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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K

(Mark One)

|x | Annual Report Pursuant to Section 13 or 15(d) of the
|- | ----------------------------------------------------

Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2006



| | or
| | --



| ̈ | 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 001-13769

CHITTENDEN CORPORATION

(Exact name of Registrant as specified in its charter)



|                                          |  |                                  
|----------------------------------------- |  | ---------------------------------
|Vermont                                   |  | 03-0228404                       
|(State of Incorporation)                  |  | (IRS Employer Identification No.)
|                                          | 
|Two Burlington Square Burlington, Vermont |  | 05401                            
|(Address of Principal Executive Offices)  |  | (Zip Code)                       

Registrants telephone number: 802-658-4000

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



|                                                                                                                     |  |                                          
|-------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Title of each class                                                                                                  |  | Name of each exchange on which
registered
|$1.00 Par Value Common Stock                                                                                         |  | New York Stock Exchange                  
|                                                                                                                     | 
|8.00% Trust Originated Preferred Securities issued byChittenden Capital Trust I, Guaranteed byChittenden Corporation |  | New York Stock Exchange                  

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

NONE

Indicate by check mark whether the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ̈

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. YES ̈NO x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ̈

Indicate by check mark 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. x

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one):.

Large Accelerated Filer x                    Accelerated Filer ̈Non-Accelerated Filer ̈

Indicate by check mark whether the registrant
is a shell company (as defined in Exchange Act Rule 12b-2). YES ̈NO x

The aggregate market value of the Registrants common stock held by non-affiliates of the Registrant, computed by reference to the last reported sale
price on the NYSE on June 30, 2006 was $1,164,981,510.55.

At January 31, 2007, there were 45,278,254 shares of the
Registrants common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents, in whole or in part, are specifically incorporated by reference in the indicated Part of this Annual Report on Form 10-K:



| | 1. | Notice of 2007 Annual Meeting and Proxy Statement: Part III, Items 10, 11, 12, 13 and 14.
| | -- | -----------------------------------------------------------------------------------------



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TABLE OF CONTENTS



|               |  |                                                                                                                 |  |         
|-------------- |  | --------------------------------------------------------------------------------------------------------------- |  | --------
|Item No.       |  |                                                                                                                 |  | Page No.
|               |  | PART I                                                                                                          |  |         
|               |  |                                                                                                                
|1.             |  | Business                                                                                                        |  | 3       
|               |  | Supervision and Regulation                                                                                      |  | 6       
|               |  | Employees                                                                                                       |  | 15      
|               |  | Company Website                                                                                                 |  | 15      
|1A.            |  | Risk Factors                                                                                                    |  | 15      
|1B.            |  | Unresolved Staff Comments                                                                                       |  | 18      
|2.             |  | Properties                                                                                                      |  | 18      
|3.             |  | Legal proceedings                                                                                               |  | 19      
|4.             |  | Submission of Matters to a Vote of Security Holders                                                             |  | 19      
|               |  |                                                                                                                
|               |  | PART II                                                                                                         |  |         
|               |  |                                                                                                                
|5.             |  | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 20      
|6.             |  | Selected Financial Data                                                                                         |  | 22      
|7.             |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 24      
|7A.            |  | Qualitative and Quantitative Disclosures about Market Risk                                                      |  | 43      
|8.             |  | Financial Statements and Supplementary Data                                                                     |  | 46      
|9.             |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 90      
|9A.            |  | Controls and Procedures                                                                                         |  | 90      
|               |  | Managements Annual Report on Internal Control Over Financial Reporting                                         |  | 90      
|               |  | Attestation Report of the Registered Public Accounting Firm                                                     |  | 90      
|9B.            |  | Other Information                                                                                               |  | 90      
|               |  |                                                                                                                
|               |  | PART III                                                                                                        |  |         
|               |  |                                                                                                                
|*10.           |  | Directors and Executive Officers of the Registrant                                                              |  | 91      
|*11.           |  | Executive Compensation                                                                                          |  | 91      
|*12.           |  | Security Ownership of Certain Beneficial Owners and Management and Related Stock- Holder Matters                |  | 91      
|*13.           |  | Certain Relationships and Related Transactions                                                                  |  | 91      
|*14.           |  | Principal Accounting Fees and Services                                                                          |  | 91      
|               |  |                                                                                                                
|               |  | PART IV                                                                                                         |  |         
|15.            |  | Exhibits and Financial Statement Schedules                                                                      |  | 92      
|               | 
|SIGNATURES     |  |                                                                                                                
|CERTIFICATIONS |  |                                                                                                                

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|* | Portions incorporated by reference from the Proxy Statement for the Registrants Annual Meeting of Stockholders to be held on April 18, 2007.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------



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FORWARD-LOOKING STATEMENTS

This report contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. You can identify these statements by forward-looking words such as may, could, should, would, intend, will,
expect, anticipate, believe, estimate, continue or similar words. Chittenden intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of complying with these safe harbor provisions. You should read statements that contain these words carefully because they
discuss the Companys future expectations, contain projections of the Companys future results of operations or financial condition, or state other forward-looking information. There may be events in the future that Chittenden
is not able to predict accurately or control and that may cause actual results to differ materially from the expectations described in forward-looking statements.

Readers are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed in this document, including the documents incorporated by
reference in this document. Important factors that could cause actual results to differ from those in the forward-looking statements include, among others, those discussed under Risk Factors in Part I, Item 1A of this Annual Report
on Form 10-K.

You should not place undue reliance on forward-looking statements. You should be aware that the occurrence of the events
described in this document, including the documents incorporated by reference, could harm the Companys business, operating results or financial condition. Chittenden does not undertake any obligation to update any forward-looking statements as
a result of future events or developments.



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PART I

ITEM 1 BUSINESS

Chittenden Corporation (the Company or Chittenden), a Vermont
corporation organized in 1971, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2006, the Company had total consolidated assets of approximately $6.4 billion. The Company is the
holding company parent and owns 100% of the outstanding common stock of Chittenden Trust Company (CTC), Flagship Bank and Trust Company (FBT), The Bank of Western Massachusetts (BWM), Maine Bank & Trust
(MBT), and Ocean National Bank (ONB) (collectively the Banks).

The following table summarizes
Chittendens acquisition history since 1994. The acquisitions of Vermont Financial Services Corp. and Granite State Bancshares, Inc. are also included as they were significant transactions that were merged into the Companys existing
franchise banks:



|               |  |                                  |  |                                          |  |                     |  |                                |  |                  |  |           
|-------------- |  | -------------------------------- |  | ---------------------------------------- |  | ------------------- |  | ------------------------------ |  | ---------------- |  | ----------
|Date Announced |  | Acquisition                      |  | SubsidiaryBank(s)                        |  | State(s) ofBusiness |  | ConsiderationPaid(in millions) |  | AccountingMethod |  | DateClosed
|11/2/2002      |  | Granite State Bancshares, Inc.   |  | Granite Bank (4)                         |  | NH                  |  | $238.9 stock & cash            |  | Purchase (1)     |  | 2/28/03   
|               |  |                                  |  |                                          |  |                    
|10/5/2001      |  | Ocean National Corporation       |  | Ocean National Bank                      |  | NH / ME             |  | $53.25 cash                    |  | Purchase (1)     |  | 2/28/02   
|               |  |                                  |  |                                          |  |                    
|1/26/2001      |  | Maine Bank Corporation           |  | Maine Bank & Trust                       |  | ME                  |  | $49.25 cash                    |  | Purchase (1)     |  | 4/30/01   
|               |  |                                  |  |                                          |  |                    
|12/16/1998     |  | Vermont Financial Services Corp. |  | Vermont NationalBank (3), UnitedBank (3) |  | VT / NH /MA         |  | $387.2 stock                   |  | Pooling (2)      |  | 5/28/99   
|               |  |                                  |  |                                          |  |                    
|9/19/1995      |  | Flagship Bank and Trust          |  | Flagship Bank and Trust                  |  | MA                  |  | $41.7 cash                     |  | Pooling (2)      |  | 2/29/96   
|               |  |                                  |  |                                          |  |                    
|8/17/1994      |  | Bank of Western Massachusetts    |  | Bank ofWesternMassachusetts              |  | MA                  |  | $26.5 cash                     |  | Purchase (1)     |  | 3/17/95   

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|(1) | These acquisitions have been accounted for as purchases and accordingly, the results of operations of the acquired companies are included in the financial statements from their
dates of acquisition.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | These acquisitions were accounted for as poolings of interests and accordingly, all financial data was restated to reflect the combined financial condition and results of operations
as if these acquisitions were in effect for all periods presented.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | United Bank merged into The Bank of Western Massachusetts in the third quarter of 1999. Vermont National Bank merged into Chittenden Trust Company in the first quarter of 2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Granite Bank merged into Ocean National Bank in the second quarter of 2004.
|--- | ---------------------------------------------------------------------------

|(5) | On January 19, 2007 Chittenden announced the acquisition of Merrill Merchants Bancshares, Inc, and its subsidiary Merrill Merchants Bank, for approximately $111.4 million in
cash and stock. The acquisition is expected to close in the second quarter of 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company engages in one line of
business, that of providing financial services through its banking subsidiaries. Through its subsidiaries, the Company offers a variety of lending services, with loans totaling approximately $4.7 billion at December 31, 2006. The largest loan
categories are commercial loans and residential real estate loans. Commercial loans include the following loan categories: commercial & industrial, municipal, multi-family, commercial real estate and construction. Commercial loans amounted
to approximately 72% of the total loans outstanding at December 31, 2006.



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Residential real estate loans include those collateralized by 1-4 family units and home equity lines of
credit, comprised 23% of total loans outstanding at December 31, 2006. The Company underwrites its residential mortgages based upon secondary market standards and sells substantially all of its fixed-rate residential mortgage loans on a
servicing-retained basis. Private banking residential mortgage loans are made primarily to commercial and wealth management customers and are typically held in portfolio. These loans generally do not meet secondary market underwriting standards.
Consumer loans at December 31, 2006 were 5% of total loans outstanding. Approximately 86% of these loans were indirect installment loans while the remaining loans consisted of direct installment and revolving credit.

The Companys lending activities are conducted primarily in Vermont, Massachusetts, New Hampshire and Maine, with additional activity related to
nearby market areas in New York, Connecticut, and Quebec. In addition to the portfolio diversification described above, the loans are diversified by borrowers and industry groups. In making commercial loans, the Company occasionally solicits the
participation of other banks. The Company also occasionally participates in loans originated by other banks. Certain of the Companys commercial loans are made under programs administered by the U.S. Small Business Administration, U.S.
Department of Agriculture Rural Development or other local government agencies within the Companys markets. Loan terms generally include repayment guarantees by the agency involved in varying amounts up to 90% of the original loan amount.

The Banks offer a wide range of banking services, including the acceptance of demand, savings, NOW, money market, cash management and time
deposits. As of December 31, 2006, the Banks had total interest-bearing deposits of approximately $4.5 billion and noninterest-bearing demand deposits of approximately $967 million. The Banks also provide personal trust services, including
services as executor, trustee, administrator, custodian and guardian. Corporate trust services are also provided, including services as trustee for pension and profit sharing plans. Asset management services are also provided for both personal and
corporate clients. Wealth management assets under administration totaled $9.0 billion at December 31, 2006, which included $2.1 billion under full discretionary management.

The Company also provides various business services including payroll processing, business credit cards, merchant credit card processing, and cash
management. Financial and investment counseling is provided to municipalities and school districts within the Companys service area, as well as central depository, lending, and other banking services. The Banks offer a variety of other
services including safe deposit facilities, certain non-deposit investment products through the brokerage services of Chittenden Securities, LLC, and various insurance related products through Chittenden Insurance Group, LLC. Chittenden Securities
and Chittenden Insurance Group are subsidiaries of Chittenden Trust Company.

The Companys principal executive offices are located at
Two Burlington Square, Burlington, Vermont 05401; telephone number: 802-658-4000.

CHITTENDEN TRUST COMPANY

CTC was chartered by the Vermont Legislature as a commercial bank in 1904. It is the largest bank headquartered in Vermont, based on total assets of
approximately $3.3 billion, total loans of approximately $2.3 billion and total deposits of approximately $2.9 billion at December 31, 2006. CTCs principal offices are located in Burlington, Vermont and it has fifty additional locations
in Vermont. The trade name Chittenden Bank is used at all locations. The Company operates its mortgage banking and servicing operations under the Chittenden Mortgage Services trade name.

CTC has a registered broker/dealer subsidiary, Chittenden Securities, LLC. (CSC). A full service broker-dealer registered with the Securities
and Exchange Commission (SEC), CSC is a member of the National Association of Securities Dealers, Inc. (NASD) and the Securities Investor Protection Corporation (SIPC). CSC operates throughout the locations of the CTC franchise as well as at
locations of the other Banks.



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CTC, through its subsidiary Chittenden Insurance Group, LLC (CIG), offers various insurance
related products including commercial, personal and life/health policies, as well as specialized coverages and risk management services. CTC, through its subsidiary Chittenden Commercial Finance based in Montreal, Quebec, offers commercial finance
lending services in Canada. CTC also provides these services directly throughout Northern New England and Massachusetts.

THE BANK OF WESTERN
MASSACHUSETTS

BWM was chartered by the Commonwealth of Massachusetts as a commercial bank in 1986. At December 31, 2006, BWM had
total assets of $765 million, total loans of $692 million and total deposits of $636 million. BWMs principal offices are located in Springfield, Massachusetts and it has thirteen additional locations in western Massachusetts and Connecticut.

FLAGSHIP BANK AND TRUST COMPANY

FBT
was chartered by the Commonwealth of Massachusetts as a commercial bank in 1986. At December 31, 2006, FBT had total assets of $525 million, total loans of $357 million and total deposits of $475 million. FBTs principal offices are
located in Worcester, Massachusetts and it has seven additional locations in the greater Worcester, Massachusetts area.

MAINE BANK & TRUST

MBT was chartered by the State of Maine as a commercial bank in 1991. At December 31, 2006, MBT had total assets of $383 million,
total loans of $288 million and total deposits of $318 million. MBTs principal offices are located in Portland, Maine and it has eleven additional locations in southern Maine.

OCEAN NATIONAL BANK

ONB is a federally chartered commercial bank founded in 1854. At
December 31, 2006, ONB had total assets of $1.6 billion, total loans of $1.0 billion and total deposits of $1.2 billion. ONBs principal offices are located in Portsmouth, New Hampshire and it has thirty-seven additional locations in
southern Maine and New Hampshire.

ECONOMY

The Northern New England economy continues to expand at a modest pace. Commercial businesses are generally performing well, and experiencing moderate growth. Meanwhile, retail sales sagged from a year ago due to a disappointing holiday
season and by the housing slowdown. The residential real estate market slowed during 2006, reflecting the changing economic conditions. The slower sales pace has translated into comparatively higher amounts of inventory across the region. The
ability and willingness of the Companys borrowers to honor their repayment commitments are impacted by many factors, including the prevailing market interest rates and the level of overall economic activity within the borrowers
geographic area. See Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K for further discussion regarding the impact of changes in the local economies on the Companys business and financial performance.

COMPETITION

There is vigorous
competition in the Companys marketplace for all aspects of banking and related financial services activities. Money market deposit accounts, cash management accounts and short-term certificates of deposit offered by the Banks compete with
investment account offerings of brokerage firms and with products offered by insurance companies. The Company also competes with other banks, credit unions, and finance companies for the commercial banking business in Northern New England. Areas of
competition include interest



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rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products
and services. The Companys operations are impacted by state and federal regulations, which are applicable to the banking industry. The Company also competes for personal and commercial trust business with investment advisory firms, mutual
funds, and insurance companies.

SUPERVISION AND REGULATION

The Company and the Banks are subject to extensive regulation under federal and
state banking laws and regulations. The following discussion of certain of the material elements of the regulatory framework applicable to banks and bank holding companies is not intended to be complete and is qualified in its entirety by the text
of the relevant state and federal statutes and regulations. A change in the applicable laws or regulations may have a material effect on the business of the Company and/or the Banks.

Regulation of the Company

General. As a corporation incorporated under Vermont law, the
Company is subject to regulation by the Vermont Secretary of State, and Vermont corporate law governs the rights of our stockholders. As a bank holding company, the Company is subject to inspection, examination, supervision and regulation by the
Board of Governors of the Federal Reserve System (the Federal Reserve Board) under the Bank Holding Company Act of 1956, as amended (the BHC Act). Under the BHC Act, bank holding companies generally may not acquire ownership
or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies (such as the Company) that are
not also financial holding companies are generally prohibited under the BHC Act from engaging in non-banking activities, subject to certain exceptions. As a bank holding company that has not elected to become a financial holding company, the
Companys activities are limited generally to the business of banking and activities determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The Federal Reserve Board has the authority to
issue orders to bank holding companies to cease and desist from unsafe or unsound banking practices and violations of conditions imposed by, or violations of agreements with, or commitments to, the Federal Reserve Board. The Federal Reserve Board is
also empowered to assess civil money penalties against companies or individuals who violate the BHC Act or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to
order termination of ownership and control of a non-banking subsidiary by a bank holding company.

Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the Interstate Act). The Interstate Act permits adequately capitalized and adequately managed bank holding companies, as determined by the Federal Reserve Board, to acquire banks in any state subject
to certain concentration limits and other conditions. The Interstate Act also generally authorizes the interstate merger of banks. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis
provided that the law of the host state specifically authorizes such action. However, as a bank holding company, the Company is required to obtain prior Federal Reserve Board approval before acquiring more than 5% of a class of voting securities, or
substantially all of the assets, of a bank holding company, bank or savings association.

Control Acquisitions.The Change in Bank
Control Act prohibits a person or group of persons from acquiring control of a bank holding company, such as the Company, unless the Federal Reserve Board hasbeen notified and has not objected to the transaction. Under a
rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting securities of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of
1934, as amended, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. Inaddition, a company is required to obtain the approval of the Federal Reserve Board under the BHC
Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding voting securities of a bank holding company, or otherwise obtaining control or a controlling influence over that
bank holding company.



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Dividends. The Federal Reserve Board has authority to prohibit bank holding companies from paying
dividends if such payment is deemed to be an unsafe or unsound practice. The Federal Reserve Board has indicated generally that it may be an unsafe and unsound practice for bank holding companies to pay dividends unless the bank holding
companys net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organizations capital needs, asset quality, and overall financial condition. The
Companys ability to pay dividends is dependent upon the flow of dividend income to it from the Banks, which may be affected or limited by regulatory restrictions imposed by federal or state bank regulatory agencies. See Regulation of The
BanksDividends.

Certain Transactions by Bank Holding Companies with their Affiliates. There are various statutory
restrictions on the extent to which bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in covered transactions with their insured depository institution subsidiaries. An insured
depository institution (and its subsidiaries) may not lend money to, or engage in covered transactions with, its non-depository institution affiliates if the aggregate amount of covered transactions outstanding involving the bank, plus the proposed
transaction exceeds the following limits: (a) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of
the insured depository institution; and (b) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured
depository institution. For this purpose, covered transactions are defined by statute to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from
an affiliate unless exempted by the Federal Reserve Board, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance or letter of credit
on behalf of an affiliate. Covered transactions are also subject to certain collateral security requirements. Covered transactions as well as other types of transactions between a bank and a bank holding company must be on market terms and not
otherwise unduly favorable to the holding company or an affiliate of the holding company. Moreover, Section 106 of the BHC Act provides that, to further competition, a bank holding company and its subsidiaries are prohibited from engaging in
certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.

Holding Company Support of Subsidiary Banks. Under Federal Reserve Board policy, the Company is expected to act as a source of financial and managerial strength to its subsidiary banks and to commit resources to support such
subsidiaries. This support of its subsidiary banks may be required at times when, absent such Federal Reserve Board policy, the Company might not otherwise be inclined to provide it. In addition, any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to deposits and certain other indebtedness of such subsidiary banks. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Liability of Commonly Controlled Depository Institutions. Under the Federal Deposit Insurance Act, as amended (FDI Act), FDIC-insured depository institutions, such as any of the Banks, can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection with (a) the default of a commonly controlled FDIC-insured depository institution, or (b) any assistance provided by the FDIC to any commonly
controlled depository institution in danger of default. For these purposes, the term default is defined generally as the appointment of a conservator or receiver and in danger of default is defined generally as
the existence of certain conditions indicating that a default is likely to occur without federal regulatory assistance.

Regulation of
the Banks

General. As FDIC-insured state-chartered banks, the Banks (with the exception of ONB) are subject to the supervision
of and regulation by the Commissioner of Banking, Insurance, Securities and Health Care



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Administration of the State of Vermont, in the case of CTC; the Maine Superintendent of the Bureau of Banking in the case of MBT; and the Commissioner of
Banks of the Commonwealth of Massachusetts in the case of BWM and FBT. We refer to these regulators collectively in this report as the Commissioners. ONB is a nationally chartered bank principally regulated by the Office of Comptroller
of the Currency (the OCC). This supervision and regulation is for the protection of depositors, the Deposit Insurance Fund (DIF), and consumers, and is not for the protection of the Companys stockholders. The prior
approval of the FDIC or the OCC and the relevant Commissioner is required, among other things, for the Banks to establish or relocate an additional branch office, assume deposits, or engage in any merger, consolidation, purchase or sale of all or
substantially all of the assets of any of the Banks.

Examinations and Supervision. The FDIC, the OCC, and the Commissioners
regularly examine the condition and the operations of the Banks, including (but not limited to) their capital adequacy, reserves, loans, investments, earnings, liquidity, compliance with laws and regulations, record of performance under the
Community Reinvestment Act of 1997 and management practices. In addition, the Banks are required to furnish quarterly and annual reports of income and condition to the FDIC and the OCC as well as periodic reports to the Commissioners. The
enforcement authority of the FDIC and the OCC includes the power to impose civil money penalties, terminate insurance coverage, remove officers and directors and issue cease-and-desist orders to prevent unsafe or unsound practices or violations of
laws or regulations and to take a broad range of actions against the Banks and their institution-affiliated parties. In addition, the FDIC has authority to impose additional restrictions and requirements with respect to banks that do not satisfy
applicable regulatory capital requirements. See Capital Requirements and FDICIAPrompt Corrective Action below.

Dividends. The principal source of the Companys revenue is dividends from the Banks. Payments of dividends by the Banks are subject to certain Vermont, Maine, and Massachusetts banking law restrictions. Payment of dividends by
CTC is subject to Vermont banking law restrictions, which require that CTC may not, without the Commissioners approval, authorize dividends that reduce capital below certain standards established by the Commissioner. Payment of dividends by
BWM and FBT is subject to Massachusetts banking law restrictions, which require that each banks capital not be impaired and limits the amount of dividends that may be paid during a calendar year to net profit for that year plus retained net
profits from the prior two years. Payments of dividends by MBT are subject to Maine banking law restrictions, which require that they may not, without the Maine Superintendents approval, authorize dividends that reduce capital below certain
standards established by the Maine Superintendent. Payment of dividends by ONB is subject to certain limitations imposed by the OCC, which limit dividends that a national bank may declare during any calendar year to retained net income for that year
plus retained net income for the preceding two years.

The FDIC and the OCC have the authority to prevent the Banks from paying dividends
if such payment would constitute an unsafe or unsound banking practice or reduce the respective Banks capital below safe and sound levels. In addition, federal legislation prohibits FDIC-insured depository institutions from paying dividends or
making capital distributions that would cause the institution to fail to meet minimum capital requirements. See Capital Requirements and FDICIAPrompt Corrective Action below.

Affiliate Transactions. As noted above, banks are subject to restrictions imposed by federal law on extensions of credit to, purchases of assets
from, and certain other transactions with affiliates and on investments in stock or other securities issued by affiliates. Such restrictions prevent the Banks from making loans to affiliates unless the loans are secured by collateral in specified
amounts and have terms at least as favorable to the Banks as the terms of comparable transactions between the Banks and non-affiliates. Further, applicable federal and state laws significantly restrict extensions of credit by the Banks to directors,
executive officers and principal stockholders and related interests of such persons.

Deposit Insurance. The Banks deposits
are insured by the Bank Insurance Fund of the FDIC to the legal maximum of $100,000 generally ($250,000 for retirement accounts) for each insured depositor. The Federal Deposit Insurance Act, as amended by the Federal Deposit Insurance Reform Act of
2005, provides that the



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FDIC shall set deposit insurance assessment rates. In 2006, the former Bank Insurance Fund merged with the Savings Association Insurance Fund to create the
Deposit Insurance Fund, or DIF. The Act eliminated the requirement that the FDIC set deposit insurance assessment rates on a semi-annual basis at a level sufficient to increase the ratio of BIF reserves to BIF-insured deposits to at least 1.25%.
Under the Act, the FDIC annually sets the designated reserve ratio (DRR) of DIF reserves to DIF-insured deposits between 1.15% and 1.50%, subject to public comment, based on appropriate considerations including risk of losses, economic conditions
such that the ratio would increase during favorable economic conditions and decrease during less favorable conditions, thus avoiding sharp swings in assessment rates. For 2007, the FDIC set the DRR at 1.25%. Although current assessment levels are
low, DIF insurance assessments may be increased in the future if necessary to maintain DIF reserves at the level determined by the FDIC. See Capital Requirements and FDICIARisk-Based Deposit Insurance and FICO Assessments below.

Federal Reserve Board Policies and Reserve Requirements. The monetary policies and regulations of the Federal Reserve Board have
had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. Federal Reserve Board policies affect the levels of bank earnings on loans and investments and the levels of interest paid on
bank deposits through the Federal Reserve Systems open-market operations in United States government securities, regulation of the discount rate on bank borrowings from Federal Reserve Banks and regulation of non-earning reserve requirements.
Regulation D promulgated by the Federal Reserve Board requires all depository institutions, including the Banks, to maintain reserves against their transaction accounts (generally, demand deposits, NOW accounts and certain other types of accounts
that permit payments or transfer to third parties) or non-personal time deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain other types of
time deposits), subject to certain exemptions. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at the Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the amount of the Banks interest-bearing assets. As of December 31, 2006, the Banks aggregate reserve requirement was approximately $31.8 million.

Consumer Protection Regulation. Other aspects of the lending and deposit businesses of the Banks that are subject to regulation by the FDIC, the
OCC and the Commissioners include disclosure requirements with respect to interest, payment and other terms of consumer and residential mortgage loans and disclosure of interest and fees and other terms of, and the availability of, funds for
withdrawal from consumer deposit accounts. In addition, the Banks are subject to federal and state laws and regulations prohibiting certain forms of discrimination in credit transactions, and imposing certain recordkeeping, reporting and disclosure
requirements with respect to residential mortgage loan applications.

USA PATRIOT Act. The USA Patriot Act of 2001, designed to deny
terrorists and others the ability to obtain anonymous access to the U.S. financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The USA PATRIOT Act, together
with the implementing regulations of various federal regulatory agencies, have caused financial institutions, including the Banks, to adopt and implement additional or amend existing policies and procedures with respect to, among other things,
anti-money laundering compliance, suspicious activity and currency transaction reporting, customer identity verification and customer risk analysis. The statute and its underlying regulations also permit information sharing for counter-terrorist
purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the Federal Reserve Board (and other federal banking agencies) to evaluate the
effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHC Act or under the Bank Merger Act.

CRA Regulations. The Community Reinvestment Act of 1997 (CRA) requires lenders to identify the communities served by the
institutions offices and to identify the types of credit the institution is prepared to extend within such communities. The FDIC examines each of the Banks, except for ONB, which is examined by



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the OCC, and the agencies rate such institutions compliance with CRA as Outstanding, Satisfactory, Needs to Improve
or Substantial Noncompliance. As of their last CRA examinations, CTC, MBT, BWM and FBT all received a rating of Outstanding, and ONB received a rating of Satisfactory.

Failure of an institution to receive at least a Satisfactory rating could inhibit such institution or its holding company from undertaking
certain activities, including engaging in activities newly permitted as a financial holding company under the Gramm-Leach Bliley Act of 1999, or (GLBA), and acquisitions of other financial institutions. The Federal Reserve Board must
take into account the record of performance of banks in meeting the credit needs of the entire community served, including low- and moderate-income neighborhoods. Current CRA regulations for large banks (CTC and ONB) primarily rely on objective
criteria of the performance of institutions under three key assessment tests: a lending test, a service test and an investment test. For smaller banks (BWM, FBT and MBT), current CRA regulations primarily evaluate the performance of institutions
under two key assessment tests: a lending test and a community development test. The Banks are committed to meeting the existing or anticipated credit needs of their entire communities, including low- and moderate-income neighborhoods, consistent
with safe and sound banking operations.

Capital Requirements and FDICIA

General. The FDIC has established guidelines with respect to the maintenance of appropriate levels of capital by FDIC-insured banks, and the OCC
has established nearly identical guidelines applicable to national banks. The Federal Reserve Board has established substantially identical guidelines with respect to the maintenance of appropriate levels of capital, on a consolidated basis, by bank
holding companies. If a banking organizations capital levels fall below the minimum requirements established by such guidelines, a bank or bank holding company will be expected to develop and implement a plan acceptable to the FDIC, the OCC or
the Federal Reserve Board, as applicable, to achieve adequate levels of capital within a reasonable period, and may be denied approval to acquire or establish additional banks or non-bank businesses, merge with other institutions or open branch
facilities until such capital levels are achieved. Federal legislation requires federal bank regulators to take prompt corrective action with respect to insured depository institutions that fail to satisfy minimum capital requirements
and imposes significant restrictions on such institutions. See Prompt Corrective Action below.

Leverage Capital Ratio.
The regulations of the FDIC and the OCC require FDIC-insured state banks and national banks, respectively, to maintain a minimum Leverage Capital Ratio or Tier 1 Capital (as defined in the Risk-Based Capital Guidelines
discussed in the following paragraphs) to total assets of 3.0%. The regulations of the FDIC and the OCC state that only banks with the highest federal bank regulatory examination rating will be permitted to operate at or near such minimum level of
capital. All other banks are expected to maintain an additional margin of capital, equal to at least 1% to 2% of total assets, above the minimum ratio. Any bank experiencing or anticipating significant growth is expected to maintain capital well
above the minimum levels. The Federal Reserve Boards guidelines impose substantially similar leverage capital requirements on bank holding companies on a consolidated basis.

Risk-Based Capital Requirements. The regulations of the FDIC and the OCC also require FDIC-insured state banks and national banks, respectively,
to maintain minimum capital levels measured as a percentage of such banks risk-adjusted assets. A banks qualifying Total Capital for this purpose may include two componentsCore (Tier 1) Capital and
Supplementary (Tier 2) Capital. Core Capital consists primarily of common stockholders equity, which generally includes common stock, related surplus and retained earnings, certain non-cumulative perpetual preferred stock and
related surplus, and minority interests in the equity accounts of consolidated subsidiaries, and (subject to certain limitations) mortgage servicing rights and purchased credit card relationships, less all other intangible assets (primarily
goodwill). Supplementary Capital elements include, subject to certain limitations, a portion of the allowance for credit losses, perpetual preferred stock that does not qualify for inclusion in Tier 1 capital, long-term preferred stock with an
original maturity of at least 20 years and related surplus, certain forms of perpetual debt and mandatory convertible securities, and certain forms of subordinated debt and intermediate-term preferred stock.



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The risk-based capital rules assign a banks balance sheet assets and the credit equivalent amounts
of the banks off-balance sheet obligations to one of four risk categories, weighted at 0%, 20%, 50% or 100%. Applying these risk-weights to each category of the banks balance sheet assets and to the credit equivalent amounts of the
banks off-balance sheet obligations and summing the totals results in the amount of the banks total Risk-Adjusted Assets for purposes of the risk-based capital requirements. Risk-Adjusted Assets can either exceed or be less than reported
balance sheet assets, depending on the risk profile of the banking organization. Risk-Adjusted Assets for institutions such as the Banks will generally be less than reported balance sheet assets because their retail banking activities include
proportionally more residential mortgage loans and certain investment securities with a lower risk weighting and relatively smaller off-balance sheet obligations.

The risk-based capital regulations require all banks to maintain a minimum ratio of Total Capital to Risk-Adjusted Assets of 8.0%, of which at least one-half (4.0%) must be Core (Tier 1) Capital. For the purpose
of calculating these ratios: (a) a banking organizations Supplementary Capital eligible for inclusion in Total Capital is limited to no more than 100% of Core Capital; and (b) the aggregate amount of certain types of Supplementary
Capital eligible for inclusion in Total Capital is further limited. For example, the regulations limit the portion of the allowance for loan losses eligible for inclusion in Total Capital to 1.25% of Risk-Adjusted Assets. The Federal Reserve Board
has established substantially identical risk-based capital requirements, which are applied to bank holding companies on a consolidated basis. The risk-based capital regulations explicitly provide for the consideration of interest rate risk in the
overall evaluation of a banks capital adequacy to ensure that banks effectively measure and monitor their interest rate risk, and that they maintain capital adequate for that risk. A bank deemed by its federal banking regulator to have
excessive interest rate risk exposure may be required by the FDIC to maintain additional capital (that is, capital in excess of the minimum ratios discussed above). The Company believes, based on the Banks level of interest rate risk exposure,
that this provision will not have a material adverse effect on the Banks.

In December 2006, the federal banking agencies issued notice of
proposed rulemaking concerning potential changes in the risk-based capital rules, known as Basel IA that are designed to apply to, and potentially reduce the risk-based capital requirements of bank holding companies, such as the Company, that are
not among the 20 or so largest U.S. bank holding companies. It remains uncertain whether the Basel IA rules will be adopted and, even if adopted, how closely the final Basel IA rules will resemble the rules described in the notice of proposed
rulemaking and what the effective date of such rules will be. Accordingly, the Company is not yet in a position to determine the effect of such rules on its risk-based capital requirements.

On December 31, 2006, the Companys consolidated Total Risk-Based Capital Ratio was 12.78% its Tier 1 Risk-Based Capital Ratio was 11.56%
and its Leverage Capital Ratio was 9.24%. Based on the above figures and accompanying discussion, the Company exceeded all regulatory capital requirements and was considered well capitalized.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires, among other things,
that the federal banking regulators take prompt corrective action with respect to, and imposes significant restrictions on, any bank that fails to satisfy its applicable minimum capital requirements. FDICIA establishes five capital
categories consisting of well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under applicable regulations, a bank
that has a Total Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Leverage Capital Ratio of 5.0% or greater, and is not subject to any written agreement, order, capital directive or prompt
corrective action directive to meet and maintain a specific capital level for any capital measure is deemed to be well capitalized. A bank that has a Total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital Ratio of
4.0% or greater and a Leverage Capital Ratio of 4.0% (or 3.0% for banks with the highest regulatory examination rating that are not experiencing or anticipating significant growth or expansion) or greater and does not meet the definition of a well
capitalized bank is considered to be adequately capitalized. A bank that has a Total Risk-Based Capital Ratio of less than 8.0% or has a Tier 1 Risk-Based Capital Ratio that is less than 4.0%, except as noted above, a Leverage Capital



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Ratio of less than 4.0% is considered undercapitalized. A bank that has a Total Risk-Based Capital Ratio of less than 6.0%, or a Tier 1
Risk-Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0% is considered to be significantly undercapitalized, and a bank that has a ratio of tangible equity to total assets equal to or less than
2.0% is deemed to be critically undercapitalized. A bank may be deemed to be in a capital category lower than is indicated by its actual capital position if it is determined to be in an unsafe or unsound condition or receives an
unsatisfactory examination rating. FDICIA generally prohibits a bank from making capital distributions (including payment of dividends) or paying management fees to controlling stockholders or their affiliates if, after such payment, the bank would
be undercapitalized.

Under FDICIA and the applicable implementing regulations, an undercapitalized bank will be:



| |  |  | subject to increased monitoring by its primary federal banking regulator;
| | - |  | -------------------------------------------------------------------------



| |  |  | required to submit to its primary federal banking regulator an acceptable capital restoration plan (guaranteed, subject to certain limits, by the banks
holding company) within 45 days of being classified as undercapitalized;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | subject to strict asset growth limitations; and
| | - |  | -----------------------------------------------



| |  |  | required to obtain prior regulatory approval for certain acquisitions, transactions not in the ordinary course of business, and entries into new lines of business.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the foregoing, the primary federal banking regulator may issue a prompt corrective action
directive to any undercapitalized institution. Such a directive may:



| |  |  | require sale or re-capitalization of the bank;
| | - |  | ----------------------------------------------



| |  |  | impose additional restrictions on transactions between the bank and its affiliates;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | limit interest rates paid by the bank on deposits;
| | - |  | --------------------------------------------------



| |  |  | limit asset growth and other activities;
| | - |  | ----------------------------------------



| |  |  | require divestiture of subsidiaries;
| | - |  | ------------------------------------



| |  |  | require replacement of directors and officers; and
| | - |  | --------------------------------------------------



| |  |  | restrict capital distributions by the banks parent holding company. In addition to the foregoing, a significantly undercapitalized institution may not award
bonuses or increases in compensation to its senior executive officers until it has submitted an acceptable capital restoration plan and received approval from its primary federal banking regulator.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Not later than 90 days after an institution becomes critically undercapitalized, the primary federal banking regulator for the institution must appoint a
receiver or, with the concurrence of the FDIC, a conservator, unless the agency, with the concurrence of the FDIC, determines that the purpose of the prompt corrective action provisions would be better served by another course of action. FDICIA
requires that any alternative determination be documented and reassessed on a periodic basis. Notwithstanding the foregoing, a receiver must be appointed after 270 days unless the appropriate federal banking agency and the FDIC certify
that the institution is viable and not expected to fail.

Deposit Insurance Assessments. The FDIC uses a risk-based system which
assigns each of the Banks to one of three capital categories (1) well capitalized, (2) adequately capitalized, or (3) undercapitalized, and to one of three subgroups within a capital category on the basis of supervisory evaluations by
the applicable Banks primary federal regulator and, if applicable, other information relevant to the Banks financial condition and the risk posed to the FDIC. An institutions assessment rate depends on the capital category and
supervisory category to which it is assigned. The FDIC is authorized to raise the assessment rates in certain circumstances. If the FDIC determines to increase the assessment rates for all institutions, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and may raise FDIC insurance premiums again in



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the future. If the FDIC takes such action, it could have an adverse effect on the earnings of the Banks, the extent of which is not currently quantifiable.
The risk classification to which an institution is assigned by the FDIC is confidential and may not be disclosed.

Assessment rates in 2006
ranged from 0% of domestic deposits for an institution in the lowest risk category (i.e., well capitalized and healthy from a supervisory standpoint) to 43% of domestic deposits for institutions in the highest risk category (i.e., undercapitalized
and unhealthy from a supervisory standpoint). The Banks paid assessments totaling $756,656 or 0.0137 cents per $100 of deposits in 2006.

