(621	)		(430	)		—			—			—			—

Benefit obligation at end of year	$	239,324		$	204,409		$	30,081		$	26,264		$	25,633		$	18,329

Change in plan assets
Fair value of plan assets at beginning of year	$	237,536		$	154,902		$	—		$	—		$	—		$	—
Actual return (loss) on plan assets		19,128			25,929			—			—			—			—
Employer contribution		17,100			47,442			1,408			909			1,431			1,498
Benefits paid		(9,212	)		(8,268	)		(1,408	)		(909	)		(1,431	)		(1,498	)
Expenses paid		(621	)		(430	)		—			—			—			—
Acquisitions		—			17,961			—			—			—			—

Fair value of plan assets at end of year	$	263,931		$	237,536		$	—		$	—		$	—		$	—

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


20.	Retirement and Other Benefit Plans — (Continued)


													Other Postretirement
	Qualified Pension						Nonqualified Pension						Benefits

	2004			2003			2004			2003			2004			2003

Funded (unfunded) status	$	24,607		$	33,127		$	(30,081	)	$	(26,264	)	$	(25,633	)	$	(18,329	)
Unrecognized net actuarial (gain) loss		71,778			54,896			7,774			5,462			7,783			6,620
Unrecognized prior service cost		43			50			2,327			1,607			937			1,076
Unrecognized net transition obligation		(498	)		(756	)		110			121			3,292			3,685

Prepaid (accrued) benefit cost	$	95,930		$	87,317		$	(19,870	)	$	(19,074	)	$	(13,621	)	$	(6,948	)

Amounts recognized in the statement of financial position consist of:
Prepaid (accrued) benefit cost	$	95,930		$	87,317		$	(19,870	)	$	(19,074	)	$	(13,621	)	$	(6,948	)
Accrued benefit liability		—			—			25,925			22,758			—			—
Intangible asset		—			—			(2,437	)		(1,728	)		—			—
Accumulated other comprehensive income		—			—			(3,618	)		(1,956	)		—			—

Net amount recognized	$	95,930		$	87,317		$	—		$	—		$	(13,621	)	$	(6,948	)

Accumulated benefit obligation	$	223,488		$	193,835		$	25,925		$	22,760


	Year Ended December 31,

	2004			2003			2002

Components of net periodic benefit cost
Qualified Pension
Service cost	$	12,326		$	9,251		$	6,810
Interest cost		12,639			12,168			9,223
Expected (gain) on plan assets		(19,821	)		(14,343	)		(12,373	)
Recognized actuarial loss		3,503			3,865			—
Net amortization and deferral		(251	)		(251	)		(251	)
Other		91			—			—

Net periodic benefit cost	$	8,487		$	10,690		$	3,409

Nonqualified Pension
Service cost	$	576		$	311		$	208
Interest cost		1,736			1,580			1,322
Expected return on plan assets		—			—			—
Recognized actuarial loss		413			124			70
Net amortization and deferral		248			183			258

Net periodic benefit cost	$	2,973		$	2,198		$	1,858

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


20.	Retirement and Other Benefit Plans — (Continued)


	Year Ended December 31,

	2004		2003		2002

Other Postretirement Benefits
Service cost	$	195	$	123	$	99
Interest cost		1,463		1,155		1,001
Expected return on plan assets		—		—		—
Recognized actuarial loss		344		310		132
Net amortization and deferral		532		532		532

Net periodic benefit cost	$	2,534	$	2,120	$	1,764

Weighted-average assumptions used to determine benefit obligations as of December 31


	2004			2003

Discount rate		5.75	%		6.25	%
Rate of compensation increase		4.50	%		4.50	%
Medical inflation rate		8.00	%		9.00	%

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31


	2004			2003

Discount rate		6.25	%		6.75	%
Expected return on plan assets		8.50	%		8.50	%
Rate of compensation increase		4.50	%		4.50	%
Medical inflation rate		9.00	%		10.00	%


	2004			2003

Assumed health care cost trend rates at December 31
Health care cost trend rate assumed for next year		7.00	%		8.00	%
Rate that the cost trend rate gradually declines to		5.00	%		5.00	%
Year that the rate reaches the rate it is assumed to remain at		2007			2007

Effect of one-percentage change in assumed health care cost trend rates in 2004


	1% Increase		1% Decrease

Effect on total service and interest cost components	$	123,065	$	(105,563	)
Effect on postretirement benefit obligation		1,948,614		(1,672,485	)

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


20.	Retirement and Other Benefit Plans — (Continued)

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:


					Other
	Qualified		Nonqualified		Postretirement
	Pension		Pension		Benefits

2005	$	8,518,186	$	2,191,582	$	2,126,158
2006		8,681,680		2,273,333		2,106,161
2007		9,267,800		2,641,818		2,033,685
2008		10,019,916		2,716,953		1,946,149
2009		10,748,152		6,058,615		1,879,914
2010 - 2014		71,262,751		11,687,393		9,212,736

	$	118,498,485	$	27,569,694	$	19,304,803

Assumptions for long-term expected return on pension plan assets in the Banknorth qualified retirement plan are periodically reviewed. As part of the review, Banknorth’s independent consulting actuaries performed a stochastic analysis of expected returns based on the plan’s asset allocation as of both January 1, 2003 and January 1, 2004 to develop expected rates of return. This forecast reflects the actuarial firm’s expected long-term rates of return for each significant asset class or economic indicator, for example, 9.6% for US large cap stocks, 6.1% for US long-term corporate bonds, and 2.7% inflation as of January 1, 2004. The range of returns developed relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class.

The following table presents the plan assets as of December 31, 2004 and 2003 and respective target allocations.


	December 31,

	2004			2003

	Actual			Actual			Target
	Percentage			Percentage			Allocation
Asset category	of Fair Value			of Fair Value			Percentage

Cash		1	%		20	%		0 - 25	%
Equities		59	%		53	%		40 - 75	%
Fixed Income		40	%		27	%		25 - 60	%

		100	%		100	%

Equity securities at December 31, 2004 and 2003 do not include any Banknorth common stock.

Banknorth’s key investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due (a) to provide a total return that, over the long-term, maximizes the ratio of the plan assets to liabilities, while minimizing the present value of required Company contributions, at the appropriate levels of risk, (b) to meet statutory requirements and regulatory agencies’ requirements (c) and to satisfy applicable accounting standards. Banknorth periodically evaluates the asset allocations, funded status, investment manager structure, rate of return assumption and contribution strategy for satisfaction of our investment objectives. The Retirement Committee meets quarterly to review the performance management reports prepared by our investment managers.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


20.	Retirement and Other Benefit Plans — (Continued)

The expected return on plan assets equals the long-term rate of return multiplied by the market related value, plus the expected contributions, weighted for timing, plus expected expenses, minus the expected distributions, weighted for timing.

Interest cost equals the discount rate multiplied by the projected benefit obligation plus the service cost minus expected expenses, minus the expected distributions, weighted for timing.


21.	Fair Value of Financial Instruments

Banknorth discloses fair value information about financial instruments for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, Banknorth’s fair values should not be compared to those of other banks.

Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of Banknorth. For certain assets and liabilities, the information required under SFAS No. 107 is supplemented with additional information relevant to an understanding of the fair value.

The following describes the methods and assumptions used by Banknorth in estimating the fair values of financial instruments and certain non-financial instruments:

Cash and cash equivalents, including cash and due from banks, short-term investments and federal funds sold. For these cash and cash equivalents, which have maturities of 90 days or less, the carrying amounts reported in the balance sheet approximate fair values.

Securities and loans held for sale. Fair values are based on quoted bid market prices, where available. Where quoted market prices for an instrument are not available, fair values are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instrument being valued. Fair values are calculated based on the value of one unit without regard to premiums or discounts that might result from selling all of Banknorth’s holdings of a particular security in one transaction.

Loans and leases. The fair values of portfolio loans and leases are estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality.

For certain variable-rate consumer loans, including home equity lines of credit the carrying value approximates fair value.

For nonperforming loans and certain loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting cash flows at a rate commensurate with the risk associated with those cash flows.

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


21.	Fair Value of Financial Instruments — (Continued)

Commitments and letters of credit not included in the table have contractual values of $7.3 billion and $6.2 billion at December 31, 2004 and 2003, respectively. These instruments generate ongoing fees at Banknorth’s current pricing levels. Of the commitments at December 31, 2004, 36% mature within one year. At December 31, 2004, the approximate fair value of standby letters of credit was $377 thousand, of which $184 thousand was unamortized and included in other liabilities on the balance sheet. At December 31, 2003, the approximate fair value of the standby letters of credit was $696 thousand.

Mortgage Servicing Rights. The fair value of Banknorth’s mortgage servicing rights was based on a third party valuation analysis (performed as of November 30, 2004) which considered the expected present value of future mortgage servicing income, net of estimated servicing costs, considering market consensus loan prepayment predictions at that date.

Deposits. The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on wholesale funding products of similar maturities.

The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding (“deposit base intangibles”).

Borrowings, including federal funds purchased, securities sold under repurchase agreements, borrowings from the Federal Home Loan Bank and other borrowings. The fair value of Banknorth’s long-term borrowings is estimated by discounting cash flows based on current rates available to Banknorth for similar types of borrowing arrangements taking into account any optionality. For short-term borrowings that mature or reprice in 90 days or less, carrying value approximates fair value.

Off-balance sheet financial instruments:

Forward commitments to sell loans held for sale. The fair value of Banknorth’s forward commitments to sell loans reflects the amount Banknorth would receive or pay to terminate the commitment at the reporting date. Of the $83.0 million of forward sales commitments at December 31, 2004, Banknorth had $51.7 million in loans available to sell at that date as well as sufficient loan originations subsequent to December 31, 2004 to fulfill the commitments. Consequently, Banknorth expects to meet all of its forward sales commitments.

Rate-lock commitments to originate loans held for sale. The fair values on commitment to originate residential loans at an agreed upon rate (rate-locked) are based on the estimated gain or loss that would be recognized had the underlying loans been funded and sold on the reporting date (i.e., mark-to-market value).

Commercial loan interest rate swaps. The estimated fair value of these derivative financial instruments is based on dealer quotes.

Loans sold or serviced with recourse. Under certain of Banknorth’s loan servicing or sales arrangements, Banknorth has $223.3 million of recourse obligations. In the event of foreclosure on a sold or serviced loan, Banknorth is obligated to repay the buyer or investor to the extent of the remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while Banknorth cannot project future losses, the fair value of this recourse obligation also is deemed to be insignificant.

100

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


21.	Fair Value of Financial Instruments — (Continued)

A summary of the carrying values and estimated fair values of Banknorth’s significant financial instruments at December 31, 2004 and 2003 follows:


		2004						2003

		Carrying			Fair			Carrying			Fair
		Value			Value			Value			Value

Assets:
	Cash and cash equivalents	$	544,306		$	544,306		$	674,331		$	674,331
	Securities — available for sale		6,905,765			6,905,765			7,122,992			7,122,992
	Securities — held to maturity		87,013			87,507			124,240			124,344
	Loans held for sale		51,693			52,936			41,696			42,801
	Loans and leases, net		18,349,842			18,510,642			16,113,675			16,153,360
	Mortgage servicing rights		5,155			5,888			2,783			3,115
Liabilities:
	Fed funds purchased		618,000			618,000			358,000			358,000
	Deposits (with no stated maturity)		14,742,635			14,742,635			13,168,081			13,168,081
	Time deposits		4,484,946			4,474,769			4,733,104			4,763,865
	Borrowings		5,372,705			5,438,189			5,524,864			5,674,074
Financial instruments with off-balance sheet notional amounts:
	Forward commitments to sell loans		(149	)		(149	)		(425	)		(425	)
	Rate-lock commitments to originate loans held for sale		147			147			188			188
	Commercial loan interest rate swaps with borrower		17,836			17,836			7,357			7,357
	Commercial loan interest rate swaps with broker		(17,836	)		(17,836	)		(7,357	)		(7,357	)
	Interest rate contracts on borrowings		(4,420	)		(4,420	)		(1,896	)		(1,896	)
	Foreign currency forward contracts with customers		3,307			3,307			3,132			3,132
	Foreign currency forward contracts with dealers		(3,056	)		(3,056	)		(3,132	)		(3,132	)
	Foreign exchange options to purchase		1,727			1,727			—			—
	Foreign exchange options to sell		(1,727	)		(1,727	)		—			—

101

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


22.	Condensed Financial Information — Parent Company Only

Condensed Financial Statements of Banknorth


			December 31,

			2004		2003

Balance Sheets
Assets:
	Cash and due from banks		$	55,674	$	27,492
	Interest bearing deposits with subsidiaries			193,942		225,492
	Securities available for sale			54,387		45,216
	Investment in subsidiaries			3,361,786		2,710,080
	Goodwill and other intangibles			618		618
	Amounts receivable from subsidiaries			10,917		—
	Other assets			25,295		16,679