Brokered Deposits and Pass-Through Deposit Insurance Limitations. Under FDICIA, a bank cannot accept brokered deposits unless it either (1) is Well Capitalized or (2) is Adequately Capitalized and
has received a written waiver from its primary federal banking regulator. For this purpose, Well Capitalized and Adequately Capitalized have the same definitions as in the Prompt Corrective Action regulations. See -
Prompt Corrective Action above. Banks that are not in the Well Capitalized category are subject to certain limits on the rates of interest that they may offer on any deposits (whether or not obtained through a third-party deposit
broker). Pass-through insurance coverage is not available in banks that do not satisfy the requirements for acceptance of brokered deposits for deposits of certain employee benefit plans, except that pass-through insurance coverage will be provided
for employee benefit plan deposits in institutions which at the time of acceptance of the deposit meet all applicable regulatory capital requirements and send written notice to their depositors that their funds are eligible for pass-through deposit
insurance. Although eligible to do so, the Banks have not accepted brokered deposits.

Conservatorship and Receivership Amendments.
FDICIA authorizes the FDIC to appoint itself conservator or receiver for a state-chartered bank under certain circumstances and expands the grounds for appointment of a conservator or receiver for an insured depository institution to include:



| |  |  | consent to such action by the board of directors of the institution;
| | - |  | --------------------------------------------------------------------



| |  |  | cessation of the institutions status as an insured depository institution;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, or fails to become adequately capitalized when required to do
so, or fails to timely submit an acceptable capital plan, or materially fails to implement an acceptable capital plan; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the institution is critically undercapitalized or otherwise has substantially insufficient capital.
| | - |  | ---------------------------------------------------------------------------------------------------

FDICIA provides that an institutions directors shall not be liable to its stockholders or creditors for acquiescing in or consenting to the
appointment of the FDIC as receiver or conservator for, or as a supervisor in the acquisition of, the institution.

Real Estate Lending
Standards. FDICIA requires the federal bank regulatory agencies to adopt uniform real estate lending standards. The FDIC and the OCC have adopted regulations, which establish supervisory limitations on Loan-to-Value (LTV) ratios in
real estate loans by FDIC-insured banks, including national banks. The regulations require banks to establish LTV ratio limitations within or below the prescribed uniform range of supervisory limits.

Standards for Safety and Soundness. Pursuant to FDICIA the federal bank regulatory agencies have prescribed, by regulation, standards and
guidelines for all insured depository institutions and depository institution holding companies relating to:



| |  |  | internal controls, information systems and internal audit systems;
| | - |  | ------------------------------------------------------------------



| |  |  | loan documentation;
| | - |  | -------------------



| |  |  | credit underwriting;
| | - |  | --------------------



| |  |  | interest rate risk exposure; (v) asset growth; and
| | - |  | --------------------------------------------------



| |  |  | compensation, fees and benefits.
| | - |  | --------------------------------



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The compensation standards prohibit employment contracts, compensation or benefit arrangements, stock
option plans, fee arrangements or other compensatory arrangements that would provide excessive compensation, fees or benefits, or that could lead to material financial loss. In addition, the federal bank regulatory agencies are required
by FDICIA to prescribe standards specifying; (a) maximum classified assets to capital ratios; (b) minimum earnings sufficient to absorb losses without impairing capital; and (c) to the extent feasible, a minimum ratio of market value
to book value for publicly-traded shares of depository institutions and depository institution holding companies.

Activities and
Investments of Insured State Banks. FDICIA provides that FDIC-insured state banks (such as CTC, MBT, BWM, and FBT) may not engage as a principal, directly or through a subsidiary, in any activity that is not permissible for a national bank, such
as ONB, unless the FDIC determines that the activity does not pose a significant risk to the insurance fund, and the bank is in compliance with its applicable capital standards. In addition, an insured state bank may not acquire or retain, directly
or through a subsidiary, any equity investment of a type, or in an amount, that is not permissible for a national bank, unless such investments meet certain grandfather requirements.

The GLBA includes a section of the FDI Act governing subsidiaries of state banks that engage in activities as principal that would only be
permissible for a national bank to conduct in a financial subsidiary. This provision permits state banks, to the extent permitted under state law, to engage in certain new activities, which are permissible for subsidiaries of a financial
holding company. See Supervision and Regulation- Regulation of the Company. Further, it expressly preserves the ability of a state bank to retain all existing subsidiaries. Because the applicable Vermont statute explicitly permits banks
chartered by the state to engage in all activities permissible for national banks, CTC will be permitted to form subsidiaries to engage in the activities authorized by the GLBA. Massachusetts and Maine permit banks chartered by those states to
engage in activities which are permissible for a national bank and that are approved by the Massachusetts Commissioner of Banks or the Maine Superintendent of Banking. Thus, MBT, BWM, and FBT would only be permitted to engage in the activities
authorized by the GLBA that are also approved by the states banking regulatory agency or otherwise by state law. In order to form a financial subsidiary, a state bank must be well-capitalized, and the state bank would be subject to certain
capital deduction, risk management and affiliate transaction rules, which are applicable to national banks.

Consumer Protection
Provisions. FDICIA also includes provisions requiring advance notice to regulators and customers for any proposed branch closing and authorizing (subject to future appropriation of the necessary funds) reduced insurance assessments for
institutions offering lifeline banking accounts or engaged in lending in distressed communities. FDICIA also includes provisions requiring depository institutions to make additional and uniform disclosures to depositors with respect to
the rates of interest, fees and other terms applicable to consumer deposit accounts.

Customer Information Security.The FDIC and
other bank regulatory agencies have adopted guidelines for establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA, which establishes a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework. Specifically, the Information Security Guidelines established by the GLBA require each
financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee of the board, to develop, implement and maintain a comprehensive written information security program designed to ensure the
security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information; and to protect against unauthorized access to or use of such information that could result in
substantial harm or inconvenience to any customer. The federal banking regulators have issued guidance for banks on response programs for unauthorized access to customer information. This guidance, among other things, requires notice to be sent to
customers whose sensitive information has been compromised if unauthorized use of this information is reasonably possible. Various states have enacted legislation concerning breaches of data security and various bills
requiring consumer notice of data security breaches are being considered by Congress.



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Privacy.The GLBA requires financial institutions to implement policies and procedures regarding
the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires financial institutions to explain to consumers their policies and procedures regarding the disclosure of such nonpublic
personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures.

FDIC Waiver of Certain Regulatory Requirements. In 2003, the FDIC issued a rule, effective on September 22, 2003, that includes a waiver
provision, which grants the FDIC Board of Directors extremely broad discretionary authority to waive FDIC regulatory provisions that are not specifically mandated by statute or by a separate regulation.

EMPLOYEES

At December 31, 2006, the Company employed 2,067 persons, with a full-time equivalency of 1,947
employees. The Company enjoys good relations with its employees. A variety of employee benefits, including health, group life and disability income replacement insurance, a funded non-contributory pension plan, and an incentive savings and profit
sharing plan, are available to qualifying employees.

COMPANY WEBSITE

The Company maintains a website at www.chittendencorp.com. The Company makes available, free of
charge, on its website the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as well as all Section 16 reports on Forms 3, 4, and 5, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Companys reports filed with, or furnished to, the SEC are
also available at the SECs website at www.sec.gov. Information contained on the Companys website does not constitute a part of this report.

NYSE CERTIFICATION

The NYSE requires that the chief executive officer of each listed company certify annually to the NYSE
that he or she is not aware of any violation by the company of NYSE corporate governance listing standards as of the date of such certification. We submitted the certification of our chief executive officer to the NYSE on April 28, 2006, which
was unqualified.

ITEM 1A RISK FACTORS

The risks and uncertainties described below are not the only ones that we face.
Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us and our business. If any of these risks were to occur, our business, financial condition or results of
operations could be materially and adversely affected.

We face significant competition for banking services in New England, our primary
market, and in the local markets in which we operate. Competition in the local banking industries may limit our ability to attract and retain customers. We may face competition now and in the future from the following: other banking institutions,
including larger New England and other commercial banking organizations; savings banks; credit unions; other financial institutions; and non-bank financial services companies serving New England and adjoining areas.

In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them
to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with higher capitalization and financial intermediaries not subject to bank regulatory
restrictions have bigger lending limits,



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which enable them to serve the credit needs of larger customers. We also face competition from out-of-state financial intermediaries that have opened low-end
production offices or that solicit deposits in our respective market areas. If we are unable to attract and retain banking customers we may be unable to continue our loan growth and level of deposits and our results of operations and financial
condition may otherwise be negatively affected.

In the past, we have expanded our operations into non-banking activities such as asset
management and wealth advisory services, insurance-related products, credit cards, payroll processing and brokerage services. We may have difficulty competing with more established providers of these products and services due to the intense
competition in many of these industries, especially in the New England region. In addition, we may be unable to attract and retain non-banking customers due to a lack of market and product knowledge or other industry specific matters or an inability
to attract and retain qualified, experienced employees. Our failure to attract and retain customers with respect to these non-banking activities could negatively impact our future earnings.

Our main source of income from operations is net interest income, which is equal to the difference between the interest income received on loans,
investment securities and other interest-bearing assets and the interest expense incurred in connection with deposits, borrowings and other interest-bearing liabilities. As a result, our net interest income can be affected by changes in market
interest rates. These rates are highly sensitive to many factors beyond our control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities. We have
adopted asset and liability management policies to try to minimize the potential adverse effects of changes in interest rates on our net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However,
even with these policies in place, we cannot provide assurance that changes in interest rates will not negatively impact our operating results.

An increase in interest rates also could have a negative impact on our business by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and
write-offs, but also necessitate further increases to our allowance for loan losses. Increases in interest rates also may reduce the demand for loans and, as a result, the amount of loan and commitment fees. In addition, fluctuations in interest
rates may result in disintermediation, which is the flow of funds away from depository institutions into direct investments that pay higher rates of return, and may affect the value of our investment securities and other interest-earning assets.

If our customers default on the repayment of their loans, our profitability could be adversely affected. A borrowers default on its
obligations under one or more of our loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work-out of the loans. If collection
efforts are unsuccessful or acceptable workout arrangements cannot be reached, we may have to write-off the loans in whole or in part. Although we may acquire any real estate or other assets that secure the defaulted loans through foreclosure or
other similar remedies, the amount owed under the defaulted loans may exceed the value of the assets acquired.

Our management periodically
makes a determination of our allowance for loan losses based on available information, including the quality of our loan portfolio, economic conditions, the value of the underlying collateral and the level of our non-accruing loans. If our
assumptions prove to be incorrect, our allowance may not be sufficient. Increases in this allowance will result in an expense for the period. If, as a result of general economic conditions or an increase in non-performing loans, management
determines that an increase in our allowance for loan losses is necessary, we may incur additional expenses.

In addition, as an integral
part of their examination process, bank regulatory agencies periodically review our allowance for loan losses and the value we attribute to real estate acquired through foreclosure or other similar remedies. These regulatory agencies may require us
to adjust our determination of the value for these items. These adjustments could negatively impact our results of operations or financial condition.



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Because we serve primarily individuals and smaller businesses located in New England and adjoining areas,
the ability of our customers to repay their loans is impacted by the economic conditions in these areas. As of December 31, 2006, approximately 72% of our loan portfolio consisted of commercial loans, defined as commercial and industrial,
municipal, multi-family, commercial real estate and construction loans. Thus, our results of operations, both in terms of the origination of new loans and the potential default of existing loans, is heavily dependent upon the strength of local
businesses.

In addition, a substantial portion of our loans are secured by real estate located primarily in Vermont, Massachusetts, New
Hampshire and Maine. Consequently, our ability to continue to originate real estate loans may be impaired by adverse changes in local and regional economic conditions in these real estate markets or by acts of nature. These events also could have an
adverse effect on the value of our collateral and, due to the concentration of our collateral in real estate, on our financial condition.

We have traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates
charged for borrowings. If, as a result of competitive pressures, market interest rates, general economic conditions or other events, the balance of our deposits decreases relative to our overall banking operations, we may have to rely more heavily
on borrowings as a source of funds in the future. Such an increased reliance on borrowings could have a negative impact on our results of operations or financial condition.

In the course of our business, we may acquire, through foreclosure, properties securing loans that are in default. Particularly in commercial real estate
lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could
substantially exceed the value of the affected properties. We may not have adequate remedies against the prior owners or other responsible parties and could find it difficult or impossible to sell the affected properties. The occurrence of one or
more of these events could adversely affect our financial condition or operating results.

Bank holding companies and state and federally
chartered banks operate in a highly regulated environment and are subject to supervision and examination by federal and state regulatory agencies. We are subject to the Bank Holding Company Act of 1956, as amended, and to regulation and supervision
by the Federal Reserve Board, or FRB. Our state chartered banks are subject to regulation and supervision by the Federal Deposit Insurance Corporation, or FDIC, and the applicable state banking authorities, including the Vermont Commissioner of
Banking, Insurance, Securities and Health Care Administration, the Maine Superintendent of the Bureau of Banking and the Massachusetts Commissioner of Banks. Our national bank subsidiary is subject to regulation by the Office of the Comptroller of
the Currency, or the OCC. The cost of compliance with regulatory requirements may adversely affect our results of operations or financial condition. Federal and state laws and regulations govern numerous matters including: changes in the ownership
or control of banks and bank holding companies; maintenance of adequate capital and the financial condition of a financial institution; permissible types, amounts and terms of extensions of credit and investments; permissible non-banking activities;
the level of reserves against deposits; and restrictions on dividend payments.

The FDIC, the OCC and state banking authorities possess
cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to bank holding companies. These and other restrictions limit the
manner in which we may conduct our business and obtain financing.

Furthermore, our banking business is affected not only by general
economic conditions, but also by the monetary policies of the FRB. Changes in monetary or legislative policies may affect the interest rates we must offer to attract deposits and the interest rates we can charge on our loans, as well as the manner
in which we offer deposits and make loans. These monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions, including our banks.



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We will continue to consider the acquisition of other businesses. However, we may not have the
opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of our business. We expect that other banking and financial companies will compete with us to acquire compatible businesses. This
competition could increase prices for acquisitions that we would likely pursue, and our competitors may have greater resources than us. Also, acquisitions of regulated businesses such as banks are subject to various regulatory approvals. If we fail
to receive the appropriate regulatory approvals, we will not be able to complete an acquisition that we believe is in our best interests.

We have in the past acquired, and will in the future consider the acquisition of, other banking and related businesses. If we acquire other companies in the future, our business may be negatively impacted by risks related to those
acquisitions. These risks include the following: the risk that the acquired business will not perform in accordance with managements expectations; the risk that difficulties will arise in connection with the integration of the operations of
the acquired business with our operations; the risk that management will divert its attention from other aspects of our business; the risk that we may lose key employees of the acquired business; the risks associated with entering into geographic
and product markets in which we have limited or no direct prior experience; and the risks of the acquired company that we may assume in connection with an acquisition.

As a result of these risks, any given acquisition, if and when consummated, may adversely affect our results of operations or financial condition. In addition, because the consideration for an acquisition may involve
cash, debt or the issuance of shares of our common stock and may involve the payment of a premium over book and market values, existing holders of our common stock could experience dilution in connection with the acquisition.

We rely heavily on communications and information systems to conduct our business. Any failure or interruptions or breach in security of these systems
could result in failures or disruptions in our customer relationship management, general ledger, deposits, servicing or loan origination systems. The occurrence of any failures or interruptions could result in a loss of customer business and have a
material adverse effect on our results of operations and financial condition.

Under regulatory capital adequacy guidelines and other
regulatory requirements, we and our Banks must meet guidelines that include quantitative measures of assets, liabilities, and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other
factors. If we fail to meet these minimum capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. Our failure to maintain the status of well capitalized under our
regulatory framework could affect the confidence of our customers in us, thus compromising our competitive position. In addition, failure to maintain the status of well capitalized under our regulatory framework or well
managed under regulatory examination procedures could compromise our status as a bank holding company and related eligibility for a streamlined review process for acquisition proposals.

ITEM 1B UNRESOLVED STAFF COMMENTS

None

ITEM 2 PROPERTIES

The offices of the Company are located in a facility owned by CTC at Two Burlington
Square in Burlington, Vermont. CTCs principal offices are also located in Burlington, Vermont and it has fifty additional locations in Vermont and one commercial finance lending office in Montreal, Quebec. BWMs principal offices are
located in Springfield, Massachusetts and it has thirteen additional locations in western Massachusetts and Connecticut. FBTs principal offices are located in Worcester, Massachusetts and it has seven additional locations in the greater
Worcester, Massachusetts area. MBTs principal offices are located in Portland, Maine and it has eleven additional locations in southern Maine. ONBs principal offices are located in Portsmouth, New Hampshire and it



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has thirty-seven additional locations in southern Maine and New Hampshire. The offices of all subsidiaries are in good physical condition with modern
equipment and facilities considered by management to be adequate to meet the banking needs of customers in the communities served.

ITEM 3 LEGAL PROCEEDINGS

A number of legal claims against the Company arising in the normal course of
business were outstanding at December 31, 2006. Management, after reviewing these claims with legal counsel, is of the opinion that these matters, when resolved, will not have a material effect on the Companys consolidated financial
statements.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None



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PART II



|ITEM 5 | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
|------ | -------------------------------------------------------------------------------------------------------------

The $1 par value common stock of Chittenden Corporation has been publicly traded since 1974. As of January 31, 2007, there were 4,282 holders of
record of the Companys common stock.

The Companys common stock trades on the NYSE under the symbol CHZ. The
following table sets forth the range of the high and low sales prices for the Companys common stock, and the dividends declared, for each quarterly period within the past two years.



|              |  |       |  |       |  |               |     
|------------- |  | ----- |  | ----- |  | ------------- | ----
|Quarter ended |  | High  |  | Low   |  | DividendsPaid
|2005          |  |       |  |       |  |               |     
|March 31      |  | 29.03 |  | 25.54 |  | $             | 0.18
|June 30       |  | 27.70 |  | 23.85 |  |               | 0.18
|September 30  |  | 29.55 |  | 25.77 |  |               | 0.18
|December 31   |  | 30.30 |  | 24.47 |  |               | 0.18
|              |  |       | 
|2006          |  |       |  |       |  |               |     
|March 31      |  | 29.78 |  | 27.00 |  | $             | 0.18
|June 30       |  | 29.44 |  | 25.01 |  |               | 0.20
|September 30  |  | 29.69 |  | 24.60 |  |               | 0.20
|December 31   |  | 31.40 |  | 28.16 |  |               | 0.20

For a discussion of dividend restrictions on the Companys common stock, see Dividends under the
caption BusinessSupervision and Regulation in this report.

Share Repurchases. The following table sets forth
information with respect to any purchase made by or on behalf of Chittenden or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of Chittenden common stock during the indicated periods.



|                    |  |                                 |  |                             |  |                                                                              |  |                                                                                   
|------------------- |  | ------------------------------- |  | --------------------------- |  | ---------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------
|Period              |  | Total Number ofShares Purchased |  | Average Price Paidper Share |  | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |  | Maximum Numberof Shares that mayyet be Purchasedunder the Plans orPrograms (1)
(2)
|October 1-31, 2006  |  | 2,000                           |  | 29.17                       |  | 2,000                                                                        |  | 960,500                                                                           
|November 1-30, 2006 |  | 447,800                         |  | 29.67                       |  | 447,800                                                                      |  | 512,700                                                                           
|December 1-31, 2006 |  | 312,700                         |  | 30.08                       |  | 312,700                                                                      |  | 200,000                                                                           
|                    |  |                                 |  |                             |  |                                                                              |  |                                                                                   
|Total               |  | 762,500                         |  | 29.83                       |  | 762,500                                                                      |  |                                                                                   

---

|(1) | On July 19, 2006, the Board of Directors authorized the repurchase of 1,000,000 shares of the Companys common stock. The repurchase of the common stock may be done in
negotiated transactions or open market purchases for two years from the date the repurchase plan was adopted.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On January 18, 2007, the Board of Directors authorized an additional repurchase of 1,000,000 shares of the Companys common stock. The repurchase of the common stock may
be done in negotiated transactions or open market purchases over the next two years.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Stock Performance Graph.The following table provides a comparison, from December 31, 2001
through December 31, 2006, of the cumulative total stockholder return (assuming reinvestment of dividends) for Chittenden; the Standard & Poors 600 Small Cap Index; and the SNL $5B-$10B Bank Index. The historical information set
forth below is not necessarily indicative of future performance.

Chittenden Corporation

LOGO



|                        |  |               |  |          |  |          |  |          |  |          |  |         
|----------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                        |  | Period Ending
|Index                   |  | 12/31/01      |  | 12/31/02 |  | 12/31/03 |  | 12/31/04 |  | 12/31/05 |  | 12/31/06
|Chittenden Corporation  |  | 100.00        |  | 94.83    |  | 128.77   |  | 141.11   |  | 140.26   |  | 159.11  
|SNL $5B-$10B Bank Index |  | 100.00        |  | 102.79   |  | 142.03   |  | 169.33   |  | 164.07   |  | 177.06  
|S&P 600 Small Cap       |  | 100.00        |  | 85.44    |  | 118.38   |  | 145.05   |  | 156.15   |  | 179.67  

The Company has used the S&P Small Cap 600 (of which the Corporation is a member) as its broad
based market index. The Corporation presents the SNL $5B-$10B Bank Index as an industry specific index that is consistent with the Corporations current asset size. The Corporations total assets ranged from $4.2 billion at
December 31, 2001 to $6.4 billion at December 31, 2006.



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ITEM 6 SELECTED FINANCIAL DATA



|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|---------------------------------------------------------------- |  | -------------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                 |  | Years Ended December 31,                           |           
|                                                                 |  | 2006                                               |            |   | 2005 |   |            | 2004 |  |   | 2003       |   |  | 2002 |           
|                                                                 |  | (In thousands, except share and per share amounts) |           
|Statements of income:                                            |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Interest income                                                  |  | $                                                  | 374,712    |   |      | $ | 320,242    |      |  | $ | 269,767    |   |  | $    | 271,442    |   |  | $ | 259,019    |  
|Interest expense                                                 |  |                                                    | 125,710    |   |      |   | 75,929     |      |  |   | 44,269     |   |  |      | 53,379     |   |  |   | 66,404     |  
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net interest income                                              |  |                                                    | 249,002    |   |      |   | 244,313    |      |  |   | 225,498    |   |  |      | 218,063    |   |  |   | 192,615    |  
|Provision for credit losses                                      |  |                                                    | 6,920      |   |      |   | 5,154      |      |  |   | 4,377      |   |  |      | 7,175      |   |  |   | 8,331      |  
|Noninterest income                                               |  |                                                    | 70,189     |   |      |   | 69,964     |      |  |   | 73,405     |   |  |      | 97,031     |   |  |   | 65,060     |  
|Noninterest expense                                              |  |                                                    | 186,367    |   |      |   | 183,841    |      |  |   | 183,190    |   |  |      | 198,124    |   |  |   | 157,445    |  
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Income before income taxes                                       |  |                                                    | 125,904    |   |      |   | 125,282    |      |  |   | 111,336    |   |  |      | 109,795    |   |  |   | 91,899     |  
|Income tax expense                                               |  |                                                    | 40,436     |   |      |   | 43,243     |      |  |   | 38,656     |   |  |      | 37,542     |   |  |   | 30,297     |  
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income                                                       |  | $                                                  | 85,468     |   |      | $ | 82,039     |      |  | $ | 72,680     |   |  | $    | 72,253     |   |  | $ | 61,602     |  
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total assets at year-end                                         |  | $                                                  | 6,431,803  |   |      | $ | 6,473,536  |      |  | $ | 6,078,305  |   |  | $    | 5,900,644  |   |  | $ | 4,920,544  |  
|Common shares outstanding at year-end                            |  |                                                    | 45,360,125 |   |      |   | 46,829,048 |      |  |   | 46,341,819 |   |  |      | 45,795,688 |   |  |   | 39,924,338 |  
|Balance sheetsaverage daily balances:                           |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total assets                                                     |  | $                                                  | 6,449,556  |   |      | $ | 6,225,167  |      |  | $ | 5,903,245  |   |  | $    | 5,777,538  |   |  | $ | 4,551,879  |  
|Net loans                                                        |  |                                                    | 4,567,228  |   |      |   | 4,240,206  |      |  |   | 3,842,719  |   |  |      | 3,568,323  |   |  |   | 2,969,430  |  
|Investment securities                                            |  |                                                    | 1,298,515  |   |      |   | 1,394,556  |      |  |   | 1,478,989  |   |  |      | 1,696,982  |   |  |   | 1,264,156  |  
|Deposits                                                         |  |                                                    | 5,413,033  |   |      |   | 5,204,051  |      |  |   | 4,956,450  |   |  |      | 4,758,388  |   |  |   | 3,896,968  |  
|Borrowings                                                       |  |                                                    | 306,006    |   |      |   | 317,777    |      |  |   | 293,583    |   |  |      | 413,339    |   |  |   | 194,118    |  
|Stockholders equity                                             |  |                                                    | 667,753    |   |      |   | 644,929    |      |  |   | 599,218    |   |  |      | 544,522    |   |  |   | 399,896    |  
|Per common share:                                                |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Basic earnings                                                   |  | $                                                  | 1.85       |   |      | $ | 1.76       |      |  | $ | 1.58       |   |  | $    | 1.61       |   |  | $ | 1.53       |  
|Diluted earnings                                                 |  |                                                    | 1.83       |   |      |   | 1.74       |      |  |   | 1.56       |   |  |      | 1.60       |   |  |   | 1.52       |  
|Cash dividends declared                                          |  |                                                    | 0.78       |   |      |   | 0.72       |      |  |   | 0.70       |   |  |      | 0.64       |   |  |   | 0.63       |  
|Book value                                                       |  |                                                    | 14.79      |   |      |   | 14.34      |      |  |   | 13.56      |   |  |      | 12.81      |   |  |   | 10.62      |  
|Tangible book value (1)                                          |  |                                                    | 9.70       |   |      |   | 9.35       |      |  |   | 8.45       |   |  |      | 7.59       |   |  |   | 9.00       |  
|Weighted average common shares outstanding                       |  |                                                    | 46,235,151 |   |      |   | 46,502,983 |      |  |   | 46,106,057 |   |  |      | 44,719,710 |   |  |   | 40,132,330 |  
|Weighted average common and common equivalent shares outstanding |  |                                                    | 46,802,265 |   |      |   | 47,051,394 |      |  |   | 46,731,304 |   |  |      | 45,150,135 |   |  |   | 40,619,253 |  
|Selected financial ratios:                                       |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Return on average stockholders equity                           |  |                                                    | 12.80      | % |      |   | 12.72      | %    |  |   | 12.13      | % |  |      | 13.27      | % |  |   | 15.45      | %
|Return on average tangible stockholders equity (2)              |  |                                                    | 19.83      |   |      |   | 20.22      |      |  |   | 20.32      |   |  |      | 21.75      |   |  |   | 18.37      |  
|Return on average total assets                                   |  |                                                    | 1.33       |   |      |   | 1.32       |      |  |   | 1.23       |   |  |      | 1.25       |   |  |   | 1.36       |  
|Return on average tangible totalassets (2)                       |  |                                                    | 1.40       |   |      |   | 1.40       |      |  |   | 1.32       |   |  |      | 1.33       |   |  |   | 1.39       |  
|Common stock dividend payout ratio (3)                           |  |                                                    | 42.35      |   |      |   | 40.78      |      |  |   | 43.88      |   |  |      | 39.17      |   |  |   | 41.20      |  
|Net yield on earning assets                                      |  |                                                    | 4.24       |   |      |   | 4.31       |      |  |   | 4.21       |   |  |      | 4.12       |   |  |   | 4.53       |  
|Interest rate spread                                             |  |                                                    | 3.72       |   |      |   | 3.99       |      |  |   | 4.02       |   |  |      | 3.90       |   |  |   | 4.16       |  
|Efficiency Ratio (4)                                             |  |                                                    | 55.98      |   |      |   | 56.67      |      |  |   | 58.67      |   |  |      | 61.82      |   |  |   | 59.56      |  
|Net charge-offs as a percent of average loans                    |  |                                                    | 0.12       |   |      |   | 0.05       |      |  |   | 0.07       |   |  |      | 0.16       |   |  |   | 0.28       |  
|Nonperforming assets ratio (5)                                   |  |                                                    | 0.43       |   |      |   | 0.36       |      |  |   | 0.49       |   |  |      | 0.39       |   |  |   | 0.49       |  
|Allowance for credit losses as a percent of year-end loans       |  |                                                    | 1.35       |   |      |   | 1.38       |      |  |   | 1.45       |   |  |      | 1.54       |   |  |   | 1.62       |  
|Leverage capital ratio                                           |  |                                                    | 9.24       |   |      |   | 9.21       |      |  |   | 8.54       |   |  |      | 7.91       |   |  |   | 9.37       |  
|Risk-based capital ratios:                                       |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Tier 1                                                           |  |                                                    | 11.56      |   |      |   | 11.23      |      |  |   | 10.61      |   |  |      | 10.22      |   |  |   | 12.39      |  
|Total                                                            |  |                                                    | 12.78      |   |      |   | 12.40      |      |  |   | 11.82      |   |  |      | 11.47      |   |  |   | 13.64      |  
|Average equity / Average assets                                  |  |                                                    | 10.35      |   |      |   | 10.36      |      |  |   | 10.15      |   |  |      | 9.42       |   |  |   | 8.79       |  
|Tangible capital ratio (1)                                       |  |                                                    | 7.10       |   |      |   | 7.01       |      |  |   | 6.71       |   |  |      | 6.14       |   |  |   | 7.40       |  



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---

|                                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|Reconciliation of non-GAAP measurements to GAAP     |  |   |            |   |  |   |            |   | 
|(1)    Tangible / Capital Book Value Reconciliation | 
|                                                    |  |   |            |   | 
|Total Equity                                        |  | $ | 671,086    |   |  | $ | 671,390    |   |  | $ | 628,352    |   |  | $ | 586,652    |   |  | $ | 424,042    |  
|Goodwill                                            |  |   | 216,038    |   |  |   | 216,038    |   |  |   | 216,136    |   |  |   | 216,431    |   |  |   | 55,257     |  
|Identified Intangible                               |  |   | 14,996     |   |  |   | 17,655     |   |  |   | 20,422     |   |  |   | 22,733     |   |  |   | 9,480      |  
|                                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|Tangible Equity (A)                                 |  | $ | 440,052    |   |  | $ | 437,697    |   |  | $ | 391,794    |   |  | $ | 347,488    |   |  | $ | 359,305    |  
|                                                    |  |   |            |   | 
|Total Assets                                        |  | $ | 6,431,803  |   |  | $ | 6,473,536  |   |  | $ | 6,078,305  |   |  | $ | 5,900,644  |   |  | $ | 4,920,544  |  
|Goodwill                                            |  |   | 216,038    |   |  |   | 216,038    |   |  |   | 216,136    |   |  |   | 216,431    |   |  |   | 55,257     |  
|Identified Intangible                               |  |   | 14,996     |   |  |   | 17,655     |   |  |   | 20,422     |   |  |   | 22,733     |   |  |   | 9,480      |  
|                                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|Tangible Assets (B)                                 |  | $ | 6,200,769  |   |  | $ | 6,239,843  |   |  | $ | 5,841,747  |   |  | $ | 5,661,480  |   |  | $ | 4,855,807  |  
|                                                    |  |   |            |   | 
|Tangible Capital (A) /(B)                           |  |   | 7.10       | % |  |   | 7.01       | % |  |   | 6.71       | % |  |   | 6.14       | % |  |   | 7.40       | %
|Common shares outstanding atyear-end (C)            |  |   | 45,360,125 |   |  |   | 46,829,048 |   |  |   | 46,341,819 |   |  |   | 45,795,688 |   |  |   | 39,924,338 |  
|Tangible Book Value (A) / (C)                       |  | $ | 9.70       |   |  | $ | 9.35       |   |  | $ | 8.45       |   |  | $ | 7.59       |   |  | $ | 9.00       |  
|                                                   
|(2)    Return on Average Tangible Equity & Assets   | 
|                                                    |  |   |            |   | 
|Net Income (GAAP)                                   |  | $ | 85,468     |   |  | $ | 82,039     |   |  | $ | 72,680     |   |  | $ | 72,253     |   |  | $ | 61,602     |  
|Amortization of Identified Intangibles,net of tax   |  |   | 1,728      |   |  |   | 1,799      |   |  |   | 2,000      |   |  |   | 1,786      |   |  |   | 831        |  
|                                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|Tangible Net Income (A)                             |  | $ | 87,196     |   |  | $ | 83,838     |   |  | $ | 74,680     |   |  | $ | 74,039     |   |  | $ | 62,433     |  
|                                                    |  |   |            |   | 
|Average Equity (GAAP)                               |  | $ | 667,753    |   |  | $ | 644,929    |   |  | $ | 599,218    |   |  | $ | 544,522    |   |  | $ | 399,896    |  
|Average Identified Intangibles                      |  |   | 16,320     |   |  |   | 19,056     |   |  |   | 21,741     |   |  |   | 22,493     |   |  |   | 9,108      |  
|Average Deferred Tax on Identified Intangibles      |  |   | (4,430     | ) |  |   | (4,785     | ) |  |   | (6,392     | ) |  |   | (5,763     | ) |  |   | (2,280     | )
|Average Goodwill                                    |  |   | 216,038    |   |  |   | 216,127    |   |  |   | 216,519    |   |  |   | 187,369    |   |  |   | 53,293     |  
|                                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|Average Tangible Equity (B)                         |  | $ | 439,825    |   |  | $ | 414,531    |   |  | $ | 367,350    |   |  | $ | 340,423    |   |  | $ | 339,775    |  
|Return on Average Tangible Equity(A) / (B)          |  |   | 19.83      | % |  |   | 20.22      | % |  |   | 20.32      | % |  |   | 21.75      | % |  |   | 18.37      | %
|                                                    |  |   |            |   | 
|Average Assets (GAAP)                               |  | $ | 6,449,556  |   |  | $ | 6,225,167  |   |  | $ | 5,903,245  |   |  | $ | 5,777,538  |   |  | $ | 4,551,879  |  
|Average Identified Intangibles                      |  |   | 16,320     |   |  |   | 19,056     |   |  |   | 21,741     |   |  |   | 22,493     |   |  |   | 9,108      |  
|Average Deferred Tax on Identified Intangibles      |  |   | (4,430     | ) |  |   | (4,785     | ) |  |   | (6,392     | ) |  |   | (5,763     | ) |  |   | (2,280     | )
|Average Goodwill                                    |  |   | 216,038    |   |  |   | 216,127    |   |  |   | 216,519    |   |  |   | 187,369    |   |  |   | 53,293     |  
|                                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|Average Tangible Assets (C)                         |  | $ | 6,221,628  |   |  | $ | 5,994,769  |   |  | $ | 5,671,377  |   |  | $ | 5,573,439  |   |  | $ | 4,491,758  |  
|Return on Average Tangible Assets(A) / (C)          |  |   | 1.40       | % |  |   | 1.40       | % |  |   | 1.32       | % |  |   | 1.33       | % |  |   | 1.39       | %



|(3) | Common stock cash dividends declared divided by net income.
|--- | -----------------------------------------------------------

|(4) | Efficiency Ratio is computed by dividing total noninterest expense (less oreo expense, amortization expense, franchise tax and any nonrecurring items) by the sum of net interest
income on a tax equivalent basis and total noninterest income (exclusive of gains and losses from bank investment securities, and nonrecurring items). The Company uses this non-GAAP measure, which is used widely in the banking industry, to provide
important information regarding its operational efficiency.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The sum of nonperforming assets (nonaccrual loans, restructured loans, and other real estate owned) divided by the sum of total loans and other real estate owned.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

While the Companys management uses non-GAAP measures for operational and investment decisions and believes that these
measures are among several useful measures for understanding its operating results and financial condition, these measures should not be construed as a substitute for GAAP measures. Non-GAAP measures should be read and used in conjunction with the
Companys reported GAAP operating results and financial information.



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|ITEM 7 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------ | -------------------------------------------------------------------------------------

For the Years Ended December 31, 2006, 2005, and 2004

The following discussion and analysis of financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and accompanying
notes and selected statistical information included in this report.

Application of Critical Accounting Policies

The Companys significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form
10-K. The Company considers the following accounting policies and related estimates to be the most critical in their potential effect on its financial position or results of operations:

Allowance for Credit Losses.The allowance for credit losses consists of two components: (1) the allowance for loan losses and (2) the
reserve for unfunded commitments. The allowance for loan losses is established through a charge against current earnings to the provision for credit losses. The allowance for loan losses is based on managements estimate of the amount required
to reflect the probable inherent losses in the loan portfolio, based on circumstances and conditions known at each reporting date in accordance with Generally Accepted Accounting Principles (GAAP). There are three components of the
allowance for loan losses: 1) specific reserves for loans considered to be impaired or for other loans for which management considers a specific reserve to be necessary; 2) allocated reserves based upon managements formula-based process for
assessing the adequacy of the allowance for loan losses; and 3) a non-specific environmentally-driven allowance considered necessary by management based on its assessment of other qualitative factors. The allowance for loan losses is a significant
estimate and is regularly reviewed by the Company for adequacy using a consistent, systematic methodology which assesses such factors as changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency
and charge-off rates; and current economic conditions that may affect a borrowers ability to repay. Adverse changes in managements assessment of these factors could lead to additional provisions for credit losses. The Companys
methodology with respect to the assessment of the adequacy of the allowance for loan losses is more fully discussed in later sections of this Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A).

The reserve for unfunded commitments is based on managements estimate of the amount required to reflect the
probable inherent losses on outstanding letters of credit, merchant processing activity and unused loan credit lines. Adequacy of the reserve is determined using a consistent, systematic methodology, similar to the one which analyzes the allowance
for loan losses. Management must also estimate the likelihood that these commitments would be funded and become loans. This is done by evaluating the historical utilization of each type of unfunded commitment and estimating the likelihood that the
current utilization rates on lines available at the balance sheet date could increase in the future.

Income Taxes.The Company
estimates its income taxes for each of the jurisdictions in which it operates to determine an appropriate expense against current pre-tax earnings. This involves estimating the Companys actual current income tax expense as well as assessing
temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the
Companys consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent that recovery is not likely, a valuation allowance must be
established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of December 31, 2006, there were no valuation allowances set aside against any deferred tax assets.

Interest Income Recognition.Interest on loans is included in income as earned based upon interest rates applied to unpaid
principal. Interest is not accrued on loans 90 days or more past due unless they are adequately secured and



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in the process of collection or on other loans when management believes collection is doubtful. All loans considered impaired are nonaccruing. Interest on
nonaccruing loans is recognized as payments are received when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on nonaccrual status, all unpaid interest previously accrued is reversed against
current-period interest income; therefore, an increase in loans on nonaccrual status could have an adverse impact on interest income recognized in future periods.