		Total assets	$	3,702,619	$	3,025,577

Liabilities and shareholders’ equity
	Amounts payable to subsidiaries		$	—	$	978
	Senior notes, net of hedge			148,330		149,991
	Subordinated debentures supporting mandatory redeemable trust securities			349,854		344,403
	Other liabilities			28,321		9,686
	Shareholders’ equity			3,176,114		2,520,519

		Total liabilities and shareholders’ equity	$	3,702,619	$	3,025,577


		Year Ended December 31,

		2004			2003			2002

Operating income:
	Dividends from subsidiaries	$	—		$	193,950		$	112,331
	Net gains (losses) on sales of securities		(6	)		53			648
	Other operating income		6,680			6,226			6,456

	Total operating income		6,674			200,229			119,435

Operating expenses:
	Interest on borrowings		32,716			31,266			26,994
	Merger and consolidation costs		5,447			—			—
	Write-off of branch automation project		—			—			6,170
	Other operating expenses		5,104			3,944			3,603

	Total operating expenses		43,267			35,210			36,767

Income before income taxes and equity in undistributed net income of subsidiaries			(36,593	)		165,019			82,668
Income tax benefit			(12,811	)		(10,126	)		(9,736	)

Income before equity in undistributed net income of subsidiaries			(23,782	)		175,145			92,404
Equity in undistributed net income of subsidiaries			328,425			175,614			206,234

Net income		$	304,643		$	350,759		$	298,638

102

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


22.	Condensed Financial Information — Parent Company Only — (Continued)


		Year Ended December 31,

		2004			2003			2002

Cash flows from operating activities:
	Net income	$	304,643		$	350,759		$	298,638
	Adjustments to reconcile net income to net cash (used) provided by operating activities:
	Undistributed net income from subsidiaries		(328,425	)		(175,614	)		(206,234	)
	Write-off of branch automation project		—			—			6,170
	(Increase) decrease in amounts receivable from subsidiaries		(10,917	)		83			23,618
	Decrease (increase) in other assets		(8,380	)		5,266			(3,969	)
	Increase (decrease) in amounts payable to subsidiaries		(978	)		978			(1,029	)
	Increase (decrease) in other liabilities		19,164			(10,920	)		4,813

Net cash provided by operating activities			(24,893	)		170,552			122,007

Cash flows from investing activities:
	Net decrease (increase) in interest bearing deposits with subsidiaries		31,550			(110,040	)		(97,097	)
	Purchase of available for sale securities		—			(3,171	)		(3,037	)
	Sales of available for sale securities		28			840			—
	Capital contribution to subsidiaries		—			(70,000	)		—
	Cash acquired in acquisition		1,518			36,022			6,110
	Proceeds from sale of investment to subsidiary		6,150			—			—

Net cash (used in) provided by investing activities			39,246			(146,349	)		(94,024	)

Cash flows from financing activities:
	Proceeds from line of credit		—			—			25,000
	Payment of line of credit		—			—			(25,000	)
	Proceeds from sale of trust preferred securities		—			—			193,150
	Proceeds from sale of senior notes		—			148,693			—
	Payment of notes payable		—			—			(1,068	)
	Dividends paid to shareholders		(135,132	)		(111,889	)		(85,894	)
	Treasury stock acquired		—			(105,071	)		(154,054	)
	Proceeds from stock issued in connection with employee benefit plans		148,961			48,677			30,406

Net cash (used in) financing activities			13,829			(19,590	)		(17,460	)

Net increase in cash due from banks			28,182			4,613			10,523
Cash and due from banks at beginning of year			27,492			22,879			12,356

Cash and due from banks at end of year		$	55,674		$	27,492		$	22,879

Supplemental disclosure information:
	Interest paid on borrowings	$	32,666		$	30,329		$	22,867

103

BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


22.	Condensed Financial Information — Parent Company Only — (Continued)

The parent-only Statements of Changes in Shareholders’ Equity are substantially similar to the Consolidated Statement of Changes in Shareholders’ Equity and therefore are not presented here.

Banknorth also holds an investment in a subsidiary, Northgroup Captive Insurance, Inc., which insures approximately $140,000 of the $1 million retention on the existing directors’ and officers’ liability policy of Banknorth.


23.	Subsequent Events (unaudited)

On January 21, 2005, Banknorth completed the acquisition of BostonFed Bancorp, Inc. (“BostonFed”), the parent company of Boston Federal Savings Bank. BostonFed had $1.5 billion of assets and $100.0 million of shareholders’ equity at the acquisition date. Under terms of the acquisition agreement, each outstanding share of BostonFed was converted into the right to receive 1.241 shares of Banknorth common stock or, at the election of the holder of BostonFed common stock, 1.055 shares of Banknorth common stock and $6.12 in cash, plus, in each case, cash in lieu of any fractional share interest. An aggregate of 6.1 million shares of Banknorth common stock will be issued and $325 thousand of cash paid by Banknorth in connection with this transaction.

Banknorth, TD, a Canadian chartered bank, Berlin Merger Co., a Delaware corporation and a wholly-owned subsidiary of TD, and Banknorth Delaware Inc., a Delaware corporation and a wholly-owned subsidiary of Banknorth (“Banknorth Delaware”) are parties to an amended and restated agreement and plan of merger, dated as of August 25, 2004. Subject to the terms and conditions in the TD/Banknorth merger agreement, Banknorth will merge with and into Banknorth Delaware, and immediately thereafter Berlin Merger Co. will merge with and into Banknorth Delaware. Upon completion of the transaction, each Banknorth shareholder will be entitled to receive, in exchange for the shares of Banknorth common stock owned by such shareholder, a package of consideration consisting of (a) a number of TD common shares equal to 0.2351, (b) an amount in cash equal to $12.24 and (c) a number of shares of Banknorth Delaware common stock equal to 0.49, in each case multiplied by the number of shares of Banknorth common stock owned by such shareholder, plus cash in lieu of any fractional share interests. Upon completion of the transaction, TD will hold 51% of the outstanding common stock of Banknorth Delaware, which will change its name to TD Banknorth Inc. The transaction is subject to all required regulatory approvals, approval of the shareholders of Banknorth and other customary conditions. Banknorth shareholders approved the merger agreement and related proposals at a special meeting of Banknorth shareholders held on February 18, 2005. The transaction is expected to close on or about March 1, 2005.

In January 2005, Banknorth replaced an existing line of credit agreement with a similar line of credit with TD for $110 million at prevailing market terms and conditions.

In February 2005, Banknorth authorized a balance sheet restructuring under which it sold or intends to sell approximately $3.0 billion of interest-earning assets and will use the net proceeds to pay down approximately $3.0 billion of borrowings. The loss on this balance sheet restructuring will total approximately $38 million after-tax, or $0.21 per diluted share. The yield on assets sold was 4.03% and the weighted average rate on borrowings that were paid off was approximately LIBOR plus 23 basis points. As a result of these actions, the sensitivity of our balance sheet to future increases in interest rates has been reduced because the assets sold or to be sold are primarily fixed-rate and have a duration of approximately 3.8 years and the borrowings to be paid down have floating rates and are short-term.

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BANKNORTH GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


24.	Selected Quarterly Data (unaudited)


			2004												2003

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

Condensed Income Statement
Interest income			$	329,846		$	325,361		$	309,146		$	292,652		$	290,414		$	290,750		$	302,478		$	309,327
Interest expense				83,783			85,701			79,096			75,043			77,126			80,918			90,904			103,190

Net interest income		(A)		246,063			239,660			230,050			217,609			213,288			209,832			211,574			206,137
Provision for loan and lease losses				10,670			10,670			9,500			9,500			10,400			10,500			10,500			10,901

Net interest income after provision for loan and lease losses				235,393			228,990			220,550			208,109			202,888			199,332			201,074			195,236
Noninterest income(1)		(B)		70,591			91,513			89,476			88,217			84,435			88,656			115,828			78,238
Noninterest expense, excluding merger and consolidation costs(2)		(C)		229,073			168,595			159,691			158,105			154,360			150,839			182,509			145,458
Merger and consolidation costs		(D)		38,286			5,603			4,135			1,614			1,316			808			1,530			4,450

Income before income taxes				38,625			146,305			146,200			136,607			131,647			136,341			132,863			123,566
Income tax expense				17,927			48,534			50,353			46,280			40,085			46,063			45,338			42,173

Net income(1)(2)			$	20,698		$	97,771		$	95,847		$	90,327		$	91,562		$	90,278		$	87,525		$	81,393

Weighted average shares outstanding:
	Basic			177,071			173,271			169,637			162,965			162,149			161,517			162,312			157,667
	Diluted			179,953			176,756			173,109			166,657			165,685			164,446			164,559			159,328
Basic earnings per share:			$	0.12		$	0.56		$	0.57		$	0.55		$	0.56		$	0.56		$	0.54		$	0.52
Diluted earnings per share:			$	0.12		$	0.55		$	0.55		$	0.54		$	0.55		$	0.55		$	0.53		$	0.51
Financial Ratios
Return on average assets(1)(2)(3)				0.29	%		1.33	%		1.36	%		1.37	%		1.39	%		1.39	%		1.38	%		1.32	%
Return on average equity(1)(2)(3)				2.66	%		13.24	%		13.54	%		14.13	%		14.72	%		14.85	%		14.24	%		14.26	%
Net interest margin (fully-taxable equivalent)(3)				3.87	%		3.68	%		3.66	%		3.68	%		3.65	%		3.63	%		3.71	%		3.66	%
Noninterest income as a percent of total income(4)				22.29	%		27.63	%		28.00	%		28.85	%		28.36	%		29.70	%		35.38	%		27.51	%
Efficiency ratio(1)(2)(5)				84.43	%		52.60	%		51.27	%		52.23	%		52.29	%		50.81	%		56.21	%		52.71	%


(1)	Noninterest income included net securities gains (losses) of ($17.8) million and $29.2 million in the fourth quarter of 2004 and second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods.

(2)	Noninterest expense included prepayment penalties on borrowings of $61.5 million and $28.5 million in the fourth quarter of 2004 and the second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods.

(3)	Annualized.

(4)	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).

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

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Banknorth Group, Inc.:

We have audited the accompanying consolidated balance sheets of Banknorth Group, Inc. and subsidiaries (“Banknorth”) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of Banknorth’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banknorth Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Banknorth’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Boston, Massachusetts

February 25, 2004

106

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Banknorth Group, Inc.:

We have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting, that Banknorth Group, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Banknorth’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Banknorth’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Banknorth maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Banknorth maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Banknorth Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’

107

equity, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 25, 2005 expressed an unqualified opinion on those consolidated financial statements.

Boston, Massachusetts

February 25, 2005

108


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

None.


Item 9A.	*Controls and Procedures*

Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are operating in an effective manner.

Management Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by its independent registered public accounting firm, as stated in its report included in Item 8.

Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Item 9B.	*Other Information*

Not applicable.

PART III.


Item 10.	*Directors and Executive Officers of the Registrant*

Incorporated by reference to “Election of Directors”, “Governance of Banknorth — Committees of the Board of Directors”, “Governance of Banknorth — Code of Conduct and Ethics” and “Executive Officers who are not Directors” in our definitive proxy statement for 2005 (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission on or before April 30, 2005.

Incorporated by reference to “Beneficial Ownership of Capital Stock by Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

Incorporated by reference to “Governance of Banknorth — Code of Conduct and Ethics” in the Proxy Statement.


Item 11.	*Executive Compensation*

Incorporated by reference to “Compensation of Executive Officers and Transactions with Management” in the Proxy Statement.

109


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners and management is incorporated by reference to “Beneficial Ownership of Capital Stock by Certain Beneficial Owners and Management” in the Proxy Statement.

Equity Compensation Plan Information. Equity compensation plan information is incorporated by reference to “Equity Compensation Plan Information” in the Proxy Statement.


Item 13.	*Certain Relationships and Related Transactions*

Incorporated by reference to “Compensation of Executive Officers and Transactions with Management — Indebtedness of Directors and Management and Certain Transactions” in the Proxy Statement.


Item 14.	*Principal Accountant Fees and Services*

Incorporated by reference to “Relationship with Independent Public Accountants” in the Proxy Statement.

PART IV.


Item 15.	*Exhibits and Financial Statement Schedules*

(a)(1) The following financial statements are incorporated by reference from Item 8 hereof:


	Consolidated balance sheets at December 31, 2004 and 2003

	Consolidated statements of income for each of the years in the three-year period ended December 31, 2004

	Consolidated statements of changes in shareholders’ equity for each of the years in the three-year period ended December 31, 2004

	Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2004

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

(a)(2) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements and related notes thereto.

(a)(3) The following exhibits are included as part of this Form 10-K. Where applicable, references to Banknorth include Peoples Heritage Financial Group, Inc., its name prior to May 10, 2000.


Exhibit No.			Exhibit	Location

	3	(a)(1)	Amended and Restated Articles of Incorporation of Banknorth		(1)
	3	(a)(2)	Amendments to the Articles of Incorporation of Banknorth		(2)
	3	(b)	Bylaws of Banknorth		(3)
	4	(a)	Specimen Common Stock certificate		(4)
	4	(b)	Stockholder Rights Agreement, dated as of September 12, 1989 and amended and restated as of July 27, 1999 and as of July 25, 2000, between Banknorth and American Stock Transfer & Trust Company, as Rights Agent		(5)
	4	(c)	Instruments defining the rights of security holders, including indentures		(6)

110


Exhibit No.			Exhibit	Location

	10	(a)	Employment Agreement, dated as of August 25, 2004, by and among Banknorth, Banknorth Delaware, TD and William J. Ryan		(7)
	10	(b)	Employment Agreement, dated as of August 25, 2004, by and among Banknorth, Banknorth Delaware, TD and Peter J. Verrill		(7)
	10	(c)	Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and David J. Ott		(7)
	10	(d)	Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and Andrew W. Greene		(7)
	10	(e)	Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and Wendy Suechrstedt		(7)
	10	(f)	Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and Stephen J. Boyle		(7)
	10	(g)	Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and John W. Fridlington		(7)
	10	(h)	Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and Carol L. Mitchell		(7)
	10	(i)	Retention Agreement, dated as of September 30, 2004, between Banknorth and Edward P. Schreiber
	10	(j)(1)	Amended and Restated Supplemental Retirement Agreement between Banknorth and William J. Ryan		(8)
	10	(j)(2)	First Amendment to Amended and Restated Supplemental Retirement Agreement between Banknorth and William J. Ryan
	10	(k)(1)	Amended and Restated Supplemental Retirement Agreement between Banknorth and Peter J. Verrill		(8)
	10	(k)(2)	First Amendment to Amended and Restated Supplemental Retirement Agreement between Banknorth and Peter J. Verrill
	10	(l)(1)	Supplemental Retirement Agreement between Banknorth and John W. Fridlington		(9)
	10	(l)(2)	First Amendment to Supplemental Retirement Agreement between Banknorth and John W. Fridlington		(10)
	10	(l)(3)	Second Amendment to Supplemental Retirement Agreement between Banknorth and John W. Fridlington		(8)
	10	(1)(4)	Third Amendment to Supplemental Retirement Agreement between Banknorth and John W. Fridlington
	10	(m)(1)	Banknorth Group, Inc. Supplemental Retirement Plan (which covers each executive officer of Banknorth named in the Proxy Statement, other than Messrs. Ryan, Verrill and Fridlington)		(10)
	10	(m)(2)	First Amendment to the Banknorth Group Inc. Supplemental Retirement Plan
	10	(n)(1)	Amended and Restated Deferred Compensation Plan for Non-Employee Directors and Key Employees, effective January 1, 2003		(10)
	10	(n)(2)	First Amendment to the Amended and Restated Deferred Compensation Plan for Non-Employee Directors and Key Employees
	10	(o)	1986 Stock Option and Stock Appreciation Rights Plan, as amended		(11)
	10	(p)	Amended and Restated Employee Stock Purchase Plan		(12)
	10	(q)	Amended and Restated Restricted Stock Plan for Non-Employee Directors		(13)
	10	(r)	Amended and Restated 1995 Stock Option Plan for Non-Employee Directors		(8)

111


Exhibit No.			Exhibit	Location

	10	(s)(1)	Amended and Restated 401(k) Plan, effective January 1, 2004		(8)
	10	(s)(2)	First Amendment to the Amended and Restated 401(k) Plan
	10	(t)	1996 Equity Incentive Plan, as amended		(10)
	10	(u)	Executive Incentive Plan		(10)
	10	(v)	2003 Equity Incentive Plan		(14)
	10	(w)	Amended and Restated 2003 Equity Incentive Plan		(15)
	21		Subsidiaries of Banknorth Group, Inc.
	23		Consent of KPMG LLP
	31.1		Certification of Chief Executive Officer under Rules 13a-14 and 15d-14
	31.2		Certification of Chief Financial Officer under Rules 13a-14 and 15d-14
	32.1		Certification of Chief Executive Officer Under 18 U.S.C. §1350
	32.2		Certification of Chief Financial Officer Under 18 U.S.C. §1350


	(1)	Incorporated by reference to Exhibit A to the Agreement and Plan of Merger, dated as of October 27, 1997, between Banknorth and CFX Corporation, which agreement is included as Exhibit A to the Prospectus/ Proxy Statement included in the Form S-4 Registration Statement (No. 333-23991) filed by Banknorth with the SEC on December 31, 1997.

	(2)	Exhibits are incorporated by reference to (i) the proxy statement filed by Banknorth with the SEC on March 23, 1998, (ii) the proxy statement filed by Banknorth with the SEC on March 22, 2000 and (iii) the Form S-4 Registration Statement (No. 333-95587) filed by Banknorth with the SEC on January 28, 2000, which describes an amendment which changed the name of the registrant to “Banknorth Group, Inc.”

	(3)	Exhibit is incorporated by reference to the Form 10-Q report filed by Banknorth for the three months ended September 30, 2003.

	(4)	Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 333-95587) filed by Banknorth with the SEC on January 28, 2000.

	(5)	Exhibit is incorporated by reference to the Form 8-A/ A report filed by Banknorth with the SEC on July 26, 2000.

	(6)	Banknorth has no instruments defining the rights of holders of its long-term debt where the amount of securities authorized under any such instrument exceeds 10% of the total assets of Banknorth and its subsidiaries on a consolidated basis. Banknorth hereby agrees to furnish a copy of any such instrument to the SEC upon request.

	(7)	Exhibit is incorporated by reference to the Form 8-K report filed by Banknorth on August 31, 2004. Upon completion of the TD acquisition, the indicated agreement will supersede the previously-filed severance agreement between Banknorth and such officer.

	(8)	Exhibit is incorporated by reference to Banknorth’s Form 10-K report for the year ended December 31, 2003.

	(9)	Exhibit is incorporated by reference to Banknorth’s Form 10-K report for the year ended December 31, 1995.


(10)	Exhibit is incorporated by reference to Banknorth’s Form 10-K report for the year ended December 31, 2002.

(11)	Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 33-20243) filed by Banknorth with the SEC on February 22, 1988. An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is incorporated by reference to the proxy statement filed by Banknorth with the SEC on March 24, 1994.

112


(12)	Exhibit is incorporated by reference to the proxy statement dated March 22, 2002 filed by Banknorth with the SEC.

(13)	Exhibit is incorporated by reference to the Form 10-K report filed by Banknorth for the year ended December 31, 1996.

(14)	Exhibit is incorporated by reference to the proxy statement dated March 10, 2003 filed by Banknorth with the SEC.

(15)	Exhibit is incorporated by reference to Annex B to Banknorth’s proxy statement for its 2005 annual meeting of stockholders, which will be filed on or before April 30, 2005.

Banknorth’s management contracts or compensatory plans or arrangements consist of Exhibit Nos. 10(a)-(w).

(d) There are no other financial statements and financial statement schedules which were excluded from this report which are required to be included herein.

113

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Banknorth Group, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Banknorth Group, Inc.



By:	/s/ William J. Ryan William J. Ryan Chairman, President and Chief Executive Officer	Date: February 25, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.



/s/ Gary G. Bahre Director				Date:

/s/ Robert G. Clarke Robert G. Clarke Director				Date: February 24, 2005

/s/ P. Kevin Condron P. Kevin Condron Director				Date: February 23, 2005

/s/ John Otis Drew John Otis Drew Director				Date: February 24, 2005

/s/ Colleen A. Khoury Colleen A. Khoury Director				Date: February 23, 2005

/s/ Dana S. Levenson Dana S. Levenson Director				Date: February 24, 2005

/s/ Steven T. Martin Director				Date:

/s/ John M. Naughton John M. Naughton Director				Date: February 24, 2005

114



/s/ Malcolm W. Philbrook, Jr. Malcolm W. Philbrook, Jr. Director				Date: February 23, 2005

/s/ Angelo P. Pizzagali Director				Date:

/s/ Irving E. Rogers, III Director				Date:

/s/ William J. Ryan William J. Ryan Chairman, President and Chief Executive Officer (principal executive officer)				Date: February 25, 2005

/s/ Curtis M. Scribner Curtis M. Scribner Director				Date: February 24, 2005

/s/ Gerry S. Weidema Gerry S. Weidema Director				Date: February 23, 2005

/s/ Stephen J. Boyle Stephen J. Boyle Executive Vice President and Chief Financial Officer (principal financial and accounting officer)				Date: February 24, 2005