Stock Compensation Plans.The Company has two stock compensation plans: The Stock Incentive Plan and the Directors Omnibus Long-term Incentive Plan. In January 2006, the Company adopted FASB Statement
No. 123R (revised 2004), Share-Based Payment (SFAS 123R) which amends SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
123R requires new, modified and unvested share-based payment transactions with employees to be measured at fair value and recognized as compensation expense over the vesting period. The fair value of each option award is estimated using a
Black-Scholes option valuation model that requires the Company to develop estimates for assumptions used in the model. The Black-Scholes valuation model uses the following assumptions: expected volatility, expected term of option, risk-free interest
rate and dividend yield. Expected volatility estimates are developed by the Company based on historical volatility of the Companys stock. The Company uses historical data to estimate the expected term of the options. The risk-free interest
rate for periods within the expected life of the option is based on the U.S. Treasury yield in effect at the grant date. The dividend yield represents the expected dividends on the Company stock.

Executive Overview

Chittenden posted 2006 net income
of $85.5 million, compared with $82.0 million in 2005. Diluted earnings per share were $1.83, an increase of 5% from 2005. Specific highlights included:



| |  |  | Average loans increased $328 million, or 8% during 2006. The increase was attributable to continued growth throughout all of its markets, particularly in the
commercial real estate, and construction portfolios.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Average deposits for 2006 increased $209 million from 2005 due to higher levels of CMA/money market deposits and CDs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Average borrowings were $306 million at December 31, 2006, compared with $318 million at December 31, 2005. The decline from last year was due to lower
Federal Home Loan Bank (FHLB) advances.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company repurchased 1,800,000 common shares in 2006 and the tangible capital ratio remained over 7.00% at year end.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Tax-equivalent net interest income for the year end was $252 million, compared to $246 million for 2005. The increase in net interest income from the same period a
year ago was due to higher average earning assets, which was partially offset by a lower net interest margin.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys net interest margin for 2006 was 4.24%, a decline of 7 basis points from 2005. The decline in the net interest margin from 2005 was due to an
increase in funding costs, which was partially offset by an increase in the yield on interest earning assets. The increase in funding costs was driven by strong competition for commercial and consumer deposits as well as increases in the federal
funds rate in 2005 and 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest income increased to $70.2 million at December 31, 2006. Investment management and trust fees ($1.3 million), credit card income ($571,000), and
other noninterest income ($769,000) increased while declines were recorded in gains on sales of loans ($2.7 million), and insurance commissions ($560,000). These fluctuations are more fully explained on page 41.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest expenses increased only $2.5 million, or 1.4% from 2005. Salary expense increased $3.7 million or 4% which was driven primarily by higher share based
payment compensation of $1.1 million and salary expense related to the opening of new branches. Other noninterest expense decreased $975,000 primarily due to lower education and training expense, examination fees and armored car costs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The Companys efficiency ratio improved to 55.98% for 2006 compared with 56.67% in 2005.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | The provision for credit losses of $6.9 million was $1.8 million higher than in 2005 due to higher net charge-offs and nonperforming loans; however, 42% of net
charge-offs primarily related to one commercial finance loan that was placed on non-accrual status in the first quarter of 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Return on average equity (ROE) was 12.80% for the year-ended December 31, 2006, compared with 12.72% and 12.13% in 2005 and 2004. Return on average assets
(ROA) was 1.33% for 2006, an increase from 1.32% in 2005 and 1.23% in 2004. These increases were primarily due to higher levels of net income.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Lending Activity

Loan Portfolio

The Company offers a range of banking services, including residential real estate, consumer and commercial loans. The following table shows the composition of the loan portfolio (based on underlying collateral
utilizing bank regulatory definitions) for the five years ended:



|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------- |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                          |  | December 31,   |          
|                          |  | 2006           |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|                          |  | (in thousands) |          
|Commercial & industrial   |  | $              | 853,839   |   |      | $ | 848,420   |      |  | $ | 801,369   |   |  | $    | 658,615   |   |  | $ | 568,224   |  
|Municipal                 |  |                | 141,522   |   |      |   | 160,357   |      |  |   | 106,120   |   |  |      | 87,080    |   |  |   | 77,820    |  
|Multi-family              |  |                | 216,049   |   |      |   | 196,590   |      |  |   | 182,541   |   |  |      | 176,478   |   |  |   | 96,494    |  
|Commercial real estate    |  |                | 1,942,685 |   |      |   | 1,778,202 |      |  |   | 1,590,457 |   |  |      | 1,430,945 |   |  |   | 1,103,897 |  
|Construction              |  |                | 232,000   |   |      |   | 192,165   |      |  |   | 174,283   |   |  |      | 140,801   |   |  |   | 85,512    |  
|Residential real estate   |  |                | 751,450   |   |      |   | 737,462   |      |  |   | 688,017   |   |  |      | 700,671   |   |  |   | 561,330   |  
|Home equity credit lines  |  |                | 322,124   |   |      |   | 316,465   |      |  |   | 294,656   |   |  |      | 270,959   |   |  |   | 203,882   |  
|Consumer                  |  |                | 237,541   |   |      |   | 257,829   |      |  |   | 239,750   |   |  |      | 259,135   |   |  |   | 276,704   |  
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total gross loans         |  |                | 4,697,210 |   |      |   | 4,487,490 |      |  |   | 4,077,193 |   |  |      | 3,724,684 |   |  |   | 2,973,863 |  
|Allowance for loan losses |  |                | (62,160   | ) |      |   | (60,822   | )    |  |   | (59,031   | ) |  |      | (57,464   | ) |  |   | (48,197   | )
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loans                 |  | $              | 4,635,050 |   |      | $ | 4,426,668 |      |  | $ | 4,018,162 |   |  | $    | 3,667,220 |   |  | $ | 2,925,666 |  
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  

Commercial Loans.The Company offers a wide range of banking services to businesses with
revenues up to approximately $100 million. The Companys lending activities are conducted primarily in Vermont, New Hampshire, Massachusetts and Maine, with additional activity relating to nearby market areas in New York, Connecticut, and
Quebec. The total commercial loan portfolio, defined as commercial & industrial (C&I)), municipal, multi-family, commercial real estate (CRE) and construction loans, constituted $3.386 billion, or 72% of
Chittendens loan portfolio at December 31, 2006.

The Companys commercial loans increased 7% from 2005 with growth
primarily coming from the CRE portfolio (up 9%), multi-family portfolio (up 10%) and the construction portfolio (up 21%). Municipal loans declined $19 million or 12% from the prior year-end, with the decrease came from the Vermont and Massachusetts
markets.

The primary emphasis in the construction portfolio is the financing of projects for the Companys commercial customers, as
well as individual consumer loans. At December 31, 2006, the construction portfolio was comprised of approximately 30% to residential developers, 26% in individual consumer construction loans, 23% for commercial customers for investor
properties, and 21% in loans to commercial customers for owner-occupied properties. The continued growth came primarily from the Companys Vermont, Maine and New Hampshire markets and was not specifically concentrated in any one industry.



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The following graph shows the industry diversification, which are based on NAICS sector codes, of the
commercial loan portfolios at December 31, 2006:

LOGO

Residential Real Estate Loans.Residential real estate loans, comprised of 1-4 family and home equity
lines of credit, totaled $1.074 billion at December 31, 2006, an increase of $20 million from 2005. The increase is primarily attributable to higher 1-4 family loans of $14 million due to the increased production of private banking loans in our
Vermont, Massachusetts and Maine markets. Approximately 3% or $25 million of the residential real estate loans are nontraditional interest only loans. Home equity lines of credit totaled $322.1 million at December 31, 2006 compared with $316.5
million at the end of 2005.

Consumer Loans.Consumer loans were $237.5 million at December 31, 2006, a decline of $20 million
from 2005. Approximately 86% of these loans were indirect installment loans, which continued to experience prepayments in excess of origination volume, while the remaining loans consisted of direct installment and revolving credit. All of the
Companys indirect installment loans were originated from dealers within the Banks primary operating areas and the average FICO score in the indirect portfolio was 720.

Mortgage Banking Operations

Residential mortgage sales during 2006 totaled $307 million, compared to
$427 million during 2005. This decline was primarily due to the origination of lower volumes of fixed rate residential loans caused by increasing market rates during 2006 and lower volumes of refinancing activity. The Company underwrites its
residential mortgages to secondary market standards and sells substantially all of its fixed-rate residential mortgage production on a servicing-retained non-recourse basis.

The portfolio of residential mortgages serviced for investors totaled $2.037 billion at December 31, 2006, compared to $2.098 billion at year-end
2005. These assets are owned by investors other than Chittenden and therefore are not included in the Companys consolidated balance sheets. The net assets relating to this servicing



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portfolio recorded on the Companys books at December 31, 2006 and 2005 were $14.2 million and $13.7 million, respectively. At December 31,
2006, the mortgage servicing rights amortized cost of $14.8 million was reduced by an impairment reserve of $622,000, as compared to an impairment reserve of $639,000 at the end of 2005.

Nonperforming Assets

Loans on which the accrual of
interest has been discontinued are designated as nonaccrual loans. Management classifies loans as nonaccrual when they become 90 days past due as to principal or interest, unless they are adequately secured and in the process of collection. In
addition, loans that have not met this delinquency test may be placed on nonaccrual at managements discretion. To the extent that certain loans classified as nonaccrual have an associated governmental agency guarantee, a separate assessment of
the classification of the guaranteed portion is made. Generally, as long as interest and principal are less than 90 days past due, the guaranteed amounts are collectible from the guarantor and therefore are not classified as nonaccrual. In these
situations, only the non-guaranteed portion of the loan would be classified as nonaccrual. (In the event that a guaranteed loan were to exceed 90 days past due, no further interest would be accrued on the guaranteed portion, as it generally would
not be reimbursed by the guarantor.) Consumer and residential loans are included when management considers it to be appropriate, based upon evidence of collectibility, the value of any underlying collateral and other general criteria. Generally, a
loan remains on nonaccrual status until the factors which indicated doubtful collectibility no longer exist or the loan is determined to be uncollectible and is charged off against the allowance for loan losses.

A loan is classified as a restructured loan when its interest rate is reduced and/or other terms are modified because of the inability of the borrower to
service debt at current market rates and terms. Other real estate owned (OREO) is real estate that has been acquired through foreclosure and is recorded at the lower of the carrying amount of the loan or the fair value of the property,
less estimated costs to sell, at the time of acquisition.

The following table shows the composition of nonperforming assets and loans past
due 90 days or more and still accruing interest as of the end of each of the five years ended:



|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                              |  | December 31,   |       
|                                                                              |  | 2006           |        |   | 2005 |   |        | 2004 |  |   | 2003   |   |  | 2002 |       
|                                                                              |  | (in thousands) |       
|Loans on nonaccrual                                                           |  | $              | 20,094 |   |      | $ | 15,819 |      |  | $ | 19,915 |   |  | $    | 14,331 |   |  | $ | 14,576 |  
|Troubled debt restructurings                                                  |  |                |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 225    |  
|Other real estate owned                                                       |  |                | 264    |   |      |   | 375    |      |  |   | 109    |   |  |      | 100    |   |  |   | 158    |  
|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                                    |  | $              | 20,358 |   |      | $ | 16,194 |      |  | $ | 20,024 |   |  | $    | 14,431 |   |  | $ | 14,959 |  
|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans past due 90 days or more and still accruing                             |  | $              | 3,352  |   |      | $ | 3,038  |      |  | $ | 2,604  |   |  | $    | 4,029  |   |  | $ | 2,953  |  
|Percentage of nonperforming assets to total loans and other real estate owned |  |                | 0.43   | % |      |   | 0.36   | %    |  |   | 0.49   | % |  |      | 0.39   | % |  |   | 0.49   | %
|Nonperforming assets to total assets                                          |  |                | 0.32   |   |      |   | 0.25   |      |  |   | 0.33   |   |  |      | 0.24   |   |  |   | 0.30   |  
|Allowance for credit losses to nonperforming loans, excluding OREO            |  |                | 315.32 |   |      |   | 392.06 |      |  |   | 296.41 |   |  |      | 400.99 |   |  |   | 325.64 |  



28



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The following graph compares the Companys percentage of nonperforming assets to total loans and
other real estate owned with the composite of banks included in the SNL Securities $5-$10 billion bank index.

LOGO

Nonaccrual loans at December 31, 2006 consisted of approximately 168 loans, which were diversified across
a range of industries, sectors and geography. Approximately 52% of the total nonaccrual loans, or $10.5 million, represent relationships of $1.0 million or greater, 3% or $528,000 represent relationships between $500,000 to $1.0 million, and 45% of
the nonaccrual loan relationships are under $100,000. Nonaccrual loans with payments less than 30 days past due represent 60% of total loans on nonaccrual at December 31, 2006.

Allowance for credit losses

The allowance for credit losses consists of two components: 1) the
allowance for loan losses which is presented as a contra to total gross loans in the assets section of the balance sheet, and 2) the reserve for unfunded commitments included in other liabilities on the balance sheet.

Adequacy of the allowance for loan losses is determined using a consistent, systematic methodology, which analyzes the risk inherent in the loan
portfolio. In addition to evaluating the collectibility of specific loans when determining the adequacy of the allowance for loan losses, management also takes into consideration other factors such as changes in the mix and size of the loan
portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, and economic trends. The adequacy of the allowance for loan losses is assessed by an allocation process whereby specific loss allocations are made
against certain adversely classified loans, and general loss allocations are made against segments of the loan portfolio which have similar attributes.

The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is
unlikely. Recoveries on loans previously charged off are credited to the allowance. While management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-accrual
loans, changes in economic conditions, growth in loan portfolios, or for other reasons. Any future additions to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies
periodically review the Companys allowance for loan losses as an integral part of their examinations. Such agencies may require the Company to record additions to the allowance based on judgments different from those of management.

Credit quality of the commercial portfolios is quantified by a corporate credit rating system designed to parallel regulatory criteria and categories
of loan risk. Individual loan officers monitor their loans to ensure appropriate rating assignments are made on a timely basis. Risk ratings and quality of commercial and consumer



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credit portfolios are also assessed on a regular basis by an independent Credit Review Department. Credit Review personnel conduct ongoing portfolio trend
analyses and individual credit reviews to evaluate loan risk and compliance with corporate lending policies. The level of allowance allocable to each group of risk-rated loans is then determined by applying a loss factor that estimates the amount of
probable loss in each category. The assigned loss factor for each risk rating is based upon managements assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions and past experience.

Consumer and residential real estate loan quality is evaluated on the basis of delinquency data and other credit data available due to the large
number of such loans and the relatively small size of individual credits. Allocations for these loan categories are principally determined by applying loss factors that represent managements estimate of inherent losses. In each category,
inherent losses are estimated based upon managements assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions and past experience. In addition, certain loans in these categories may be
individually risk-rated if considered necessary by management.

The other method used to allocate the allowance for loan losses entails the
assignment of reserve amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Company will not collect all of the
contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based on internal risk ratings or non-accrual status. A specific reserve amount is allocated to an individual loan
when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. At December 31, 2006, impaired
loans with specific reserves totaled $1,088,850 (all of these loans were on nonaccrual status) and the amount of such reserves was $231,175.

The adequacy of the reserve for unfunded commitments is determined similarly to the allowance for loan losses, with the exception that management must also estimate the likelihood of these commitments being funded and becoming loans. This
is done by evaluating the historical utilization of each type of unfunded commitment and estimating the likelihood that the current utilization rates could increase in the future.



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Results and recommendations from these processes provide senior management and our Board of Directors
with independent information on the loan portfolio and unfunded commitments credit risk. The following table summarizes the activity in the Companys allowance for credit losses for the five years ended:



|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------------------------ |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                               |  | December 31,   |          
|                                                                               |  | 2006           |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|                                                                               |  | (in thousands) |          
|Allowance for loan losses, at beginning of year                                |  | $              | 60,822    |   |      | $ | 59,031    |      |  | $ | 57,464    |   |  | $    | 48,197    |   |  | $ | 45,268    |  
|Allowance acquired through acquisitions                                        |  |                |          |   |      |   |          |      |  |   |          |   |  |      | 7,936     |   |  |   | 2,972     |  
|Loans charged off:                                                             |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial & industrial                                                        |  |                | 5,137     |   |      |   | 1,354     |      |  |   | 2,755     |   |  |      | 3,653     |   |  |   | 4,340     |  
|Commercial real estate                                                         |  |                | 233       |   |      |   | 577       |      |  |   | 248       |   |  |      | 1,794     |   |  |   | 554       |  
|Construction                                                                   |  |                |          |   |      |   | 266       |      |  |   | 4         |   |  |      |          |   |  |   |          |  
|Residential real estate                                                        |  |                | 373       |   |      |   | 350       |      |  |   | 143       |   |  |      | 187       |   |  |   | 487       |  
|Home equity credit lines                                                       |  |                | 46        |   |      |   | 35        |      |  |   | 11        |   |  |      | 21        |   |  |   | 138       |  
|Consumer                                                                       |  |                | 2,999     |   |      |   | 3,393     |      |  |   | 3,989     |   |  |      | 4,383     |   |  |   | 6,048     |  
|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total loans charged off                                                        |  |                | 8,788     |   |      |   | 5,975     |      |  |   | 7,150     |   |  |      | 10,038    |   |  |   | 11,567    |  
|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Recoveries of loans previously charged off:                                    |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial & industrial                                                        |  |                | 936       |   |      |   | 1,198     |      |  |   | 1,986     |   |  |      | 1,287     |   |  |   | 1,048     |  
|Commercial real estate                                                         |  |                | 74        |   |      |   | 109       |      |  |   | 246       |   |  |      | 189       |   |  |   | 232       |  
|Construction                                                                   |  |                | 209       |   |      |   |          |      |  |   | 5         |   |  |      | 64        |   |  |   | 19        |  
|Residential real estate                                                        |  |                | 240       |   |      |   | 184       |      |  |   | 158       |   |  |      | 333       |   |  |   | 71        |  
|Home equity credit lines                                                       |  |                | 8         |   |      |   | 104       |      |  |   | 18        |   |  |      | 90        |   |  |   | 36        |  
|Consumer                                                                       |  |                | 1,739     |   |      |   | 2,217     |      |  |   | 1,927     |   |  |      | 2,231     |   |  |   | 1,787     |  
|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total recoveries                                                               |  |                | 3,206     |   |      |   | 3,812     |      |  |   | 4,340     |   |  |      | 4,194     |   |  |   | 3,193     |  
|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loans charged off                                                          |  |                | 5,582     |   |      |   | 2,163     |      |  |   | 2,810     |   |  |      | 5,844     |   |  |   | 8,374     |  
|Transfer for liability for unfunded commitments                                |  |                |          |   |      |   | 1,200     |      |  |   |          |   |  |      |          |   |  |   |          |  
|Provision for credit losses charged to expense                                 |  |                | 6,920     |   |      |   | 5,154     |      |  |   | 4,377     |   |  |      | 7,175     |   |  |   | 8,331     |  
|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance for loan losses, at year-end                                         |  | $              | 62,160    |   |      | $ | 60,822    |      |  | $ | 59,031    |   |  | $    | 57,464    |   |  | $ | 48,197    |  
|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Components of allowance for credit losses:                                     |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance for loan losses                                                      |  | $              | 62,160    |   |      | $ | 60,822    |      |  | $ | 59,031    |   |  | $    | 57,464    |   |  | $ | 48,197    |  
|Liability for unfunded credit commitments                                      |  |                | 1,200     |   |      |   | 1,200     |      |  |   |          |   |  |      |          |   |  |   |          |  
|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Balance of allowance for credit losses at year-end                             |  | $              | 63,360    |   |      | $ | 62,022    |      |  | $ | 59,031    |   |  | $    | 57,464    |   |  | $ | 48,197    |  
|                                                                               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loans outstanding at end of year                                               |  | $              | 4,697,210 |   |      | $ | 4,487,490 |      |  | $ | 4,077,193 |   |  | $    | 3,724,684 |   |  | $ | 2,973,863 |  
|Average loans outstanding during the year                                      |  | $              | 4,612,527 |   |      |   | 4,275,625 |      |  |   | 3,874,107 |   |  |      | 3,550,648 |   |  |   | 2,974,370 |  
|Ratio of net charge-offs during year to average loans outstanding              |  |                | 0.12      | % |      |   | 0.05      | %    |  |   | 0.07      | % |  |      | 0.16      | % |  |   | 0.28      | %
|Allowance for credit losses as a percentage of loans                           |  |                | 1.35      |   |      |   | 1.38      |      |  |   | 1.45      |   |  |      | 1.54      |   |  |   | 1.62      |  
|Allowance for credit losses as a percentage of loans excluding municipal loans |  |                | 1.39      |   |      |   | 1.43      |      |  |   | 1.49      |   |  |      | 1.58      |   |  |   | 1.66      |  

Management strives for directional consistency between its provision for credit losses and the
quantitative and qualitative indicators of its asset quality. In 2003, the provision was reduced by $1.2 million, primarily due to improved credit quality evidenced by much lower net charge-offs, which declined $2.5 million. This trend continued in
2004 when the provision declined $2.8 million to $4.4 million, primarily due to significantly lower net charge-offs, which declined $3.0 million from 2003. In 2005, the provision increased $777,000 primarily due to continued strong commercial loan
growth. In 2006, the provision increased $1.8 million, primarily due to higher net charges-offs and nonperforming loans. Approximately $2.3 million or 42% of net charge-offs primarily relates to one commercial finance loan that was placed on
non-accrual status in the first quarter of 2006. Excluding this one loan, net charge-offs for 2006 would have approximated 7 basis points. The allowance



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for credit losses as a percentage of loans has declined from 1.62% at December 31, 2002 to 1.35% at December 31, 2006, as a result of the sustained
period of lower net charge-offs and the relative stability in the ratio of nonperforming assets to loans plus OREO.

The allowance for loan
losses is allocated to various loan categories for analytical purposes as part of the Companys process of evaluating the adequacy of the allowance for loan losses. The following table summarizes the allocation of the allowance for loan losses
at:



|                         |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  
|------------------------ |  | --------------- | ------ | ---------------- | ---- | - | --------------- | ---- | ---------------- |  | ---- | --------------- |  | ---------------- | ------ |  | --------------- | - | ---------------- | - | ------ | --------------- | --- | ---------------- |  | - | ------ |  | --- | -
|                         |  | December 31,    |       
|                         |  | 2006            |        |                  | 2005 |   |                 | 2004 |                  |  | 2003 |                 |  | 2002             |       
|                         |  | AmountAllocated |        | LoanDistribution |      |   | AmountAllocated |      | LoanDistribution |  |      | AmountAllocated |  | LoanDistribution |        |  | AmountAllocated |   | LoanDistribution |   |        | AmountAllocated |     | LoanDistribution | 
|                         |  | (in thousands)  |       
|Commercial & industrial  |  | $               | 14,216 |                  | 21   | % |                 | $    | 14,057           |  | 22   | %               |  | $                | 13,028 |  | 22              | % |                  | $ | 13,302 |                 | 20  | %                |  | $ | 11,252 |  | 22  | %
|Commercial real estate   |  |                 | 33,481 |                  | 41   |   |                 |      | 32,475           |  | 40   |                 |  |                  | 28,479 |  | 40              |   |                  |   | 25,832 |                 | 38  |                  |  |   | 19,429 |  | 37  |  
|Construction             |  |                 | 3,529  |                  | 5    |   |                 |      | 2,949            |  | 4    |                 |  |                  | 2,742  |  | 4               |   |                  |   | 2,240  |                 | 4   |                  |  |   | 1,257  |  | 3   |  
|Residential real estate  |  |                 | 1,909  |                  | 21   |   |                 |      | 1,951            |  | 21   |                 |  |                  | 1,756  |  | 21              |   |                  |   | 1,763  |                 | 24  |                  |  |   | 1,733  |  | 22  |  
|Home equity credit lines |  |                 | 1,141  |                  | 7    |   |                 |      | 1,194            |  | 7    |                 |  |                  | 1,064  |  | 7               |   |                  |   | 966    |                 | 7   |                  |  |   | 748    |  | 7   |  
|Consumer                 |  |                 | 3,445  |                  | 5    |   |                 |      | 3,813            |  | 6    |                 |  |                  | 3,905  |  | 6               |   |                  |   | 4,454  |                 | 7   |                  |  |   | 4,821  |  | 9   |  
|Other                    |  |                 | 4,439  |                  |     |   |                 |      | 4,383            |  |     |                 |  |                  | 8,057  |  |                |   |                  |   | 8,907  |                 |    |                  |  |   | 8,957  |  |    |  
|                         |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  
|                         |  | $               | 62,160 |                  | 100  | % |                 | $    | 60,822           |  | 100  | %               |  | $                | 59,031 |  | 100             | % |                  | $ | 57,464 |                 | 100 | %                |  | $ | 48,197 |  | 100 | %
|                         |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  

During 2006, the allowance for loan losses allocated to commercial & industrial loans
increased by $159,000, the allocation to commercial real estate loans increased by $1.0 million and the allocation to construction loans increased $580,000. The increased allocations to these categories reflected growth in the portfolios.

The other category is the allowance considered necessary by management based on its assessment of historical loss experience, industry
trends, and the impact of the local and regional economy on the Companys borrowers that have not been captured in the specific risk classifications. Due to the imprecise nature of the loan loss estimation process and the effects of changing
environmental conditions, these risk attributes may not be adequately captured in the data related to the formula-based loan loss components used to determine allocations in the Companys analysis of the adequacy of the allowance for loan
losses.

Prior to the Companys recognition in 2005 of a separate reserve for unfunded commitments, a portion of the other category
was reserved for inherent losses in the off-balance sheet exposures, which are now recognized in the separate liability.

Investment Securities

The investment portfolio is used to meet liquidity demands, invest excess liquidity, generate interest income and mitigate interest
rate sensitivity. At December 31, 2006, net unrealized losses were $27.3 million compared with net unrealized losses of $29.3 million at December 31, 2005. The decline is primarily attributable to lower investment securities at
December 31, 2006. There was no other than temporary impairment in the available for sale portfolio at December 31, 2006 (see note 3 to the Companys consolidated financial statements in Item 8 of this Form 10-K for
further discussion).



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The following table shows the composition of the Companys investment portfolio, at:



|                                                  |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                  |  | December 31,
|                                                  |  | 2006         |           | 2005 |   | 2004      |  | 2003 |           | 2002
|Securities available for sale (at amortized cost) |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|U.S. Treasury securities                          |  | $            | 3,841     |      | $ | 5,342     |  | $    | 6,612     |      | $ | 7,797     |  | $ | 51,989   
|U.S. government agency obligations                |  |              | 497,704   |      |   | 548,734   |  |      | 452,150   |      |   | 497,573   |  |   | 475,268  
|Obligations of states and political subdivisions  |  |              | 116       |      |   | 500       |  |      | 1,294     |      |   | 1,297     |  |   | 1,571    
|Mortgage-backed securities                        |  |              | 332,823   |      |   | 406,353   |  |      | 499,891   |      |   | 537,033   |  |   | 453,855  
|Corporate bonds and notes                         |  |              | 329,397   |      |   | 451,483   |  |      | 484,309   |      |   | 519,890   |  |   | 469,301  
|Other debt securities                             |  |              | 820       |      |   | 842       |  |      | 834       |      |   | 843       |  |   | 874      
|                                                  |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total securities available for sale               |  | $            | 1,164,701 |      | $ | 1,413,254 |  | $    | 1,445,090 |      | $ | 1,564,433 |  | $ | 1,452,858
|                                                  |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          

The following table shows the maturity distribution of the amortized cost of the Companys
investment securities and weighted average yields of such securities on a fully taxable equivalent basis at December 31, 2006, with comparative totals for 2005. Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay certain investments:



|                                                 |  |                 |         |          |                               |   |        |                               |           |  |                |        |  |          |        |  |        |   |          |   |       |        |      |          |  |   |           |  |      |  
|------------------------------------------------ |  | --------------- | ------- | -------- | ----------------------------- | - | ------ | ----------------------------- | --------- |  | -------------- | ------ |  | -------- | ------ |  | ------ | - | -------- | - | ----- | ------ | ---- | -------- |  | - | --------- |  | ---- | -
|                                                 |  | Within One Year |         |          | After OneBut WithinFive Years |   |        | After FiveBut WithinTen Years |           |  | AfterTen Years |        |  | Total    |       
|                                                 |  | Amount          |         | Yield(2) |                               |   | Amount |                               | Yield(2)  |  |                | Amount |  | Yield(2) |        |  | Amount |   | Yield(2) |   |       | Amount |      | Yield(2) | 
|                                                 |  | (in thousands)  |        
|SECURITIES AVAILABLE FOR SALE                    |  |                 |         |         
|U.S. Treasury securities                         |  | $               | 1,102   |          | 2.74                          | % |        | $                             | 2,739     |  | 3.58           | %      |  | $        |       |  | 0.00   | % |          | $ |      |        | 0.00 | %        |  | $ | 3,841     |  | 3.34 | %
|U.S. government agency obligations               |  |                 | 122,365 |          | 3.80                          | % |        |                               | 375,327   |  | 3.63           | %      |  |          | 12     |  | 7.61   | % |          |   |      |        | 0.00 | %        |  |   | 497,704   |  | 3.67 | %
|Obligations of states and political subdivisions |  |                 | 4       |          | 8.79                          | % |        |                               | 14        |  | 8.79           | %      |  |          | 17     |  | 8.79   | % |          |   | 81    |        | 8.79 | %        |  |   | 116       |  | 8.79 | %
|Mortgage-backed securities(1)                    |  |                 | 93,101  |          | 4.28                          | % |        |                               | 169,444   |  | 4.46           | %      |  |          | 68,990 |  | 4.48   | % |          |   | 1,288 |        | 7.49 | %        |  |   | 332,823   |  | 4.43 | %
|Corporate bonds and notes                        |  |                 | 95,740  |          | 4.86                          | % |        |                               | 233,657   |  | 4.20           | %      |  |          |       |  | 0.00   | % |          |   |      |        | 0.00 | %        |  |   | 329,397   |  | 4.39 | %
|Other debt securities                            |  |                 | 10      |          | 4.98                          | % |        |                               | 810       |  | 4.63           | %      |  |          |       |  | 0.00   | % |          |   |      |        | 0.00 | %        |  |   | 820       |  | 4.63 | %
|                                                 |  |                 |         |          |                               |   |        |                               |           |  |                |        |  |          |        |  |        |   |          |   |       |        |      |          |  |   |           |  |      |  
|Total available for sale                         |  | $               | 312,322 |          | 4.27                          | % |        | $                             | 781,991   |  | 3.98           | %      |  | $        | 69,019 |  | 4.48   | % |          | $ | 1,369 |        | 7.57 | %        |  | $ | 1,164,701 |  | 4.09 | %
|                                                 |  |                 |         |          |                               |   |        |                               |           |  |                |        |  |          |        |  |        |   |          |   |       |        |      |          |  |   |           |  |      |  
|Comparative totals for 2005                      |  | $               | 264,741 |          | 4.31                          | % |        | $                             | 1,061,416 |  | 4.07           | %      |  | $        | 85,223 |  | 4.57   | % |          | $ | 1,874 |        | 7.03 | %        |  | $ | 1,413,254 |  | 4.15 | %

---

|(1) | Maturities of mortgage-backed securities are based on contractual payments and estimated mortgage loan prepayments.
|--- | -------------------------------------------------------------------------------------------------------------------

|(2) | Tax-equivalent yield computed using a 35% effective tax rate and historical cost balances and does not give effect to changes in fair value.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



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The Company evaluates and monitors the credit risk of its investments utilizing a variety of resources
including external credit rating agencies (predominantly Moodys and S&P). The following table shows the rating distribution of the investment portfolio on December 31, 2006 with comparative totals for 2005 (in thousands):



|                                                 |  |         |         |       |   |         |  |     |         |       |   |         |  |          |       |       |   |       |  |   |     |  |   |          
|------------------------------------------------ |  | ------- | ------- | ----- | - | ------- |  | --- | ------- | ----- | - | ------- |  | -------- | ----- | ----- | - | ----- |  | - | --- |  | - | ---------
|                                                 |  | AAA/AAA |         | AA/AA |   | AA/A    |  | A/A |         | A/BBB |   | BAA/BB  |  | Notrated |       | TOTAL
|Securities available for sale(at amortized cost) |  |         |         |       |   |         |  |     |         |       |   |         |  |          |       |       |   |       |  |   |     |  |   |          
|U.S. Treasury securities                         |  | $       | 3,841   |       | $ |        |  | $   |        |       | $ |        |  | $        |      |       | $ |      |  | $ |    |  | $ | 3,841    
|U.S. government agency obligations               |  |         | 497,704 |       |   |        |  |     |        |       |   |        |  |          |      |       |   |      |  |   |    |  |   | 497,704  
|Corporate bonds and notes                        |  |         | 17,094  |       |   | 119,930 |  |     | 46,081  |       |   | 146,292 |  |          |      |       |   |      |  |   |    |  |   | 329,397  
|Mortgage-backed securities                       |  |         | 332,823 |       |   |        |  |     |        |       |   |        |  |          |      |       |   |      |  |   |    |  |   | 332,823  
|Other debt securities                            |  |         |        |       |   | 820     |  |     |        |       |   |        |  |          |      |       |   |      |  |   | 116 |  |   | 936      
|                                                 |  |         |         |       |   |         |  |     |         |       |   |         |  |          |       |       |   |       |  |   |     |  |   |          
|Total                                            |  | $       | 851,462 |       | $ | 120,750 |  | $   | 46,081  |       | $ | 146,292 |  | $        |      |       | $ |      |  | $ | 116 |  | $ | 1,164,701
|                                                 |  |         |         |       |   |         |  |     |         |       |   |         |  |          |       |       |   |       |  |   |     |  |   |          
|Comparative totals for 2005                      |  | $       | 979,681 |       | $ | 40,357  |  | $   | 127,212 |       | $ | 255,574 |  | $        | 8,299 |       | $ | 2,000 |  | $ | 131 |  | $ | 1,413,254

Deposits

During 2006, total deposits averaged $5.4 billion, up from $5.2 billion in 2005. The increase from the prior year end was primarily attributable to higher levels of demand, CMA/money market, and CDs. The growth in CDs
was generated by our customers desire for higher interest rates as well as their willingness to invest money for longer time periods. Approximately 42% of the Companys deposit base is comprised of demand deposits, savings and NOW
accounts, which had an overall weighted average cost of 43 basis points in 2006. In addition, approximately 30% of the Companys total deposits are held in CMA/money market accounts that are primarily from its commercial customers with a
weighted average cost of 2.67%. The remaining deposits consist of CDs of less than $100,000 and CDs of $100,000 and greater with a weighted average cost of 3.30% and 4.16%, respectively, for 2006. The average term at year-end 2006 of the
Companys CDs of less than $100,000 is 8.5 months and greater than $100,000 is 6.2 months. The overall cost of deposits, including demand deposits at 0%, in 2006 was 2.01%, compared to 1.23% in 2005, and the all in cost of funds was 2.20%
compared to 1.38% in 2005.

The following table shows average balances of the Companys deposits for the periods indicated:



|                                                |  |                          |           |      |   |           |  |   |          
|----------------------------------------------- |  | ------------------------ | --------- | ---- | - | --------- |  | - | ---------
|                                                |  | Years Ended December 31,
|                                                |  | 2006                     |           | 2005 |   | 2004     
|                                                |  | (in thousands)          
|Demands                                         |  | $                        | 940,456   |      | $ | 921,934   |  | $ | 882,408  
|Savings                                         |  |                          | 482,100   |      |   | 505,177   |  |   | 528,480  
|NOWs                                            |  |                          | 858,264   |      |   | 870,896   |  |   | 887,801  
|NN m CMA/Money Markets                          |  |                          | 1,620,005 |      |   | 1,561,028 |  |   | 1,550,528
|Certificates of deposit less than $100,000      |  |                          | 855,167   |      |   | 790,968   |  |   | 769,222  
|Certificates of deposit of $100,000 and greater |  |                          | 657,041   |      |   | 554,048   |  |   | 338,011  
|                                                |  |                          |           |      |   |           |  |   |          
|Total deposits                                  |  | $                        | 5,413,033 |      | $ | 5,204,051 |  | $ | 4,956,450
|                                                |  |                          |           |      |   |           |  |   |          



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The Companys ending balances of outstanding certificates of deposit and other time deposits in
denominations of $100,000 and greater had maturities as follows:



|                                 |  |                |         |      |   |         |  |      |         |      |   |         |  |   |        
|-------------------------------- |  | -------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                 |  | December 31,  
|                                 |  | 2006           |         | 2005 |   | 2004    |  | 2003 |         | 2002
|                                 |  | (in thousands)
|Three months or less             |  | $              | 302,333 |      | $ | 226,447 |  | $    | 182,892 |      | $ | 130,067 |  | $ | 126,062
|Over three months to six months  |  |                | 157,770 |      |   | 108,050 |  |      | 73,835  |      |   | 38,440  |  |   | 54,448 
|Over six months to twelve months |  |                | 149,247 |      |   | 161,880 |  |      | 95,151  |      |   | 73,370  |  |   | 57,433 
|Over twelve months               |  |                | 68,893  |      |   | 129,305 |  |      | 81,722  |      |   | 61,782  |  |   | 33,748 
|                                 |  |                |         |      |   |         |  |      |         |      |   |         |  |   |        
|                                 |  | $              | 678,243 |      | $ | 625,682 |  | $    | 433,600 |      | $ | 303,659 |  | $ | 271,691
|                                 |  |                |         |      |   |         |  |      |         |      |   |         |  |   |        

Borrowings

Borrowings and customer repurchase agreements were $210.0 million at December 31, 2006, a decrease of $17.3 million from the end of 2005. During 2006, borrowings averaged $306.0 million, down slightly from $317.8
million in 2005. This funding consists of proceeds from securities sold under agreements to repurchase, FHLB borrowings, federal funds purchased and the trust-preferred securities described below. Repurchase agreements averaged $86.0 million for
2006, up from $86.7 million in 2005. FHLB borrowings averaged $13.2 million for 2006, down from $52.4 million in 2005.