115 EX-10.(I) 2 b53274bgexv10wxiy.txt EX-10.(I) RETENTION AGMT. DATED SEPTEMBER 30, 2004 EXHIBIT 10(i) BANKNORTH GROUP, INC. RETENTION AGREEMENT This Retention Agreement (this "Agreement") is made and entered into as of the 30th of September, 2004, by and between Banknorth Group, Inc., a Maine corporation, (the "Company") and Edward P. Schreiber (the "Executive"); W I T N E S S E T H: WHEREAS, the Company, Berlin Delaware Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Berlin Delaware"), The Toronto Dominion Bank, a Canadian chartered bank, ("TD"), and Berlin Merger Co., a Delaware corporation and wholly owned subsidiary of TD ("Berlin Mergerco"), have entered into an Agreement and Plan of Merger dated as of August 25, 2004, whereby, among other things, Berlin Mergerco will merge with and into Berlin Delaware (the "Merger"); and WHEREAS, the Company wishes to continue to retain the services of the Executive after the Effective Date for the benefit of its successor Berlin Delaware; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive hereby agree, contingent on completion of the Merger, as follows: 1. Definitions. (a) Accrued Benefits means: (i) all salary earned or accrued through the date the Executive's employment is terminated, and any unpaid amounts described in Section 5(a); (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive through the date the Executive's employment is terminated; (iii) any and all other compensation previously earned by the Executive and deferred under or pursuant to any deferred compensation plan or plans of the Company then in effect together with any interest or deemed earnings thereon pursuant to, and to the extent consistent with, the terms of such plan or plans; (iv) any bonus earned by the Executive for a Year or other performance period ending prior to the Year or other performance period in which employment terminates, but not yet paid to the Executive, under any bonus or incentive compensation plan or plans in which the Executive is a participant; (v) to the extent not previously paid or provided to the Executive, all other payments and benefits to which the Executive may be entitled under the terms of any applicable compensation or benefit plan, program or arrangement of the Company except for any severance plan, or any plan, program or arrangement that would result in any duplication of benefits. (b) Affiliate of any specified person means any other person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under direct or indirect common control with such specified person. For the purposes of this definition, "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or 2 otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (c) Annual Bonus means any bonus or incentive award under any bonus or incentive compensation plan, program or arrangement of the Company in which the Executive is a participant the performance period for which is or was initially scheduled to be one (1) year or less. (d) Base Amount means an amount equal to the Executive's Annualized Includable Compensation for the Base Period as defined in Section 280G(d)(1) and (2) of the Code (as hereinafter defined). (e) Benefit Computation Base means either (i) the Benefit Computation Base as defined in the Supplemental Retirement Agreement between Executive and the Company or (ii) if there is no Supplemental Retirement Agreement between the Executive and the Company, the base annual compensation amount used in calculating the Executive's benefits under the Retirement Plan. (f) Bonus (whether or not capitalized) means any bonus or incentive award (including any Annual Bonus or Long-Term Incentive Award) under any bonus or incentive compensation plan, program or arrangement of the Company in which the Executive is a participant. (g) Cause means: (i) the Executive's conviction of, or plea of nolo contendere to, a felony; or (ii) willful and intentional misconduct, willful neglect, or gross negligence in the performance of the Executive's duties, which has caused a demonstrable and serious injury to the Company, monetary or otherwise. The Executive shall be given written notice that the Company intends to terminate the Executive's employment for Cause. 3 Such written notice shall specify the particular acts, or failures to act, on the basis of which the decision to so terminate employment was made. In the case of a termination for Cause as described in clause (ii), above, the Executive shall be given the opportunity within thirty (30) days of the receipt of such notice to meet with the Board of Directors of the Company to defend such acts, or failures to act, prior to termination. The Company may suspend the Executive's title and authority pending such meeting, and such suspension shall not constitute Good Reason, as defined in subsection (o) below. (h) Change of Control means a change of control, as that term is defined in TD's Performance Based Restricted Share Unit Plan (Outside Canada) (as in effect from time to time, or any successor plan), of either TD or the Company, with such definition being appropriately adjusted, where necessary, to refer to the Company. (i) Code means the Internal Revenue Code of 1986, as amended. (j) Deferred Compensation Plan means a deferred compensation plan approved by the Compensation Committee of the Board. (k) Disability means a disability entitling the Executive to payments under the Company's long-term disability plan applicable to the Executive, provided that in no event shall the Executive's employment be terminable by reason of Disability unless the Executive shall have been absent from the Executive's duties with the Company on a full-time basis for one hundred and twenty (120) consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. 4 (l) Early Retirement Benefit means either (i) the "Early Retirement Benefit" or "Early Retirement/Termination of Service Benefit" as defined in the SERP Agreement or (ii) if there is no Supplemental Retirement Agreement between the Executive and the Company, the early retirement benefit as defined in the Retirement Plan. (m) Effective Date means the date on which the Effective Time (as defined in the Merger Agreement) occurs. (n) EIP means the Company's Executive Incentive Plan as amended and in effect on the Merger Agreement Date. (o) Good Reason means: (i) any breach of this Agreement by the Company, including without limitation (A) any reduction during the Retention Period in the amount of the Executive's base salary, incentive compensation opportunities or aggregate welfare and pension benefits as in effect on the Effective Date, or (B) failure to provide the Executive with the same fringe benefits that were provided to the Executive immediately prior to the Effective Date, or with a package of fringe benefits (including paid vacations) that, though one or more of such benefits may vary from those in effect immediately prior to the Effective Date, is substantially comparable in all material respects to such fringe benefits taken as a whole; (ii) without the Executive's express written consent, the assignment to the Executive of any duties that are materially inconsistent with the Executive's positions, duties, responsibilities and status immediately following the Effective Date, a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect immediately following the Effective Date, or a significant reduction in the 5 Executive's title, duties, or responsibilities, as in effect immediately prior to the Effective Date, but without regard to the Executive's normal and appropriate interaction with executives of TD as a result of the Company's status as an Affiliate of TD; (iii) the relocation of the Executive's principal place of employment, without the Executive's written consent, to a location outside the same metropolitan area in which the Executive was employed at the time of the Effective Date, or the imposition of any requirement that the Executives spend more than ninety (90) business days per year at a location other than such principal place of employment; or (iv) any purported termination of the Executive's employment for Cause or Disability which is not effected pursuant to a satisfactory Notice of Termination. In the event of the occurrence of any of the events described in (i), (ii), (iii) or (iv) above, the Executive may, within three (3) months after the Executive has knowledge of the occurrence of any such event, give the Company written notice that such event constitutes Good Reason, and the Company shall thereafter have thirty (30) days in which to cure. If the Company has not cured in that time, the event shall constitute Good Reason. If the Executive has not given notice of Good Reason during such three (3) month period, such event shall not constitute Good Reason. (p) Long-Term Incentive Award means an incentive award under the EIP the performance period for which is or was initially scheduled to be in excess of one (1) year. (q) Merger Agreement means the Agreement and Plan of Merger, dated as of August 25, 2004 among the Company, Berlin Delaware, TD and Berlin Mergerco. (r) Merger Agreement Date means the date upon which the Merger Agreement was executed by the parties thereto. 6 (s) Notice of Termination means a notice which shall indicate the specific termination provision relied upon in this Agreement and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (t) Plan Year with respect to any of the Retirement Plan or the 401(k) Plan, the "plan year" as defined in such plan. (u) Post-Retention Period Severance means a severance payment consisting of eighteen (18) months of continuation of the Executive's then base salary. (v) Pre-Merger Option means any option to purchase common stock of the Company that was granted prior to the date on which the Merger Agreement was executed by the parties thereto. (w) Prorated Bonus means a lump sum cash payment payable within ten (10) business days of the date of termination equal to the product of (x) the average Annual Bonus paid (whether deferred or paid in equity) to the Executive under the annual bonus plan of the Company for the last three (3) full fiscal years of the Company ending prior to the date of termination or such shorter number of years that the Executive has been employed by the Company and eligible to receive a full year bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the date of termination and the denominator of which is three hundred and sixty-five (365). (x) Retention Amount shall be: (i) a lump sum payment equal to $1,127,964; and 7 (ii) for purposes of determining the Executive's benefit under the SERP Agreement an additional thirty-six (36) months of age and of service shall be credited, determined as follows: (A) The additional thirty-six (36) months of age and service shall be applied for purposes of benefit accrual, vesting, eligibility for early retirement, subsidized early retirement factors, actuarial equivalence and any other purposes under the SERP Agreement. (B) Any provision under the SERP Agreement prohibiting the accrual of any additional benefits after the Executive has been credited with more than a stated number of years of service shall be disregarded. (C) For purposes of determining the amount of the Executive's benefit under the SERP Agreement, the reduction in respect of the benefit paid under the Retirement Plan shall be based on the Executive's actual Retirement Plan benefit (that is, without any additional deemed service). (D) For purposes of determining the Early Retirement Benefit and other forms of benefit under the SERP Agreement, if the Executive is less than fifty-five (55) years of age, the Executive shall be deemed to be at least fifty-five (55) years of age on the date the Executive's employment with the Company terminates, notwithstanding the Executive's actual age, if less. (E) The Benefit Computation Base (as defined in the SERP Agreement) shall be determined as if it were being calculated at the end of the thirty-six (36) month period of service credited to the Executive under this paragraph (ii) and as if during such thirty-six (36) additional month period the Executive's annualized compensation was the same as such compensation for (I) the Year during which the Executive's employment is terminated, or, (II) 8 any Year before the Effective Date occurred, whichever is greater. The parties hereto agree that (i) any bonus amount that would normally be payable in 2005, but is accelerated into 2004 shall be taken into account in determining the Executive's Benefit Computation Base under this paragraph (E) as if it had been paid in 2005, (ii) no amounts payable pursuant to Sections 5, 6 and 7 shall be taken into account in determining the Executive's benefits under the SERP Agreement, and (iii) the SERP Agreement shall be amended accordingly, if necessary. (F) Any amendment to the Retirement Plan after the date hereof shall be disregarded to the extent that the application of such amendment would decrease the total amount of the benefits provided for in this paragraph (ii). (G) The Executive shall be entitled to a lump sum distribution of SERP Agreement benefits in all events, and the Company shall not be entitled to require payment over a longer period. If the Executive elects a lump sum payment (i) the actuarial equivalent benefit shall be determined in accordance with the provisions of the Retirement Plan as in effect immediately prior to the Effective Date, or as in effect on termination of the Executive's employment, whichever creates the greater benefit, and (ii) the lump sum payment shall, unless deferred in advance by the Executive pursuant to reasonable criteria consistent with the requirements of the Code, be made within thirty (30) days following the termination of the Executive's employment. (H) An example of the SERP calculation described by this Agreement will be appended hereto as Exhibit A as soon as reasonably practicable following the Merger Agreement Date. (y) Retention Period means a period commencing on the Effective Date and ending on the third (3rd) anniversary of the date on which the Effective Date occurs. 9 (z) Retirement means a termination of the Executive's employment on account of resignation by the Executive at or after age sixty-two and one-half (62.5), other than a resignation for Good Reason. (aa) Retirement Plan means the Banknorth Group, Inc. Retirement Plan, as amended and in effect from time to time and any successor plan. (bb) SERP Agreement means either (i) the Supplemental Retirement Agreement between the Executive and the Company or (ii) if there is no Supplemental Retirement Agreement between the Executive and the Company, the Banknorth Group, Inc. Supplemental Retirement Plan, as amended. (cc) Year means a calendar year unless otherwise specifically provided. (dd) 401(k) Plan means the Banknorth Group, Inc. 401(k) Plan dated January 1, 2001, as amended, or any successor plan. 2. Term of Agreement. This Agreement shall begin on the Effective Date and shall terminate on the third anniversary of such date. If the Effective Date does not occur, this Agreement shall be null and void ab initio. 3. Duties. During the Retention Period, the Executive shall serve the Company in such capacities and positions as may be assigned by the Company consistent with the Executive's capacities and positions immediately prior to the Effective Date and shall devote the Executive's best efforts and all of the Executive's business time, attention and skill to the business and affairs of the Company, as such business and affairs now exist and as they may hereafter be conducted. 4. Compensation. 10 During the Retention Period, the Executive shall be compensated by the Company as follows: (a) the Executive shall receive, at such intervals and in accordance with such standard policies of the Company from time to time, an annual base salary not less than the Executive's annual base salary as in effect immediately prior to the Effective Date, subject to adjustment as hereinafter provided, and shall be entitled to such increases in Executive's base salary, if any, as may be determined from time to time in the sole discretion of the Board, provided that in no event may the Executive's annual base salary be decreased; (b) the Executive shall be included in all plans providing incentive compensation to executives, including but not limited to bonus, deferred compensation, annual or other incentive compensation, supplemental pension, stock ownership, stock option, stock appreciation, stock bonus and similar or comparable plans as any such plans are extended by the Company from time to time to senior corporate officers, key employees and other employees of comparable status, provided that in no event shall the Executive's incentive compensation opportunities be less favorable than the Executive's incentive compensation opportunities immediately prior to the Effective Date; (c) the Executive shall be reimbursed, at such intervals and in accordance with such standard policies as may be in effect on the Effective Date, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Company, including travel expenses; (d) the Executive shall enjoy the fringe benefits normally afforded to the Company's executive officers. Such fringe benefits may vary from those in effect immediately prior to the 11 Effective Date, provided that such fringe benefits taken as a whole are substantially comparable in all material respects to those in effect immediately prior to such date; (e) the Executive shall be allowed to participate, on the same basis as applicable to other employees of comparable status and position, in any and all plans, programs or arrangements covering employee benefits or fringe benefits, including but not limited to the following: group medical insurance, hospitalization benefits, disability benefits, medical benefits, dental benefits, pension benefits, profit sharing and stock bonus plans, but excluding severance and any similar plans, programs or arrangements, and, in any event, such plans, programs or arrangements shall be no less favorable, in the aggregate, than those in effect as of immediately prior to the Effective Date; (f) the Executive shall receive annually not less than the amount of paid vacation and not fewer than the number of paid holidays received annually immediately prior to the Effective Date or, if greater, available annually to other employees of comparable status and position with the Company; and (g) notwithstanding the terms and conditions of the pre-Merger Options (whether set forth in any option plan or option agreement), the transactions contemplated by the Merger Agreement shall be deemed not to constitute a change of control under the applicable plan or agreement, and, as a consequence, none of the pre-Merger Options shall vest and become exercisable directly as a result of the transactions contemplated by the Merger Agreement. During the Retention Period, the Board of Directors of the Company, or an appropriate committee thereof, will consider and appraise, at least annually, the contributions of the Executive to the Company's operating efficiency, growth, production and profits and, in accordance with past practice, due consideration shall be given to the upward adjustment of the 12 Executive's compensation rate, at least annually, commensurate with increases generally given to other senior corporate officers and key employees and as the scope of the Executive's duties expands. 5. Initial Payment and Retention Amount. (a) Initial Payment. Within ten (10) business days after the Effective Date, the Executive shall be paid any unpaid portion of a pro-rata Long Term Incentive Award in an amount determined as described in Section 5 of the EIP. (b) Retention Amount. Subject to the provisions of Section 6 and in consideration for the Executive's agreement to remain employed by the Company and to abide by the provisions of Sections 8(a) and 8(b) hereof, within ten (10) business days following the third (3rd) anniversary of the Effective Date, provided that the Executive has continuously been in the employ of the Company from the Effective Date through such anniversary date, the Executive shall be paid, or be credited with, as the case may be, the Retention Amount. 6. Termination of Employment. Any termination by the Company or the Executive of the Executive's employment during the Retention Period shall be communicated by written Notice of Termination to the Executive if such notice is delivered by the Company, and to the Company if such notice is delivered by the Executive. Any payments made under this Section 6, other than due to death, shall be contingent on the Executive's prior execution and non-revocation of a mutual release substantially in the form attached hereto as Exhibit B; provided, however, that if the Company refuses to execute such mutual release, the Executive's obligation to execute and not revoke the release as a precondition to receiving severance benefits shall terminate. The Notice of Termination shall comply with the requirements of Section 18 below. 13 (a) Termination for Disability Prior to the End of the Retention Period. If during the Retention Period, the Executive's employment is terminated on account of the Executive's Disability, the Executive shall receive any Accrued Benefits, the Prorated Bonus, and any unpaid Retention Amount, and shall remain eligible for all benefits as provided pursuant to the terms of any long-term disability programs of the Company in effect at the time of such termination. In addition, the pre-Merger Options shall become immediately vested and exercisable (to the extent not previously vested and exercisable) and shall remain exercisable for the period provided under the applicable option agreement. (b) Termination due to the Executive's Death or Retirement Prior to the End of the Retention Period. If, during the Retention Period, the Executive's employment is terminated on account of the Executive's death or Retirement, the Executive, (or the Executive's estate or designated beneficiary (or beneficiaries), as applicable), shall receive all the Executive's Accrued Benefits, the Prorated Bonus, and any unpaid Retention Amount. In addition, the pre-Merger Options shall become immediately vested and exercisable (to the extent not previously vested and exercisable) and shall remain exercisable for the period provided under the applicable option agreement. (c) Voluntary Termination or Termination for Cause Prior to the End of the Retention Period. If, during the Retention Period, (i) the Executive shall terminate employment with the Company other than for Good Reason, or (ii) the Executive's employment is terminated for Cause, the Executive shall receive from the Company only the Accrued Benefits. (d) Termination by the Company Without Cause or by the Executive for Good Reason Prior to the End of the Retention Period. If, during the Retention Period, the Executive's 14 employment with the Company is terminated by the Company other than for Cause, or by the Executive for Good Reason, then: (i) the Executive shall receive from the Company the Accrued Benefits, the Prorated Bonus, and any unpaid Retention Amount, which shall be paid within ten (10) days after the date of termination of the Executive's employment; and (ii) the pre-Merger Options shall become immediately vested and exercisable (to the extent not previously vested and exercisable) and shall remain exercisable for the period provided under the applicable option agreement; and (iii) if such termination takes place following a Change of Control that occurs after the Effective Date, any other grants of equity-based compensation awards from Toledo or the Company shall become immediately vested and exercisable (to the extent not previously vested and exercisable) and, if applicable, shall remain exercisable for the period provided under the applicable award agreement; and (iv) the Executive shall continue to be covered at the expense of the Company by the same or equivalent hospital, medical, dental, accident, disability and life insurance coverage as in effect for the Executive immediately prior to termination of the Executive's employment, until the earlier of (I) thirty-six (36) months following termination of employment, or (II) the date the Executive has commenced new employment and has thereby become eligible for comparable benefits; provided that, with respect to any of the coverages described above, if such coverage is provided through an insurance policy with an insurance company unaffiliated with the Company and if under the terms of the applicable policy, it is not possible to provide continued coverage (or if continued coverage under such policy would increase the Company's cost allocable to the 15 Executive by more than one hundred percent (100%)), then the Company shall pay the Executive a lump sum cash amount, no later than thirty (30) days following termination of employment an amount equal to twice the aggregate allocable cost of such coverage as applicable immediately prior to termination of employment, such payment to be made without any discount for present value (the "Medical Benefits"). (e) Termination After the Retention Period. (i) If, after the Retention Period, the Executive's employment with the Company is terminated by the Company other than for cause or by the Executive for good reason, each as defined pursuant to the Company's then-applicable severance program for its executives, the Executive shall receive the Post-Retention Period Severance. (ii) In addition, in the event that the Executive ceases to be employed by the Company for any reason at or following the end of the Retention Period (other than by reason of a termination of the Executive's employment by the Company for Cause), the Executive shall be entitled to the Medical Benefits. 7. Certain Supplemental Payments by the Company. (a) In the event it is determined that part or all of the compensation and benefits to be paid to the Executive, whether or not payable hereunder, (i) constitute "parachute payments" under Section 280G of the Code (the "Payments"), and (ii) exceed one hundred and five percent (105%) of three (3) times the Executive's Base Amount, the Company, on or before the date for payment of such excise tax, shall pay to or on behalf of the Executive, in lump sum, an amount (the "Gross-Up Amount") such that, after payment of all federal, state and local income tax and any additional excise tax under Section 4999 of the Code in respect of the Gross-Up Amount payment, the Executive will be fully reimbursed for the amount of such excise tax. If the 16 Payments equal three (3) times the Executive's Base Amount or exceed three (3) times the Executive's Base Amount, but by an amount less than five percent (5%) of three (3) times the Base Amount, such payments shall be reduced by the least amount necessary to bring such Payments below three (3) times the Executive's Base Amount. (b) The determination of the Parachute Amount, the Base Amount and the Gross-Up Amount, as well as any other calculations necessary to implement this Section 7 shall be made by KPMG LLP, and subject to the review and reasonable approval of Ernst & Young LLP, unless the Executive and the Company agree otherwise. The accounting firm's fee shall be paid by the Company. (c) As promptly as practicable following such determination and the elections hereunder, the Company shall pay to or distribute to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement and shall promptly pay to or distribute for the benefit of the Executive in the future such amounts as become due to the Executive under this Agreement. (d) As a result of the uncertainty in the application of Section 280G of the Code at the time of an initial determination hereunder, it is possible that payments will not have been made by the Company which should have been made under clause (a) of this Section 7 ("Underpayment"). In the event that there is a final determination by the Internal Revenue Service, or a final determination by a court of competent jurisdiction, that an Underpayment has been made and the Executive thereafter is required to make any payment of an excise tax, income tax, any interest or penalty, the accounting or benefits consulting firm selected under clause (b) above shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. If 17 and to the extent that the Executive receives any tax refund from the Internal Revenue Service that is attributable to payments by the Company pursuant to this Section 7 of amounts in excess of the actual Gross-Up Amount as finally determined by the Internal Revenue Service or a court of competent jurisdiction ("Overpayment"), the Executive shall promptly pay to the Company the amount of such refund that is attributable to the Overpayment (together with any interest paid or credited thereon after taxes applicable thereto); provided, however, the Executive shall not have any obligation to pay the Company any amount pursuant to this Section 7(d) if and to the extent that any such obligation would cause the arrangement to be treated as a loan or extension of credit prohibited by applicable law. 8. Further Obligations of the Executive. (a) Confidentiality. During and following the Executive's employment by the Company, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company, except to the extent authorized in writing by the Board or required by any court or administrative agency or otherwise by applicable law, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials or copies thereof relating to the Company's business which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 18 (b) Non-Solicitation. During the Retention Period and, for a period of three (3) years following the date the Executive ceases to be employed by the Company (the "Restricted Period"), the Executive will not hire, or, directly or indirectly, contact, approach or solicit for the purpose of offering employment to or hiring (whether as an employee, consultant, agent, independent contractor or otherwise), or encouraging to cease work with the Company or its Affiliates, any person who is then employed or retained as a consultant by the Company, or an Affiliate of the Company, other than on behalf of the Company or an Affiliate of the Company, or was employed or retained as a consultant by the Company or an Affiliate of the Company during the one (1) year period prior to such hiring, solicitation or other act prohibited by this Section 8(b)(i). (c) Certain Accelerations and Option Exercises. The Executive agrees that the Company may, at its election, accelerate the payment of (x) the amount described in Section 5(a) and/or (y) the annual bonus for 2004 to a date on or before December 31, 2004 (it being understood that the amount payable under Section 6(a) shall be based upon the date upon which the Effective Time occurs and shall be reduced by any amount previously paid under this Section 8(c)), and agrees to exercise, prior to December 31, 2004, any vested options to purchase Berlin shares that would otherwise expire by their terms during calendar year 2004, 2005 and 2006 and that may reasonably be necessary, based on the advice of KPMG LLP, and subject to the review and reasonable approval of Ernst & Young, LLP, in order for the Executive to mitigate the effects of Section 280G of the Code. 9. Equitable Relief. Executive acknowledges and agrees that in the event of a breach by Executive of any of the provisions of Sections 8(a) and 8(b) hereof, the Company may suffer irreparable harm for 19 which monetary damages alone will constitute an insufficient remedy. Consequently, in the event of any such breach, the Company may, in addition to other rights and remedies existing in its favor, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof, in each case without the requirement of posting a bond or proving actual damages. 10. Expenses and Interest. If, during the Retention Period, a good faith dispute arises with respect to the enforcement of the Executive's rights under this Agreement, or if any legal or arbitration proceeding shall be brought in good faith to enforce or interpret any provision contained herein, or to recover damages for breach hereof, the Executive shall recover from the Company any reasonable attorney's fees and necessary costs and disbursements incurred as a result of such dispute, and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by Banknorth N.A., or any successor thereto, from time to time as its prime rate from the date that payments to the Executive should have been made under this Agreement. 11. Payment Obligations Absolute. The Company's obligation during and after the Retention Period to pay the Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against the Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final and the Company will not seek to recover all or any part of such payment from the Executive or from 20 whomsoever may be entitled thereto, for any reason whatever except as provided in Section 7(d) above. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Successors. (a) The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement and shall entitle the Executive to terminate the Executive's employment for Good Reason. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to all or substantially all of the business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12(a) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. Notwithstanding the foregoing, the Executive hereby expressly agrees to the assumption of this Agreement by Berlin Delaware. (b) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive hereunder shall be 21 paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives. Except as provided in this Section 12, no party may assign this Agreement or any rights, interests, or obligations hereunder without the prior written approval of the other party. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns pursuant to Section 12(a). This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. In addition, Sections 6, 7, 8, 9, 10, 11, 13 and 17 shall survive the termination of this Agreement to the extent necessary to give effect to the terms thereof. 13. Severability and Enforcement. The provisions of this Agreement shall be regarded as divisible, and if any such provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. It is expressly understood and agreed that although the Executive and the Company consider the restrictions contained herein to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 14. Amendment. 22 This Agreement may not be amended or modified at any time except by a written instrument executed by the Company and the Executive. 15. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes, or charge which it is from time to time required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. 16. Governing Law. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Maine. 17. Arbitration. Any dispute arising out of this Agreement other than with regard to Sections 8(a) and 8(b) shall be determined by arbitration in the State of Maine under the rules of the American Arbitration Association then in effect and judgment upon any award pursuant to such arbitration may be enforced in any court having jurisdiction thereof. 18. Notice. Notices given pursuant to this Agreement shall be in writing and shall be deemed given when received and, if mailed, shall be mailed by United States registered or certified mail, return receipt requested, addressee only postage prepaid, to the Company at: Banknorth Group, Inc. P.O. Box 9540 Two Portland Square Portland, ME 04112 Attn: General Counsel 23 or if to the Executive, at the address contained in the records of the Company, or to such other address as the party to be notified shall have given to the other. 19. No Waiver. No waiver by any party at any time of any breach by another party of, or compliance with, any condition or provision of this Agreement to be performed by another party shall be deemed a waiver of similar or dissimilar provisions or conditions at any time. 20. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. 21. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes any prior severance agreements between the Executive and the Company. 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. BANKNORTH GROUP, INC. By: /s/ Carol L. Mitchell ------------------------------------- Name: Carol L. Mitchell Title: Executive Vice President, General Counsel, Secretary and Clerk /s/ Edward P. Schreiber ----------------------------------------- Edward P. Schreiber 25 EXHIBIT A [EXAMPLE OF SERP CALCULATION] EXHIBIT B GENERAL RELEASE 1. Release of Claims by Executive. (a) In consideration of the payments and benefits to be provided to [________] ("Executive") pursuant to the retention agreement, dated as of August___, 2004, to which Executive and Banknorth Group, Inc., a Maine corporation (the "Company"), are parties (the "Retention Agreement"), the sufficiency of which is acknowledged hereby, Executive, with the intention of binding himself and his heirs, executors, administrators and assigns, does hereby release, remise, acquit and forever discharge the Company, Toronto-Dominion Bank ("TD") and each of their subsidiaries and affiliates (the "Company Affiliated Group"), their present and former officers, directors, executives, agents, attorneys and employees, and the successors, predecessors and assigns of each of the foregoing (collectively, the "Company Released Parties"), of and from any and all claims, actions, causes of action, complaints, charges, demands, rights, damages, debts, sums of money, accounts, financial obligations, suits, expenses, attorneys' fees and liabilities of whatever kind or nature in law, equity or otherwise, whether accrued, absolute, contingent, unliquidated or otherwise and whether now known or unknown, suspected or unsuspected, which Executive, individually or as a member of a class, now has, owns or holds, or has at any time heretofore had, owned or held, against any Company Released Party in any capacity, including, without limitation, any and all claims (i) arising out of or in any way connected with Executive's service to any member of the Company Affiliated Group (or the predecessors thereof) in any capacity, or the termination of such service in any such capacity, (ii) for severance or vacation benefits, unpaid wages, salary or incentive payments, (iii) for breach of contract, wrongful discharge, impairment of economic opportunity, defamation, intentional infliction of emotional harm or other tort, (iv) for any violation of applicable state and local labor and employment laws (including, without limitation, all laws concerning unlawful and unfair labor and employment practices) and (v) for employment discrimination under any applicable federal, state or local statute, provision, order or regulation, and including, without limitation, any claim under Title VII of the Civil Rights Act of 1964 ("Title VII"), the Civil Rights Act of 1988, the Fair Labor Standards Act, the Americans with Disabilities Act ("ADA"), the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Age Discrimination in Employment Act ("ADEA") and any similar or analogous state statute, excepting only: (A) the rights of Executive under the Retention Agreement; (B) the rights of Executive (i) relating to any stock options and other equity-based awards held by Executive as of the date hereof (collectively, the "Equity Arrangements") and (ii) as a stockholder of the Company or its affiliates; (C) the right of Executive to receive COBRA continuation coverage in accordance with applicable law; (D) rights to indemnification Executive may have under (i) applicable corporate law, (ii) the by-laws or certificate of incorporation of any Company Released Party, (iii) any other agreement between Executive and a Company Released Party (iv) as an insured under any director's and officer's liability insurance policy now or previously in force or (v) Section 6.7 of the Agreement and Plan of Merger, dated as of August 25, 2004, among the Company, Berlin Delaware, Inc., TD and Berlin Merger Co.; and (E) claims for benefits under any health, disability, retirement, life insurance or other, similar "employee benefit plan" (within the meaning of Section 3(3) of ERISA) of the Company Affiliated Group (the "Company Benefit Plans"). (b) Executive acknowledges and agrees that the release of claims set forth in this Section 1 is not to be construed in any way as an admission of any liability whatsoever by any Company Released Party, any such liability being expressly denied. (c) The release of claims set forth in this Section 1 applies to any relief no matter how called, including, without limitation, wages, back pay, front pay, compensatory damages, liquidated damages, punitive damages, damages for pain or suffering, costs, and attorney's fees and expenses. (d) Executive specifically acknowledges that his acceptance of the terms of the release of claims set forth in this Section 1 is, among other things, a specific waiver of his rights, claims and causes of action under Title VII, ADEA, ADA and any state or local law or regulation in respect of discrimination of any kind. (e) Executive shall have a period of 21 days to consider whether to execute this General Release. To the extent Executive has executed this General Release within less than twenty-one (21) days after its delivery to him, the Executive hereby acknowledges that his decision to execute this General Release prior to the expiration of such twenty-one (21) day period was entirely voluntary. If Executive accepts the terms hereof and executes this General Release, he may thereafter, for a period of 7 days following (and not including) the date of execution, revoke this General Release. If no such revocation occurs, this General Release shall become irrevocable in its entirety, and binding and enforceable against Executive, on the day next following the day on which the foregoing seven-day period has elapsed. Any revocation of this General Release shall be deemed for all purposes a revocation of this General Release in its entirety. (f) Executive acknowledges and agrees that he has not, with respect to any transaction or state of facts existing prior to the date hereof, filed any complaints, charges or lawsuits against any Company Released Party with any governmental agency, court or tribunal. 