On May 21,
2002, a wholly-owned subsidiary of the Company, Chittenden Capital Trust I (the Trust), issued $125 million of 8% trust preferred securities (TPS) to the public and invested the proceeds from this offering in an equivalent
amount of junior subordinated debentures issued by the Company. The TPS pay interest quarterly, are mandatorily redeemable on July 1, 2032 and may be redeemed by the Trust at par any time on or after July 1, 2007. The Company has fully and
unconditionally guaranteed the securities issued by the Trust. Concurrent with the issuance of these securities, the Company entered into interest rate swap agreements with two counterparties, in which the Company receives 8% fixed on the notional
amount of $125 million, while paying the counterparties a variable rate based on the three month LIBOR (London Interbank Offered Rate), plus approximately 122 basis points. In August 2006, the Company terminated the interest rate swap agreements
with both counterparties and settled with a final payment of interest and termination fees of $372,000. Transaction costs associated with the issuance were amortized on an effective yield basis over five years to the call date. The amortization of
these costs added approximately 92 basis points to the overall cost of these borrowings.

Capital Resources

The Companys capital is the foundation for developing programs for growth and new activities. Total capital at December 31, 2006 was
$671 million, which was effectively equivalent to total capital at December 31, 2005. Net income of $85.5 million increased the Companys capital position in 2006, while dividend payments of $36.2 million, and the repurchase of $51.1
million of the Companys common stock reduced it. In addition, accumulated other comprehensive income declined approximately $5.0 million due primarily to the fourth quarter adoption of Financial Accounting Standard No. 158 on employers
accounting for defined benefit pension and other post retirement plans. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net
periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. Accordingly, the Company decreased other assets and increased accumulated other
comprehensive income by $7.1 million in the connection with the adoption of SFAS 158.

The FRB, FDIC and OCC have defined leverage capital
requirements, which measure Tier 1 capital (as defined below) against average total assets without regard to risk weighting. Additionally, these regulators have a risk-based capital standard. Under this measure of capital, banks are required to hold
more capital against certain assets perceived as higher risk, such as commercial loans, than against other assets perceived as lower risk, such



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as residential mortgage loans and U.S. Treasury securities. Further, certain off-balance sheet items such as unfunded loan commitments and standby letters of
credit are included for purposes of determining risk-weighted assets. Commercial banking organizations are required to have total capital equal to 8% of risk-weighted assets, and Tier 1 capitalconsisting of common stock and certain types of
preferred stock, including the TPS, equal to at least 4% of risk-weighted assets. Tier 2 capital, included in total capital, includes the allowance for possible loan losses up to a maximum of 1.25% of risk-weighted assets.

FDIC and OCC regulations pertaining to capital adequacy, which apply to the Banks, require a minimum 3% leverage capital ratio for those institutions
with the most favorable composite regulatory examination rating. In addition, a 4% Tier 1 risk-based capital ratio, and an 8% total risk-based capital ratio are required for a bank to be considered adequately capitalized. Leverage, Tier 1
risk-based, and total risk-based capital ratios exceeding 5%, 6%, and 10%, respectively, qualify a bank for the well-capitalized designation.

The following table presents the regulatory capital ratios for each subsidiary bank and the Company at December 31, 2006:



|                  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |         |  
|----------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ------- | -
|                  |  | CTC   |   |  | BWM   |   |  | FBT   |   |  | MBT   |   |  | ONB   |   |  | COMPANY |  
|Leverage          |  | 7.67  | % |  | 8.87  | % |  | 7.92  | % |  | 8.75  | % |  | 8.02  | % |  | 9.24    | %
|Tier 1 Risk-Based |  | 10.13 | % |  | 9.92  | % |  | 9.95  | % |  | 9.93  | % |  | 9.77  | % |  | 11.56   | %
|Total Risk-Based  |  | 11.31 | % |  | 11.17 | % |  | 11.17 | % |  | 11.18 | % |  | 11.02 | % |  | 12.78   | %

These ratios placed the Banks in the FDICs highest capital category of well
capitalized. Capital ratios in excess of minimum requirements indicate capacity to take advantage of profitable and credit-worthy opportunities as well as the potential to respond to unforeseen adverse conditions.

In June 2004, the central bank governors of the member countries of the Basel Committee approved a revised capital adequacy framework generally known as
the Basel II Framework. The Basel II Framework is a three-pillar capital adequacy approach versus the flat 8% of risk-weighted assets (as defined) currently used. The Basel II Framework also permits qualifying bank institutions to use
more advanced approaches for measuring operational risk and credit risk. In order to address competitive equity issues for community and regional banking organizations that could arise under the bifurcated regulatory capital framework following the
implementation of the Basel II Framework, the United States bank regulatory agencies issued an advance notice of proposed rulemaking in October 2005, known as Basel IA, which would make some aspects of the Basel II Framework applicable in modified
form to smaller banks. After receiving extensive comment, the agencies proposed a notice of proposed rulemaking in December 2006. It remains uncertain whether the rules will be adopted and, even if adopted, how closely the final Basel IA rules will
resemble the rules described in the notice of proposed rulemaking and the effective date of such rules.

On July 19, 2006, the Company
announced that the Board of Directors authorized the repurchase of up to 1,000,000 shares of the Companys common stock in negotiated transactions or open market purchases. Chittenden, depending on market conditions, may repurchase its common
stock without further Board authorization over the next two years.



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The following table presents regulatory capital components and ratios of the Company at:



|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------ |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                         |  | December 31,   |          
|                         |  | 2006           |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|                         |  | (in thousands) |          
|Leverage                 |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Stockholders equity     |  | $              | 582,892   |   |      | $ | 576,059   |      |  | $ | 511,195   |   |  | $    | 452,479   |   |  | $ | 450,831   |  
|Total average assets (1) |  |                | 6,310,104 |   |      |   | 6,257,484 |      |  |   | 5,986,153 |   |  |      | 5,720,890 |   |  |   | 4,809,467 |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                         |  |                | 9.24      | % |      |   | 9.21      | %    |  |   | 8.54      | % |  |      | 7.91      | % |  |   | 9.37      | %
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Risk-based               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Capital components:      |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Tier 1                   |  | $              | 582,892   |   |      | $ | 576,059   |      |  | $ | 511,195   |   |  | $    | 452,479   |   |  | $ | 450,831   |  
|Tier 2 (2)               |  |                | 61,721    |   |      |   | 60,461    |      |  |   | 57,915    |   |  |      | 55,359    |   |  |   | 45,509    |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total                    |  | $              | 644,613   |   |      | $ | 636,520   |      |  | $ | 569,110   |   |  | $    | 507,838   |   |  | $ | 496,340   |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Risk-weighted assets:    |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|On-balance sheet         |  | $              | 4,928,082 |   |      | $ | 4,844,146 |      |  | $ | 4,573,253 |   |  | $    | 4,199,347 |   |  | $ | 3,448,755 |  
|Off-balance sheet        |  |                | 116,369   |   |      |   | 289,453   |      |  |   | 244,587   |   |  |      | 229,382   |   |  |   | 191,897   |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                         |  | $              | 5,044,451 |   |      | $ | 5,133,599 |      |  | $ | 4,817,840 |   |  | $    | 4,428,729 |   |  | $ | 3,640,652 |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Ratios:                  |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Tier 1                   |  |                | 11.56     | % |      |   | 11.23     | %    |  |   | 10.61     | % |  |      | 10.22     | % |  |   | 12.39     | %
|Total (including Tier 2) |  |                | 12.78     |   |      |   | 12.40     |      |  |   | 11.82     |   |  |      | 11.47     |   |  |   | 13.64     |  
|Tangible capital         |  |                | 7.10      |   |      |   | 7.01      |      |  |   | 6.71      |   |  |      | 6.14      |   |  |   | 7.40      |  

---

|(1) | Total average assets for the fourth quarter of the respective year.
|--- | -------------------------------------------------------------------

|(2) | Includes allowable portion of allowance for credit losses.
|--- | ----------------------------------------------------------

The components of stockholders equity under GAAP that are not considered in capital for regulatory purposes include goodwill, accumulated other comprehensive income and directors deferred compensation to be settled in stock.

Liquidity

The measure of an
institutions liquidity is its ability to meet its cash commitments at all times with available cash or by conversion of other assets to cash at a reasonable price. The Asset and Liability Committee, based upon policies approved by our Board of
Directors, monitors the Companys liquidity and rate sensitivity.

The primary source of funding for the parent company is dividends
received from the Banks. For the Banks, primary sources of funding include customer deposits, and wholesale funding. The Banks generate significant amounts of low cost funds through their deposit gathering operations. For the year ended
December 31, 2006, the Companys ratio of average loans to average deposits was approximately 86%. At December 31, 2006, the Company maintained cash and cash equivalents of approximately $199 million, compared with $180.7 million at
December 31, 2005. In addition, the Companys securities available for sale were $1.1 billion at December 31, 2006 with expected cash flow of $312 million in 2007 from maturities and normal MBS prepayments.

The Companys borrowing costs and its ability to raise wholesale funds can be impacted by its credit ratings and changes thereto. Chittenden
Corporations credit ratings at December 31, 2006 were Moodys A3, DBRS A, Fitch A-, and S&P of BBB+. S&Ps rating was increased to BBB+ on February 10, 2006. An adverse change in one or more of Chittendens
credit ratings could inhibit the Companys ability to raise additional wholesale funds or increase costs related to the Companys capital raising activities.



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The Company has available borrowing capacity under certain programs including the FHLB, U.S. Treasury,
repurchase agreement lines, and advised Fed Funds lines totaling more than $957 million as of December 31, 2006. Chittenden also has an effective shelf registration statement under which an additional $100 million in debt securities, common
stock, preferred stock, or warrants may be offered from time to time ($225 million at December 31, 2006 prior to Chittendens issuance of $125 million of notes in February 2007).

Aggregate Contractual Obligations



|                                                     |                |                        |                 |  |          |        |          |   |                  |  |   |       |  |   |        
|---------------------------------------------------- | -------------- | ---------------------- | --------------- |  | -------- | ------ | -------- | - | ---------------- |  | - | ----- |  | - | -------
|Contractual Obligations                              |                | Payments due by period
|                                                     | (in thousands)
|                                                     | Total          |                        | Less than1 year |  | 1-3years |        | 3-5years |   | More than5 years
|FHLB borrowings                                      |                | $                      | 2,822           |  | $        | 78     |          | $ | 163              |  | $ | 1,831 |  | $ | 750    
|Trust preferred securities                           |                |                        | 125,000         |  |          |       |          |   |                 |  |   |      |  |   | 125,000
|Data processing contract                             |                |                        | 3,400           |  |          | 1,360  |          |   | 2,040            |  |   |      |  |   |       
|Equity investment commitments to limitedpartnerships |                |                        | 13,476          |  |          | 7,625  |          |   | 5,851            |  |   |      |  |   |       
|Operating leases                                     |                |                        | 23,640          |  |          | 5,013  |          |   | 8,924            |  |   | 2,135 |  |   | 7,568  
|                                                     |                |                        |                 |  |          |        |          |   |                  |  |   |       |  |   |        
|Total                                                |                | $                      | 168,338         |  | $        | 14,076 |          | $ | 16,978           |  | $ | 3,966 |  | $ | 133,318
|                                                     |                |                        |                 |  |          |        |          |   |                  |  |   |       |  |   |        

Due to recent contributions made in excess of the minimum required amounts, the Company does not
anticipate a required pension contribution during 2007. However, it is possible that the Company could make a voluntary contribution during 2007 to respond to changes in pension funding legislation and/or to further improve the plans funded
status. No pension contributions are reflected beyond 12 months because these depend on a variety of factors that cannot be easily predicted.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, to meet customers financing needs and to reduce their own exposure to fluctuations in interest rates, the Banks are parties to financial instruments with off-balance sheet risk,
held for purposes other than trading. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Banks exposure to credit loss in
the event of nonperformance by the other party for loan commitments and standby letters of credit is represented by the contractual amount of those instruments, assuming that the amounts are fully advanced and that collateral or other security is of
no value. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on
managements credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, plant and equipment, and real estate.

Commitments to originate loans, unused lines of credit, and unadvanced portions of commercial real estate and 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. Many of the commitments are expected to expire without being drawn upon. Therefore, the amounts presented
below do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance by a customer to a third party. These guarantees are issued primarily to support public and private borrowing arrangements, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan commitments to customers.

Other commitments refer to the Companys equity
investments in limited partnerships for CRA related low income housing projects.



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Financial instruments whose contractual amounts represent off-balance sheet risk at December 31,
2006 and 2005 are as follows:



|                                                                      |  |                |         |      |   |        
|--------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                                      |  | 2006           |         | 2005
|                                                                      |  | (in thousands)
|Loan Commitments                                                      |  |                |        
|Commitments to originate new loans                                    |  | $              | 129,487 |      | $ | 120,635
|Unused home equity lines of credit                                    |  |                | 405,432 |      |   | 365,040
|Unadvanced portions of C&I loans                                      |  |                | 479,263 |      |   | 435,697
|Unadvanced portions of commercial real estate and construction loans  |  |                | 212,774 |      |   | 245,523
|Unused portions of business credit card lines                         |  |                | 57,557  |      |   | 55,393 
|                                                                      | 
|Standby Letters of Credit                                             |  |                |        
|Notional amount collateralized by cash                                |  |                | 64,021  |      |   | 65,345 
|Notional amount of other standby letters of credit                    |  |                | 41,278  |      |   | 32,430 
|Liability associated with letters of credit recorded on balance sheet |  |                | 926     |      |   | 669    
|                                                                      | 
|Other Commitments                                                     |  |                |        
|Equity investment commitments                                         |  |                | 13,476  |      |   | 13,186 

Results of Operations

Comparison of Years Ended December 31, 2006 and 2005

Net Interest Income

Net interest income is the amount by which interest income on interest earning assets exceeds interest paid on interest bearing liabilities. Fluctuations
in interest rates, as well as changes in the amount and type of interest earning assets and interest bearing liabilities, combine to affect net interest income.

For 2006, net interest income was $249 million, up $4.7 million from the 2005 level. On a fully tax equivalent basis, net interest income increased $5.6 million from 2005, to $252 million in 2006. The net yield on
earnings assets was 4.24%, a decline of 7 basis points from 2005. The decline in the net yield on earning assets from 2005 was due to an increase in funding costs, which was partially offset by an increase in the yield on interest earning assets.
The increase in funding costs was driven by strong competition for both commercial and consumer deposits as well as increases in the federal funds rate in 2006 and 2005.



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The following table presents an analysis of average rates and yields on a fully taxable equivalent basis
for the years indicated:



|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|------------------------------------------ |  | -------------- | --------- | - | -------------------------- | - | --------------------- | ---- | ---- | -------------- |  | - | -------------------------- | - | --------------------- | - | ------- | -------------- | ---- | - | -------------------------- | - | --------------------- | - |  | - | ------- |  | ---- | -
|                                           |  | 2006           |           |   | 2005                       |   |                       | 2004 |     
|                                           |  | AverageBalance |           |   | InterestIncome/Expense (1) |   | AverageYield/Rate (1) |      |      | AverageBalance |  |   | InterestIncome/Expense (1) |   | AverageYield/Rate (1) |   |         | AverageBalance |      |   | InterestIncome/Expense (1) |   | AverageYield/Rate (1) |  
|                                           |  | (in thousands) |          
|Assets                                     |  |                |           |  
|Interest-earning assets:                   |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Loans                                      |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Commercial & industrial                    |  | $              | 847,360   |   |                            | $ | 66,297                |      | 7.82 | %              |  | $ | 826,073                    |   |                       | $ | 54,591  |                | 6.61 | % |                            | $ | 726,467               |   |  | $ | 39,635  |  | 5.46 | %
|Municipal                                  |  |                | 153,309   |   |                            |   | 8,087                 |      | 5.27 |                |  |   | 127,476                    |   |                       |   | 5,219   |                | 4.09 |   |                            |   | 98,462                |   |  |   | 3,070   |  | 3.12 |  
|Commercial real estate                     |  |                | 1,876,989 |   |                            |   | 130,442               |      | 6.95 |                |  |   | 1,700,160                  |   |                       |   | 105,991 |                | 6.23 |   |                            |   | 1,510,458             |   |  |   | 82,914  |  | 5.49 |  
|Construction                               |  |                | 217,025   |   |                            |   | 16,196                |      | 7.36 |                |  |   | 159,838                    |   |                       |   | 10,296  |                | 6.35 |   |                            |   | 142,764               |   |  |   | 7,568   |  | 5.30 |  
|Residential real estate (2)                |  |                | 1,285,019 |   |                            |   | 86,671                |      | 6.74 |                |  |   | 1,234,922                  |   |                       |   | 73,024  |                | 5.90 |   |                            |   | 1,174,944             |   |  |   | 62,231  |  | 5.30 |  
|Consumer                                   |  |                | 249,769   |   |                            |   | 14,607                |      | 5.84 |                |  |   | 252,614                    |   |                       |   | 14,297  |                | 5.66 |   |                            |   | 247,847               |   |  |   | 15,014  |  | 6.06 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total loans                                |  |                | 4,629,471 |   |                            |   | 322,300               |      | 6.95 |                |  |   | 4,301,083                  |   |                       |   | 263,418 |                | 6.12 |   |                            |   | 3,900,942             |   |  |   | 210,432 |  | 5.39 |  
|Investments:                               |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Taxable                                    |  |                | 1,298,031 |   |                            |   | 54,930                |      | 4.23 |                |  |   | 1,393,446                  |   |                       |   | 58,177  |                | 4.18 |   |                            |   | 1,475,016             |   |  |   | 60,361  |  | 4.09 |  
|Tax-favored                                |  |                | 484       |   |                            |   | 31                    |      | 6.49 |                |  |   | 1,110                      |   |                       |   | 69      |                | 6.22 |   |                            |   | 3,973                 |   |  |   | 164     |  | 4.13 |  
|Interest-bearing deposits                  |  |                | 280       |   |                            |   | 9                     |      | 3.07 |                |  |   | 211                        |   |                       |   | 5       |                | 2.33 |   |                            |   | 150                   |   |  |   | 2       |  | 1.21 |  
|Federal funds sold                         |  |                | 8,806     |   |                            |   | 445                   |      | 5.06 |                |  |   | 16,633                     |   |                       |   | 644     |                | 3.87 |   |                            |   | 13,007                |   |  |   | 181     |  | 1.39 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-earning assets              |  |                | 5,937,072 |   |                            |   | 377,715               |      | 6.35 |                |  |   | 5,712,483                  |   |                       |   | 322,313 |                | 5.64 |   |                            |   | 5,393,088             |   |  |   | 271,140 |  | 5.03 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Noninterest-earning assets                 |  |                | 574,727   |   |                            |   |                       |      |      |                |  |   | 573,561                    |   |                       |   |         |                |      |   |                            |   | 568,380               |   |  |   |         |  |      |  
|Allowance for loan losses                  |  |                | (62,243   | ) |                            |   |                       |      |      |                |  |   | (60,877                    | ) |                       |   |         |                |      |   |                            |   | (58,223               | ) |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total assets                               |  | $              | 6,449,556 |   |                            |   |                       |      |      |                |  | $ | 6,225,167                  |   |                       |   |         |                |      |   |                            | $ | 5,903,245             |   |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Interest-bearing liabilities:              |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Savings                                    |  | $              | 482,100   |   |                            |   | 3,496                 |      | 0.73 |                |  | $ | 505,177                    |   |                       |   | 2,203   |                | 0.44 |   |                            | $ | 528,480               |   |  |   | 1,654   |  | 0.31 |  
|NOWs                                       |  |                | 858,264   |   |                            |   | 6,293                 |      | 0.73 |                |  |   | 870,896                    |   |                       |   | 4,081   |                | 0.47 |   |                            |   | 887,801               |   |  |   | 2,465   |  | 0.28 |  
|CMA / Money Markets                        |  |                | 1,620,005 |   |                            |   | 43,218                |      | 2.67 |                |  |   | 1,561,028                  |   |                       |   | 22,728  |                | 1.46 |   |                            |   | 1,550,528             |   |  |   | 11,498  |  | 0.74 |  
|CDs under $100,000                         |  |                | 855,167   |   |                            |   | 28,187                |      | 3.30 |                |  |   | 790,968                    |   |                       |   | 18,636  |                | 2.36 |   |                            |   | 769,222               |   |  |   | 14,554  |  | 1.89 |  
|CDs $100,000 and over                      |  |                | 657,041   |   |                            |   | 27,359                |      | 4.16 |                |  |   | 554,048                    |   |                       |   | 16,278  |                | 2.94 |   |                            |   | 338,011               |   |  |   | 6,268   |  | 1.85 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-bearing deposits            |  |                | 4,472,577 |   |                            |   | 108,553               |      | 2.43 |                |  |   | 4,282,117                  |   |                       |   | 63,926  |                | 1.49 |   |                            |   | 4,074,042             |   |  |   | 36,439  |  | 0.89 |  
|Repurchase agreements                      |  |                | 86,045    |   |                            |   | 2,917                 |      | 3.39 |                |  |   | 86,701                     |   |                       |   | 1,498   |                | 1.73 |   |                            |   | 73,860                |   |  |   | 618     |  | 0.84 |  
|Borrowings                                 |  |                | 219,961   |   |                            |   | 14,240                |      | 6.47 |                |  |   | 231,076                    |   |                       |   | 10,505  |                | 4.55 |   |                            |   | 219,723               |   |  |   | 7,212   |  | 3.28 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-bearing liabilities         |  |                | 4,778,583 |   |                            |   | 125,710               |      | 2.63 |                |  |   | 4,599,894                  |   |                       |   | 75,929  |                | 1.65 |   |                            |   | 4,367,625             |   |  |   | 44,269  |  | 1.01 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Noninterest-bearing liabilities:           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Demands                                    |  |                | 940,456   |   |                            |   |                       |      |      |                |  |   | 921,934                    |   |                       |   |         |                |      |   |                            |   | 882,408               |   |  |   |         |  |      |  
|Other liabilities                          |  |                | 62,764    |   |                            |   |                       |      |      |                |  |   | 58,410                     |   |                       |   |         |                |      |   |                            |   | 53,994                |   |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total liabilities                          |  |                | 5,781,803 |   |                            |   |                       |      |      |                |  |   | 5,580,238                  |   |                       |   |         |                |      |   |                            |   | 5,304,027             |   |  |   |         |  |      |  
|Stockholders equity                       |  |                | 667,753   |   |                            |   |                       |      |      |                |  |   | 644,929                    |   |                       |   |         |                |      |   |                            |   | 599,218               |   |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total liabilities and stockholders equity |  | $              | 6,449,556 |   |                            |   |                       |      |      |                |  | $ | 6,225,167                  |   |                       |   |         |                |      |   |                            | $ | 5,903,245             |   |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Net interest income                        |  |                |           |   |                            | $ | 252,005               |      |      |                |  |   |                            |   |                       | $ | 246,384 |                |      |   |                            |   |                       |   |  | $ | 226,871 |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Interest rate spread (3)                   |  |                |           |   |                            |   |                       |      | 3.72 | %              |  |   |                            |   |                       |   |         |                | 3.99 | % |                            |   |                       |   |  |   |         |  | 4.02 | %
|Net yield on earning assets (4)            |  |                |           |   |                            |   |                       |      | 4.24 | %              |  |   |                            |   |                       |   |         |                | 4.31 | % |                            |   |                       |   |  |   |         |  | 4.21 | %

---

|(1) | On a fully taxable equivalent basis using a Federal income tax rate of 35%. Loan income includes fees.
|--- | ------------------------------------------------------------------------------------------------------

|(2) | Residential real estate includes 1-4 family, multi-family, home equity credit lines, and loans held for sale.
|--- | -------------------------------------------------------------------------------------------------------------

|(3) | Interest rate spread is the average rate earned on total interest-earning assets less the average rate paid on interest-bearing liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Net yield on earning assets is net interest income divided by total interest-earning assets.
|--- | --------------------------------------------------------------------------------------------



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The following table attributes changes in the Companys net interest income (on a fully taxable
equivalent basis) to changes in either average balances or average rates. Changes due to both interest rate and volume have been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar
amounts of the change in each.



|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|----------------------------- |  | ------------------------------------------------------- | ------- | - | ------------------------ | - | ------ | ------------------------------------------------------- | ----------- | - | ------------------------ | -------------- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                              |  | 2006 Compared With 2005                                 |         |   | 2005 Compared With 2004  |  
|                              |  | Increase (Decrease)Due to Change in NetInterest Income: |         |   | Total Increase(Decrease) |   |        | Increase (Decrease)Due to Change in NetInterest Income: |             |   | Total Increase(Decrease) |               
|                              |  | AverageRate                                             |         |   | AverageBalance           |   |        |                                                         | AverageRate |   |                          | AverageBalance |  |  
|                              |  | (in thousands)                                          |        
|Interest income:              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Loans                         |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Commercial & industrial       |  | $                                                       | 10,041  |   |                          | $ | 1,665  |                                                         |             | $ | 11,706                   |                |  | $ | 8,392   |   |  | $ | 6,564  |   |  | $ | 14,956  |  
|Municipal                     |  |                                                         | 1,505   |   |                          |   | 1,363  |                                                         |             |   | 2,868                    |                |  |   | 961     |   |  |   | 1,188  |   |  |   | 2,149   |  
|Commercial real estate        |  |                                                         | 12,162  |   |                          |   | 12,289 |                                                         |             |   | 24,451                   |                |  |   | 11,300  |   |  |   | 11,777 |   |  |   | 23,077  |  
|Construction                  |  |                                                         | 1,632   |   |                          |   | 4,268  |                                                         |             |   | 5,900                    |                |  |   | 1,662   |   |  |   | 1,066  |   |  |   | 2,728   |  
|Residential real estate       |  |                                                         | 10,182  |   |                          |   | 3,465  |                                                         |             |   | 13,647                   |                |  |   | 7,256   |   |  |   | 3,537  |   |  |   | 10,793  |  
|Consumer                      |  |                                                         | 476     |   |                          |   | (166   | )                                                       |             |   | 310                      |                |  |   | (969    | ) |  |   | 252    |   |  |   | (717    | )
|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Total loans                   |  |                                                         | 35,998  |   |                          |   | 22,884 |                                                         |             |   | 58,882                   |                |  |   | 28,602  |   |  |   | 24,384 |   |  |   | 52,986  |  
|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Investments:                  |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Taxable                       |  |                                                         | 791     |   |                          |   | (4,038 | )                                                       |             |   | (3,247                   | )              |  |   | 1,279   |   |  |   | (3,463 | ) |  |   | (2,184  | )
|Tax-favored                   |  |                                                         | 3       |   |                          |   | (41    | )                                                       |             |   | (38                      | )              |  |   | 83      |   |  |   | (178   | ) |  |   | (95     | )
|Interest-bearing deposits     |  |                                                         | 2       |   |                          |   | 2      |                                                         |             |   | 4                        |                |  |   | 2       |   |  |   | 1      |   |  |   | 3       |  
|Federal funds sold            |  |                                                         | 198     |   |                          |   | (397   | )                                                       |             |   | (199                     | )              |  |   | 323     |   |  |   | 140    |   |  |   | 463     |  
|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Total interest income         |  |                                                         | 36,992  |   |                          |   | 18,410 |                                                         |             |   | 55,402                   |                |  |   | 30,289  |   |  |   | 20,884 |   |  |   | 51,173  |  
|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Interest expense:             |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Deposits:                     |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Savings                       |  |                                                         | (1,460  | ) |                          |   | 167    |                                                         |             |   | (1,293                   | )              |  |   | (645    | ) |  |   | 96     |   |  |   | (549    | )
|NOW s                         |  |                                                         | (2,305  | ) |                          |   | 93     |                                                         |             |   | (2,212                   | )              |  |   | (1,685  | ) |  |   | 69     |   |  |   | (1,616  | )
|CMA / Money market            |  |                                                         | (18,917 | ) |                          |   | (1,573 | )                                                       |             |   | (20,490                  | )              |  |   | (11,014 | ) |  |   | (216   | ) |  |   | (11,230 | )
|CDs under $100,000            |  |                                                         | (7,435  | ) |                          |   | (2,116 | )                                                       |             |   | (9,551                   | )              |  |   | (3,517  | ) |  |   | (565   | ) |  |   | (4,082  | )
|CDs of $100,000 and over      |  |                                                         | (6,792  | ) |                          |   | (4,289 | )                                                       |             |   | (11,081                  | )              |  |   | (3,601  | ) |  |   | (6,409 | ) |  |   | (10,010 | )
|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Total deposits                |  |                                                         | (36,909 | ) |                          |   | (7,718 | )                                                       |             |   | (44,627                  | )              |  |   | (20,462 | ) |  |   | (7,025 | ) |  |   | (27,487 | )
|Repurchase agreements         |  |                                                         | (1,441  | ) |                          |   | 22     |                                                         |             |   | (1,419                   | )              |  |   | (653    | ) |  |   | (227   | ) |  |   | (880    | )
|Borrowings                    |  |                                                         | (4,455  | ) |                          |   | 720    |                                                         |             |   | (3,735                   | )              |  |   | (2,747  | ) |  |   | (546   | ) |  |   | (3,293  | )
|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Total interest expense        |  |                                                         | (42,805 | ) |                          |   | (6,976 | )                                                       |             |   | (49,781                  | )              |  |   | (23,862 | ) |  |   | (7,798 | ) |  |   | (31,660 | )
|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  
|Change in net interest income |  | $                                                       | (5,813  | ) |                          |   | 11,434 |                                                         |             | $ | 5,621                    |                |  | $ | 6,427   |   |  | $ | 13,086 |   |  | $ | 19,513  |  
|                              |  |                                                         |         |   |                          |   |        |                                                         |             |   |                          |                |  |   |         |   |  |   |        |   |  |   |         |  

Noninterest Income and Noninterest Expense

Noninterest income for the year ended December 31, 2006, was $70.2 million, an increase of $225,000 from the prior year. The increase was a result of
higher investment management and trust fees and other noninterest income which was mostly offset by lower gains on sales of mortgage loans. Investment management and trust income increased approximately $1.3 million from 2005 primarily due to higher
retail investment and retirement plan services income. Other noninterest income increased $769,000 from 2005 due to $1.1 million recognized in relation to the Companys interest in a mortgage insurance captive, which was partially offset by
higher amortization on investments in low income housing limited partnerships. Gains on sales of mortgage loans declined from 2005 primarily due to increases in market interest rates during 2006, which slowed mortgage originations and resulted in
lower volumes of mortgage loans sold.



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In 2006, noninterest expenses were $186.4 million an increase of $2.5 million from 2005. The increase was
primarily attributable to higher salary costs that were partially offset by lower other noninterest expenses. The increase in salary expense was driven by higher share based payment compensation of $1.1 million and salary expense related to the
opening of new branches. Other noninterest expenses declined $975,000 from 2005 due to lower legal and accounting ($1,075 million) education and trainings ($262,000), examination fees ($149,000) and armored car costs ($114,000), which was primarily
offset by higher marketing expense ($1,224 million).

The components of other noninterest expense for the years presented are as follows:



|                                 |  |                |        |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------- |  | -------------- | ------ | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                 |  | 2006           |        | 2005 |   |        | 2004 |  |   | 2003   |   |  | 2002 |       
|                                 |  | (in thousands) |       
|Legal and accounting             |  | $              | 2,556  |      | $ | 3,631  |      |  | $ | 2,695  |   |  | $    | 3,105  |   |  | $ | 1,864  |  
|Marketing                        |  |                | 4,471  |      |   | 3,247  |      |  |   | 3,466  |   |  |      | 3,282  |   |  |   | 2,942  |  
|Software and supplies            |  |                | 7,335  |      |   | 7,344  |      |  |   | 7,845  |   |  |      | 7,288  |   |  |   | 4,924  |  
|Net OREO and collection expenses |  |                | 123    |      |   | (51    | )    |  |   | (617   | ) |  |      | (129   | ) |  |   | (293   | )
|Telephone                        |  |                | 2,033  |      |   | 2,438  |      |  |   | 2,829  |   |  |      | 3,210  |   |  |   | 3,071  |  
|Postage                          |  |                | 2,594  |      |   | 2,454  |      |  |   | 2,865  |   |  |      | 3,009  |   |  |   | 2,561  |  
|Outside services                 |  |                | 2,251  |      |   | 2,101  |      |  |   | 2,430  |   |  |      | 2,308  |   |  |   | 2,433  |  
|Franchise tax                    |  |                | 3,230  |      |   | 3,012  |      |  |   | 2,977  |   |  |      | 2,757  |   |  |   | 2,694  |  
|Other                            |  |                | 16,240 |      |   | 17,632 |      |  |   | 14,082 |   |  |      | 14,932 |   |  |   | 13,688 |  
|                                 |  |                |        |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                 |  | $              | 40,833 |      | $ | 41,808 |      |  | $ | 38,572 |   |  | $    | 39,762 |   |  | $ | 33,884 |  
|                                 |  |                |        |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  

Income Tax Provision

The Company and the Banks are taxed on income by the IRS at the Federal level and by various states in which they do business. For the years ended December 31, 2006 and 2005, Federal and state income tax
provisions amounted to $40.4 million and $43.2 million, respectively. The effective tax rates for the respective periods were 32.1% and 34.5%. The lower effective income tax rate was attributable to higher low-income housing and historic
rehabilitation tax credits. During both periods, the Companys statutory Federal corporate tax rate was 35%. The Companys effective tax rates differed from the statutory rates primarily because of state income taxes, net of benefit on
Federal taxes, interest income from state and municipal securities and loans, which are partially exempt from Federal taxation, and historic rehabilitation tax credits and investments in qualified low income housing projects. The Company invests in
these partnerships primarily for CRA purposes.

Tax returns filed by the Company are subject to periodic examinations by various federal
and state governmental tax authorities. During 2005, two such examinations were completed. The impact of the examinations on income tax expense in 2005 was not material.

Results of Operations

Comparison of Years Ended December 31, 2005 and 2004

Net Interest Income

For 2005, net interest income
was $244.3 million, up $18.8 million from the 2004 level. On a fully tax equivalent basis, net interest income increased $19.5 million from 2004, to $246.4 million in 2005. The net yield on earnings assets was 4.31%, an increase of 10 basis points
from 2004. The increase in the net yield on earning assets from 2004 was primarily attributable to higher yields on loans driven by increases in the prime rate, as well as continued improvement in the Companys asset mix which was partially
offset by higher funding costs.



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Noninterest Income and Noninterest Expense

Noninterest income for the year ended December 31, 2005 was $69.9 million, a decline of $3.4 million from the prior year. The decline was a result of
lower investment management and trust income, lower service charges on deposits and lower levels of gains on sales of securities, net of losses on prepayments of borrowings. Partially offsetting these declines were higher mortgage servicing and
other income. Investment management and trust income declined $1.6 million from 2004 primarily due to lower annuity sales. Service charges on deposits declined $1.8 million due to lower overdraft fee income from our customers. Mortgage servicing
income was $1.7 million higher in 2005 than in 2004, driven primarily by lower amortization of $3.1 million.

In 2005, noninterest expenses
were $183.8 million, up $651,000 from 2004. Higher salary expenses, net occupancy expenses, and other expenses were offset by lower data processing and conversion and restructuring charges. Salary expense increased due to higher incentive accruals
of $3.3 million. Net occupancy expense increased from 2004 due to higher utility and property expenses as well as the opening of new branches in Westborough, Massachusetts and Manchester, New Hampshire. Increases in other noninterest expense were
related to higher legal and accounting, and education & training. Data processing expenses declined $2.7 million from 2004 due to efficiencies gained from the conversion of the Companys core data processing platform in mid-2004.

Income Taxes

For the years ended
December 31, 2005 and 2004, Federal and state income tax provisions amounted to $43.2 million and $38.7 million, respectively. The effective tax rates for the respective periods were 34.5% and 34.7%. During both periods, the Companys
statutory Federal corporate tax rate was 35%. The Companys effective tax rates differed from the statutory rates primarily because of state income taxes, net of benefit on Federal taxes, interest income from state and municipal securities and
loans which are partially exempt from Federal taxation, and tax credits on investments in qualified low income housing projects. The Company invests in these partnerships primarily for CRA purposes.

Tax returns filed by the Company are subject to periodic examinations by various federal and state governmental tax authorities. During 2005, two such
examinations were completed. The impact of the examinations on income tax expense in 2005 was not material.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the sensitivity of
income to changes in interest rates, foreign exchange rates, commodity prices, equity prices, and other market-driven rates or prices. Since the Company has no trading operations, risks associated with foreign exchange rates, commodity prices, and
equity prices are not significant. Interest rate risk, including mortgage prepayment risk, is the single most significant non-credit risk to which the Company is exposed.

To measure the sensitivity of its income to changes in interest rates, the Company uses a variety of methods, including simulation, and gap analyses. Interest rate risk is the sensitivity of income to variations in
interest rates over both short-term and long-term horizons. The primary goal of interest-rate risk management is to control this risk within limits approved by our Board of Directors, which reflect the Companys tolerance for interest-rate
risk. The Company attempts to control interest-rate risk by identifying exposures, quantifying them and taking appropriate actions.

The
Company uses simulation analyses to measure the exposure of net interest income to changes in interest rates over a relatively short (i.e., within one year) time horizon. Simulation analysis incorporates what management believes to be the most
appropriate assumptions about customer and competitor behavior in the specified interest rate scenario. These assumptions are the basis for projecting future interest income and expense from the Companys assets and liabilities under various
scenarios. Simulation analysis may have certain



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limitations caused by market conditions varying from those assumed in a model. Actual results can often differ due to the effects of prepayments and
refinancings of loans and investments, as well as the repricing or runoff of deposits, which may be different from that which has been assumed.

The Companys limits on interest-rate risk specify that if interest rates were to shift immediately, up or down 200 basis points, estimated net interest income for the next twelve months should not be impacted by greater than 10%. An
additional analysis is performed to review results if interest rates were to shift quarterly, (ramped) up or down 100 and 200 basis points over a twelve-month period. The results of these simulations are shown below:

Interest Rate Sensitivity Analysis

As
of December 31, 2006

($ in thousands)



|                          |  |                             |   |  |                           |  |                          |   
|------------------------- |  | --------------------------- | - |  | ------------------------- |  | ------------------------ | --
|                          |  | ImmediateNet InterestIncome |   |  |                           |  | RampedNet InterestIncome |   
|Changes in interest rates |  |                             |   |  | Changes in interest rates |  |                          |   
|+ 200 bps                 |  | 0.14                        | % |  | +50 bps                   |  | (0.09                    | %)
|+ 100 bps                 |  | 0.24                        |   |  | +25 bps                   |  | (0.04                    | ) 
|- 100 bps                 |  | (0.46                       | ) |  | -25 bps                   |  | 0.01                     |   
|- 200 bps                 |  | (1.94                       | ) |  | -50 bps                   |  | (0.17                    | ) 
|Policy Limit              |  | +/-10.00                    | % |  |                           |  |                          |   

As noted above, one of the tools used to measure rate sensitivity is gap analysis. The gap is
defined as the amount by which a banks rate sensitive assets exceed its rate sensitive liabilities. A positive gap exists when rate sensitive assets exceed rate sensitive liabilities. This indicates that a greater volume of assets than
liabilities will reprice during a given period. This mismatch will improve earnings in a rising rate environment and inhibit earnings when rates decline. Conversely, when rate sensitive liabilities exceed rate sensitive assets, the gap is referred
to as negative. In this case, a rising rate environment will inhibit earnings and declining rates will improve earnings. Notwithstanding this general description of the effect on net interest income of the gap position, it may not be an accurate
predictor of changes in net interest income. The Companys limits on interest-rate risk specify that the cumulative one-year gap should be less than 10% of total assets.