2. Effect of Unenforceability of Release. In addition to any other remedy available to the Company hereunder, in the event that, as a result of a challenge brought by an Employee Released Party (as defined below), the release of claims set forth in Section 1 becomes null and void or is otherwise determined not to be enforceable, then the Company's obligation to make any additional payments or to provide any additional benefits under the Retention Agreement shall immediately cease to be of any force and effect, and Executive shall promptly return to the Company any payments or benefits the provision of which by the Company was conditioned on the enforceability of this General Release. 2 3. Release of Claims by the Company and TD. (a) The Company and TD, with the intention of binding themselves and their subsidiaries, affiliates, predecessors and successors and their directors and officers (collectively, the "Releasing Entities"), do hereby release, remise, acquit and forever discharge Executive and his heirs, estate, executors, administrators and assigns (collectively, the "Employee Released Parties"), of and from any and all claims, actions, causes of action, complaints, charges, demands, rights, damages, debts, sums of money, accounts, financial obligations, suits, expenses, attorneys' fees and liabilities of whatever kind or nature in law, equity or otherwise, whether accrued, absolute, contingent, unliquidated or otherwise and whether now known or unknown, suspected or unsuspected, which the Company, TD and their subsidiaries, affiliates, predecessors and successors, individually or as a member of a class, now have, own or hold, or have at any time heretofore had, owned or held, against any Employee Released Party, excepting only: (A) rights of the Releasing Entities under this General Release, the Retention Agreement, the Equity Arrangements and the Company Benefit Plans; and (B) rights of the Releasing Entities arising by reason of Executive having committed a crime or an act or omission to act which constitutes fraud, willful misconduct or gross negligence. (b) The Releasing Entities acknowledge and agree that the release of claims set forth in this Section 3 is not to be construed in any way as an admission of any liability whatsoever by any Employee Released Party, any such liability being expressly denied. (c) The release of claims set forth in this Section 3 applies to any relief no matter how called, including, without limitation, compensatory damages, liquidated damages, punitive damages, damages for pain or suffering, costs, and attorney's fees and expenses. (d) Nothing herein shall be deemed, nor does anything contained herein purport, to be a waiver of any right or claim or cause of action which by law the Company is not permitted to waive. (e) The Company acknowledges and agrees that it has not, with respect to any transaction or state of facts existing prior to the date hereof, filed any complaints, charges or lawsuits against any Employee Released Party with any governmental agency, court or tribunal. 4. Nondisparagement. Executive agrees not to make any disparaging statements about the Company Released Parties or the Company Affiliated Group's business practices, operations or personnel policies and practices to any of the Company Affiliated Group's customers, clients, competitors, suppliers, directors, consultants, employees, former employees, or the press or other media in any country. Similarly, the Company agrees to instruct its executive officers and directors not to make any disparaging statement about the Executive or Executive's performance of his duties and responsibilities while employed with the Company Affiliated Group to any of the Company Affiliated Group's customers, client's, competitors, 3 suppliers, directors, consultants, employees, former employees or the press or other media in any country. 5. Counterparts. This General Release may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6. Successors. This General Release shall be binding upon any and all successors and assigns of Executive and the Company. 7. Governing Law. Except for issues or matters as to which federal law is applicable, this General Release shall be construed in accordance with and governed by the laws of the State of Maine. IN WITNESS WHEREOF, this General Release has been signed by or on behalf of each of the Parties, all as of _____________. BANKNORTH GROUP, INC. ________________________________ ________________________________ [Executive] By: Its: Dated: _________________________ Dated: _________________________ THE TORONTO-DOMINION BANK ________________________________ By: Its: Dated: _________________________ 4 EX-10.(J)(2) 3 b53274bgexv10wxjyx2y.txt EX-10.(J)(2) RETIREMENT AGMT. WITH WILLIAM J. RYAN EXHIBIT 10(J)(2) FIRST AMENDMENT TO AMENDED AND RESTATED SUPPLEMENTAL RETIREMENT AGREEMENT THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED SUPPLEMENTAL RETIREMENT AGREEMENT (this "Amendment") is made and entered into as of this 14th day of February 2005 by and between Banknorth Group, Inc. (formerly known as Peoples Heritage Financial Group, Inc.), its subsidiaries and affiliates (collectively, the "Corporation"), and William J. Ryan (the "Executive"). RECITALS: A. The Corporation and the Executive are parties to a certain Amended and Restated Supplemental Retirement Agreement, dated as of February 18, 2004 (the "Restated Agreement"). The Restated Agreement, as amended by this Amendment, is referred to as the "Agreement." B. Since the date of the Restated Agreement, the Corporation has entered into an Amended and Restated Agreement and Plan of Merger among The Toronto-Dominion Bank, Berlin Merger Co., the Corporation and Banknorth Delaware Inc., dated as of August 25, 2004 (the "Merger Agreement"), and the Corporation and the Executive now wish to amend the Restated Agreement as required by Section 6.13(i) of the Merger Agreement and as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree to amend the Restated Agreement as follows: 1. AMENDMENTS. 1.1 Benefit Computation Base. Section 2.2 of the Agreement is hereby amended by deleting the second, third and fourth sentences of such section in their entirety and replacing them with the following: "For the purposes of this Agreement, compensation shall mean the amount actually paid or made available to the Executive during a calendar year as remuneration of a kind or nature reported by the Corporation on the Executive's W-2, except as set forth below. Compensation shall also include annual bonuses, any contributions made on behalf of the Executive by the Corporation pursuant to a salary reduction agreement under Internal Revenue Code Sections 125, 129 and/or 401(k), and any and all other amounts that would have been reportable by the Corporation on the Executive's W-2 but for deferral of payment of such amounts under any agreement or plan or program (other than the Pension Plan), including any voluntary deferrals and any deferrals required or mandated by the terms of any agreement or plan or program of the Corporation or action of its Board of Directors, except that the $178,480 short-term incentive bonus for calendar 2004 the payment of which was accelerated to December 2004 shall be taken into account as if it was paid in 2005 rather than 2004. Compensation shall not include any amounts available to the Executive pursuant to any Stock Option, Stock Appreciation Right, or Senior Management Long Term Incentive Plans of the Corporation or paid to the Executive pursuant to Sections 7, 10 and 11 of the Employment Agreement between the Corporation and the Executive dated as of August 25, 2004." 1.2 Alternative Benefit under the SERP Plan. Section 7.2 of the Agreement is hereby amended by adding the following sentence to the end of such section: "For purposes of calculating the actuarial equivalent of the Alternative Benefit to which the Executive would be entitled under the SERP Plan, (1) the $178,480 short-term incentive payment the payment of which was accelerated to December 2004 shall be taken into account as if it was paid in 2005 rather than 2004, (2) the $6,260,440 long-term incentive payment the payment of which was accelerated to December 2004 shall be taken into account in such amounts and at such times as it would have been paid absent the acceleration, and (3) no amounts payable to the Executive pursuant to Sections 7, 10 and 11 of the Employment Agreement between the Corporation and the Executive dated as of August 25, 2004 shall be taken into account." 2. NO FURTHER MODIFICATION. Except as expressly amended hereby, the Agreement remains unmodified and in full force and effect. 3. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Maine without regard to its conflicts of laws principles. 4. SEVERABILITY. Each provision of this Amendment is intended to be severable and the invalidity, illegality or unenforceability of any portion of this Amendment shall not affect the validity, legality and enforceability of the remainder. 2 IN WITNESS WHEREOF, the Corporation and the Executive have caused this Amendment to be executed as of the date and year first above written. BANKNORTH GROUP, INC. F/K/A PEOPLES HERITAGE FINANCIAL GROUP, INC. /s/ Susan G. Shorey By:/s/ Cynthia H. Hamilton - ------------------------ --------------------------------- Witness Name: Cynthia H. Hamilton Title: Executive Vice President /s/ Susan G. Shorey /s/ William J. Ryan - ------------------------ --------------------------------- Witness William J. Ryan 3 EX-10.(K)(2) 4 b53274bgexv10wxkyx2y.txt EX-10.(K)(2) RETIREMENT AGMT. WITH PETER J. VERRILL EXHIBIT 10(K)(2) FIRST AMENDMENT TO AMENDED AND RESTATED SUPPLEMENTAL RETIREMENT AGREEMENT THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED SUPPLEMENTAL RETIREMENT AGREEMENT (this "Amendment") is made and entered into as of this 14th day of February 2005 by and between Banknorth Group, Inc. (formerly known as Peoples Heritage Financial Group, Inc.), its subsidiaries and affiliates (collectively, the "Corporation"), and Peter J. Verrill (the "Executive"). RECITALS: A. The Corporation and the Executive are parties to a certain Amended and Restated Supplemental Retirement Agreement, dated as of February 18, 2004 (the "Restated Agreement"). The Restated Agreement, as amended by this Amendment, is referred to as the "Agreement." B. Since the date of the Restated Agreement, the Corporation has entered into an Amended and Restated Agreement and Plan of Merger among The Toronto-Dominion Bank, Berlin Merger Co., the Corporation and Banknorth Delaware Inc., dated as of August 25, 2004 (the "Merger Agreement"), and the Corporation and the Executive now wish to amend the Restated Agreement as required by Section 6.13(i) of the Merger Agreement and as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree to amend the Restated Agreement as follows: 1. AMENDMENTS. 1.1 Benefit Computation Base. Section 2.2 of the Agreement is hereby amended by deleting the second, third and fourth sentences of such section in their entirety and replacing them with the following: "For the purposes of this Agreement, compensation shall mean the amount actually paid or made available to the Executive during a calendar year as remuneration of a kind or nature reported by the Corporation on the Executive's W-2, except as set forth below. Compensation shall also include annual bonuses, any contributions made on behalf of the Executive by the Corporation pursuant to a salary reduction agreement under Internal Revenue Code Sections 125, 129 and/or 401(k), and any and all other amounts that would have been reportable by the Corporation on the Executive's W-2 but for deferral of payment of such amounts under any agreement or plan or program (other than the Pension Plan), including any voluntary deferrals and any deferrals required or mandated by the terms of any agreement or plan or program of the Corporation or action of its Board of Directors, except that the $86,400 short-term incentive bonus for calendar 2004 the payment of which was accelerated to December 2004 shall be taken into account as if it was paid in 2005 rather than 2004. Compensation shall not include any amounts available to the Executive pursuant to any Stock Option, Stock Appreciation Right, or Senior Management Long Term Incentive Plans of the Corporation or paid to the Executive pursuant to Sections 7, 10 and 11 of the Employment Agreement between the Corporation and the Executive dated as of August 25, 2004." 1.2 Alternative Benefit under the SERP Plan. Section 7.2 of the Agreement is hereby amended by adding the following sentence to the end of such section: "For purposes of calculating the actuarial equivalent of the Alternative Benefit to which the Executive would be entitled under the SERP Plan, (1) the $86,400 short-term incentive payment the payment of which was accelerated to December 2004 shall be taken into account as if it was paid in 2005 rather than 2004, (2) the $3,130,220 long-term incentive payment the payment of which was accelerated to December 2004 shall be taken into account in such amounts and at such times as it would have been paid absent the acceleration, and (3) no amounts payable to the Executive pursuant to Sections 7, 10 and 11 of the Employment Agreement between the Corporation and the Executive dated as of August 25, 2004 shall be taken into account." 2. NO FURTHER MODIFICATION. Except as expressly amended hereby, the Agreement remains unmodified and in full force and effect. 3. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Maine without regard to its conflicts of laws principles. 4. SEVERABILITY. Each provision of this Amendment is intended to be severable and the invalidity, illegality or unenforceability of any portion of this Amendment shall not affect the validity, legality and enforceability of the remainder. 2 IN WITNESS WHEREOF, the Corporation and the Executive have caused this Amendment to be executed as of the date and year first above written. BANKNORTH GROUP, INC. F/K/A PEOPLES HERITAGE FINANCIAL GROUP, INC. /s/ Susan G. Shorey By:/s/ Cynthia H. Hamilton - ------------------------------------ ------------------------------------- Witness Name: Cynthia H. Hamilton Title: Executive Vice President /s/ Susan G. Shorey /s/ Peter J. Verrill - ------------------------------------ ------------------------------------- Witness Peter J. Verrill 3 EX-10.(L)(4) 5 b53274bgexv10wxlyx4y.txt EX-10.(L)(4) RETIREMENT AGMT. WITH JOHN W. FRIDLINGTON EXHIBIT 10(L)(4) THIRD AMENDMENT TO SUPPLEMENTAL RETIREMENT AGREEMENT THIS THIRD AMENDMENT TO THE SUPPLEMENTAL RETIREMENT AGREEMENT (this "Amendment") is made and entered into as of this 14th day of February 2005 by and between Banknorth Group, Inc. (formerly known as Peoples Heritage Financial Group, Inc. and hereafter referred to as the Corporation), and John W. Fridlington (the "Executive"). RECITALS: A. The Corporation and the Executive are parties to a certain Supplemental Retirement Agreement, dated as of January 1, 1996 and amended as of April 1, 2001 and December 23, 2003 (the "Amended Agreement"). The Amended Agreement, as amended by this Amendment, is referred to as the "Agreement." B. Since the date of the last amendment to the Amended Agreement, the Corporation has entered into an Amended and Restated Agreement and Plan of Merger among The Toronto-Dominion Bank, Berlin Merger Co., the Corporation and Banknorth Delaware Inc., dated as of August 25, 2004 (the "Merger Agreement"), and the Corporation and the Executive now wish to amend the Amended Agreement as required by Section 6.13(i) of the Merger Agreement and as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree to amend the Amended Agreement as follows: 1. AMENDMENTS. 1.1 Benefit Computation Base. Section 2.02 of the Agreement is hereby amended by deleting the second, third and fourth sentences of such section in their entirety and replacing them with the following: "For the purposes of this Agreement, compensation shall mean the amount actually paid or made available to the Executive during a calendar year as remuneration of a kind or nature reported by the Corporation on the Executive's W-2, except as set forth below. Compensation shall also include annual bonuses, any contributions made on behalf of the Executive by the Corporation pursuant to a salary reduction agreement under Internal Revenue Code Sections 125, 129 and/or 401(k), and any compensation deferred under the Corporation's Senior Management Deferred Compensation Plan, except that the $52,000 short-term incentive bonus for calendar 2004 the payment of which was accelerated to December 2004 shall be taken into account as if it was paid in 2005 rather than 2004. Compensation shall not include any amounts available to the Executive pursuant to any Stock Option, Stock Appreciation Right and Senior Management Long Term Incentive Plans of the Corporation or paid to the Executive pursuant to Sections 6, 7 and 8 of the Retention Agreement between the Corporation and the Executive dated as of August 25, 2004." 1.2 Alternative Benefit under the SERP Plan. The language added by Section 1.1 of the Second Amendment to the Agreement is hereby amended by adding the following sentence to the end of such section: "For purposes of calculating the actuarial equivalent of the Alternative Benefit to which the Executive would be entitled under the SERP Plan, (1) the $52,000 short-term incentive payment the payment of which was accelerated to December 2004 shall be taken into account as if it was paid in 2005 rather than 2004, (2) the $3,130,220 long-term incentive payment the payment of which was accelerated to December 2004 shall be taken into account in such amounts and at such times as it would have been paid absent the acceleration, and (3) no amounts payable to the Executive pursuant to Sections 6, 7 and 8 of the Retention Agreement between the Corporation and the Executive dated as of August 25, 2004 shall be taken into account." 