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##### Table of Contents

The following table shows the amounts of interest-earning assets and interest-bearing liabilities at
December 31, 2006 that reprice and/or mature during the periods indicated:



|                                      |  |                                  |           |    |                           |    |         |                           |  |   |                |   |  |       |           |   |  |   |          
|------------------------------------- |  | -------------------------------- | --------- | -- | ------------------------- | -- | ------- | ------------------------- |  | - | -------------- | - |  | ----- | --------- | - |  | - | ---------
|                                      |  | Maturity and / or Repricing Date
|                                      |  | One Day ToSix Months             |           |    | Over SixMonths ToOne Year |    |         | Over OneYear To FiveYears |  |   | Over FiveYears |   |  | Total
|                                      |  | (in thousands)                  
|Interest-earning assets:              |  |                                  |          
|Loans (1)                             |  | $                                | 2,072,004 |    |                           | $  | 544,132 |                           |  | $ | 1,897,989      |   |  | $     | 200,439   |   |  | $ | 4,714,564
|Investment securities (2)             |  |                                  | 146,606   |    |                           |    | 172,010 |                           |  |   | 759,281        |   |  |       | 72,029    |   |  |   | 1,149,926
|Interest-bearing cash equivalents     |  |                                  | 43,200    |    |                           |    | 60      |                           |  |   | 860            |   |  |       |          |   |  |   | 44,120   
|                                      |  |                                  |           |    |                           |    |         |                           |  |   |                |   |  |       |           |   |  |   |          
|Total interest-earning assets         |  |                                  | 2,261,810 |    |                           |    | 716,202 |                           |  |   | 2,658,130      |   |  |       | 272,468   |   |  |   | 5,908,610
|                                      |  |                                  |           |    |                           |    |         |                           |  |   |                |   |  |       |           |   |  |   |          
|Interest-bearing liabilities:         |  |                                  |           |    |                           |    |         |                           |  |   |                |   |  |       |           |   |  |   |          
|Deposits                              |  |                                  | 2,780,926 |    |                           |    | 419,092 |                           |  |   | 418,745        |   |  |       | 893,372   |   |  |   | 4,512,135
|Borrowings                            |  |                                  | 82,195    |    |                           |    | 155     |                           |  |   | 1,163          |   |  |       | 126,507   |   |  |   | 210,020  
|                                      |  |                                  |           |    |                           |    |         |                           |  |   |                |   |  |       |           |   |  |   |          
|Total interest-bearing liabilities    |  |                                  | 2,863,121 |    |                           |    | 419,247 |                           |  |   | 419,908        |   |  |       | 1,019,879 |   |  |   | 4,722,155
|                                      |  |                                  |           |    |                           |    |         |                           |  |   |                |   |  |       |           |   |  |   |          
|Net interest rate sensitivity gap     |  |                                  | ($601,311 | )  |                           | $  | 296,955 |                           |  | $ | 2,238,222      |   |  |       | ($747,411 | ) |  | $ | 1,186,455
|                                      |  |                                  |           |    |                           |    |         |                           |  |   |                |   |  |       |           |   |  |   |          
|Cumulative gap at December 31, 2006   |  |                                  | ($601,311 | )  |                           | ($ | 304,356 | )                         |  | $ | 1,933,866      |   |  | $     | 1,186,455 |   |  |   |          
|Cumulative gap as a % of total assets |  |                                  | (9.50     | %) |                           |    | (5.28   | %)                        |  |   | 29.91          | % |  |       | 28.67     | % |  |   |          
|Cumulative gap at December 31, 2005   |  |                                  | ($496,665 | )  |                           | ($ | 256,647 | )                         |  | $ | 1,858,872      |   |  | $     | 1,157,873 |   |  |   |          
|Cumulative gap as a % of total assets |  |                                  | (7.68     | %) |                           |    | (3.97   | %)                        |  |   | 28.75          | % |  |       | 17.91     | % |  |   |          

---

|(1) | Loans include loans held for sale.
|--- | ----------------------------------

|(2) | Amounts are based on amortized cost balances. Total includes securities available for sale and FRB / FHLB stock.
|--- | ----------------------------------------------------------------------------------------------------------------

The following table shows scheduled maturities of selected loans at December 31, 2006:



|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|--------------------------------------- |  | ----------------- | ------- | -------------------- | - | -------------- |  | ----- | ------- |  | - | ---------
|                                        |  | Less ThanOne Year |         | One YearTo FiveYears |   | Over FiveYears |  | Total
|                                        |  | (in thousands)   
|Predetermined rates:                    |  |                   |         |                      |   |                |  |       |         |  |   |          
|Commercial (1)                          |  | $                 | 230,699 |                      | $ | 227,118        |  | $     | 66,120  |  | $ | 523,937  
|Commercial real estate and construction |  |                   | 110,815 |                      |   | 567,301        |  |       | 296,822 |  |   | 974,938  
|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|Total                                   |  |                   | 341,514 |                      |   | 794,419        |  |       | 362,942 |  |   | 1,498,875
|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|Comparative totals for 2005             |  | $                 | 312,530 |                      | $ | 633,202        |  | $     | 263,077 |  | $ | 1,208,809
|                                        |  |                   |         |                     
|Floating or adjustable rates:           |  |                   |         |                      |   |                |  |       |         |  |   |          
|Commercial (1)                          |  |                   | 374,287 |                      |   | 231,198        |  |       | 81,988  |  |   | 687,473  
|Commercial real estate and construction |  |                   | 181,442 |                      |   | 486,672        |  |       | 531,633 |  |   | 1,199,747
|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|Total                                   |  | $                 | 555,729 |                      | $ | 717,870        |  | $     | 613,621 |  | $ | 1,887,220
|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|Comparative totals for 2005             |  | $                 | 505,748 |                      | $ | 806,549        |  | $     | 654,628 |  | $ | 1,966,925

---

|(1) | Includes commercial, municipal and multi-family.
|--- | ------------------------------------------------



45



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##### Table of Contents

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CHITTENDEN CORPORATION

CONSOLIDATED BALANCE SHEETS



|                                                                                                                           |  |                |           |   |      |   |           |  
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                           |  | December 31,   |          
|                                                                                                                           |  | 2006           |           |   | 2005 |  
|                                                                                                                           |  | (in thousands) |          
|Assets                                                                                                                     |  |                |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                  |  | $              | 199,358   |   |      | $ | 180,707   |  
|Securities available for sale                                                                                              |  |                | 1,137,352 |   |      |   | 1,383,909 |  
|FRB and FHLB stock                                                                                                         |  |                | 13,403    |   |      |   | 19,352    |  
|Loans held for sale                                                                                                        |  |                | 17,354    |   |      |   | 19,737    |  
|Loans                                                                                                                      |  |                | 4,697,210 |   |      |   | 4,487,490 |  
|Less: Allowance for loan losses                                                                                            |  |                | (62,160   | ) |      |   | (60,822   | )
|                                                                                                                           |  |                |           |   |      |   |           |  
|Net loans                                                                                                                  |  |                | 4,635,050 |   |      |   | 4,426,668 |  
|Accrued interest receivable                                                                                                |  |                | 33,123    |   |      |   | 32,621    |  
|Other assets                                                                                                               |  |                | 83,938    |   |      |   | 93,377    |  
|Premises and equipment, net                                                                                                |  |                | 67,036    |   |      |   | 69,731    |  
|Mortgage servicing rights                                                                                                  |  |                | 14,155    |   |      |   | 13,741    |  
|Identified intangibles                                                                                                     |  |                | 14,996    |   |      |   | 17,655    |  
|Goodwill                                                                                                                   |  |                | 216,038   |   |      |   | 216,038   |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total assets                                                                                                               |  | $              | 6,431,803 |   |      | $ | 6,473,536 |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Liabilities and Stockholders Equity                                                                                       |  |                |           |   |      |   |           |  
|LIABILITIES:                                                                                                               |  |                |           |   |      |   |           |  
|Deposits:                                                                                                                  |  |                |           |   |      |   |           |  
|Demand                                                                                                                     |  | $              | 966,758   |   |      | $ | 973,752   |  
|Savings                                                                                                                    |  |                | 468,294   |   |      |   | 489,734   |  
|NOW                                                                                                                        |  |                | 861,435   |   |      |   | 861,000   |  
|Cash management / money market                                                                                             |  |                | 1,655,349 |   |      |   | 1,749,878 |  
|Certificates of deposit less than $100,000                                                                                 |  |                | 848,814   |   |      |   | 814,289   |  
|Certificates of deposit $100,000 and over                                                                                  |  |                | 678,243   |   |      |   | 625,682   |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total deposits                                                                                                             |  |                | 5,478,893 |   |      |   | 5,514,335 |  
|Securities sold under agreements to repurchase                                                                             |  |                | 73,611    |   |      |   | 56,315    |  
|Other borrowings                                                                                                           |  |                | 136,409   |   |      |   | 171,008   |  
|Accrued expenses and other liabilities                                                                                     |  |                | 71,804    |   |      |   | 60,488    |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total liabilities                                                                                                          |  |                | 5,760,717 |   |      |   | 5,802,146 |  
|STOCKHOLDERS EQUITY:                                                                                                      |  |                |           |   |      |   |           |  
|Preferred stock$100 par valueauthorized: 1,000,000 sharesissued and outstanding: none                                   |  |                |          |   |      |   |          |  
|Common stock$1 par valueauthorized: 120,000,000 sharesissued and outstanding: 50,234,661 in 2006 and 50,219,825 in
2005 |  |                | 50,235    |   |      |   | 50,220    |  
|Surplus                                                                                                                    |  |                | 276,034   |   |      |   | 276,278   |  
|Retained earnings                                                                                                          |  |                | 468,331   |   |      |   | 419,057   |  
|Treasury stock, at cost4,874,536 shares in 2006 and 3,390,777 shares in 2005                                              |  |                | (105,666  | ) |      |   | (60,801   | )
|Accumulated other comprehensive income                                                                                     |  |                | (24,008   | ) |      |   | (18,968   | )
|Directors deferred compensation to be settled in stock                                                                    |  |                | 6,160     |   |      |   | 5,604     |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total stockholders equity                                                                                                 |  |                | 671,086   |   |      |   | 671,390   |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                 |  | $              | 6,431,803 |   |      | $ | 6,473,536 |  
|                                                                                                                           |  |                |           |   |      |   |           |  

The accompanying notes are an integral part of these consolidated financial statements.



46



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##### Table of Contents

CHITTENDEN CORPORATION

CONSOLIDATED STATEMENTS OF INCOME



|                                                                 |  |                                         |         |      |   |         |  |   |        
|---------------------------------------------------------------- |  | --------------------------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                                 |  | Years Ended December 31,               
|                                                                 |  | 2006                                    |         | 2005 |   | 2004   
|                                                                 |  | (in thousands, except per shareamounts)
|INTEREST INCOME:                                                 |  |                                         |        
|Interest on loans                                                |  |                                         | 319,307 |      | $ | 261,359 |  | $ | 209,107
|Interest on investment securities:                               |  |                                         |         |      |   |         |  |   |        
|Taxable                                                          |  |                                         | 54,930  |      |   | 58,177  |  |   | 60,413 
|Tax-favored                                                      |  |                                         | 21      |      |   | 45      |  |   | 53     
|Short-term investments                                           |  |                                         | 454     |      |   | 661     |  |   | 194    
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Total interest income                                            |  |                                         | 374,712 |      |   | 320,242 |  |   | 269,767
|                                                                 |  |                                         |         |      |   |         |  |   |        
|INTEREST EXPENSE:                                                |  |                                         |         |      |   |         |  |   |        
|Deposits                                                         |  |                                         | 108,553 |      |   | 63,926  |  |   | 36,439 
|Borrowings                                                       |  |                                         | 17,157  |      |   | 12,003  |  |   | 7,830  
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Total interest expense                                           |  |                                         | 125,710 |      |   | 75,929  |  |   | 44,269 
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Net interest income                                              |  |                                         | 249,002 |      |   | 244,313 |  |   | 225,498
|Provision for credit losses                                      |  |                                         | 6,920   |      |   | 5,154   |  |   | 4,377  
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Net interest income after provision for credit losses            |  |                                         | 242,082 |      |   | 239,159 |  |   | 221,121
|                                                                 |  |                                         |         |      |   |         |  |   |        
|NONINTEREST INCOME:                                              |  |                                         |         |      |   |         |  |   |        
|Investment management and trust                                  |  |                                         | 21,293  |      |   | 20,017  |  |   | 21,622 
|Service charges on deposits                                      |  |                                         | 16,728  |      |   | 16,113  |  |   | 17,886 
|Mortgage servicing                                               |  |                                         | 2,106   |      |   | 1,829   |  |   | 159    
|Gains on sales of loans, net                                     |  |                                         | 6,294   |      |   | 9,021   |  |   | 9,661  
|Credit card income, net                                          |  |                                         | 5,107   |      |   | 4,536   |  |   | 4,150  
|Insurance commissions, net                                       |  |                                         | 5,805   |      |   | 6,365   |  |   | 6,966  
|Other                                                            |  |                                         | 12,856  |      |   | 12,083  |  |   | 12,961 
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Total noninterest income                                         |  |                                         | 70,189  |      |   | 69,964  |  |   | 73,405 
|                                                                 |  |                                         |         |      |   |         |  |   |        
|NONINTEREST EXPENSE:                                             |  |                                         |         |      |   |         |  |   |        
|Salaries                                                         |  |                                         | 93,217  |      |   | 89,496  |  |   | 88,460 
|Employee benefits                                                |  |                                         | 22,155  |      |   | 22,218  |  |   | 21,958 
|Net occupancy expense                                            |  |                                         | 23,424  |      |   | 24,094  |  |   | 22,669 
|Data processing                                                  |  |                                         | 4,079   |      |   | 3,457   |  |   | 6,188  
|Amortization of intangibles                                      |  |                                         | 2,659   |      |   | 2,768   |  |   | 3,077  
|Conversion and restructuring charges                             |  |                                         |        |      |   |        |  |   | 2,266  
|Other                                                            |  |                                         | 40,833  |      |   | 41,808  |  |   | 38,572 
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Total noninterest expense                                        |  |                                         | 186,367 |      |   | 183,841 |  |   | 183,190
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Income before income taxes                                       |  |                                         | 125,904 |      |   | 125,282 |  |   | 111,336
|Income tax expense                                               |  |                                         | 40,436  |      |   | 43,243  |  |   | 38,656 
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Net income                                                       |  | $                                       | 85,468  |      | $ | 82,039  |  | $ | 72,680 
|                                                                 |  |                                         |         |      |   |         |  |   |        
|Basic earnings per share                                         |  | $                                       | 1.85    |      | $ | 1.76    |  | $ | 1.58   
|Diluted earnings per share                                       |  |                                         | 1.83    |      |   | 1.74    |  |   | 1.56   
|Dividends per share                                              |  |                                         | 0.78    |      |   | 0.72    |  |   | 0.70   
|Weighted average common shares outstanding                       |  |                                         | 46,235  |      |   | 46,503  |  |   | 46,106 
|Weighted average common and common equivalent shares outstanding |  |                                         | 46,802  |      |   | 47,051  |  |   | 46,731 

The accompanying notes are an integral part of these consolidated financial statements.



47



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##### Table of Contents

CHITTENDEN CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

AND COMPREHENSIVE INCOME

Years ended December 31, 2006, 2005 and 2004

(In thousands)



|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- |  | - | ----------------- | - |  | -------------- | ------- | - | ----------------------------------------- | - | -------- | ------------------------------- |  | - | --------------------------------------------- | - |  | ---------------------------- | ----- | - |  | - | --- | - |  | - | ------- | -
|                                                        |  | Comp- rehensive Income |         |   | Common Stock |   | Surplus |  |   | Retained Earnings |   |  | Treasury Stock |         |   | Accum- ulated OtherComp-
rehensive Income |   |          | Directors Deferred Comp. Stock |  |   | Unearned Portion of Employee Restricted Stock |   |  | Total Stock- holders
Equity |      
|BALANCE AT DECEMBER 31, 2003                            |  |                        |         |   |              | $ | 50,178  |  | $ | 265,400           |   |  | $              | 329,681 |   |                                           | $ | (78,579  | )                               |  | $ | 15,595                                        |   |  | $                            | 4,413 |   |  | $ | (35 | ) |  | $ | 586,653 |  
|Comprehensive income:                                   |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Net income                                              |  | $                      | 72,680  |   |              |   |        |  |   |                  |   |  |                | 72,680  |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 72,680  |  
|Other comprehensive income(Note 8)                      |  |                        | (14,923 | ) |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   | (14,923                                       | ) |  |                              |      |   |  |   |    |   |  |   | (14,923 | )
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Total comprehensive income                              |  | $                      | 57,757  |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Cash dividends ($0.70 per share)                        |  |                        |         |   |              |   |        |  |   |                  |   |  |                | (31,889 | ) |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (31,889 | )
|Shares issued under stock plans, net                    |  |                        |         |   |              |   | 26      |  |   | 2,098             |   |  |                |        |   |                                           |   | 9,333    |                                 |  |   |                                              |   |  |                              | (16   | ) |  |   | 2   |   |  |   | 11,443  |  
|Shares based compensation                               |  |                        |         |   |              |   |        |  |   | 3,841             |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 3,841   |  
|Amortization of restricted stock                        |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   | 15  |   |  |   | 15      |  
|Directors deferred compensation                        |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              | 533   |   |  |   |    |   |  |   | 533     |  
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2004                            |  |                        |         |   |              |   | 50,204  |  |   | 271,339           |   |  |                | 370,472 |   |                                           |   | (69,246  | )                               |  |   | 672                                           |   |  |                              | 4,930 |   |  |   | (18 | ) |  |   | 628,353 |  
|Comprehensive income:                                   |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Net income                                              |  | $                      | 82,039  |   |              |   |        |  |   |                  |   |  |                | 82,039  |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 82,039  |  
|Other comprehensive income(Note 8)                      |  |                        | (19,640 | ) |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   | (19,640                                       | ) |  |                              |      |   |  |   |    |   |  |   | (19,640 | )
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Total comprehensive income                              |  | $                      | 62,399  |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Cash dividends ($0.72 per share)                        |  |                        |         |   |              |   |        |  |   |                  |   |  |                | (33,454 | ) |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (33,454 | )
|Shares issued under stock plans, net                    |  |                        |         |   |              |   | 16      |  |   | 2,817             |   |  |                |        |   |                                           |   | 8,445    |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 11,278  |  
|Shares based compensation                               |  |                        |         |   |              |   |        |  |   | 2,122             |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 2,122   |  
|Amortization of restricted stock                        |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   | 18  |   |  |   | 18      |  
|Directors deferred compensation                        |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              | 674   |   |  |   |    |   |  |   | 674     |  
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2005                            |  |                        |         |   |              |   | 50,220  |  |   | 276,278           |   |  |                | 419,057 |   |                                           |   | (60,801  | )                               |  |   | (18,968                                       | ) |  |                              | 5,604 |   |  |   |    |   |  |   | 671,390 |  
|Other Comprehensive income:                             |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Net income                                              |  | $                      | 85,468  |   |              |   |        |  |   |                  |   |  |                | 85,468  |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 85,468  |  
|Foreign currency translation adjustment                 |  |                        | (2      | ) |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   | (2                                            | ) |  |                              |      |   |  |   |    |   |  |   | (2      | )
|Unrealized holding gains on securities                  |  |                        | 2,071   |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   | 2,071                                         |   |  |                              |      |   |  |   |    |   |  |   | 2,071   |  
|Reclassification adj. for realized gains on investments |  |                        | (7      | ) |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   | (7                                            | ) |  |                              |      |   |  |   |    |   |  |   | (7      | )
|Adoption of FASB Statement No. 158                      |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   | (7,102                                        | ) |  |                              |      |   |  |   |    |   |  |   | (7,102  | )
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Total other comprehensive income                        |  | $                      | 87,530  |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Cash dividends ($0.78 per share)                        |  |                        |         |   |              |   |        |  |   |                  |   |  |                | (36,194 | ) |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (36,194 | )
|Share repurchases                                       |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   | (51,143  | )                               |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (51,143 | )
|Shares issued under stock plans, net                    |  |                        |         |   |              |   | 15      |  |   | 1,009             |   |  |                |        |   |                                           |   | 6,278    |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 7,302   |  
|Shares based compensation                               |  |                        |         |   |              |   |        |  |   | 3,161             |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 3,161   |  
|Excess tax benefits from employee stock plans           |  |                        |         |   |              |   |        |  |   | 131               |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 131     |  
|SFAS 123R adoption adjustment                           |  |                        |         |   |              |   |        |  |   | (4,545            | ) |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (4,545  | )
|Directors deferred compensation                        |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |         |                                 |  |   |                                              |   |  |                              | 556   |   |  |   |    |   |  |   | 556     |  
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2006                            |  |                        |         |   |              | $ | 50,235  |  | $ | 276,034           |   |  | $              | 468,331 |   |                                           | $ | (105,666 | )                               |  | $ | (24,008                                       | ) |  | $                            | 6,160 |   |  | $ |    |   |  | $ | 671,086 |  
|                                                        |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |          |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



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CHITTENDEN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                          |  | Years Ended December 31, |         
|                                                                                          |  | 2006                     |          |   | 2005 |   |          | 2004 | 
|                                                                                          |  | (in thousands)           |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                                |  | $                        | 85,468   |   |      | $ | 82,039   |      |  | $ | 72,680   |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                          |          |   |      |   |          |      |  |   |          |  
|Provision for credit losses                                                               |  |                          | 6,920    |   |      |   | 5,154    |      |  |   | 4,377    |  
|Depreciation                                                                              |  |                          | 7,427    |   |      |   | 8,066    |      |  |   | 7,977    |  
|Amortization of intangible assets                                                         |  |                          | 2,659    |   |      |   | 2,768    |      |  |   | 3,077    |  
|Amortization (accretion) of premiums, fees, and discounts, net                            |  |                          | 8,132    |   |      |   | 11,333   |      |  |   | 15,110   |  
|Share-based payment compensation                                                          |  |                          | 4,040    |   |      |   | 2,572    |      |  |   | 3,841    |  
|Provision for (Recovery on) of impairment of MSR asset                                    |  |                          | (17      | ) |      |   | (380     | )    |  |   | (1,691   | )
|Investment securities (gains) losses                                                      |  |                          |         |   |      |   |         |      |  |   | (2,335   | )
|Prepaid income taxes                                                                      |  |                          | (2,365   | ) |      |   | (5,393   | )    |  |   | (341     | )
|Loans originated and purchased for sale                                                   |  |                          | (304,853 | ) |      |   | (413,586 | )    |  |   | (499,350 | )
|Proceeds from sales of loans                                                              |  |                          | 309,599  |   |      |   | 430,786  |      |  |   | 495,648  |  
|Gains on sales of loans, net                                                              |  |                          | (6,294   | ) |      |   | (9,021   | )    |  |   | (9,661   | )
|Changes in assets and liabilities:                                                        |  |                          |          |   |      |   |          |      |  |   |          |  
|Accrued interest receivable                                                               |  |                          | (502     | ) |      |   | (3,665   | )    |  |   | 168      |  
|Other assets                                                                              |  |                          | 28,276   |   |      |   | (1,787   | )    |  |   | 17,014   |  
|Accrued expenses and other liabilities                                                    |  |                          | (6,056   | ) |      |   | 12,015   |      |  |   | 1,168    |  
|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                 |  |                          | 132,434  |   |      |   | 120,901  |      |  |   | 107,682  |  
|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid, net of cash acquired in acquisition of National Pension Service                |  |                          |         |   |      |   |         |      |  |   | (1,120   | )
|Proceeds from sale (purchase) of FRB and FHLB stock                                       |  |                          | 5,958    |   |      |   | (109     | )    |  |   | 1,510    |  
|Proceeds from sales of securities available for sale                                      |  |                          | 37,455   |   |      |   | 26,196   |      |  |   | 195,437  |  
|Proceeds from maturing securities and principal payments on securities available for sale |  |                          | 230,684  |   |      |   | 263,883  |      |  |   | 325,115  |  
|Purchases of securities available for sale                                                |  |                          | (25,318  | ) |      |   | (265,706 | )    |  |   | (409,963 | )
|Loans originated, net of principal repayments                                             |  |                          | (224,583 | ) |      |   | (420,181 | )    |  |   | (362,894 | )
|Purchases of premises and equipment                                                       |  |                          | (4,732   | ) |      |   | (3,526   | )    |  |   | (10,118  | )
|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                       |  |                          | 19,464   |   |      |   | (399,443 | )    |  |   | (262,033 | )
|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in deposits                                                       |  |                          | (35,442  | ) |      |   | 475,605  |      |  |   | 68,839   |  
|Net increase (decrease) in borrowings                                                     |  |                          | (34,599  | ) |      |   | (108,747 | )    |  |   | 71,301   |  
|Net increase (decrease) in repurchase agreements                                          |  |                          | 17,296   |   |      |   | (20,401  | )    |  |   | (2,264   | )
|Common stock transactions, net                                                            |  |                          | 6,835    |   |      |   | 9,778    |      |  |   | 9,893    |  
|Dividends on common stock                                                                 |  |                          | (36,194  | ) |      |   | (33,454  | )    |  |   | (31,889  | )
|Repurchase of common stock                                                                |  |                          | (51,143  | ) |      |   |         |      |  |   |         |  
|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                       |  |                          | (133,247 | ) |      |   | 322,781  |      |  |   | 115,880  |  
|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                          | 18,651   |   |      |   | 44,239   |      |  |   | (38,471  | )
|Cash and cash equivalents at beginning of year                                            |  |                          | 180,707  |   |      |   | 136,468  |      |  |   | 174,939  |  
|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                  |  | $                        | 199,358  |   |      | $ | 180,707  |      |  | $ | 136,468  |  
|                                                                                          |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of cash flow information:                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid during the year for:                                                            |  |                          |          |   |      |   |          |      |  |   |          |  
|Interest                                                                                  |  | $                        | 127,598  |   |      | $ | 77,933   |      |  | $ | 45,277   |  
|Income taxes                                                                              |  |                          | 40,307   |   |      |   | 50,323   |      |  |   | 27,529   |  
|Non-cash investing and financing activities:                                              |  |                          |          |   |      |   |          |      |  |   |          |  
|Assets acquired through foreclosure and repossession                                      |  |                          | 425      |   |      |   | 472      |      |  |   | 1,021    |  
|Issuance of treasury and restricted stock                                                 |  |                          | 591      |   |      |   | 637      |      |  |   | 3        |  
|Assets acquired and liabilities assumed through acquisitions:                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Fair value of assets acquired, including core deposit intangibles                         |  |                          |         |   |      |   |         |      |  |   | 854      |  
|Cash paid                                                                                 |  |                          |         |   |      |   |         |      |  |   | 1,120    |  
|Goodwill Acquired                                                                         |  |                          |         |   |      |   |         |      |  |   | 266      |  

The accompanying notes are an integral part of these consolidated financial statements.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Chittenden Corporation (the Company) and its subsidiaries:
Chittenden Trust Company (CTC), and its subsidiaries Chittenden Insurance Group, LLC (CIG), Chittenden Securities, LLC (CSC) and Chittenden Commercial Finance (CCF); The Bank of Western Massachusetts (BWM); Flagship Bank and Trust Company (FBT);
Maine Bank & Trust (MBT); and Ocean National Bank (ONB). (CTC, BWM, FBT, MBT, and ONB are collectively referred to as the Banks.) All material intercompany accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior year balances to conform to the current year presentation.

Nature of Operations

The Banks primary business is providing loans, deposits, and other banking services to commercial, individual, and public sector customers.
Chittenden Mortgage Services is a mortgage banking operation with offices in Brattleboro, Vermont. CIG is an independent insurance agency with offices in Vermont, Massachusetts and New Hampshire. CSC is a registered broker/dealer providing brokerage
services to its customers through banking locations in Vermont, Massachusetts, New Hampshire, and Maine. CCFs commercial finance operations are based in Montreal, Quebec.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term
relate to the determination of the allowance for credit losses, income tax expense, recognition of interest income on loans, and the recognition of restructuring charges.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, amounts due from banks,
interest-bearing deposits and certain money market fund investments. Cash equivalents are accounted for at cost, which approximates fair value.

Investments

Investments in debt securities may be classified as held for investment and measured at amortized cost only if
the Company has the positive intent and ability to hold such securities to maturity. Investments in debt securities that are not classified as held for investment and equity securities that have readily determinable fair values are classified as
either trading securities or securities available for sale. Trading securities are investments purchased and held principally for the purpose of selling in the near term; securities available for sale are investments not classified as trading or
held for investment. All of the Companys securities are classified as available for sale.

Securities transferred between categories
are accounted for at market value. Unrealized holding gains and losses on trading securities are included in earnings; unrealized holding gains and losses on securities available for sale or on securities transferred into the available for sale
category from the held for investment category are



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



reported as a separate component of stockholders equity, net of applicable income taxes. Unrealized losses that are considered other than temporary in
nature are recognized in earnings. The Company uses the specific identification method to determine the cost basis in the recognition of gains and losses on the sales of securities as well as the calculation of unrealized gains and losses.

Loans

Loans are stated at the amount
of unpaid principal, net of unearned discounts and unearned loan origination fees. Such fees and discounts are accreted using the effective-interest method. Interest on loans is included in income as earned based upon interest rates applied to
unpaid principal. Interest is not accrued on loans 90 days or more past due unless they are adequately secured and in the process of collection or on other loans when management believes collection is doubtful. All loans considered impaired (except
troubled debt restructurings), as defined in the following paragraph, are nonaccruing. Interest on nonaccruing loans is recognized as payments are received when the ultimate collectibility of interest is no longer considered doubtful. When a loan is
placed on nonaccrual status, all unpaid interest previously accrued is reversed against current-period interest income.

A loan is impaired
when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of the expected
future cash flows discounted at the loans effective interest rate. In the case of collateral dependent loans, impairment may be measured based on the fair value of the collateral. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation allowance.

Allowance for Loan Losses

The allowance for loan losses is based on managements estimate of the amount required to reflect the probable inherent losses in the loan portfolio,
based on circumstances and conditions known at each reporting date. There are inherent uncertainties with respect to the collectibility of the Banks loans. Because of these inherent uncertainties, it is reasonably possible that actual losses
experienced in the near term may differ from the amounts reflected in these consolidated financial statements.

Adequacy of the allowance
is determined using a consistent, systematic methodology, which analyzes the size and risk of the loan portfolio. In addition to evaluating the collectibility of specific loans when determining the adequacy of the allowance for loan losses,
management also takes into consideration other factors such as changes in the mix and volume of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, and economic trends. An allocation process
whereby specific loss allocations are made against certain adversely classified loans, and general loss allocations are made against segments of the loan portfolio, which have similar attributes together, assesses the adequacy of the allowance for
loan losses.

Provisions charged against current earnings increase the allowance for loan losses. Loan losses are charged against the
allowance when management believes that the collectibility of the loan principal is doubtful. Recoveries on loans previously charged off are credited to the allowance. While management uses available information to assess probable losses on loans,
future additions to the allowance may be necessary. In addition, various regulatory agencies periodically review the Companys allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to
recognize additions to the allowance based on judgments different from those of management.

Credit quality of the commercial portfolios is
quantified by a corporate credit rating system designed to parallel regulatory criteria and categories of loan risk. Individual loan officers monitor their loans to ensure appropriate rating assignments are made on a timely basis. Risk ratings and
quality of both commercial and



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



consumer credit portfolios are also assessed on a regular basis by an independent Credit Review Department. Credit Review personnel conduct ongoing portfolio
trend analyses and individual credit reviews to evaluate loan risk and compliance with corporate lending policies. Results and recommendations from this process provide senior management and the Board of Directors with independent information on the
loan portfolio condition. Consumer and residential real estate loan quality is evaluated on the basis of delinquency data and other credit data available due to the large number of such loans and the relatively small size of individual credits.

Key elements of the above estimates, including assumptions used in developing independent appraisals, are dependent on the economic
conditions prevailing at the time such estimates are made. Accordingly, uncertainty exists as to the final outcome of certain valuation judgments as a result of changes in economic conditions in the Banks lending areas.

Loan Origination and Commitment Fees

Loan
origination and commitment fees, and certain loan origination costs, are deferred and amortized over the contractual term of the related loans as yield adjustments using primarily the level-yield method. When loans are sold or paid off, the
unamortized net fees and costs are recognized in income. Net deferred loan fees amounted to $6,849,000 and $6,720,000 at December 31, 2006 and 2005, respectively.

Loans Held for Sale / Gains and Losses on Sales of Mortgage Loans

Loans held for sale are carried at
the lower of aggregate cost or market value. Gains and losses on sales of mortgage loans are recognized at the time of the sale and are generally comprised of 1) an amount representing a mortgage servicing right (see below) and 2) a cash gain or
loss based on the sale of the loan to a third party. The price paid by a willing third party is influenced by the contractual interest rate charged to the borrower and the prevailing market rate for similar loans. The Company enters into forward
sale contracts on substantially all loan commitments at the time that the customer locks their contractual interest rate, so that the exposure due to interest rate changes on the cash gain / loss recognized by the Company is minimal.

Mortgage Servicing Rights

Servicing assets are
recognized when rights are acquired through purchase or sale of residential mortgage loans. Capitalized servicing rights are amortized against mortgage servicing income in proportion to, and over the period of, the estimated future net servicing
income of the underlying mortgage loans. Servicing assets are evaluated regularly for impairment based upon the fair value of the servicing rights as compared to their amortized cost. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated
useful lives of the premises and equipment. Leasehold improvements are amortized over the shorter of the terms of the respective leases or the estimated useful lives of the improvements. Expenditures for maintenance, repairs, and renewals of minor
items are charged to expense as incurred.

Other Real Estate Owned

Collateral acquired through foreclosure (Other Real Estate Owned or OREO) is recorded at the lower of the carrying amount of the loan or the fair value of the property, less estimated costs to
sell, at the time of acquisition. Net operating income or expense related to OREO is included in noninterest expense in the accompanying consolidated statements of income.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Identified Intangible Assets & Goodwill

Intangible assets include the excess of the purchase price over the fair value of net assets acquired (goodwill) in various acquisitions as well as core
deposit intangibles (CDI) and customer list intangibles. Core deposit intangibles are amortized on a straight-line basis over 10 years. The straight-line basis is used because the Company has not experienced significant run off of core deposits in
its past acquisitions. The customer list intangibles are also amortized straight-line over 10 years. The Company periodically evaluates intangible assets for impairment on the basis of whether these assets are fully recoverable from projected,
undiscounted net cash flows of the related acquired segment or customer base.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the Companys assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

Reserve for Unfunded Commitments

The
reserve for unfunded commitments is based on managements estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit, merchant processing activity and unused loan credit lines. Adequacy of the
reserve is determined using a consistent, systematic methodology, similar to the one, which analyzes the allowance for loan losses. Additionally, management must also estimate the likelihood that these commitments would be funded and become loans.
This is done by evaluating the historical utilization of each type of unfunded commitment and estimating the likelihood that the current utilization rates on lines available at the balance sheet date could increase in the future.

Earnings Per Share

The calculation of basic earnings
per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is based on the weighted average number of shares of common stock outstanding adjusted for the incremental shares
attributed to outstanding common stock equivalents, using the treasury stock method. Common stock equivalents include options granted under the Companys stock plans and shares to be issued under the Companys Directors Deferred
Compensation Plan.

Investment Management and Trust

Assets under administration of approximately $9.0 billion and $9.1 billion at December 31, 2006 and 2005, respectively, held by the Banks in a fiduciary or agency capacity for customers, are not included in the
accompanying consolidated balance sheets. Investment management and trust income is recorded on the cash basis (which approximates the accrual method) in accordance with industry practice.

Credit Card Income

Credit card income includes
interchange income from business credit cards issued by the Company, and merchant discount income. Merchant discount income consists of the fees charged on credit card receipts submitted by the Companys commercial customers. Credit card income
is presented net of credit card expense, which includes fees paid by the Company to credit card issuers and third-party processors. Such amounts are recognized on the accrual basis, and are presented in noninterest income in the consolidated
statements of income.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Insurance Commissions

Insurance commission income is recognized when billed to the customer, net of commissions paid to the producing agent. In addition, CIG may receive additional performance commissions based on achieving specific sales
goals and loss experience targets.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R) which amends SFAS 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company adopted SFAS 123R using the modified retrospective method. The modified retrospective method requires that
compensation cost be recognized beginning with the effective date 1) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and 2) based on the requirements of SFAS 123 for all awards granted to
employees prior to the effective date of SFAS 123R. The modified retrospective method also requires companies to adjust prior year financials based on the amounts previously reported under the SFAS 123 pro forma disclosures for all prior periods in
which SFAS 123 was effective.

Accounting for Derivatives

The Company accounts and reports for derivative instruments in accordance with Statement of Financial Accounting 149, Amendment of Statement of 133 on Derivative Instruments and Hedging Activities(SFAS
149). SFAS 149 amends Statement 133 for decisions made (1) as part of the Derivatives Implementation Group, (2) in connection with other Board projects dealing with financial instruments, and (3) in connection with
implementation issues raised in relation to the application of the definition of a derivative. Statements 133 and 149 require companies to recognize all derivatives as either assets or liabilities in the statement of financial position and to
measure those instruments at fair value.

Changes in the fair value of a derivative that is highly effective, and that is designated and
qualifies, as a fair value hedge, along with changes in fair value of the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in noninterest income. If a derivative has
ceased to be highly effective, hedge accounting is discontinued prospectively.