2. NO FURTHER MODIFICATION. Except as expressly amended hereby, the Agreement remains unmodified and in full force and effect. 3. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Maine without regard to its conflicts of laws principles. 4. SEVERABILITY. Each provision of this Amendment is intended to be severable and the invalidity, illegality or unenforceability of any portion of this Amendment shall not affect the validity, legality and enforceability of the remainder. 2 IN WITNESS WHEREOF, the Corporation and the Executive have caused this Amendment to be executed as of the date and year first above written. BANKNORTH GROUP, INC. F/K/A PEOPLES HERITAGE FINANCIAL GROUP, INC. /s/ Susan G. Shorey By:/s/ Cynthia H. Hamilton - ------------------------------------ ------------------------------------ Witness Name: Cynthia H. Hamilton Title: Executive Vice President /s/ Susan G. Shorey /s/ John W. Fridlington - ------------------------------------ ------------------------------------ Witness John W. Fridlington 3 EX-10.(M)(2) 6 b53274bgexv10wxmyx2y.txt EX-10.(M)(2) AMENDMENT TO SUPPLEMENTAL RETIREMENT PLAN EXHIBIT 10(M)(2) FIRST AMENDMENT TO BANKNORTH GROUP, INC. SUPPLEMENTAL RETIREMENT PLAN THIS FIRST AMENDMENT TO THE BANKNORTH GROUP, INC. SUPPLEMENTAL RETIREMENT PLAN (this "Amendment") is made and entered into as of this 14th day of February 2005 by Banknorth Group, Inc. (the "Company"), effective as of January 1, 2005. RECITALS: A. The Company adopted a certain Supplemental Retirement Plan, effective as of March 27, 2001 (the "SERP"). The SERP, as amended by this Amendment, is referred to as the "Plan." B. Since the date of the SERP, the Company has entered into an Amended and Restated Agreement and Plan of Merger among The Toronto-Dominion Bank, Berlin Merger Co., the Company and Banknorth Delaware Inc., dated as of August 25, 2004 (the "Merger Agreement"), and has entered into new employment and retention agreements with certain of its officers. C. The Company now wishes to amend the SERP as required by Section 6.13(i) of the Merger Agreement and by the new employment and retention agreements as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing, the Company hereby amends the SERP as follows: 1. AMENDMENTS. Section 4.01(i) of the Plan is hereby amended and restated in its entirety to read as follows: "(i) the benefit to which such Participant would be entitled under the Banknorth Group, Inc. Retirement Plan (known before May 10, 2000, as the Peoples Heritage Financial Group, Inc. Retirement Plan and hereinafter referred to as the "Pension Plan"), stated in the form described in the first sentence of Section 3.02 of the Pension Plan (the "Normal Benefit") and commencing on the Participant's "Normal Retirement Date" as defined in the Pension Plan (the "NRD"), computed without regard to those provisions of the Pension Plan implementing the restrictions or limitations imposed by the provisions of Section 1.16 of the Pension Plan following the first paragraph thereof or any other Pension Plan provision implementing the limitations set forth in Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), and without regard to Section 3.10 of the Pension Plan or any other Pension Plan provision implementing the limitations set forth in Section 415 of the Code (the "Hypothetical Unrestricted Benefit"); provided, however, that notwithstanding the foregoing, for purposes of calculating the Hypothetical Unrestricted Benefit to which a Participant would be entitled to under the Pension Plan, the following adjustments shall be made in determining the Earnings of a Participant for any Plan Year: (1) any short-term incentive bonus for calendar 2004 that a Participant received in December 2004 because of the acceleration of such payment shall be included in Earnings in 2005 rather than 2004; (2) any long-term incentive payment that a Participant received in December 2004 because of the acceleration of such payment shall be included in Earnings in such amounts and at such times as it would have been paid absent the acceleration; and (3) for those Participants who have an employment or retention agreement with the Company as of February 28, 2005, none of the payments made to the Participant pursuant to the sections of such agreements entitled "Initial Payment and Non-Competition and Retention Amount," "Initial Payment and Retention Amount," "Termination of Employment" and "Certain Supplemental Payments by the Company" shall be included in Earnings; over" 2. NO FURTHER MODIFICATION. Except as expressly amended hereby, the Plan remains unmodified and in full force and effect. 3. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Maine without regard to its conflicts of laws principles. 4. SEVERABILITY. Each provision of this Amendment is intended to be severable and the invalidity, illegality or unenforceability of any portion of this Amendment shall not affect the validity, legality and enforceability of the remainder. 2 IN WITNESS WHEREOF, the Company has caused this Amendment to be executed as of the date and year first above written. BANKNORTH GROUP, INC. /s/ Susan G. Shorey By:/s/ Cynthia H. Hamilton - ------------------------------------ ------------------------------------ Witness Name: Cynthia H. Hamilton Title: Executive Vice President 3 EX-10.(N)(2) 7 b53274bgexv10wxnyx2y.txt EX-10(N)(2) AMENDED DEFERRED COMPENSATION PLAN EXHIBIT 10(n)(2) AMENDMENT NUMBER ONE DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS AND KEY EMPLOYEES (AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2003) BY THIS AMENDMENT NUMBER ONE, the Banknorth Group, Inc. Deferred Compensation Plan for Non-Employee Directors and Key Employees (amended and restated effective January 1, 2003) (the "Plan") is hereby amended as follows, with such amendment being effective as of January 1, 2005: 1. Section 2.4 of the Plan is amended to restate Section 2.4 as Section 2.4(a) and to add Section 2.4(b) to read in its entirety as follows: (b) At the Committee's sole discretion, each Participant may elect during the period set forth below to terminate his or her participation in the Plan and, as a result of such termination, to receive a distribution of his or her entire vested Account Balance in the Plan, provided that all amounts distributed to a Participant as a result of the termination are included in the Participant's income in calendar year 2005. As a condition to terminating participation, a Participant shall timely complete, execute and return to the Committee an election form, or such other form(s) as the Committee shall determine, by the date selected by the Committee. The Participants shall be given until the close of business on February 15, 2005 to make the above-referenced election, unless the Committee elects to extend such date and time in its sole discretion. 2. Section 3.3(b) of the Plan is amended to add the following sentence at the end of such section: Notwithstanding anything herein to the contrary, a deferral election may not be made with respect to compensation to be earned on or after January 1, 2005, unless the Company subsequently amends this Plan to permit future deferrals. 3. Section 5.3 of the Plan is hereby deleted. 4. All other provisions of the Plan shall continue in full force and effect. IN WITNESS WHEREOF, this Amendment has been executed this 31st day of January 2005. ATTEST: BANKNORTH GROUP, INC. By: /s/ Janet E. McGorty By: /s/ Cynthia H. Hamilton ------------------------------------- --------------------------------- Name: Janet E. McGorty Name: Cynthia H. Hamilton Title: Compensation Manager, SVP Title: Human Resources Director, EVP EX-10.(S)(2) 8 b53274bgexv10wxsyx2y.txt EX-10(S)(2) FIRST AMENDMENT TO THE AMENDED AND RESTATED 401(K) PLAN EXHIBIT 10(s)(2) FIRST AMENDMENT TO THE BANKNORTH GROUP, INC. 401(k) PLAN The Banknorth Group, Inc. 401(k) Plan (the "Plan") was last amended and restated effective generally January 1, 2004. The Plan shall be further amended as set forth herein. 1. The terms used in this First Amendment shall have the meanings set forth in the Plan unless the context indicates otherwise. In addition, the terms "TD" and "TD Bank" mean or refer to Toronto-Dominion Bank and the term "TD Date" means the closing date of the transaction by which TD Bank acquires a majority interest in Banknorth Group, Inc.. 2. Section 1.65(c) shall be amended by including the following in the table of acquired organizations:
Organization Acquisition Date Effective Date ------------ ---------------- -------------- Foxborough Savings Bank April 30, 2004 April 30, 2004 Cape Cod Bank and Trust April 30, 2004 July 1, 2004 Drake, Swan & Crocker July 1, 2004 September 1, 2004 Insurance Agency, Inc.
3. Section 7.08(b) shall be amended to read in its entirety as follows: (b) Cash proceeds received by the Trustee from the sale or exchange of any shares of Stock under this Section shall be invested by the Trustee in the Investment Fund that presents the least risk of loss as determined by the Plan Administrator. 4. Section 1.57 shall be amended to read in its entirety as follows: 1.57 "Stock" means common stock issued by the Company (or by a corporation which is a member of the same controlled group pursuant to Code Section 409(l)(4)) That is readily tradable on an established securities market or that otherwise constitutes "employer securities" within the meaning of Section 409(l) of the Code and "qualifying employer securities" within the meaning of Section 4975(e)(8) of the Code and Section 407(d)(5) of ERISA, specifically including the following: (a) Before the TD Date, common stock of Banknorth Group, Inc. (or, before May 10, 2000, Peoples Heritage Financial Group, Inc.); and (b) On and after the TD Date, (i) common stock of Banknorth Group, Inc. ("Banknorth Stock") and (ii) common stock of Toronto-Dominion Bank ("TD Bank STOCK"). 5. The first two sentences of Section 6.01 shall be amended to read in their entirety as follows: "The Trustee shall establish a Banknorth Stock Fund and a TD Bank Stock Fund, in accordance with Section 7.01, and one or more other Investment Funds, as the Plan Administrator shall from time to time direct. Each Investment Fund, other than the Banknorth Stock Fund and the TD Bank Stock Fund, shall be invested, as the Plan Administrator shall direct:". 6. Sections 1.01, 1.26, 1.30, 6.02, 7.02, and 7.10 shall be amended by deleting each occurrence of the term "Stock" and replacing each such occurrence with the phrase "Banknorth Stock." Any other occurrences of the term "Stock" shall also be so interpreted to the extent necessary to assure that the ESOP Assets under the Plan shall not at any time include TD Bank Stock. 7. Section 7.01 shall be amended to read in its entirety as follows: 7.01 Stock Funds. (a) The Trustee shall establish a Banknorth Stock Fund, which shall consist of all amounts held by the Plan that are invested in Banknorth Stock. The Trustee further shall establish the following two sub-funds under the Banknorth Stock Fund: (i) The "Banknorth Stock Fund (non-ESOP)" shall consist of all amounts held by the Plan that are invested in Banknorth Stock that are attributable to Salary Deferrals and Company Contributions for the current Plan Year. (ii) The "Banknorth Stock Fund (ESOP)" shall be an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended, and shall consist of all amounts held by the Plan that are invested in Banknorth Stock that are not attributable to Salary Deferrals and Company Contributions for the current Plan Year. Such amounts (together with any Acquisition Loan Suspense Account) shall be the "ESOP Assets" under the Plan. As soon as practicable following the last day of each Plan Year, the contributions attributable to such Plan Year that are invested in the Banknorth Stock Fund (non-ESOP), adjusted for gains or losses, shall automatically be transferred to the Banknorth Stock Fund (ESOP). The Trustee shall invest the Banknorth Stock Fund (non-ESOP) and the ESOP Assets in accordance with the Plan and Trust Agreement and the applicable provisions of the Code, ERISA, and (excluding the Banknorth Stock Fund (non-ESOP)) any other laws affecting tax qualified pension benefit plans designed to qualify as employee stock ownership plans; provided that, in aggregate, the ESOP Assets shall be invested primarily in Banknorth Stock. 2 (b) Effective as of the TD Date, the Trustee shall establish a TD Bank Stock Fund, which shall consist of all amounts held by the Plan that are invested in TD Bank Stock. The Trustee shall invest the TD Bank Stock Fund in accordance with the Plan and Trust Agreement and the applicable provisions of the Code and ERISA. 8. Section 7.03 shall be amended to read in its entirety as follows: 7.03 Purchase of Stock. (a) Whenever required by the terms of the Plan or the Participants' investment directions under Article VI, the Trustee shall purchase shares of Stock from such source and in such manner as the Trustee may determine. If the Trustee and the Company agree, any such shares may be purchased from the Company and may either be treasury shares or authorized but unissued shares; provided, however, that no shares of Banknorth Stock purchased with the proceeds of an Acquisition Loan shall be purchased from a Participating Employer (other than the Company) or any Affiliate. If shares of Stock are acquired by the Plan other than on an exchange or other national market system, such shares shall be purchased at prices that do not exceed Fair Market Value. (b) For purposes of crediting cash contributions invested in the Banknorth Stock Fund and the TD Bank Stock Fund, the credit shall be based on the average cost per share (including brokerage fees and transfer fees) of Banknorth Stock or TD Bank Stock, as the case may be, purchased by the Trustee for all Participants for the month in which the contributions were made, and for this purpose contributions of shares of Stock shall be valued at the closing price of such stock for the date of contributions, or, if no sale occurred on such date, for the next preceding day on which a sale occurred. (c) Notwithstanding any other provision of this Section, the Trustee shall not purchase shares of Stock during any period in which such purchase is, in the opinion of counsel for the Company or the Plan Administrator, restricted by any law or regulation applicable thereto. During such period, amounts that would otherwise be invested in shares of Stock shall be invested in such other assets as the Trustee may in its discretion determine, or the Trustee may hold such amounts uninvested for a reasonable period pending the designated investment. 9. Section 7.04(b) shall be amended to read in its entirety as follows: (b) Each Participant (or, in the event of a Participant's death, the Participant's Beneficiary) shall have the right, to the extent of shares of Stock allocated to the Participant's Aggregate Account, to direct the Trustee in writing as to the manner in which to vote with respect to such shares of Stock. Before each annual or special meeting of the shareholders of the Company or TD Bank, as the case may be, the Plan Administrator shall cause to be sent to each Participant a copy of the proxy solicitation material for the meeting, together with a form requesting confidential instructions to the Trustee as to the voting of the affected shares of Stock allocated to each Participant's 3 Aggregate Account, whether or not vested. The Trustee, itself or by proxy, shall vote the shares of Stock in such Aggregate Account in accordance with the instructions of the Participant; provided, that if the Trustee determines (in its sole discretion) that adherence to any such instructions is inconsistent with the discharge of its fiduciary duties under ERISA, the Trustee shall vote the affected shares of Stock in a manner consistent with the proper exercise of its fiduciary duties. If the Trustee shall not have received instructions as to the manner in which to vote any shares of Stock held in the Trust Fund (whether because instructions have not been timely received or because the shares of Stock are not allocated to any Participant's Aggregate Account), the Trustee, itself or by proxy, shall vote all such shares in a manner consistent with the proper exercise of its fiduciary duties under ERISA, as determined in its sole discretion. 10. Paragraphs (b) and (c) of Section 7.05 shall be amended to read in their entirety as follows: (b) Any cash dividends received on shares of Stock allocated to Participant accounts as of the record date on which the dividends are declared shall be allocated to the accounts of the Participants to whose accounts those shares of Stock are allocated as of the record date for which such cash dividends are declared. Any cash dividends received on shares of Banknorth Stock allocated to an Acquisition Loan Suspense Account shall be allocated to such account; provided that such cash dividends may be applied by the Trustee to pay principal or interest on an Acquisition Loan as described in Code Section 404(k)(2)(c) Any cash dividends received on shares of Stock either not allocated to Participant accounts or not allocated to the Acquisition Loan Suspense Account as of the record date for which the dividends are declared shall be included in the computation of net income (or loss) of the Trust Fund and allocated as set forth in Section 5.03. (c) Notwithstanding Paragraph (b), any cash dividends received on shares of Banknorth Stock allocated to a Participant's ESOP Account as of the record date on which the dividends are declared shall, at the election of the Participant or his or her Beneficiary, either: (i) be paid by the Company in cash to the Participant or Beneficiary, or, at the discretion of the Plan Administrator, paid by the Company to the Trust and distributed from the Trust to the Participant or his or her Beneficiary, not later than ninety (90) days after the close of the Plan Year in which paid to the Plan; or (ii) be paid to the Plan and reinvested in Banknorth Stock. The Plan Administrator shall determine the scope, manner and timing of the elections, dividend payments or distributions, and reinvestment in Banknorth Stock described in this Paragraph (c) in any manner that is consistent with Code Section 404(k) and other applicable provisions of the Code and ERISA. 11. Section 7.06 shall be amended to read in its entirety as follows: 7.06 Certain Forfeitures of Banknorth Stock. Notwithstanding any other provision of the Plan to the contrary, any Banknorth Stock that was acquired with the proceeds of an Acquisition Loan and was forfeited during a Plan Year shall be allocated 4 to the ESOP Accounts, as of the last day of the Plan Year, as follows: first, an amount sufficient to restore forfeitures as provided in Section 9.03 and second, the remainder of such forfeitures among the ESOP Accounts in the same proportion that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants who either (a) are credited with one Year of Service for the Plan Year and are employed by the Employer or an Affiliate on the last day of the Plan Year or (b) terminated employment during the Plan Year on account of death, retirement or Disability. 12. Item 2 above shall be effective as of the dates indicated therein. Item 3 shall be effective as of the adoption date of this First Amendment. Items 4 through 11 shall be effective as of the TD Date, provided that such items are expressly conditioned on the acquisition of a majority interest in Banknorth Group, Inc. by TD Bank on or before March 1, 2005. If such acquisition does not occur on or before March 1, 2005, then items 4 through 11 shall be null and void and of no effect whatsoever. IN WITNESS WHEREOF, to record the adoption of this First Amendment, Banknorth Group, Inc. has caused this instrument to be executed by its duly authorized officer this 26th day of October, 2004. BANKNORTH GROUP, INC. By /s/ Wade D. Thomas -------------------------- Its Officer, Assistant Secretary and Assistant Clerk 5 EX-21 9 b53274bgexv21.htm EX-21 SUBSIDIARIES OF BANKNORTH GROUP, INC. Subsidiaries of Banknorth Group, Inc.