On May 21, 2002, a wholly-owned subsidiary of the
Company, Chittenden Capital Trust I (the Trust), issued $125 million of 8% trust preferred securities (TPS) to the public and invested the proceeds from this offering in an equivalent amount of junior subordinated debentures
issued by the Company. The TPS pay interest quarterly, are mandatorily redeemable on July 1, 2032 and may be redeemed by the Trust at par any time on or after July 1, 2007. Concurrent with the issuance of these securities, the Company
entered into interest rate swap agreements with two counterparties, in which the Company receives 8% fixed on the notional amount of $125 million, while paying the counterparties a variable rate based on the three month LIBOR (London Interbank
Offered Rate), plus approximately 122 basis points. The Companys risk management objective for undertaking the hedge is to hedge its exposure to changes in the risk free (or benchmark) rate, specifically LIBOR. The Company designated the swap
transactions as hedging the exposure in changes in the fair value of its obligation to pay 8% fixed; therefore the hedge is considered a fair value hedge. The Company assesses effectiveness of the hedge on an ongoing basis utilizing the dollar
offset method effectiveness test. In August 2006, the Company terminated the interest rate swap agreements with both counterparties and settled with a final payment of interest and termination fees of $372,000.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Restructuring Charges

The Company has adopted Statement of Financial Accounting Standard No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which contains specific guidance regarding the types
of, and circumstances under which, certain expenses related to restructuring activities can be accrued. In general, SFAS 146 requires that the Company have a detailed plan in place, which has been communicated to employees affected. Significant
management judgment is required in estimating the amount of expense that is appropriate to recognize in relation to these plans.

Accounting Policies
Adopted in the Current Period

Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement
No. 123 (revised 2004), Share-Based Payment (SFAS 123R) which amends SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
adopted SFAS 123R using the modified retrospective method. The modified retrospective method requires that compensation cost be recognized beginning with the effective date 1) based on the requirements of SFAS 123R for all share-based payments
granted after the effective date and 2) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R. The modified retrospective method also requires companies to adjust prior year financials
based on the amounts previously reported under the SFAS 123 pro forma disclosures for all prior periods in which SFAS 123 was effective. See Note 9 for a more detailed description of the Companys adoption of SFAS 123R.

Effective November 15, 2006, the Company adopted Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial-statement
misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatements
present in a companys balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements
as material if they are material according to either the income statement or balance sheet approach. The adoption of SAB 108 had no impact on the reported results of operations or financial conditions.

Effective December 15, 2006, the Company adopted Financial Accounting Standards Board Statement No. 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans (SFAS 158), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance
sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other
comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement datethe date at which the benefit obligation and plan assets are measuredis required to be the companys fiscal
year end. SFAS 158 was effective for publicly held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. See Note 10 for
a more detailed description of the Companys adoption of SFAS 158.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 2 INTANGIBLE ASSETS AND GOODWILL

Identified Intangible Assets



|                             |  |                                        |        |                         |   |                    |  |   |       
|---------------------------- |  | -------------------------------------- | ------ | ----------------------- | - | ------------------ |  | - | ------
|                             |  | As of December 31, 2006 (in thousands)
|                             |  | Gross CarryingAmount                   |        | AccumulatedAmortization |   | Net CarryingAmount
|Amortized intangible assets: |  |                                        |        |                         |   |                    |  |   |       
|Core deposit intangibles     |  | $                                      | 28,541 |                         | $ | 16,871             |  | $ | 11,670
|Customer list intangibles    |  |                                        | 3,498  |                         |   | 1,363              |  |   | 2,135 
|Acquired trust relationships |  |                                        | 4,000  |                         |   | 2,809              |  |   | 1,191 
|                             |  |                                        |        |                         |   |                    |  |   |       
|Total                        |  | $                                      | 36,039 |                         | $ | 21,043             |  | $ | 14,996
|                             |  |                                        |        |                         |   |                    |  |   |       



|                                              |  |   |      
|--------------------------------------------- |  | - | -----
|Aggregate Amortization Expense:               |  |   |      
|For the twelve months ended December 31, 2006 |  | $ | 2,659
|                                              | 
|Estimated Amortization Expense:               |  |   |      
|For year ended 12/31/07                       |  |   | 2,659
|For year ended 12/31/08                       |  |   | 2,659
|For year ended 12/31/09                       |  |   | 2,659
|For year ended 12/31/10                       |  |   | 2,542
|For year ended 12/31/11                       |  |   | 2,379

There were no changes in the carrying amount of goodwill for the year ended December 31,
2006.

Note 3 INVESTMENTS

Investment securities at December 31, 2006 and 2005 are as follows:



|                                                 |  |                |           |                 |   |                  |  |   |           |   |  |   |          
|------------------------------------------------ |  | -------------- | --------- | --------------- | - | ---------------- |  | - | --------- | - |  | - | ---------
|                                                 |  | AmortizedCost  |           | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|                                                 |  | (in thousands)
|2006                                             |  |                |           |                 |   |                  |  |   |           |   |  |   |          
|SECURITIES AVAILABLE FOR SALE:                   |  |                |           |                 |   |                  |  |   |           |   |  |   |          
|U.S. government agency obligations               |  | $              | 497,704   |                 | $ | 7                |  | $ | (9,905    | ) |  | $ | 487,806  
|Mortgage-backed securities                       |  |                | 332,823   |                 |   | 372              |  |   | (12,497   | ) |  |   | 320,698  
|Corporate bonds and notes                        |  |                | 329,397   |                 |   | 28               |  |   | (5,280    | ) |  |   | 324,145  
|U.S. Treasury securities                         |  |                | 3,841     |                 |   | 6                |  |   | (80       | ) |  |   | 3,767    
|Other debt securities                            |  |                | 820       |                 |   |                 |  |   |          |   |  |   | 820      
|Obligations of states and political subdivisions |  |                | 116       |                 |   |                 |  |   |          |   |  |   | 116      
|                                                 |  |                |           |                 |   |                  |  |   |           |   |  |   |          
|Total securities available for sale              |  | $              | 1,164,701 |                 | $ | 413              |  | $ | (27,762   | ) |  | $ | 1,137,352
|                                                 |  |                |           |                 |   |                  |  |   |           |   |  |   |          
|2005                                             |  |                |           |                 |   |                  |  |   |           |   |  |   |          
|SECURITIES AVAILABLE FOR SALE:                   |  |                |           |                 |   |                  |  |   |           |   |  |   |          
|U.S. government agency obligations               |  | $              | 548,734   |                 | $ | 80               |  | $ | (12,690   | ) |  | $ | 536,124  
|Corporate bonds and notes                        |  |                | 451,483   |                 |   | 630              |  |   | (6,661    | ) |  |   | 445,452  
|Mortgage-backed securities                       |  |                | 406,353   |                 |   | 1,107            |  |   | (11,710   | ) |  |   | 395,750  
|U.S. Treasury securities                         |  |                | 5,342     |                 |   | 2                |  |   | (105      | ) |  |   | 5,239    
|Other debt securities                            |  |                | 842       |                 |   |                 |  |   |          |   |  |   | 842      
|Obligations of states and political subdivisions |  |                | 500       |                 |   | 2                |  |   |          |   |  |   | 502      
|                                                 |  |                |           |                 |   |                  |  |   |           |   |  |   |          
|Total securities available for sale              |  | $              | 1,413,254 |                 | $ | 1,821            |  | $ | (31,166   | ) |  | $ | 1,383,909
|                                                 |  |                |           |                 |   |                  |  |   |           |   |  |   |          



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table presents information related to sales of debt securities in each of the years
ended December 31:



|                |  |                |        |      |   |        |  |   |        
|--------------- |  | -------------- | ------ | ---- | - | ------ |  | - | -------
|                |  | 2006           |        | 2005 |   | 2004  
|                |  | (in thousands)
|Proceeds        |  | $              | 37,455 |      | $ | 26,196 |  | $ | 195,437
|Realized losses |  |                | 138    |      |   | 97     |  |   | 2,448  
|Realized gains  |  |                | 148    |      |   | 103    |  |   | 4,783  

The market value of securities pledged to secure U.S. Treasury borrowings, public deposits,
securities sold under agreements to repurchase, and for other purposes required by law, amounted to $645 million and $519 million at December 31, 2006 and 2005, respectively.

The following table shows the maturity distribution of the amortized cost of the Companys investment securities at December 31, 2006, with
comparative totals for 2005. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations:



|                                                 |  |                |         |                               |   |                               |  |                |        |       |   |       |  |   |          
|------------------------------------------------ |  | -------------- | ------- | ----------------------------- | - | ----------------------------- |  | -------------- | ------ | ----- | - | ----- |  | - | ---------
|                                                 |  | WithinOne Year |         | After OneBut WithinFive Years |   | After FiveBut WithinTen Years |  | After TenYears |        | Total
|                                                 |  | (in thousands)
|Investment securities:                           |  |                |         |                               |   |                               |  |                |        |       |   |       |  |   |          
|U.S. Treasury securities                         |  | $              | 1,102   |                               | $ | 2,739                         |  | $              |       |       | $ |      |  | $ | 3,841    
|U.S. government agency obligations               |  |                | 122,365 |                               |   | 375,327                       |  |                | 12     |       |   |      |  |   | 497,704  
|Obligations of states and political subdivisions |  |                | 4       |                               |   | 14                            |  |                | 17     |       |   | 81    |  |   | 116      
|Mortgage-backed securities (1)                   |  |                | 93,101  |                               |   | 169,444                       |  |                | 68,990 |       |   | 1,288 |  |   | 332,823  
|Corporate bonds and notes                        |  |                | 95,740  |                               |   | 233,657                       |  |                |       |       |   |      |  |   | 329,397  
|Other debt securities                            |  |                | 10      |                               |   | 810                           |  |                |       |       |   |      |  |   | 820      
|                                                 |  |                |         |                               |   |                               |  |                |        |       |   |       |  |   |          
|Total investment securities                      |  | $              | 312,322 |                               | $ | 781,991                       |  | $              | 69,019 |       | $ | 1,369 |  | $ | 1,164,701
|                                                 |  |                |         |                               |   |                               |  |                |        |       |   |       |  |   |          
|Comparative totals for 2005                      |  | $              | 264,741 |                               | $ | 1,061,416                     |  | $              | 85,223 |       | $ | 1,874 |  | $ | 1,413,254

---

|(1) | Maturities of mortgage-backed securities are based on contractual payments and estimated mortgage loan prepayments.
|--- | -------------------------------------------------------------------------------------------------------------------



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table shows the maturity distribution of the fair value of the Companys
investment securities at December 31, 2006, with comparative totals for 2005. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations:



|                                                 |  |                |         |                               |   |                               |  |                |        |       |   |       |  |   |          
|------------------------------------------------ |  | -------------- | ------- | ----------------------------- | - | ----------------------------- |  | -------------- | ------ | ----- | - | ----- |  | - | ---------
|                                                 |  | WithinOne Year |         | After OneBut WithinFive Years |   | After FiveBut WithinTen Years |  | After TenYears |        | Total
|                                                 |  | (in thousands)
|INVESTMENT SECURITIES:                           |  |                |         |                               |   |                               |  |                |        |       |   |       |  |   |          
|U.S. Treasury securities                         |  | $              | 1,081   |                               | $ | 2,686                         |  | $              |       |       | $ |      |  | $ | 3,767    
|U.S. government agency obligations               |  |                | 121,138 |                               |   | 366,655                       |  |                | 13     |       |   |      |  |   | 487,806  
|Obligations of states and political subdivisions |  |                | 4       |                               |   | 14                            |  |                | 17     |       |   | 81    |  |   | 116      
|Mortgage-backed securities (1)                   |  |                | 89,710  |                               |   | 163,271                       |  |                | 66,476 |       |   | 1,241 |  |   | 320,698  
|Corporate bonds and notes                        |  |                | 95,440  |                               |   | 228,705                       |  |                |       |       |   |      |  |   | 324,145  
|Other debt securities                            |  |                | 10      |                               |   | 810                           |  |                |       |       |   |      |  |   | 820      
|                                                 |  |                |         |                               |   |                               |  |                |        |       |   |       |  |   |          
|Total investment securities                      |  | $              | 307,383 |                               | $ | 762,141                       |  | $              | 66,506 |       | $ | 1,322 |  | $ | 1,137,352
|                                                 |  |                |         |                               |   |                               |  |                |        |       |   |       |  |   |          
|Comparative totals for 2005                      |  | $              | 261,390 |                               | $ | 1,037,690                     |  | $              | 83,003 |       | $ | 1,826 |  | $ | 1,383,909

---

|(1) | Maturities of mortgage-backed securities are based on contractual repayments and estimated mortgage loan prepayments.
|--- | ---------------------------------------------------------------------------------------------------------------------

The following table is a summary of those investment securities that had been in a continuous unrealized loss position for less than and greater than
twelve months as of December 31, 2006 and 2005, respectively:

December 31, 2006 (in thousands):



|                                      |  |                     |        |                  |                     |       |           |       |                  |           |  |           |   |                  |   |           |  |          |  
|------------------------------------- |  | ------------------- | ------ | ---------------- | ------------------- | ----- | --------- | ----- | ---------------- | --------- |  | --------- | - | ---------------- | - | --------- |  | -------- | -
|                                      |  | Less than 12 months |        |                  | 12 months or longer |       |           | Total |                 
|                                      |  | FairValue           |        | UnrealizedLosses |                     |       | FairValue |       | UnrealizedLosses |           |  | FairValue |   | UnrealizedLosses |  
|Description of Investment Securities  |  |                     |        |                  |                     |       |           |       |                  |           |  |           |   |                  |   |           |  |          |  
|U.S. Treasury securities              |  | $                   | 0      |                  | $                   | 0     |           |       | $                | 3,265     |  | ($80      | ) |                  | $ | 3,265     |  | ($80     | )
|U.S. government agency obligations    |  |                     | 25,721 |                  |                     | (99   | )         |       |                  | 459,077   |  | (9,806    | ) |                  |   | 484,798   |  | (9,905   | )
|Mortgage-backed securities            |  |                     | 11,010 |                  |                     | (34   | )         |       |                  | 283,788   |  | (12,463   | ) |                  |   | 294,798   |  | (12,497  | )
|Corporate bonds and notes             |  |                     | 6,022  |                  |                     | (1    | )         |       |                  | 274,770   |  | (5,279    | ) |                  |   | 280,792   |  | (5,280   | )
|                                      |  |                     |        |                  |                     |       |           |       |                  |           |  |           |   |                  |   |           |  |          |  
|Total temporarily impaired securities |  | $                   | 42,753 |                  |                     | ($134 | )         |       | $                | 1,020,900 |  | ($27,628  | ) |                  | $ | 1,063,653 |  | ($27,762 | )
|                                      |  |                     |        |                  |                     |       |           |       |                  |           |  |           |   |                  |   |           |  |          |  



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 (in thousands):



|                                      |  |                     |         |                  |                     |   |           |       |                  |  |          |           |  |                  |           |  |          |  
|------------------------------------- |  | ------------------- | ------- | ---------------- | ------------------- | - | --------- | ----- | ---------------- |  | -------- | --------- |  | ---------------- | --------- |  | -------- | -
|                                      |  | Less than 12 months |         |                  | 12 months or longer |   |           | Total |                 
|                                      |  | FairValue           |         | UnrealizedLosses |                     |   | FairValue |       | UnrealizedLosses |  |          | FairValue |  | UnrealizedLosses |          
|Description of Investment Securities  |  |                     |         |                  |                     |   |           |       |                  |  |          |           |  |                  |           |  |          |  
|U.S. Treasury securities              |  | $                   | 288     |                  | ($5                 | ) |           | $     | 3,950            |  | ($100    | )         |  | $                | 4,238     |  | ($105    | )
|U.S. government agency obligations    |  |                     | 203,200 |                  | (3,061              | ) |           |       | 288,167          |  | (9,629   | )         |  |                  | 491,367   |  | (12,690  | )
|Mortgage-backed securities            |  |                     | 40,244  |                  | (547                | ) |           |       | 294,590          |  | (11,163  | )         |  |                  | 334,834   |  | (11,710  | )
|Corporate bonds and notes             |  |                     | 178,799 |                  | (2,438              | ) |           |       | 159,595          |  | (4,223   | )         |  |                  | 338,394   |  | (6,661   | )
|                                      |  |                     |         |                  |                     |   |           |       |                  |  |          |           |  |                  |           |  |          |  
|Total temporarily impaired securities |  | $                   | 422,531 |                  | ($6,051             | ) |           | $     | 746,302          |  | ($25,115 | )         |  | $                | 1,168,833 |  | ($31,166 | )
|                                      |  |                     |         |                  |                     |   |           |       |                  |  |          |           |  |                  |           |  |          |  

U.S. Treasury securities and U.S. government agency obligations. The unrealized losses on
the Companys investments in U.S. Treasury securities and direct obligations of U.S. government agencies were caused by interest rate increases. The Company has the ability and intent to hold these investments until a recovery of their
amortized cost, which may be at maturity, and does not consider these investments to be other-than-temporarily impaired at December 31, 2006.

Mortgage-backed securities. The unrealized losses on the Companys investment in federal agency mortgage-backed securities were caused by interest rate increases. The decline in market value is attributable to changes in
interest rates and not credit quality. The Company has the ability and intent to hold these investments until a recovery of their amortized cost, which may be at maturity, and does not consider these investments to be other-than-temporarily impaired
at December 31, 2006.

Corporate bonds and notes.The Companys unrealized loss on investments in corporate
bonds and notes was caused by a general increase in market interest rates. Included are 31 issuers with a carrying value of $286million and a fair value of $281 million. These bonds have at least an S&P rating of A- and a Moodys
rating of A3. The Company has the ability and intent to hold these investments until a recovery of their amortized cost, which may be at maturity, and does not consider these investments to be other-than-temporarily impaired at December 31,
2006.

Note 4 LOANS

The Companys lending activities are conducted primarily in Vermont, New Hampshire, Massachusetts and Maine, with additional activity relating to nearby market areas in New York, Connecticut and Quebec. The Banks make single-family and
multi-family residential loans, commercial real estate loans, commercial & industrial loans, and a variety of consumer loans and municipal loans. In addition, the Banks make loans for the construction of residential homes, multi-family and
commercial properties, and for land development.



59



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Major classifications of loans at December 31, 2006 and 2005 are as follows:



|                          |  |                |           |   |      |   |           |  
|------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                          |  | 2006           |           |   | 2005 |  
|                          |  | (in thousands) |          
|Commercial & industrial   |  | $              | 853,839   |   |      | $ | 848,420   |  
|Municipal                 |  |                | 141,522   |   |      |   | 160,357   |  
|Multi-family              |  |                | 216,049   |   |      |   | 196,590   |  
|Commercial real estate    |  |                | 1,942,685 |   |      |   | 1,778,202 |  
|Construction              |  |                | 232,000   |   |      |   | 192,165   |  
|Residential real estate   |  |                | 751,450   |   |      |   | 737,462   |  
|Home equity credit lines  |  |                | 322,124   |   |      |   | 316,465   |  
|Consumer                  |  |                | 237,541   |   |      |   | 257,829   |  
|                          |  |                |           |   |      |   |           |  
|Total loans               |  |                | 4,697,210 |   |      |   | 4,487,490 |  
|Allowance for loan losses |  |                | (62,160   | ) |      |   | (60,822   | )
|                          |  |                |           |   |      |   |           |  
|Net loans                 |  | $              | 4,635,050 |   |      | $ | 4,426,668 |  
|                          |  |                |           |   |      |   |           |  
|Loans held for sale       |  | $              | 17,354    |   |      | $ | 19,737    |  
|                          |  |                |           |   |      |   |           |  

Changes in the allowance for loan losses are summarized as follows:



|                                                  |  |                |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                  |  | 2006           |        |   | 2005 |   |        | 2004 | 
|                                                  |  | (in thousands) |       
|Balance at beginning of year                      |  | $              | 60,822 |   |      | $ | 59,031 |      |  | $ | 57,464 |  
|Provision for loan losses                         |  |                | 6,920  |   |      |   | 5,154  |      |  |   | 4,377  |  
|Loan recoveries                                   |  |                | 3,206  |   |      |   | 3,812  |      |  |   | 4,340  |  
|Loans charged off                                 |  |                | (8,788 | ) |      |   | (5,975 | )    |  |   | (7,150 | )
|Transferred to liability for unfunded commitments |  |                |       |   |      |   | (1,200 | )    |  |   |       |  
|                                                  |  |                |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                            |  | $              | 62,160 |   |      | $ | 60,822 |      |  | $ | 59,031 |  
|                                                  |  |                |        |   |      |   |        |      |  |   |        |  

The principal amount of loans on nonaccrual status was $20,093,800 and $15,819,400 at
December 31, 2006 and 2005, respectively. At the end of 2006 and 2005, the Company had no loans whose terms had been substantially modified in troubled debt restructurings.

The amount of interest which was not earned but which would have been earned had nonaccrual loans performed in accordance with their original terms and
conditions were as follows:



|                                                       |  |                |       |      |   |       |  |   |      
|------------------------------------------------------ |  | -------------- | ----- | ---- | - | ----- |  | - | -----
|                                                       |  | 2006           |       | 2005 |   | 2004 
|                                                       |  | (in thousands)
|Interest income in accordance with original loan terms |  | $              | 2,066 |      | $ | 1,895 |  | $ | 1,762
|Interest income recognized                             |  |                | 650   |      |   | 564   |  |   | 359  
|                                                       |  |                |       |      |   |       |  |   |      
|Reduction in interest income                           |  | $              | 1,416 |      | $ | 1,331 |  | $ | 1,403
|                                                       |  |                |       |      |   |       |  |   |      



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Information regarding loans that were considered to be impaired under SFAS 114 is as follows:



|                                                         |  |                |        |      |   |        |  |   |       
|-------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|                                                         |  | December 31,  
|                                                         |  | 2006           |        | 2005 |   | 2004  
|                                                         |  | (in thousands)
|Investment in impaired loans                             |  | $              | 12,941 |      | $ | 8,076  |  | $ | 15,211
|Impaired loans with no specific reserve                  |  |                | 11,852 |      |   | 4,581  |  |   | 8,670 
|Impaired loans with a specific reserve                   |  |                | 1,089  |      |   | 3,495  |  |   | 6,541 
|Specific reserve for impaired loans                      |  |                | 231    |      |   | 1,061  |  |   | 2,040 
|Average investment in impaired loans during the year     |  |                | 15,853 |      |   | 11,915 |  |   | 15,024
|Cash-basis interest income recognized during the year    |  |                |       |      |   | 143    |  |   | 2     
|Accrual-basis interest income recognized during the year |  |                |       |      |   |       |  |   |      

Residential mortgage loans serviced for others, which are not reflected in the consolidated
balance sheets, totaled approximately $2.037 billion and $2.098 billion at December 31, 2006 and 2005, respectively. No recourse provisions exist in connection with such servicing.

The following table is a summary of activity for mortgage servicing rights purchased and originated for the three years ended December 31, 2006:



|                             |  |                |      |   |            |   |        |       |  |   |        |  
|---------------------------- |  | -------------- | ---- | - | ---------- | - | ------ | ----- |  | - | ------ | -
|                             |  | Purchased      |      |   | Originated |   |        | Total | 
|                             |  | (in thousands) |     
|Balance at December 31, 2003 |  | $              | 573  |   |            | $ | 11,692 |       |  | $ | 12,265 |  
|Additions                    |  |                |     |   |            |   | 5,090  |       |  |   | 5,090  |  
|Amortization                 |  |                | (551 | ) |            |   | (6,669 | )     |  |   | (7,220 | )
|Recovery of impairment       |  |                | 388  |   |            |   | 1,303  |       |  |   | 1,691  |  
|                             |  |                |      |   |            |   |        |       |  |   |        |  
|Balance at December 31, 2004 |  | $              | 410  |   |            | $ | 11,416 |       |  | $ | 11,826 |  
|Additions                    |  |                |     |   |            |   | 5,619  |       |  |   | 5,619  |  
|Amortization                 |  |                | (177 | ) |            |   | (3,907 | )     |  |   | (4,084 | )
|Recovery of impairment       |  |                | 78   |   |            |   | 302    |       |  |   | 380    |  
|                             |  |                |      |   |            |   |        |       |  |   |        |  
|Balance at December 31, 2005 |  | $              | 311  |   |            | $ | 13,430 |       |  | $ | 13,741 |  
|Additions                    |  |                |     |   |            |   | 3,931  |       |  |   | 3,931  |  
|Amortization                 |  |                | (83  | ) |            |   | (3,451 | )     |  |   | (3,534 | )
|Recovery of impairment       |  |                | 5    |   |            |   | 12     |       |  |   | 17     |  
|                             |  |                |      |   |            |   |        |       |  |   |        |  
|Balance at December 31, 2006 |  | $              | 233  |   |            | $ | 13,922 |       |  | $ | 14,155 |  
|                             |  |                |      |   |            |   |        |       |  |   |        |  

SFAS 140 requires enterprises to measure the impairment of servicing assets based on the
difference between the carrying amount of the servicing rights and their current fair value. Fair value is measured as the discounted cash flow of future servicing income expected to be received based upon market conditions at the time the estimate
is made. Significant assumptions made by management at December 31, 2006 include the weighted average discount rate (9.8%), weighted average prepayment speed (226 PSA/13.56 CPR), weighted average servicing fee (25.60 basis points) and net cost
to service loans ($17/loan). Based upon these assumptions, the Company calculated the fair value of its servicing rights to be $19.382 million at December 31, 2006.

The Company stratifies its servicing portfolio based upon interest rate (in increments of 50 basis points) and original loan term (primarily 15 and 30 year). The estimated market value of capitalized servicing rights
may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds, and discount rates. At December 31, 2006 and 2005, the impairment valuation allowance was $622,000 and
$639,000, respectively.



61



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The estimated sensitivity of the current fair value of the mortgage servicing rights portfolio to
changes in interest rates at December 31, 2006, was as follows:



|                                |  |                                     |  
|------------------------------- |  | ----------------------------------- | -
|Change in Market Interest Rates |  | Change in fair value (in thousands) |  
|+25 bps                         |  | 1,050                               |  
|+50 bps                         |  | 2,028                               |  
|+100 bps                        |  | 3,613                               |  
|+200 bps                        |  | 5,552                               |  
|25 bps                         |  | (1,171                              | )
|50 bps                         |  | (2,305                              | )
|100 bps                        |  | (4,313                              | )
|200 bps                        |  | (6,967                              | )

The sensitivities in the table above are hypothetical and should be used with caution. The effect
of a variation in a particular assumption on the fair value of the mortgage servicing right is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or
counteract the sensitivities. Because the amount recognized on the Companys balance sheet is at the lower of cost or market (fair value), changes in the calculated fair value of mortgage servicing rights will not necessarily translate to a
corresponding change in the amount shown on the balance sheet.

Note 5 PREMISES AND
EQUIPMENT

Premises and equipment at December 31, 2006 and 2005 are summarized as follows:



|                                          |  |                |         |   |      |   |         |                               |  |            
|----------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ----------------------------- |  | -----------
|                                          |  | 2006           |         |   | 2005 |   |         | EstimatedOriginalUseful Lives
|                                          |  | (in thousands)
|Land                                      |  | $              | 12,616  |   |      | $ | 12,672  |                               |  |           
|Buildings and improvements                |  |                | 62,085  |   |      |   | 62,734  |                               |  | 25-50 years
|Leasehold improvements                    |  |                | 14,206  |   |      |   | 13,625  |                               |  | 2-50 years 
|Furniture and equipment                   |  |                | 54,740  |   |      |   | 52,851  |                               |  | 3-15 years 
|Construction in progress                  |  |                | 1,119   |   |      |   | 406     |                               |  |           
|                                          |  |                |         |   |      |   |         |                               |  |            
|Premises and equipment, gross             |  |                | 144,766 |   |      |   | 142,288 |                               |  |            
|Accumulated depreciation and amortization |  |                | (77,730 | ) |      |   | (72,557 | )                             |  |            
|                                          |  |                |         |   |      |   |         |                               |  |            
|Premises and equipment, net               |  | $              | 67,036  |   |      | $ | 69,731  |                               |  |            
|                                          |  |                |         |   |      |   |         |                               |  |            

Total depreciation expense amounted to approximately $7,427,000, $8,066,000 and $7,977,000 in
2006, 2005 and 2004.

The Company is obligated under various noncancelable operating leases for premises and equipment expiring in various
years through 2021. Total lease expense, net of income from subleases, amounted to approximately $4,480,000, $4,518,000 and $4,560,000 in 2006, 2005, and 2004, respectively.



62



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Future minimum rental commitments for noncancelable operating leases on premises and equipment with
initial or remaining terms of one year or more at December 31, 2006 are as follows:



|                             |  |                  |       
|---------------------------- |  | ---------------- | ------
|Year                         |  | LeaseObligations
|                             |  | (in thousands)  
|2007                         |  | $                | 5,013 
|2008                         |  |                  | 3,563 
|2009                         |  |                  | 2,848 
|2010                         |  |                  | 2,513 
|2011                         |  |                  | 2,135 
|Thereafter                   |  |                  | 7,568 
|                             |  |                  |       
|Total minimum lease payments |  | $                | 23,640
|                             |  |                  |       

Note 6 BORROWINGS

Borrowings at December 31, 2006 and 2005 consisted of the following:



|                                                                   |  |                |         |      |   |        
|------------------------------------------------------------------ |  | -------------- | ------- | ---- | - | -------
|                                                                   |  | 2006           |         | 2005
|                                                                   |  | (in thousands)
|Securities sold under agreements to repurchase                     |  | $              | 73,611  |      |   | 56,315 
|Trust preferred securities                                         |  |                | 125,000 |      |   | 125,000
|Bank revolving debt @ 5.03%                                        |  |                | 8,328   |      |   | 3,273  
|Note Payable, 7.87% in 2006 and 6.18% in 2005, due January 1, 2015 |  |                | 259     |      |   | 290    
|FHLB Advances:                                                     |  |                |         |      |   |        
|Maturing December 27, 2010 @ 4.80% (called 6/26/06)                |  |                |        |      |   | 20,000 
|Maturing April 19, 2011 @ 3.50%                                    |  |                | 1,368   |      |   | 1,416  
|Maturing August 1, 2011 @ 5.00%                                    |  |                | 560     |      |   | 560    
|Maturing January 17, 2012 @ 3.95% (called 1/17/06)                 |  |                |        |      |   | 20,000 
|Maturing December 29, 2023 @ 0.13%                                 |  |                | 452     |      |   | 469    
|Maturing July 1, 2026 @ 0.1%                                       |  |                | 169     |      |   |       
|Maturing July 1, 2026 @ 2.50%                                      |  |                | 273     |      |   |       
|                                                                   |  |                |         |      |   |        
|Total Borrowings                                                   |  | $              | 210,020 |      | $ | 227,323
|                                                                   |  |                |         |      |   |        

Securities sold under agreements to repurchase are collateralized by U.S. Treasury and agency
securities, mortgage-backed securities and corporate notes or bonds. These assets had a carrying value and a market value of $82,254,000 and $78,369,000, respectively, at December 31, 2006, and $63,802,000 and $61,418,000, respectively, at
December 31, 2005. The borrowings from the Federal Home Loan Bank of Boston are secured by residential mortgage loans held in the Companys loan portfolio.

The following information relates to securities sold under agreements to repurchase:



|                                            |  |                |         |   |      |   |         |      |  |   |        |  
|------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                            |  | 2006           |         |   | 2005 |   |         | 2004 | 
|                                            |  | (in thousands) |        
|Average balance outstanding during the year |  | $              | 86,045  |   |      | $ | 86,701  |      |  | $ | 73,860 |  
|Average interest rate during the year       |  |                | 3.39    | % |      |   | 1.73    | %    |  |   | 0.84   | %
|Maximum amount outstanding at any month-end |  | $              | 138,773 |   |      | $ | 149,750 |      |  | $ | 79,365 |  



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following information relates to FHLB borrowings:



|                                            |  |                |        |   |      |   |        |      |  |   |        |  
|------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                            |  | 2006           |        |   | 2005 |   |        | 2004 | 
|                                            |  | (in thousands) |       
|Average balance outstanding during the year |  | $              | 13,166 |   |      | $ | 52,365 |      |  | $ | 52,942 |  
|Average interest rate during the year       |  |                | 4.39   | % |      |   | 4.30   | %    |  |   | 4.47   | %
|Maximum amount outstanding at any month-end |  | $              | 22,440 |   |      | $ | 52,533 |      |  | $ | 52,535 |  

On May 21, 2002, a wholly-owned subsidiary of the Company, Chittenden Capital Trust I (the
Trust), issued $125 million of 8% trust preferred securities (TPS) to the public and invested the proceeds from this offering in an equivalent amount of junior subordinated debentures issued by the Company. These debentures
are the sole asset of the trust subsidiary. The proceeds from the offering, which was net of $4.5 million of issuance costs, were used as the cash consideration in the Granite Bank acquisition. The TPS pay interest quarterly, are mandatorily
redeemable on July 1, 2032 and may be redeemed by the Trust at par any time on or after July 1, 2007. The Company has fully and unconditionally guaranteed the TPS issued by the Trust.

Concurrent with the issuance of these securities, the Company entered into interest rate swap agreements with two counterparties, in which the Company
received 8% fixed on the notional amount of $125 million, while paying the counterparties a variable rate based on the three month LIBOR (London Interbank Offered Rate), plus approximately 122 basis points. In August 2006, the Company terminated the
interest rate swap agreements with both counterparties and settled with a final payment of interest and termination fees of $372,000.

The
following information relates to TPS borrowings:



|                                                                             |  |                |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                             |  | 2006           |         |   | 2005 |   |         | 2004 | 
|                                                                             |  | (in thousands) |        
|Average balance outstanding during the year                                  |  | $              | 125,000 |   |      | $ | 125,000 |      |  | $ | 125,000 |  
|Average effective interest rate during the year (net of interest rate swaps) |  |                | 6.84    | % |      |   | 4.58    | %    |  |   | 2.73    | %
|Maximum amount outstanding at any month-end                                  |  | $              | 125,000 |   |      | $ | 125,000 |      |  | $ | 125,000 |  

Note 7 INCOME TAXES

Income tax expense consists of the following:



|                   |  |                |        |   |      |   |        |      |  |   |        |  
|------------------ |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                   |  | 2006           |        |   | 2005 |   |        | 2004 | 
|                   |  | (in thousands) |       
|Current payable    |  |                |        |   |      |   |        |      |  |   |        |  
|Federal            |  | $              | 38,461 |   |      | $ | 44,668 |      |  | $ | 35,070 |  
|State              |  |                | 4,340  |   |      |   | 3,968  |      |  |   | 3,927  |  
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|                   |  |                | 42,801 |   |      |   | 48,636 |      |  |   | 38,997 |  
|Deferred (prepaid) |  |                |        |   |      |   |        |      |  |   |        |  
|Federal            |  |                | (2,300 | ) |      |   | (4,921 | )    |  |   | 13     |  
|State              |  |                | (65    | ) |      |   | (472   | )    |  |   | (354   | )
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|                   |  |                | (2,365 | ) |      |   | (5,393 | )    |  |   | (341   | )
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|Income tax expense |  | $              | 40,436 |   |      | $ | 43,243 |      |  | $ | 38,656 |  
|                   |  |                |        |   |      |   |        |      |  |   |        |  



64



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Current income taxes payable, included in other liabilities, was $3,813,000 at December 31,
2006, compared to a current income taxes receivable, included in other assets of $2,285,000 at December 31, 2005.

The following is a
reconciliation of the provision for Federal income taxes, calculated at the statutory rate, to the recorded income tax expense:



|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | 2006           |        |   | 2005 |   |        | 2004 | 
|                                              |  | (in thousands) |       
|Computed tax at statutory Federal rate of 35% |  | $              | 44,067 |   |      | $ | 43,849 |      |  | $ | 38,968 |  
|Increase (decrease) in taxes from:            |  |                |        |   |      |   |        |      |  |   |        |  
|Amortization of intangible assets             |  |                |       |   |      |   | 98     |      |  |   | 98     |  
|Tax-exempt interest, net                      |  |                | (1,928 | ) |      |   | (1,506 | )    |  |   | (954   | )
|Dividends received deduction                  |  |                |       |   |      |   |       |      |  |   | (13    | )
|State taxes, net of Federal tax benefit       |  |                | 2,779  |   |      |   | 2,219  |      |  |   | 2,320  |  
|Tax credits                                   |  |                | (4,324 | ) |      |   | (2,034 | )    |  |   | (2,169 | )
|Other, net                                    |  |                | (158   | ) |      |   | 617    |      |  |   | 406    |  
|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|Total                                         |  | $              | 40,436 |   |      | $ | 43,243 |      |  | $ | 38,656 |  
|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|Effective income tax rate                     |  |                | 32.12  | % |      |   | 34.52  | %    |  |   | 34.72  | %

The components of the net deferred tax asset at December 31, 2006 and 2005 are as follows:



|                                                   |  |                |        |   |      |   |        |  
|-------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                   |  | 2006           |        |   | 2005 |  
|                                                   |  | (in thousands) |       
|Allowance for loan losses                          |  | $              | 23,297 |   |      | $ | 22,630 |  
|Deferred compensation and pension                  |  |                | 3,552  |   |      |   | 3,832  |  
|Depreciation                                       |  |                | (2,862 | ) |      |   | (2,256 | )
|Accrued liabilities                                |  |                |       |   |      |   | (1,028 | )
|Unrealized losses on securities available for sale |  |                | 10,027 |   |      |   | 10,694 |  
|Basis differences, purchase accounting             |  |                | (2,401 | ) |      |   | (2,954 | )
|Core deposit intangible                            |  |                | (4,738 | ) |      |   | (4,690 | )
|Lease financing                                    |  |                | (9     | ) |      |   | (333   | )
|Mortgage servicing                                 |  |                | (5,073 | ) |      |   | (4,803 | )
|Stock based compensation                           |  |                | 5,166  |   |      |   | 8,866  |  
|Other                                              |  |                | 2,921  |   |      |   | (1,002 | )
|                                                   |  |                |        |   |      |   |        |  
|                                                   |  | $              | 29,880 |   |      | $ | 28,956 |  
|                                                   |  |                |        |   |      |   |        |  

Note 8 STOCKHOLDERS EQUITY

Treasury Stock

During 2006, the Company repurchased a
total of 1.8 million shares of common stock. On October 20, 2005, the Company announced that the Board of Directors authorized the repurchase of up to 1,000,000 shares of the Companys common stock in negotiated transactions or open
market purchases. Chittenden repurchased all of those shares by June 30, 2006. On July 19, 2006 the Board of Directors authorized the repurchase of an additional 1,000,000 shares of the Companys common stock. The Company repurchased
800,000 of this second authorization during 2006.



65



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Dividends

Dividends paid by the Banks are the primary source of funds available to the Company for payment of dividends to its stockholders and for other corporate needs. Applicable federal and state statutes, regulations, and guidelines impose
restrictions on the amount of dividends that may be declared by the Banks. The Company paid dividends to stockholders of $36.2 million, $33.4 million and $31.9 million, which represented $0.78, $0.72, and $0.70 per share during 2006, 2005, and
2004, respectively.

Earnings Per Share

The following table summarizes the calculation of basic and diluted earnings per share:



|                                                     |  |                                            |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------- |  | ------------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                     |  | 2006                                       |        |   | 2005 |   |        | 2004 | 
|                                                     |  | (in thousands except per shareinformation) |       
|Net income                                           |  | $                                          | 85,468 |   |      | $ | 82,039 |      |  | $ | 72,680 |  
|                                                     |  |                                            |        |   |      |   |        |      |  |   |        |  
|Weighted average common shares outstanding           |  |                                            | 46,235 |   |      |   | 46,503 |      |  |   | 46,106 |  
|Dilutive effect of common stock equivalents          |  |                                            | 567    |   |      |   | 548    |      |  |   | 625    |  
|                                                     |  |                                            |        |   |      |   |        |      |  |   |        |  
|Weighted average common and common equivalent shares |  |                                            | 46,802 |   |      |   | 47,051 |      |  |   | 46,731 |  
|                                                     |  |                                            |        |   |      |   |        |      |  |   |        |  
|Basic earnings per share                             |  | $                                          | 1.85   |   |      | $ | 1.76   |      |  | $ | 1.58   |  
|Dilutive effect of common stock equivalents          |  |                                            | (0.02  | ) |      |   | (0.02  | )    |  |   | (0.02  | )
|                                                     |  |                                            |        |   |      |   |        |      |  |   |        |  
|Diluted earnings per share                           |  | $                                          | 1.83   |   |      | $ | 1.74   |      |  | $ | 1.56   |  
|                                                     |  |                                            |        |   |      |   |        |      |  |   |        |  

The following table summarizes options that could potentially dilute earnings per share in the
future which were not included in the computation of the common stock equivalents because to do so would have been antidilutive:



|                                |  |      |         |      |   |         |  |   |        
|------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                |  | 2006 |         | 2005 |   | 2004   
|Anti-dilutive options           |  |      | 860,990 |      |   | 445,725 |  |   | 449,414
|Weighted average exercise price |  | $    | 29.51   |      | $ | 29.90   |  | $ | 29.90  

Accumulated Other Comprehensive Income

Comprehensive income is the total of net income and all other non-owner changes in equity. The Company has chosen to display comprehensive income in the
Consolidated Statements of Changes in Stockholders Equity. The following table summarizes reclassification detail for other comprehensive income for the years ended December 31:



|                                                                                          |  |                |        |   |      |    |        |      |  |    |        |  
|----------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | -- | ------ | ---- |  | -- | ------ | -
|                                                                                          |  | 2006           |        |   | 2005 |    |        | 2004 | 
|                                                                                          |  | (in thousands) |       
|Unrealized gains (losses) on securities available for sale, net of tax                    |  | $              | 2,071  |   |      | ($ | 19,632 | )    |  | ($ | 13,405 | )
|Reclassification adjustment for realized (gains) losses arising during period, net of tax |  |                | (7     | ) |      |    | (4     | )    |  |    | (1,518 | )
|Adoption of SFAS 158 pension liability, net of tax                                        |  |                | (7,102 | ) |      |    |       |      |  |    |       |  
|Foreign currency translation adjustments                                                  |  |                | (2     | ) |      |    | (4     | )    |  |    |       |  
|                                                                                          |  |                |        |   |      |    |        |      |  |    |        |  
|Total accumulated other comprehensive income                                              |  | ($             | 5,040  | ) |      | ($ | 19,640 | )    |  | ($ | 14,923 | )
|                                                                                          |  |                |        |   |      |    |        |      |  |    |        |  



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 9 STOCK PLANS

The Company has two stock option plans: The Stock Incentive Plan, and the Directors Omnibus Long-term Incentive Plan. Effective January 1,
2006, the Company adopted SFAS 123R using the modified retrospective method to account for share-based payments to employees and the Companys Board of Directors. In accordance with the modified retrospective method, the Company has adjusted
previously reported results to reflect the effect of expensing stock options granted during those periods. The cumulative adjustment associated with the adoption of SFAS 123R increased the Companys deferred tax asset $4.2 million, surplus
$19.8 million and decreased retained earnings $15.6 million as of the quarter ended March 31, 2006.

Under the plans there are various
types of stock incentives, including, but not limited to options; restricted stock which vests after a specified period of time; unrestricted stock awards; and performance awards. The primary type of share-based payment utilized by the Company is
stock options. Stock options are awards which allow the employee to purchase shares of the Companys stock at a fixed price. In accordance with Chittendens Stock Incentive Plan, stock options are granted at an exercise price equal to the
Company stock price at the date of grant. Prior to 2006, the stock options issued by the Company generally vested immediately at the time of issuance. In 2006, the Companys Board of Directors changed this practice and vested the new option
grants over one year. There were a total of 7,688,324 shares at December 31, 2006 and 2005 available to be issued under the plans and 6,163,698 and 5,636,131 had been issued at each of these dates.

The Company has a Performance Share Program that governs Performance Share Awards under the Stock
Incentive Plan. Performance awards consist of shares of the Companys common stock to be issued at the conclusion of the three-year performance cycle provided that performance goals are met as measured by one or more of the following: corporate
profitability, EPS, ROE and/or other measures as deemed relevant by the Executive Committee. In 2006 and 2005, targets of 45,500 and 41,460 Performance Shares were set that could be earned at the end of the three-year performance cycle if the
performance measures are attained. The plan is a leveraged plan meaning that if the Company is ranked in the 100thpercentile versus its comparison group, up to 150% of the targeted amount of shares could be earned. In order to earn the full target award of 45,500, the Company would need to be ranked in the 75thpercentile. If the Company is not ranked in at least the 25thpercentile, no shares will be awarded. Notwithstanding these guidelines, the Board of Directors has the authority to reduce, but not increase, these awards if they deem it to be appropriate in the
circumstances. Salary expenses related to the performance shares were $855,000 in 2006.



67



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following tables summarize information regarding the Companys stock option plans:



|                                 |  |                                         |       |         |           |  
|-------------------------------- |  | --------------------------------------- | ----- | ------- | --------- | -
|                                 |  | WeightedAverage ExercisePrice Per Share |       | Options |          
|December 31, 2003                |  | $                                       | 21.09 |         | 3,105,612 |  
|Granted                          |  |                                         | 27.71 |         | 771,226   |  
|Exercised                        |  |                                         | 18.35 |         | (529,292  | )
|Expired                          |  |                                         | 28.83 |         | (313      | )
|                                 |  |                                         |       |         |           |  
|December 31, 2004                |  |                                         | 23.07 |         | 3,347,233 |  
|Granted                          |  |                                         | 24.52 |         | 485,050   |  
|Exercised                        |  |                                         | 21.66 |         | (452,184  | )
|Expired                          |  |                                         | 6.53  |         | (6,476    | )
|                                 |  |                                         |       |         |           |  
|December 31, 2005                |  |                                         | 23.49 |         | 3,373,623 |  
|Granted                          |  |                                         | 29.11 |         | 489,500   |  
|Exercised                        |  |                                         | 22.86 |         | (299,887  | )
|Forfeited                        |  |                                         | 29.11 |         | (7,125    | )
|Expired                          |  |                                         | 29.45 |         | (19,125   | )
|                                 |  |                                         |       |         |           |  
|Outstanding at December 31, 2006 |  |                                         | 24.28 |         | 3,536,986 |  
|Exercisable at December 31, 2006 |  | $                                       | 24.28 |         | 3,536,986 |  
|                                 |  |                                         |       |         |           |  

OPTIONS OUTSTANDING AND EXERCISABLE

December 31, 2006



|                        |  |                     |  |                                           |  |                               |  |                    |  |                              
|----------------------- |  | ------------------- |  | ----------------------------------------- |  | ----------------------------- |  | ------------------ |  | -----------------------------
|                        |  | Options Outstanding |  | Options Exercisable                      
|Range of ExercisePrices |  | OptionsOutstanding  |  | WeightedAverageRemaining Contractual Life |  | WeightedAverageExercise Price |  | OptionsOutstanding |  | WeightedAverageExercise Price
|$14.62 - $19.97         |  | 579,876             |  | 4.43                                      |  | $18.99                        |  | 579,876            |  | $18.99                       
|$20.15 - $21.71         |  | 455,165             |  | 4.52                                      |  | $20.91                        |  | 455,165            |  | $20.91                       
|$21.83 - $22.93         |  | 455,781             |  | 4.78                                      |  | $22.70                        |  | 455,781            |  | $22.70                       
|$23.23 - $24.50         |  | 638,580             |  | 7.56                                      |  | $24.01                        |  | 638,580            |  | $24.01                       
|$24.60 - $26.73         |  | 527,850             |  | 6.57                                      |  | $26.08                        |  | 527,850            |  | $26.08                       
|$27.06 - $28.75         |  | 42,967              |  | 1.33                                      |  | $28.01                        |  | 42,967             |  | $28.01                       
|$29.11 - $29.11         |  | 451,875             |  | 9.21                                      |  | $29.11                        |  | 451,875            |  | $29.11                       
|$29.20 - $36.02         |  | 384,892             |  | 6.76                                      |  | $30.03                        |  | 384,892            |  | $30.03                       
|                        |  |                     |  |                                           |  |                               |  |                    |  |                              
|$14.62 - $36.02         |  | 3,536,986           |  | 6.20                                      |  | $24.28                        |  | 3,536,986          |  | $24.28                       
|                        |  |                     |  |                                           |  |                               |  |                    |  |                              

The Company estimates the fair value of stock option grants using the Black-Scholes valuation
model and the key input assumptions are: expected volatility, expected term of option, risk-free interest rate and dividend yield. Expected volatility estimates are developed by the Company based on historical volatility of the Companys stock.
The Company uses historical data to estimate the expected term of the options. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield in effect at the grant date. The dividend yield
represents the expected dividends on the Company stock. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are consistent with SFAS 123R. Estimates of fair value are not intended to
predict the actual future value ultimately realized by employees who receive share-based awards, and subsequent events are not indicative of the reasonableness of original estimates of fair value made by the Company under SFAS 123R.



68



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table presents the key input assumptions for the Black-Scholes valuation model for
grants in 2006, 2005 and 2004:



|                        |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                        |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Expected term (years)   |  |      | 4.79  |   |      |   | 4.76  |      |  |   | 4.67  |  
|Volatility              |  |      | 24.67 |   |      |   | 21.97 |      |  |   | 22.45 |  
|Risk-free interest rate |  |      | 4.71  | % |      |   | 3.78  | %    |  |   | 3.25  | %
|Dividend yield          |  |      | 2.47  | % |      |   | 2.91  | %    |  |   | 2.63  | %
|Fair value per share    |  | $    | 6.55  |   |      | $ | 4.36  |      |  | $ | 5.55  |  

The total intrinsic value (market value on date of exercise less grant price) of options exercised
during the twelve months ended December 31, 2006, 2005 and 2004, was $1.9 million, $3.1 million, and $4.6 million, respectively. The total cash received from employees as a result of employee stock option exercises for the years ended
December 31, 2006, 2005, and 2004 was approximately $6.8 million, $9.3 million and $9.7 million, respectively. The tax benefit realized as a result of the stock option exercises was $619,000 in 2006 compared with $1.1 million in 2005 and $1.6
million in 2004.

The total compensation costs related to options were $3.2 million, $2.1 million and $3.8 million during 2006, 2005, and
2004, respectively. These amounts are included in salary expense in the accompanying consolidated Statements of Income.

Note 10 EMPLOYEE
BENEFITS

Pension Plan

The Company sponsors a qualified defined benefit pension plan that covers substantially all of its employees who meet minimum age and service requirements.

In 2005, the Board of Directors approved changes to the Companys retirement program. As a result, on December 31, 2005, benefits accrued under the defined benefit Pension Account Plan were frozen based on
participants current service and pay levels. Effective January 1, 2006, the Companys annual contribution to the Incentive Savings and Profit Sharing Plan (401(k) Plan) was enhanced for all eligible employees.

The changes in the benefit obligation for the years ended December 31, 2006 and 2005 are as follows:



|                                                  |  |                |        |   |      |   |         |  
|------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | -
|                                                  |  | 2006           |        |   | 2005 |  
|                                                  |  | (in thousands) |       
|Projected benefit obligation at beginning of year |  | $              | 67,068 |   |      | $ | 71,378  |  
|Service cost                                      |  |                | 995    |   |      |   | 4,189   |  
|Interest cost                                     |  |                | 3,843  |   |      |   | 4,030   |  
|Actuarial loss                                    |  |                | (2,044 | ) |      |   | 1,901   |  
|Disbursements                                     |  |                | (2,710 | ) |      |   | (3,751  | )
|Curtailment                                       |  |                |       |   |      |   | (10,679 | )
|                                                  |  |                |        |   |      |   |         |  
|Projected benefit obligation at end of year       |  | $              | 67,152 |   |      | $ | 67,068  |  
|                                                  |  |                |        |   |      |   |         |  
|Accumulated Benefit obligation at end of year     |  | $              | 67,152 |   |      | $ | 67,068  |  
|                                                  |  |                |        |   |      |   |         |  



69



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Weighted-average assumptions used in determining pension obligations for the years ended
December 31:



|                              |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | -
|                              |  | 2006 |   |  | 2005 |  
|Discount rate                 |  | 6.00 | % |  | 5.75 | %
|Rate of compensation increase |  | N/A  |   |  | 4.50 | %

The changes in the plan assets for the years ended December 31, 2006 and 2005 are as follows:



|                                          |  |                |        |   |      |   |        |  
|----------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                          |  | 2006           |        |   | 2005 |  
|                                          |  | (in thousands) |       
|Fair value of assets at beginning of year |  | $              | 73,076 |   |      | $ | 64,450 |  
|Actual return on plan assets              |  |                | 5,216  |   |      |   | 4,877  |  
|Company contributions                     |  |                | 1,500  |   |      |   | 7,500  |  
|Disbursements                             |  |                | (2,710 | ) |      |   | (3,751 | )
|                                          |  |                |        |   |      |   |        |  
|Fair value of assets at end of year       |  | $              | 77,082 |   |      | $ | 73,076 |  
|                                          |  |                |        |   |      |   |        |  

The asset allocation for the Companys pension plan at December 31, 2005 and 2006, and
the target asset allocation for 2007, by asset category are as follows:



|                  |  |      |   |  |      |   |  |                              |  
|----------------- |  | ---- | - |  | ---- | - |  | ---------------------------- | -
|Asset Category    |  | 2005 |   |  | 2006 |   |  | Target Asset Allocation 2007 |  
|Equity securities |  | 67   | % |  | 63   | % |  | 40-75                        | %
|Debt securities   |  | 20   | % |  | 17   | % |  | 20-55                        | %
|Cash              |  | 13   | % |  | 20   | % |  | 0-20                         | %
|                  |  |      |   |  |      |   |  |                              |  
|Total             |  | 100  | % |  | 100  | % |  |                              |  

Chittenden uses a measurement date of September 30 for its pension plan.

The Companys investment policy seeks to achieve long-term capital growth to enable the plan to meet its future benefit obligations to participants
and to maintain liquidity sufficient to cover plan distributions without exposing the Company to undue investment risk. The Retirement Plan Committee is responsible for overseeing the investment performance of the plan, including evaluating the
performance of the investment managers. The Committee is also responsible for periodically reviewing the plans investment objectives and guidelines to ensure they remain appropriate.

Funded status, end of year:



|                                                                   |  |                |         |   |      |   |         |  
|------------------------------------------------------------------ |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                   |  | 2006           |         |   | 2005 |  
|                                                                   |  | (in thousands) |        
|Fair value of plan assets                                          |  | $              | 77,082  |   |      | $ | 73,076  |  
|Projected benefit obligation                                       |  |                | (67,152 | ) |      |   | (67,068 | )
|                                                                   |  |                |         |   |      |   |         |  
|Funded status                                                      |  |                | 9,930   |   |      |   | 6,008   |  
|Prior service cost not yet recognized in net periodic pension cost |  |                | N/A     |   |      |   |        |  
|Unrecognized net loss from actual experience versus assumptions    |  |                | N/A     |   |      |   | 13,325  |  
|                                                                   |  |                |         |   |      |   |         |  
|Amount recognized, end of year                                     |  | $              | 9,930   |   |      | $ | 19,333  |  
|                                                                   |  |                |         |   |      |   |         |  



70



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Amounts recognized in the statement of financial position:



|                     |  |                |       |      |   |       
|-------------------- |  | -------------- | ----- | ---- | - | ------
|                     |  | 2006           |       | 2005
|                     |  | (in thousands)
|Noncurrent asset     |  | $              | 9,930 |      | $ |      
|Prepaid benefit cost |  |                |      |      |   | 19,333
|                     |  |                |       |      |   |       
|Total                |  | $              | 9,930 |      | $ | 19,333
|                     |  |                |       |      |   |       

Amounts recognized in accumulated other comprehensive income (pretax):



|                                       |  |                |        |      |    
|-------------------------------------- |  | -------------- | ------ | ---- | ---
|                                       |  | 2006           |        | 2005
|                                       |  | (in thousands)
|Net actuarial loss / (gain)            |  | $              | 11,136 |      | N/A
|Prior service cost / (credit)          |  |                |       |      | N/A
|Transition obligation / (asset)        |  |                |       |      | N/A
|                                       |  |                |        |      |    
|Accumulated other comprehensive income |  | $              | 11,136 |      | N/A
|                                       |  |                |        |      |    

At the end of 2006 and 2005, the projected benefit obligation, the accumulated benefit obligation
and the fair value of plan assets for the pension plan with a projected benefit obligation in excess of plan assets and for the pension plan with an accumulated benefit obligation in excess of plan assets were as follows:



|                               |  |                                                                  |  |                                                                    |  |      |  |     
|------------------------------ |  | ---------------------------------------------------------------- |  | ------------------------------------------------------------------ |  | ---- |  | ----
|                               |  | Projected BenefitObligation exceeds theFair Value of Plan Assets |  | Accumulated BenefitObligation exceeds theFair Value of Plan Assets
|                               |  | 2006                                                             |  | 2005                                                               |  | 2006 |  | 2005
|Projected benefit obligation   |  | N/A                                                              |  | N/A                                                                |  | N/A  |  | N/A 
|Accumulated benefit obligation |  | N/A                                                              |  | N/A                                                                |  | N/A  |  | N/A 
|Fair value of plan assets      |  | N/A                                                              |  | N/A                                                                |  | N/A  |  | N/A 

Benefit disbursements and employer contributions for the years ended December 31, 2005 and
2006, and expected benefit disbursements and contributions for 2007 are as follows:



|                      |  |      |       |      |   |               |  |   |      
|--------------------- |  | ---- | ----- | ---- | - | ------------- |  | - | -----
|                      |  | 2005 |       | 2006 |   | Projected2007
|Benefit disbursements |  | $    | 3,751 |      | $ | 2,710         |  | $ | 3,300
|Employer contribution |  |      | 7,500 |      |   | 1,500         |  |   |     

Expected Cash Flows

Due to recent contributions made in excess of the minimum required amounts, the Company does not anticipate a required contribution during 2007.



|                           |  |                  |       
|-------------------------- |  | ---------------- | ------
|Expected benefit payments: |  | Pension Benefits
|2007                       |  | $                | 3,300 
|2008                       |  |                  | 4,100 
|2009                       |  |                  | 4,600 
|2010                       |  |                  | 4,800 
|2011                       |  |                  | 4,900 
|Thereafter                 |  |                  | 27,900



71



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Net pension expense components included in employee benefits in the consolidated statements of income
are as follows:



|                               |  |                |        |   |      |   |        |      |  |   |        |  
|------------------------------ |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                               |  | December 31,   |       
|                               |  | 2006           |        |   | 2005 |   |        | 2004 | 
|                               |  | (in thousands) |       
|Service cost                   |  | $              | 995    |   |      | $ | 4,189  |      |  | $ | 3,419  |  
|Interest cost                  |  |                | 3,843  |   |      |   | 4,030  |      |  |   | 3,697  |  
|Expected return on plan assets |  |                | (5,201 | ) |      |   | (4,803 | )    |  |   | (4,451 | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Net amortization:              |  |                |        |   |      |   |        |      |  |   |        |  
|Prior service cost             |  |                |       |   |      |   | (380   | )    |  |   | (640   | )
|Net actuarial loss             |  |                | 131    |   |      |   | 816    |      |  |   | 468    |  
|Transition amount              |  |                |       |   |      |   |       |      |  |   | (112   | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Total amortization             |  |                | 131    |   |      |   | 436    |      |  |   | (284   | )
|Curtailment (gain)             |  |                |       |   |      |   | (1,531 | )    |  |   |       |  
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Net pension expense (income)   |  | $              | (232   | ) |      | $ | 2,321  |      |  | $ | 2,381  |  
|                               |  |                |        |   |      |   |        |      |  |   |        |  

Weighted-average assumptions used to determine net cost:



|                                         |  |      |   |  |              |    |  |      |  
|---------------------------------------- |  | ---- | - |  | ------------ | -- |  | ---- | -
|                                         |  | 2006 |   |  | 2005         |    |  | 2004 |  
|Discount rate                            |  | 5.75 | % |  | 5.75% / 5.25 | %* |  | 6.00 | %
|Expected long term return on plan assets |  | 7.25 | % |  | 7.25         | %  |  | 7.25 | %
|Rate of compensation increase            |  | 4.50 | % |  | 4.50         | %  |  | 4.50 | %

---

|* | 5.75% was used to determine cost for the first eight months of 2005. As of May 31, 2005, the plan was remeasured due to the Companys decision to change the delivery
mechanism, effective January 1, 2006, for its employees pension benefit by redirecting it through the Companys 401(k) plan. 5.25% was used to determine cost for the last four months of 2005.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2007 are as follows:



|                                       |  |   |    
|-------------------------------------- |  | - | ---
|Net actuarial loss / (gain)            |  | $ | 126
|Prior service cost / (credit)          |  |   |   
|Transition obligation / (asset)        |  |   |   
|                                       |  |   |    
|Accumulated other comprehensive income |  | $ | 126
|                                       |  |   |    

Based on a representative allocation within the target asset allocation described above,
management expects an annual long-term return for its portfolio of 7.25%. In formulating this assumed long-term rate of return, the Company considered historical returns by asset category and expectations for future returns by asset category based,
in part, on simulated capital market performance over the next 15 years. Resulting expected returns by asset category have been weighted based on the target asset allocation to produce the weighted average assumption of 7.25%.

Amounts resulting from changes in actuarial assumptions used to measure the Companys benefit obligations are not recognized as they occur, but are
amortized systematically over subsequent periods.



72



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



CTC has supplemental pension arrangements with certain retired employees. The liability, included in
accrued expenses and other liabilities, related to such arrangements was $1,149,000 and $1,297,000 at December 31, 2006 and 2005, respectively.

The Company has established a supplemental executive retirement plan (SERP) for members of the executive management group. This unfunded plan is intended to cover only those benefits excluded from coverage under the
Companys qualified defined benefit pension plan as a result of IRS regulations. The design elements of this SERP mirror those of the Companys qualified plan. In addition to the SERP, the Company has a separate arrangement with its Chief
Executive Officer under which contributions are accrued based upon the Companys return on equity (ROE). A ROE of 10% is the minimum threshold at which any contribution will be made. Benefits are payable upon attaining the age of 55, except in
the event of death or disability. The liability related to the CEOs SERP, included in accrued expenses and other liabilities was $3,675,000 and $3,258,000 at December 31, 2006 and 2005, respectively. Expenses related to this plan were $417,385,
$265,000 and $377,000 in 2006, 2005 and 2004, respectively.

Other Benefit Plans

The Company has an incentive savings and profit sharing plan to provide eligible employees with a means to invest a portion of their earnings for
retirement. Eligible employees of the Company may contribute, by salary reductions, up to 6% of their compensation as a basic employee contribution and may contribute up to an additional 20% of their compensation as a supplemental employee
contribution. Investment in the Companys common stock is one of the investment options available to employees; however, there are no restrictions on transfers or required holding periods.

During the three year period ended December 31, 2006, the Company made incentive savings contributions in amounts equal to 35% of each
employees basic contribution, which was charged to benefits expense.



|     |  |                 |          
|---- |  | --------------- | ---------
|Year |  | 35%Contribution
|2006 |  | $               | 1,361,000
|2005 |  |                 | 1,320,000
|2004 |  |                 | 1,322,000

The Company may also make an additional matching contribution (profit-sharing) to the incentive
savings and profit sharing plan based on the extent to which the annual corporate profitability goals established by the Board of Directors are met. Benefits expense related to the additional matching contribution totaled:



|     |  |                           |        
|---- |  | ------------------------- | -------
|Year |  | ProfitSharingContribution
|2006 |  | $                         | 775,000
|2005 |  |                           | 922,000
|2004 |  |                           | 376,000

The following table reflects the shares of the Companys common stock that were purchased
through the incentive savings and profit sharing plan, during each of the last three years:



|     |  |        
|---- |  | -------
|Year |  | Shares 
|2006 |  | 140,952
|2005 |  | 122,226
|2004 |  | 123,212



73



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##### Table of Contents

CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has established a supplemental executive savings plan. This plan is intended to cover
only those benefits excluded from coverage under the Corporations qualified incentive savings and profit sharing plan as a result of IRS regulations. Any contributions under this supplemental plan, when combined with the regular pre-tax
contributions shall not exceed 16% of the individuals earnings. Benefit expense related to this plan was $87,000, $110,000 and $12,000 in 2006, 2005 and 2004, respectively.

The Company also has an Executive Management Incentive Compensation Plan. Executives at defined levels of responsibility are eligible to participate in
the plan. Incentive award payments are determined on the basis of corporate and group profitability, relative performance within a defined peer group and individual performance. Awards may range from zero to 100% of annual compensation. Expenses for
this plan totaled $2,058,000, $2,235,000 and $715,000 in 2006, 2005, and 2004, respectively.

The Company has a Directors Deferred
Compensation Plan. Under the plan, Directors may defer fees and retainers that would otherwise be payable currently. Deferrals may be made to an uninsured interest bearing account or to an account recorded in equivalents of the Companys common
stock. Directors are required to defer 50% of their compensation (and may defer as much as 100%) in the equivalent of the Companys common stock. Expenses for this plan totaled $1,365,000, $1,256,000, and $1,189,000 for 2006, 2005, and 2004,
respectively. Based on these elections, shares that could be issued under the plan totaled 417,299 at December 31, 2006.

Note 11
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, to meet customers financing needs and to reduce their own exposure to fluctuations in interest rates, the Banks are parties to financial instruments with off-balance sheet risk,
held for purposes other than trading. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Banks exposure to credit loss in
the event of nonperformance by the other party for loan commitments and standby letters of credit is represented by the contractual amount of those instruments, assuming that the amounts are fully advanced and that collateral or other security is of
no value. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on
managements credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, plant and equipment, and real estate.

Commitments to originate loans, unused lines of credit, and unadvanced portions of commercial real estate and 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. Many of the commitments are expected to expire without being drawn upon. Therefore, the amounts presented
below do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance by a customer to a third party. These guarantees are issued primarily to support public and private borrowing arrangements, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan commitments to customers.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Financial instruments whose contractual amounts represent off-balance sheet risk at December 31,
2006 and 2005 are as follows:



|                                                                      |  |                |         |      |   |        
|--------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                                      |  | 2006           |         | 2005
|                                                                      |  | (in thousands)
|Loan Commitments                                                      |  |                |        
|Commitments to originate new loans                                    |  | $              | 129,487 |      | $ | 120,635
|Unused home equity lines of credit                                    |  |                | 405,432 |      |   | 365,040
|Unadvanced portions of C&I loans                                      |  |                | 479,263 |      |   | 435,697
|Unadvanced portions of commercial real estate and construction loans  |  |                | 212,774 |      |   | 245,523
|Unused portions of business credit card lines                         |  |                | 57,557  |      |   | 55,393 
|                                                                      |  |               
|Standby Letters of Credit                                             |  |                |         |      |   |        
|Notional amount collateralized by cash                                |  |                | 64,021  |      |   | 65,345 
|Notional amount of other standby letters of credit                    |  |                | 41,278  |      |   | 32,430 
|Liability associated with letters of credit recorded on balance sheet |  |                | 926     |      |   | 669    
|                                                                      |  |               
|Other Commitments                                                     |  |                |         |      |   |        
|Equity investment commitments                                         |  |                | 13,476  |      |   | 13,186 

Note 12 COMMITMENTS AND CONTINGENCIES

The Federal Reserve System requires nonmember banks to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank
of Boston. The amount of this reserve requirement, included in cash and cash equivalents, was $31,802,000 and $29,483,000 at December 31, 2006 and 2005, respectively.

The Company has entered into severance agreements with the Chief Executive Officer and several members of senior management. These agreements are
triggered by a change of control under certain circumstances. Payments are equal to two times (2.99 times for the CEO) the amount of the highest base salary and target bonus in effect at or following a change in control; two times (2.99 times for
the CEO) the amount of the Core Contribution that would have been contributed on the officers behalf under the Chittenden Corporation Incentive Savings and Profit Sharing Plan in the event the officer had continued employment until the end of
the then current year; two times (2.99 times for the CEO) the amount of the 401(k) match, the profit sharing portion of the 401(k) contribution and the amount of the 401(k) restoration payment, if any, that would have been contributed on behalf of
the officer in the event the officer had continued employment until the end of the then current year; and two times (2.99 times for the CEO) the amount that would have been contributed on behalf of the officer under the supplemental executive
retirement plan for members of the executive management group in the event the officer had continued employment until the end of the then current year.

Various legal claims against the Company arising in the normal course of business were outstanding at December 31, 2006. Management, after reviewing these claims with legal counsel, is of the opinion that the
resolution of these claims will not have a material effect on the financial condition or results of operations of the Company.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 13 OTHER NONINTEREST EXPENSE

The components of other noninterest expense for the years presented are as follows:



|                                 |  |                |        |      |   |        |      |  |   |        |  
|-------------------------------- |  | -------------- | ------ | ---- | - | ------ | ---- |  | - | ------ | -
|                                 |  | 2006           |        | 2005 |   |        | 2004 | 
|                                 |  | (in thousands) |       
|Legal and accounting             |  | $              | 2,556  |      | $ | 3,631  |      |  | $ | 2,695  |  
|Marketing                        |  |                | 4,471  |      |   | 3,247  |      |  |   | 3,466  |  
|Software and supplies            |  |                | 7,335  |      |   | 7,344  |      |  |   | 7,845  |  
|Net OREO and collection expenses |  |                | 123    |      |   | (51    | )    |  |   | (617   | )
|Telephone                        |  |                | 2,033  |      |   | 2,438  |      |  |   | 2,829  |  
|Postage                          |  |                | 2,594  |      |   | 2,454  |      |  |   | 2,865  |  
|Outside services                 |  |                | 2,251  |      |   | 2,101  |      |  |   | 2,430  |  
|Franchise tax                    |  |                | 3,230  |      |   | 3,012  |      |  |   | 2,977  |  
|Other                            |  |                | 16,240 |      |   | 17,632 |      |  |   | 14,082 |  
|                                 |  |                |        |      |   |        |      |  |   |        |  
|                                 |  | $              | 40,833 |      | $ | 41,808 |      |  | $ | 38,572 |  
|                                 |  |                |        |      |   |        |      |  |   |        |  

Note 14 FAIR VALUE OF FINANCIAL
INSTRUMENTS

Cash and Cash Equivalents

The carrying amounts for cash and cash equivalents approximate fair value because they mature in 90 days or less and do not present unanticipated valuation risk.

Securities

The fair value of investment securities,
other than Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank (FRB) stock, is based on quoted market prices. The carrying value of FHLB and FRB stock represents its redemption value.

Loans

Fair values are estimated for portfolios of
loans with similar financial and credit characteristics. The loan portfolio was evaluated in the following segments: 1) commercial loans which include commercial & industrial, municipal, multi-family, commercial real estate and construction
and 2) residential real estate loans including home equity credit lines.

The fair value of performing commercial loans is estimated by
discounting cash flows through the estimated maturity using discount rates that reflect the expected maturity, credit and interest rate risk inherent in such loans. The fair value of nonperforming commercial loans is estimated using historical net
charge-off experience applied to the nonperforming balances. For performing residential real estate loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market
sources. The fair value of municipal loans is estimated to be equal to amortized cost since most of these loans mature within nine months. The fair value of consumer loans is estimated based on secondary market prices for asset-backed securities
with similar characteristics.

Mortgage Servicing Rights

The fair value is estimated by discounting the future cash flows through the estimated maturity of the underlying mortgage loans.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Deposits

The fair value of deposits with no stated maturity is equal to the amount payable on demand, that is, the carrying amount. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount
rate used is based on the estimated rates currently offered for deposits of similar remaining maturities.

Borrowings

The fair value of long-term debt is based upon the discounted value of contractual cash flows using a discount rate consistent with currently offered
rates of similar duration.

Commitments to Extend Credit and Standby Letters of Credit

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of
financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.

Assumptions

Fair value estimates are made at a
specific point in time, based on relevant market information and information about specific financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Banks entire
holdings of a particular financial instrument. Because no active observable market exists for a significant portion of the Banks financial instruments, fair value estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The estimated fair values of the Companys financial instruments are as follows:



|                                             |  |                |           |            |   |                |  |            |           |  |   |          
|-------------------------------------------- |  | -------------- | --------- | ---------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                                             |  | December 31,  
|                                             |  | 2006           |           | 2005      
|                                             |  | CarryingAmount |           | Fair Value |   | CarryingAmount |  | Fair Value
|                                             |  | (in thousands)
|Financial assets:                            |  |                |           |            |   |                |  |            |           |  |   |          
|Cash and cash equivalents                    |  | $              | 199,358   |            | $ | 199,358        |  | $          | 180,707   |  | $ | 180,707  
|Securities available for sale                |  |                | 1,137,352 |            |   | 1,137,352      |  |            | 1,383,909 |  |   | 1,383,909
|FRB and FHLB stock                           |  |                | 13,403    |            |   | 13,403         |  |            | 19,352    |  |   | 19,352   
|Loans, net                                   |  |                | 4,635,050 |            |   | 4,641,182      |  |            | 4,426,668 |  |   | 4,403,151
|Loans held for sale                          |  |                | 17,354    |            |   | 17,354         |  |            | 19,737    |  |   | 19,737   
|Mortgage servicing rights                    |  |                | 14,155    |            |   | 19,382         |  |            | 13,741    |  |   | 21,464   
|Financial liabilities:                       |  |                |           |            |   |                |  |            |           |  |   |          
|Deposits:                                    |  |                |           |            |   |                |  |            |           |  |   |          
|Demand                                       |  |                | 966,758   |            |   | 966,758        |  |            | 973,752   |  |   | 988,096  
|Savings                                      |  |                | 468,294   |            |   | 468,294        |  |            | 489,734   |  |   | 489,734  
|NOW                                          |  |                | 861,435   |            |   | 861,435        |  |            | 861,000   |  |   | 861,000  
|CMA / money market                           |  |                | 1,655,349 |            |   | 1,655,349      |  |            | 1,749,878 |  |   | 1,749,878
|Certificates of deposit less than $100,000   |  |                | 848,814   |            |   | 846,796        |  |            | 814,289   |  |   | 810,778  
|Certificates of deposit of $100,000 and over |  |                | 678,243   |            |   | 676,926        |  |            | 625,682   |  |   | 623,959  
|Borrowings                                   |  |                | 210,020   |            |   | 209,669        |  |            | 227,323   |  |   | 227,201  
|Commitments                                  |  |                | 926       |            |   | 849            |  |            | 669       |  |   | 704      

Note 15 PARENT COMPANY FINANCIAL STATEMENTS

Chittenden Corporation (Parent Company Only)

BALANCE SHEETS



|                                           |  |                |         |      |   |        
|------------------------------------------ |  | -------------- | ------- | ---- | - | -------
|                                           |  | December 31,  
|                                           |  | 2006           |         | 2005
|                                           |  | (in thousands)
|Assets                                     |  |                |         |      |   |        
|Cash and cash equivalents                  |  | $              | 106,986 |      | $ | 88,657 
|Investment in subsidiaries                 |  |                | 721,607 |      |   | 729,784
|Other assets                               |  |                | 10,778  |      |   | 15,217 
|                                           |  |                |         |      |   |        
|Total assets                               |  | $              | 839,371 |      | $ | 833,658
|                                           |  |                |         |      |   |        
|Liabilities and stockholders equity       |  |                |         |      |   |        
|Liabilities                                |  |                |         |      |   |        
|Accrued expenses and other liabilities     |  |                | 43,285  |      |   | 37,268 
|Other borrowings                           |  |                | 125,000 |      |   | 125,000
|                                           |  |                |         |      |   |        
|Total liabilities                          |  |                | 168,285 |      |   | 162,268
|                                           |  |                |         |      |   |        
|Total stockholders equity                 |  |                | 671,086 |      |   | 671,390
|                                           |  |                |         |      |   |        
|Total liabilities and stockholders equity |  | $              | 839,371 |      | $ | 833,658
|                                           |  |                |         |      |   |        



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



STATEMENTS OF INCOME



|                                                                                |  |                          |         |   |      |   |        |  |   |       
|------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ |  | - | ------
|                                                                                |  | Years Ended December 31,
|                                                                                |  | 2006                     |         |   | 2005 |   | 2004  
|                                                                                |  | (in thousands)          
|Operating income:                                                               |  |                          |         |   |      |   |        |  |   |       
|Dividends from bank subsidiaries                                                |  | $                        | 102,420 |   |      | $ | 46,525 |  | $ | 49,525
|Interest income                                                                 |  |                          | 147     |   |      |   |       |  |   |      
|                                                                                |  |                          |         |   |      |   |        |  |   |       
|Total operating income                                                          |  |                          | 102,567 |   |      |   | 46,525 |  |   | 49,525
|                                                                                |  |                          |         |   |      |   |        |  |   |       
|Operating expense:                                                              |  |                          |         |   |      |   |        |  |   |       
|Interest expense                                                                |  |                          | 9,599   |   |      |   | 6,682  |  |   | 4,284 
|Other operating expense                                                         |  |                          | 1,683   |   |      |   | 4,355  |  |   | 5,004 
|                                                                                |  |                          |         |   |      |   |        |  |   |       
|Total expense                                                                   |  |                          | 11,282  |   |      |   | 11,037 |  |   | 9,288 
|                                                                                |  |                          |         |   |      |   |        |  |   |       
|Income before income taxes and equity in undistributed earnings of subsidiaries |  |                          | 91,285  |   |      |   | 35,488 |  |   | 40,237
|Income tax benefit                                                              |  |                          | 4,341   |   |      |   | 4,069  |  |   | 3,332 
|                                                                                |  |                          |         |   |      |   |        |  |   |       
|Income before equity in undistributed earnings of subsidiaries                  |  |                          | 95,626  |   |      |   | 39,557 |  |   | 43,569
|Equity in undistributed earnings of subsidiaries                                |  |                          | (10,158 | ) |      |   | 42,482 |  |   | 29,111
|                                                                                |  |                          |         |   |      |   |        |  |   |       
|Net income                                                                      |  | $                        | 85,468  |   |      | $ | 82,039 |  | $ | 72,680
|                                                                                |  |                          |         |   |      |   |        |  |   |       

STATEMENTS OF CASH FLOWS



|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | Years Ended December 31, |        
|                                                                                  |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|                                                                                  |  | (in thousands)           |        
|Cash flows from operating activities:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $                        | 85,468  |   |      | $ | 82,039  |      |  | $ | 72,680  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |         |      |  |   |         |  
|Shares based payment compensation                                                 |  |                          | 3,560   |   |      |   | 2,572   |      |  |   | 3,841   |  
|Equity in undistributed earnings of bank subsidiaries                             |  |                          | 10,158  |   |      |   | (42,482 | )    |  |   | (29,111 | )
|Increase (decrease) in other assets                                               |  |                          | (5,372  | ) |      |   | 7,302   |      |  |   | 1,094   |  
|Increase in accrued expenses and other liabilities                                |  |                          | 5,017   |   |      |   | 6,179   |      |  |   | 5,873   |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  |                          | 98,831  |   |      |   | 55,610  |      |  |   | 54,377  |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Investments in and advanced to subsidiaries                                       |  |                          |        |   |      |   | (10,000 | )    |  |   |        |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                             |  |                          |        |   |      |   | (10,000 | )    |  |   |        |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of treasury and common stock                               |  |                          | 6,835   |   |      |   | 9,778   |      |  |   | 9,893   |  
|Dividends paid on common stock                                                    |  |                          | (36,194 | ) |      |   | (33,454 | )    |  |   | (31,889 | )
|Repurchase of common stock                                                        |  |                          | (51,143 | ) |      |   |        |      |  |   |        |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                             |  |                          | (80,502 | ) |      |   | (23,676 | )    |  |   | (21,996 | )
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                          | 18,329  |   |      |   | 21,934  |      |  |   | 32,381  |  
|Cash and cash equivalents at beginning of year                                    |  |                          | 88,657  |   |      |   | 66,723  |      |  |   | 34,342  |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                          |  | $                        | 106,986 |   |      | $ | 88,657  |      |  | $ | 66,723  |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 16 REGULATORY MATTERS

The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Each entitys capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the tables below) of total and Tier I capital (as defined in the regulation) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2006, that the Company and
the Banks meet all capital adequacy requirements.