EXHIBIT 21

Information relating to certain of the subsidiaries of Banknorth Group, Inc. as of December 31, 2004 is set forth below. All of the indicated subsidiaries are directly or indirectly wholly-owned by Banknorth Group, Inc., except as indicated below.


Direct Subsidiaries:

Name		Jurisdiction of Incorporation

Banknorth, NA		United States
Peoples Heritage Capital Trust I		Delaware
Banknorth Capital Trust I		Delaware
Banknorth Capital Trust II		Delaware
Ipswich Statutory Trust I		Connecticut
Cape Cod Capital Trust 1		Vermont
Northgroup Captive Insurance, Inc.		Connecticut
Northgroup Realty, Inc.		Vermont

Indirect Subsidiaries:

Name		Jurisdiction of Incorporation

Bancnorth Investment Planning Group, Inc. (1)(2)		Maine
Banknorth Leasing Corp. (1)		Maine
Banknorth Insurance Group (1)(3)		Maine
Northgroup Asset Management Company (1)(4)		Maine

(1)		Subsidiary of Banknorth, NA.

(2)		Holds as a subsidiary Bancnorth Investment and Insurance Agency, Inc., a Massachusetts corporation.

(3)		Holds as subsidiaries Morse, Payson & Noyes Insurance, a Maine corporation, and Banknorth Insurance Agency, Inc./MA, a Massachusetts corporation.

(4)		Owns 100% of the common securities of Northgroup Preferred Capital Corp., a Maine corporation which has qualified as a real estate investment trust under the Internal Revenue Code. Banknorth, NA owns 87% of the preferred securities of Northgroup Preferred Capital Corp.

EX-23 10 b53274bgexv23.htm EX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM exv23

EXHIBIT 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Banknorth Group, Inc.:

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-22205, 33-22206, 33-80310, 333-17467, 333-46367, 333-49999, 333-70095, 333-72909, 333-36834, 333-61436, 333-72692, 333-97311, 333-102331, 333-103312 and 333-104693), on Form S-3 (No. 333-81980) and on Form S-4 (No. 333-61757) of Banknorth Group, Inc. of our reports, dated February 25, 2005, with respect to the consolidated balance sheets of Banknorth Group, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004 annual report on Form 10-K of Banknorth Group, Inc.

/s/ KPMG LLP

Boston, Massachusetts
February 25, 2005

EX-31.1 11 b53274bgexv31w1.htm EX-31.1 SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT
OF 1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William J. Ryan, certify that:

1.   I have reviewed this annual report on Form 10-K of Banknorth Group, Inc. (the “Registrant”);

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.   The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: February 25, 2005 /s/ William J. Ryan
William J. Ryan
Chief Executive Officer

EX-31.2 12 b53274bgexv31w2.htm EX-31.2 SECTION 302 CFO CERTIFICATION Section 302 CFO Certification`

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT
OF 1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen J. Boyle, certify that:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: February 25, 2005 /s/ Stephen J. Boyle
Stephen J. Boyle
Chief Financial Officer

EX-32.1 13 b53274bgexv32w1.htm EX-32.1 SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350)

     The undersigned executive officer of Banknorth Group, Inc. (the “Registrant”) hereby certifies that the Registrant’s Form 10-K for the year ended December 31, 2004 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ William J. Ryan
Name:   William J. Ryan
Title:   Chief Executive Officer

Date: February 25, 2005

Note: A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Banknorth Group, Inc. and will be retained by Banknorth Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 14 b53274bgexv32w2.htm EX-32.2 SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350)

     The undersigned executive officer of Banknorth Group, Inc. (the “Registrant”) hereby certifies that the Registrant’s Form 10-K for the year ended December 31, 2004 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Stephen J. Boyle
Name:   Stephen J. Boyle
Title:   Chief Financial Officer

Date: February 25, 2005

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1.	I have reviewed this annual report on Form 10-K of Banknorth Group, Inc. (the “Registrant”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.



Date: February 25, 2005	/s/ William J. Ryan
	William J. Ryan
	Chief Executive Officer



Date: February 25, 2005	/s/ Stephen J. Boyle
	Stephen J. Boyle
	Chief Financial Officer



	/s/ William J. Ryan
	Name:	William J. Ryan
	Title:	Chief Executive Officer