As of December 31, 2006, the Company and the Banks were well
capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately or well capitalized, the Company and the Banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as
set forth in the tables below.

The Companys and the Banks actual capital amounts (dollars in thousands) and ratios are
presented in the following tables:



|                                          |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|----------------------------------------- |  | ------ | ------- | ----- | --------------------------- | - | ------ | -------------------------------------------------------------- | ------- |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                                          |  | Actual |         |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions: |        
|                                          |  | Amount |         | Ratio |                             |   | Amount |                                                                | Ratio   |  |      | Amount |  | Ratio |        
|As of December 31, 2006                   |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Total Capital (to Risk Weighted Assets):  |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  | $      | 644,613 |       | 12.78                       | % |        | $                                                              | 403,425 |  | 8.00 | %      |  | $     | 504,281 |  | 10.00 | %
|Chittenden Trust Company                  |  |        | 288,216 |       | 11.31                       |   |        |                                                                | 203,891 |  | 8.00 |        |  |       | 254,863 |  | 10.00 |  
|Bank of Western Massachusetts             |  |        | 74,745  |       | 11.17                       |   |        |                                                                | 53,513  |  | 8.00 |        |  |       | 66,891  |  | 10.00 |  
|Flagship Bank and Trust                   |  |        | 46,999  |       | 11.17                       |   |        |                                                                | 33,451  |  | 8.00 |        |  |       | 41,814  |  | 10.00 |  
|Maine Bank & Trust                        |  |        | 35,311  |       | 11.18                       |   |        |                                                                | 25,263  |  | 8.00 |        |  |       | 31,579  |  | 10.00 |  
|Ocean National Bank                       |  |        | 125,142 |       | 11.02                       |   |        |                                                                | 90,883  |  | 8.00 |        |  |       | 113,604 |  | 10.00 |  
|Tier 1 Capital (to Risk Weighted Assets): |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  |        | 582,892 |       | 11.56                       |   |        |                                                                | 201,778 |  | 4.00 |        |  |       | 302,667 |  | 6.00  |  
|Chittenden Trust Company                  |  |        | 258,112 |       | 10.13                       |   |        |                                                                | 101,945 |  | 4.00 |        |  |       | 152,918 |  | 6.00  |  
|Bank of Western Massachusetts             |  |        | 66,366  |       | 9.92                        |   |        |                                                                | 26,813  |  | 4.00 |        |  |       | 40,219  |  | 6.00  |  
|Flagship Bank and Trust                   |  |        | 41,608  |       | 9.95                        |   |        |                                                                | 16,726  |  | 4.00 |        |  |       | 25,088  |  | 6.00  |  
|Maine Bank & Trust                        |  |        | 31,361  |       | 9.93                        |   |        |                                                                | 12,641  |  | 4.00 |        |  |       | 18,961  |  | 6.00  |  
|Ocean National Bank                       |  |        | 110,945 |       | 9.77                        |   |        |                                                                | 45,442  |  | 4.00 |        |  |       | 68,162  |  | 6.00  |  
|Tier 1 Capital (to Average Assets):       |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  |        | 582,892 |       | 9.24                        |   |        |                                                                | 252,404 |  | 4.00 |        |  |       | 315,505 |  | 5.00  |  
|Chittenden Trust Company                  |  |        | 258,112 |       | 7.67                        |   |        |                                                                | 134,596 |  | 4.00 |        |  |       | 168,245 |  | 5.00  |  
|Bank of Western Massachusetts             |  |        | 66,366  |       | 8.87                        |   |        |                                                                | 29,936  |  | 4.00 |        |  |       | 37,420  |  | 5.00  |  
|Flagship Bank and Trust                   |  |        | 41,608  |       | 7.92                        |   |        |                                                                | 21,024  |  | 4.00 |        |  |       | 26,280  |  | 5.00  |  
|Maine Bank & Trust                        |  |        | 31,361  |       | 8.75                        |   |        |                                                                | 14,334  |  | 4.00 |        |  |       | 17,918  |  | 5.00  |  
|Ocean National Bank                       |  |        | 110,945 |       | 8.02                        |   |        |                                                                | 55,342  |  | 4.00 |        |  |       | 69,177  |  | 5.00  |  



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CHITTENDEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                          |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|----------------------------------------- |  | ------ | ------- | ----- | --------------------------- | - | ------ | -------------------------------------------------------------- | ------- |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                                          |  | Actual |         |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions: |        
|                                          |  | Amount |         | Ratio |                             |   | Amount |                                                                | Ratio   |  |      | Amount |  | Ratio |        
|As of December 31, 2005                   |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Total Capital (to Risk Weighted Assets):  |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  | $      | 636,520 |       | 12.40                       | % |        | $                                                              | 410,563 |  | 8.00 | %      |  | $     | 513,204 |  | 10.00 | %
|Chittenden Trust Company                  |  |        | 288,706 |       | 10.96                       |   |        |                                                                | 210,794 |  | 8.00 |        |  |       | 263,492 |  | 10.00 |  
|Bank of Western Massachusetts             |  |        | 68,566  |       | 11.02                       |   |        |                                                                | 49,800  |  | 8.00 |        |  |       | 62,250  |  | 10.00 |  
|Flagship Bank and Trust                   |  |        | 46,887  |       | 11.31                       |   |        |                                                                | 33,179  |  | 8.00 |        |  |       | 41,474  |  | 10.00 |  
|Maine Bank & Trust                        |  |        | 36,066  |       | 11.60                       |   |        |                                                                | 24,876  |  | 8.00 |        |  |       | 31,094  |  | 10.00 |  
|Ocean National Bank                       |  |        | 135,712 |       | 11.34                       |   |        |                                                                | 95,749  |  | 8.00 |        |  |       | 119,687 |  | 10.00 |  
|Tier 1 Capital (to Risk Weighted Assets): |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  |        | 576,059 |       | 11.23                       |   |        |                                                                | 205,344 |  | 4.00 |        |  |       | 308,016 |  | 6.00  |  
|Chittenden Trust Company                  |  |        | 258,162 |       | 9.80                        |   |        |                                                                | 105,397 |  | 4.00 |        |  |       | 158,095 |  | 6.00  |  
|Bank of Western Massachusetts             |  |        | 60,766  |       | 9.76                        |   |        |                                                                | 24,959  |  | 4.00 |        |  |       | 37,438  |  | 6.00  |  
|Flagship Bank and Trust                   |  |        | 42,543  |       | 10.26                       |   |        |                                                                | 16,589  |  | 4.00 |        |  |       | 24,884  |  | 6.00  |  
|Maine Bank & Trust                        |  |        | 32,178  |       | 10.35                       |   |        |                                                                | 12,442  |  | 4.00 |        |  |       | 18,662  |  | 6.00  |  
|Ocean National Bank                       |  |        | 121,827 |       | 10.18                       |   |        |                                                                | 47,875  |  | 4.00 |        |  |       | 71,812  |  | 6.00  |  
|Tier 1 Capital (to Average Assets):       |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  |        | 576,059 |       | 9.21                        |   |        |                                                                | 250,299 |  | 4.00 |        |  |       | 312,874 |  | 5.00  |  
|Chittenden Trust Company                  |  |        | 258,162 |       | 7.87                        |   |        |                                                                | 131,285 |  | 4.00 |        |  |       | 164,107 |  | 5.00  |  
|Bank of Western Massachusetts             |  |        | 60,766  |       | 8.95                        |   |        |                                                                | 27,168  |  | 4.00 |        |  |       | 33,959  |  | 5.00  |  
|Flagship Bank and Trust                   |  |        | 42,543  |       | 8.05                        |   |        |                                                                | 21,133  |  | 4.00 |        |  |       | 26,417  |  | 5.00  |  
|Maine Bank & Trust                        |  |        | 32,178  |       | 9.74                        |   |        |                                                                | 13,222  |  | 4.00 |        |  |       | 16,527  |  | 5.00  |  
|Ocean National Bank                       |  |        | 121,827 |       | 8.44                        |   |        |                                                                | 57,731  |  | 4.00 |        |  |       | 72,163  |  | 5.00  |  

NOTE 17 BUSINESS SEGMENTS

Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Informationhas
established standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are components of an enterprise, which are evaluated regularly
by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Companys chief operating decision maker is the President and Chief Executive Officer of the Company.

The Company has identified Commercial Banking as its reportable operating business segment based on the fact that the results of operations are viewed as
a single strategic unit by the chief operating decision-maker. The Commercial Banking segment is comprised of the five Commercial Banking subsidiaries, which provide similar products and services, have similar distribution methods, types of
customers and regulatory responsibilities. Commercial Banking derives its revenue from a wide range of banking services, including lending activities, acceptance of demand, savings and time deposits, business services, trust and investment
management, brokerage services, mortgage banking, and loan servicing for investor portfolios.

Immaterial operating segments of the
Companys operations, which do not have similar characteristics to the commercial banking operations and do not meet the quantitative thresholds requiring disclosure, are included in the Other category in the disclosure of business segments
below. Revenue derived from these segments includes insurance commissions from insurance products and services, as well as other operations associated with the parent holding company. The accounting policies used in the disclosure of business
segments are the same as those described in the summary of significant accounting policies.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following tables present the results of the Companys reportable operating business
segments:



|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|------------------------------------- |  | ----------------- | --------- | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | ---------
|                                      |  | CommercialBanking |           | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated
|Year Ended December 31, 2006          |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Net interest income (1)               |  | $                 | 258,454   |           | $ | (9,452  | )                         |  | $ |             |   |  | $ | 249,002  
|Noninterest income:                   |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Investment management income          |  |                   | 21,293    |           |   |        |                           |  |   |             |   |  |   | 21,293   
|Service charges on deposits           |  |                   | 16,728    |           |   |        |                           |  |   |             |   |  |   | 16,728   
|Mortgage servicing                    |  |                   | 2,106     |           |   |        |                           |  |   |             |   |  |   | 2,106    
|Gains on sales of loans, net          |  |                   | 6,294     |           |   |        |                           |  |   |             |   |  |   | 6,294    
|Gains on sales of securities          |  |                   |          |           |   |        |                           |  |   |             |   |  |   |         
|Loss on prepayment of borrowings      |  |                   |          |           |   |        |                           |  |   |             |   |  |   |         
|Credit card income, net               |  |                   | 5,107     |           |   |        |                           |  |   |             |   |  |   | 5,107    
|Insurance commissions, net            |  |                   |          |           |   | 5,805   |                           |  |   |             |   |  |   | 5,805    
|Other non-interest income             |  |                   | 13,054    |           |   | (198    | )                         |  |   |             |   |  |   | 12,856   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Total non-interest income             |  |                   | 64,582    |           |   | 5,607   |                           |  |   |             |   |  |   | 70,189   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Total income                          |  |                   | 323,036   |           |   | (3,845  | )                         |  |   |             |   |  |   | 319,191  
|Provision for credit losses           |  |                   | 6,920     |           |   |        |                           |  |   |             |   |  |   | 6,920    
|Depreciation and amortization expense |  |                   | 9,670     |           |   | 416     |                           |  |   |             |   |  |   | 10,086   
|Salaries and employee benefits        |  |                   | 99,660    |           |   | 15,712  |                           |  |   |             |   |  |   | 115,372  
|Other non-interest expense            |  |                   | 70,488    |           |   | (9,579  | )                         |  |   |             |   |  |   | 60,909   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Total non-interest expense            |  |                   | 179,818   |           |   | 6,549   |                           |  |   |             |   |  |   | 186,367  
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Income (loss) before income taxes     |  |                   | 136,298   |           |   | (10,394 | )                         |  |   |             |   |  |   | 125,904  
|Income tax expense (benefit)          |  |                   | 44,339    |           |   | (3,903  | )                         |  |   |             |   |  |   | 40,436   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Net income (loss)                     |  | $                 | 91,959    |           | $ | (6,491  | )                         |  | $ |             |   |  | $ | 85,468   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|End of period assets                  |  | $                 | 6,568,422 |           | $ | 869,466 |                           |  | $ | (1,006,085   | ) |  | $ | 6,431,803
|End of period loans, net              |  |                   | 4,635,050 |           |   |        |                           |  |   |             |   |  |   | 4,635,050
|End of period deposits                |  |                   | 5,509,852 |           |   |        |                           |  |   | (30,959      | ) |  |   | 5,478,893
|Expenditures for long-lived assets    |  |                   | 4,686     |           |   | 46      |                           |  |   |             |   |  |   | 4,732    



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|------------------------------------- |  | ----------------- | --------- | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | ---------
|                                      |  | CommercialBanking |           | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated
|Year Ended December 31, 2005          |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Net interest income (1)               |  | $                 | 250,995   |           | $ | (6,682  | )                         |  | $ |             |   |  | $ | 244,313  
|Noninterest income:                   |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Investment management income          |  |                   | 20,017    |           |   |        |                           |  |   |             |   |  |   | 20,017   
|Service charges on deposits           |  |                   | 16,113    |           |   |        |                           |  |   |             |   |  |   | 16,113   
|Mortgage servicing                    |  |                   | 1,829     |           |   |        |                           |  |   |             |   |  |   | 1,829    
|Gains on sales of loans, net          |  |                   | 9,021     |           |   |        |                           |  |   |             |   |  |   | 9,021    
|Gains on sales of securities          |  |                   | 6         |           |   |        |                           |  |   |             |   |  |   | 6        
|Loss on prepayment of borrowings      |  |                   |          |           |   |        |                           |  |   |             |   |  |   |         
|Credit card income, net               |  |                   | 4,536     |           |   |        |                           |  |   |             |   |  |   | 4,536    
|Insurance commissions, net            |  |                   |          |           |   | 6,365   |                           |  |   |             |   |  |   | 6,365    
|Other non-interest income             |  |                   | 11,953    |           |   | 124     |                           |  |   |             |   |  |   | 12,077   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Total non-interest income             |  |                   | 63,475    |           |   | 6,489   |                           |  |   |             |   |  |   | 69,964   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Total income                          |  |                   | 314,470   |           |   | (193    | )                         |  |   |             |   |  |   | 314,277  
|Provision for credit losses           |  |                   | 5,154     |           |   |        |                           |  |   |             |   |  |   | 5,154    
|Depreciation and amortization expense |  |                   | 10,415    |           |   | 418     |                           |  |   |             |   |  |   | 10,833   
|Salaries and employee benefits        |  |                   | 94,010    |           |   | 17,704  |                           |  |   |             |   |  |   | 111,714  
|Other non-interest expense            |  |                   | 69,986    |           |   | (8,692  | )                         |  |   |             |   |  |   | 61,294   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Total non-interest expense            |  |                   | 174,411   |           |   | 9,430   |                           |  |   |             |   |  |   | 183,841  
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Income (loss) before income taxes     |  |                   | 134,905   |           |   | (9,623  | )                         |  |   |             |   |  |   | 125,282  
|Income tax expense (benefit)          |  |                   | 46,649    |           |   | (3,406  | )                         |  |   |             |   |  |   | 43,243   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|Net income (loss)                     |  | $                 | 88,256    |           | $ | (6,217  | )                         |  | $ |             |   |  | $ | 82,039   
|                                      |  |                   |           |           |   |         |                           |  |   |              |   |  |   |          
|End of period assets                  |  | $                 | 6,583,160 |           | $ | 871,274 |                           |  | $ | (980,898     | ) |  | $ | 6,473,536
|End of period loans, net              |  |                   | 4,426,668 |           |   |        |                           |  |   |             |   |  |   | 4,426,668
|End of period deposits                |  |                   | 5,602,992 |           |   |        |                           |  |   | (88,657      | ) |  |   | 5,514,335
|Expenditures for long-lived assets    |  |                   | 3,465     |           |   | 61      |                           |  |   |             |   |  |   | 3,526    



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|------------------------------------- |  | ----------------- | --------- | - | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                      |  | CommercialBanking |           |   | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated |  
|Year Ended December 31, 2004          |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net interest Income (1)               |  | $                 | 229,782   |   |           | $ | (4,284  | )                         |  | $ |             |   |  | $ | 225,498   |  
|Noninterest income:                   |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Investment management income          |  |                   | 21,622    |   |           |   |        |                           |  |   |             |   |  |   | 21,622    |  
|Service charges on deposits           |  |                   | 17,886    |   |           |   |        |                           |  |   |             |   |  |   | 17,886    |  
|Mortgage servicing                    |  |                   | 159       |   |           |   |        |                           |  |   |             |   |  |   | 159       |  
|Gains on sales of loans, net          |  |                   | 9,661     |   |           |   |        |                           |  |   |             |   |  |   | 9,661     |  
|Gains on sales of securities          |  |                   | 2,335     |   |           |   |        |                           |  |   |             |   |  |   | 2,335     |  
|Loss on prepayment of borrowings      |  |                   | (1,194    | ) |           |   |        |                           |  |   |             |   |  |   | (1,194    | )
|Credit card income, net               |  |                   | 4,150     |   |           |   |        |                           |  |   |             |   |  |   | 4,150     |  
|Insurance commissions, net            |  |                   |          |   |           |   | 6,966   |                           |  |   |             |   |  |   | 6,966     |  
|Other non-interest income             |  |                   | 11,725    |   |           |   | 95      |                           |  |   |             |   |  |   | 11,820    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest income             |  |                   | 66,344    |   |           |   | 7,061   |                           |  |   |             |   |  |   | 73,405    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total income                          |  |                   | 296,126   |   |           |   | 2,777   |                           |  |   |             |   |  |   | 298,903   |  
|Provision for loan losses             |  |                   | 4,377     |   |           |   |        |                           |  |   |             |   |  |   | 4,377     |  
|Depreciation and amortization expense |  |                   | 10,748    |   |           |   | 306     |                           |  |   |             |   |  |   | 11,054    |  
|Salaries and employee benefits        |  |                   | 93,145    |   |           |   | 17,273  |                           |  |   |             |   |  |   | 110,418   |  
|Other non-interest expense            |  |                   | 70,230    |   |           |   | (8,512  | )                         |  |   |             |   |  |   | 61,718    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest expense            |  |                   | 174,123   |   |           |   | 9,067   |                           |  |   |             |   |  |   | 183,190   |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Income (loss) before income taxes     |  |                   | 117,626   |   |           |   | (6,290  | )                         |  |   |             |   |  |   | 111,336   |  
|Income tax expense (benefit)          |  |                   | 41,180    |   |           |   | (2,524  | )                         |  |   |             |   |  |   | 38,656    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net income (loss)                     |  | $                 | 76,446    |   |           |   | ($3,766 | )                         |  | $ |             |   |  | $ | 72,680    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|End of period assets                  |  | $                 | 6,166,544 |   |           | $ | 801,615 |                           |  |   | ($889,854    | ) |  | $ | 6,078,305 |  
|End of period loans, net              |  |                   | 4,018,162 |   |           |   |        |                           |  |   |             |   |  |   | 4,018,162 |  
|End of period deposits                |  |                   | 5,101,453 |   |           |   |        |                           |  |   | (62,723      | ) |  |   | 5,038,730 |  
|Expenditures for long-lived assets    |  |                   | 9,945     |   |           |   | 173     |                           |  |   |             |   |  |   | 10,118    |  

---

|(1) | The Commercial Banking segment derives a majority of its revenue from net interest income. In addition, management primarily relies on net interest income, not the gross revenue and
expense amounts, in managing that segment. Therefore, only the net amount has been disclosed.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Revenue derived from these non-reportable segments includes insurance commissions from various insurance related products and services, as well as other operations associated with
the parent holding company.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 18 RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements (Statement 157). Statement
157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices
that have emerged since prior guidance was issued. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact.

In June, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109 (FIN 48). This statement clarifies



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a companys financial
statements. FIN 48 prescribes recognition threshold of more-likelythan-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 31, 2006. Accordingly, the Company will adopt FIN 48 on January 1, 2007. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment of the Companys
opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position). The Company has assessed the impact of this Interpretation and estimates that the adoption of this standard will
not result in a material effect. The Company will implement FIN 48 in the first quarter of 2007.

In March 2006, the FASB also issued
Statement of Financial Accounting Standards No. 156 (SFAS 156), Accounting for Servicing of Financial Assets. This statement amends Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 requires companies to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. The statement permits a company to choose either the amortized cost method or fair value measurement method for each class of
separately recognized servicing assets. This statement is effective as of the beginning of a companys first fiscal year after September 15, 2006. The Company has analyzed SFAS 156 and determined that upon adoption it will have no material
impact on the reported results of operations or financial conditions. The Company will implement SFAS 156 in the first quarter of 2007.

Note 19
SUBSEQUENT EVENTS

On January 19, 2007, the Company announced that it had signed a definitive merger
agreement whereby Chittenden will acquire Merrill Merchants Bancshares, Inc. and its subsidiary, Merrill Merchants Bank, for approximately $111.4 million in cash and stock. The transaction, which is subject to regulatory approval, the approval of
Merrills Shareholders, and other customary closing conditions, is expected to close in the second quarter of 2007. The acquisition will be accounted for as a purchase. Merrill and its subsidiary, Merrill Merchants Bank, are headquartered in
Bangor, Maine. Merrill had total assets of $449 million, $339 million in loans, deposits of $360 million, and $39 million of stockholders equity at December 31, 2006 and presently operates 11 banking offices in central and eastern Maine.

On February 14, 2007, the Company issued $125 million of Subordinated Notes due 2017. The notes will bear interest at 5.80% per
year from the date of issuance to but excluding February 14, 2012. The notes will mature on February 14, 2017. Beginning February 14, 2012, we may, at our option and subject to prior regulatory approval, redeem some or all of the
notes. The Company will use the net proceeds from the sale of the notes for general corporate purposes. Initially the net proceeds may be used to make short-term investments and repay short-term borrowings.



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Report of Independent Registered Public Accounting Firm

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CHITTENDEN CORPORATION:

We have completed integrated audits of Chittenden Corporations consolidated financial
statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the
consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Chittenden Corporation (the Company) and its subsidiaries at December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, managements assessment, included in Managements Annual Report on Internal Control over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. The Company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 opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on
our audit. We conducted our audit of internal control over financial reporting 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. An audit of internal control over financial reporting includes 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 consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.



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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.

LOGO

PricewaterhouseCoopers LLP

Montpelier, VT

February 26, 2007



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MANAGEMENTS STATEMENT OF
RESPONSIBILITY

The consolidated financial statements contained in this annual report on Form 10-K have been prepared in
accordance with generally accepted accounting principles and, where appropriate, include amounts based upon managements best estimates and judgments. Management is responsible for the integrity and the fair presentation of the consolidated
financial statements and related information.

Management maintains a system of internal controls to provide reasonable assurance that the
Companys assets are safeguarded against loss and that transactions are executed in accordance with managements authorization and recorded properly to permit the preparation of consolidated financial statements in accordance with
generally accepted accounting principles in the United States of America. These internal controls include the establishment and communication of policies and procedures, the selection and training of qualified personnel and an internal auditing
program that evaluates the adequacy and effectiveness of such internal controls, policies and procedures. Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the
circumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances. However, management believes that the internal control system provides reasonable assurance that errors or
irregularities that could be material to the consolidated financial statements are prevented or would be detected on a timely basis and corrected through the normal course of business. As of December 31, 2006, management believes the internal
controls were in place and operating effectively.

The Board of Directors discharges its responsibility for the consolidated financial
statements through its Audit Committee, which is comprised entirely of non-employee directors. The Audit Committee meets periodically with management, internal auditors and the independent public accountants. The internal auditors and the
independent public accountants have direct full and free access to the Audit Committee and meet with it, with and without management being present, to discuss the scope and results of their audits and any recommendations regarding the system of
internal controls.

The independent accountants were engaged to perform an independent audit of the consolidated financial statements. They
have conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) as stated in their report which appears on page 86 and 87.



|                                                                  |  |  |  |                                                    
|----------------------------------------------------------------- |  |  |  | ---------------------------------------------------
|                                                                  |  | 
|LOGO                                                              |  |  |  | LOGO                                               
|Paul A. Perrault                                                  |  |  |  | Kirk W. Walters                                    
|President, Chief Executive Officer andChair of Board of Directors |  |  |  | Executive Vice President andChief Financial Officer



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QUARTERLY FINANCIAL DATA (Unaudited)

A summary of quarterly financial data for 2006 and 2005 is presented below:



|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|-------------------------- |  | ---------------------------------------- | ------ | ------- | - | -------- |  | ------- | ------ |  | - | ------
|                           |  | Three Months Ended                      
|                           |  | March 31                                 |        | June 30 |   | Sept. 30 |  | Dec. 31
|                           |  | (in thousands, except per share amounts)
|2006                       |  |                                          |       
|Total interest income      |  | $                                        | 87,959 |         | $ | 92,667   |  | $       | 96,282 |  | $ | 97,804
|Total interest expense     |  |                                          | 26,963 |         |   | 30,615   |  |         | 33,557 |  |   | 34,575
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net interest income        |  |                                          | 60,996 |         |   | 62,052   |  |         | 62,725 |  |   | 63,229
|Provision for loan losses  |  |                                          | 1,533  |         |   | 1,750    |  |         | 1,670  |  |   | 1,967 
|Noninterest income         |  |                                          | 17,587 |         |   | 18,528   |  |         | 16,137 |  |   | 17,937
|Noninterest expense        |  |                                          | 46,400 |         |   | 47,636   |  |         | 46,018 |  |   | 46,313
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Income before income taxes |  |                                          | 30,650 |         |   | 31,194   |  |         | 31,174 |  |   | 32,886
|Income tax expense         |  |                                          | 10,452 |         |   | 10,185   |  |         | 9,449  |  |   | 10,350
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net income                 |  | $                                        | 20,198 |         | $ | 21,009   |  | $       | 21,725 |  | $ | 22,536
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Basic earnings per share   |  | $                                        | 0.43   |         | $ | 0.45     |  | $       | 0.47   |  | $ | 0.50  
|Diluted earnings per share |  |                                          | 0.43   |         |   | 0.45     |  |         | 0.47   |  |   | 0.48  
|Dividends paid per share   |  |                                          | 0.18   |         |   | 0.20     |  |         | 0.20   |  |   | 0.20  



|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|-------------------------- |  | ---------------------------------------- | ------ | ------- | - | -------- |  | ------- | ------ |  | - | ------
|                           |  | Three Months Ended                      
|                           |  | March 31                                 |        | June 30 |   | Sept. 30 |  | Dec. 31
|                           |  | (in thousands, except per share amounts)
|2005                       |  |                                          |       
|Total interest income      |  | $                                        | 73,212 |         | $ | 77,615   |  | $       | 82,621 |  | $ | 86,794
|Total interest expense     |  |                                          | 14,227 |         |   | 17,535   |  |         | 20,406 |  |   | 23,761
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net interest income        |  |                                          | 58,985 |         |   | 60,080   |  |         | 62,215 |  |   | 63,033
|Provision for loan losses  |  |                                          | 1,075  |         |   | 1,400    |  |         | 1,325  |  |   | 1,354 
|Noninterest income         |  |                                          | 17,559 |         |   | 17,176   |  |         | 17,778 |  |   | 17,451
|Noninterest expense        |  |                                          | 46,212 |         |   | 46,230   |  |         | 45,412 |  |   | 45,989
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Income before income taxes |  |                                          | 29,257 |         |   | 29,626   |  |         | 33,256 |  |   | 33,141
|Income tax expense         |  |                                          | 10,175 |         |   | 10,166   |  |         | 11,572 |  |   | 11,328
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net income                 |  | $                                        | 19,082 |         | $ | 19,460   |  | $       | 21,684 |  | $ | 21,813
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Basic earnings per share   |  | $                                        | 0.41   |         | $ | 0.42     |  | $       | 0.47   |  | $ | 0.46  
|Diluted earnings per share |  |                                          | 0.41   |         |   | 0.41     |  |         | 0.46   |  |   | 0.46  
|Dividends paid per share   |  |                                          | 0.18   |         |   | 0.18     |  |         | 0.18   |  |   | 0.18  



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|ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------ | ------------------------------------------------------------------------------------

None

ITEM 9A CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
of December 31, 2006, the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. In designing and evaluating the Companys disclosure controls and procedures, the Company and its management
recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Companys management necessarily was required to apply its judgment
in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company in the reports it files or submits 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. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that the Companys systems evolve with its business.

There was no change in the Companys internal
control over financial reporting that occurred during the fiscal quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Chittenden
Corporation is responsible for establishing and maintaining adequate internal control over financial reporting and for identifying the framework used to evaluate its effectiveness. Chittendens system of internal control over financial
reporting was designed to provide reasonable assurance to the Companys management and Board of Directors regarding the preparation and fair presentation of financial statements in accordance with Generally Accepted Accounting Principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Chittendens
management including the Companys Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the companys internal control over financial reporting as of December 31, 2006. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, management concluded that, as of December 31, 2006, the Companys
internal control over financial reporting was effective based on those criteria.

Chittendens independent auditors,
PricewaterhouseCoopers, LLP, an independent registered public accounting firm, have issued an attestation report on our managements assessment of the Companys internal control over financial reporting, as referenced below.

ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM

See Report of Independent Registered Public
Accounting Firm on pages 86 and 87.

ITEM 9B OTHER INFORMATION

none



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PART III

ITEM 10 DIRECTORS, EXECUTIVE OFFICERS and CORPORATE GOVERNANCE

Information with respect to directors and
executive officers of the Company required by Item 10 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 18, 2007 and is incorporated herein by reference.

The Companys Policy on Ethics and Professional Standards was approved by the Chittenden Board of Directors on September 17, 2003 and is
available on the Companys website at www.chittendencorp.com. A copy of the Code of Ethics will be provided to any person without charge upon request to the Secretary of the Company.

ITEM 11 EXECUTIVE COMPENSATION

Information with respect to executive compensation required by
Item 11 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 18, 2007 and is incorporated herein by reference.



|ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|------- | ----------------------------------------------------------------------------------------------

Equity Compensation Plan Information. The following table sets forth the aggregate information regarding securities authorized for issuance under
the Companys equity compensation plans as of December 31, 2006:

Equity Compensation Plan Information



|                                                           |  |                                                                                           |  |                                                                          |       |                                                                                                                                          |          
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan category                                              |  | Number of securities tobe issued upon exercise of outstanding
options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |       | Number of securities remainingavailable for future
issuanceunder equity compensation plan(excluding securities referenced in column
(a))
|                                                           |  | (a)                                                                                       |  |                                                                          | (b)   |                                                                                                                                          | (c)      
|Equity compensation plans approved by security holders     |  | 3,536,986                                                                                 |  | $                                                                        | 24.28 |                                                                                                                                          | 1,524,626
|Equity compensation plans not approved by security holders |  | 59,485                                                                                    |  |                                                                          | N/A   |                                                                                                                                          | N/A      
|Total                                                      |  | 3,596,471                                                                                 |  | $                                                                        | 24.28 |                                                                                                                                          | 1,524,626



|ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|------- | -------------------------------------------------------------------------

Information with respect to certain relationships and related transactions required by Item 13 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 18, 2007 and
is incorporated herein by reference.



|ITEM 14 | PRINCIPAL ACCOUNTING FEES AND SERVICES
|------- | --------------------------------------

Information
with respect to principal accounting fees and services required by Item 14 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 18, 2007 and is incorporated herein by reference.



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PART IV

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

(1) FINANCIAL STATEMENTS

The financial statements of
the Company and its subsidiaries are included in Part II, Item 8 hereof and are incorporated herein by reference.

(2) FINANCIAL STATEMENT
SCHEDULES

There are no financial statement schedules required to be included in this report.

(3) EXHIBITS



|(a) | The following are included as exhibits to this report:
|--- | ------------------------------------------------------

|        |  |                                                                                                                                                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i).1  |  | Amended and Restated Articles of Incorporation of the Company, incorporated herein by reference to the Companys Proxy Statement for the 1999 Annual Meeting of
Stockholders.                                                                               
|        | 
|3(i).2  |  | Articles of Amendment of Amended and Restated Articles of Incorporation of the Company, incorporated herein by reference to Exhibit 3.2 of the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005.                                
|        | 
|3(ii).1 |  | Bylaws of the Company, as amended and restated as of October 18, 2006, incorporated herein by reference to Exhibit 3(ii) of the Companys Current Report on Form 8-K filed on October 24,
2006.                                                             
|        | 
|4.      |  | Statement of the Company regarding its Dividend Reinvestment Plan, incorporated herein by reference to Exhibit 4.31 of the Companys Annual Report on Form 10-K for the year ended
December 31, 1993.                                                       
|        | 
|10.1    |  | Deferred Compensation Plan (formerly known as the Directors Deferred Compensation Plan), dated April 1972, as amended and restated, incorporated herein by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on October 24, 2006.
|        | 
|*10.2   |  | Amended and Restated Pension Plan amended and restated effective December 31, 2001.                                                                                                                                                                         
|        | 
|*10.3   |  | Amendments Number One, Two, Three, Four, Five, Six, Seven, Eight, and Nine to Amended and Restated Pension Plan.                                                                                                                                            
|        | 
|10.4    |  | Incentive Savings and Profit Sharing Plan, incorporated herein by reference to Exhibit 10.3 of the Companys Annual Report on Form 10-K for the year ended December 31,
1994.                                                                               
|        | 
|10.5    |  | Amendment Number One to the Companys Incentive Savings and Profit Sharing Plan, incorporated herein by reference to Exhibit 10.3 of the Companys Annual Report on Form 10-K for the
year ended December 31, 1995.                                         
|        | 
|*10.6   |  | Letter from the Company to Paul A. Perrault, dated July 26, 1990, regarding terms of employment.                                                                                                                                                            
|        | 
|10.7    |  | 2005 Executive Management Incentive Compensation Plan, as amended and restated as of November 15, 2006, incorporated herein by reference to Exhibit 10.3 of the Companys Current Report
on Form 8-K filed on November 21, 2006.                            
|        | 
|10.8    |  | Stock Incentive Plan, amended and restated as of February 16, 2005, incorporated herein by reference to Exhibit C of the Companys Proxy Statement for the 2005 Annual Meeting of
Stockholders filed on March 9, 2005.                                      
|        | 
|10.9    |  | Compensation Plan of Paul A. Perrault, incorporated herein by reference to Exhibit 10.11 of the Companys Annual Report on Form 10-K for the year ended December 31,
1996.                                                                                  



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|       |  |                                                                                                                                                                                                                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.10  |  | Supplemental Executive Retirement Plan of Paul A. Perrault, as amended and restated, incorporated herein by reference to Exhibit 10.4 of the Companys Current Report on Form 8-K filed on
November 21, 2006.                                                                                        
|       | 
|10.11  |  | Supplemental Executive Cash Balance Restoration Plan, incorporated herein by reference to Exhibit 10.13 of the Companys Annual Report on Form 10-K for the year ended December 31,
1997.                                                                                                            
|       | 
|10.12  |  | Supplemental Executive Savings Plan, incorporated herein by reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for the year ended December 31, 1997.                                                                                                                             
|       | 
|10.13  |  | Amended and Restated Directors Omnibus Long-Term Incentive Plan, incorporated herein by reference to Exhibit A of the Companys Proxy Statement for the 2002 Annual Meeting of
Stockholders filed on March 11, 2002.                                                                                
|       | 
|10.14  |  | Stock Incentive Plan Option Agreement, incorporated herein by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2004.                                                                                                                     
|       | 
|10.15  |  | Amended and Restated Directors Omnibus Long-Term Incentive PlanNon-Employee Director Stock Option Agreement, incorporated herein by reference to Exhibit 10.2 of the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.                                             
|       | 
|10.16  |  | Performance Share Program, as amended and restated as of November 15, 2006, incorporated herein by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on November
21, 2006.                                                                                                 
|       | 
|10.17  |  | Form of Performance Share Award Agreement, incorporated herein by reference to Exhibit 99.1 of the Company Quarterly Report on Form 10-Q for the quarter ended September 30,
2005.                                                                                                                  
|       | 
|*10.18 |  | Senior Executive Severance Agreement dated November 15, 2006, between the Company and Paul A. Perrault.                                                                                                                                                                                              
|       | 
|*10.19 |  | Form of Senior Executive Severance Agreement, dated November 15, 2006, between the Company and each of Kirk W. Walters, John P. Barnes, John W. Kelly, and Danny H.
OBrien.                                                                                                                         
|       | 
|*10.20 |  | Letter from the Company to John W. Kelly, dated April 1, 1999, regarding terms of employment.                                                                                                                                                                                                        
|       | 
|*10.21 |  | Summary of Compensation Arrangements for Directors.                                                                                                                                                                                                                                                  
|       | 
|14     |  | The Companys Policy on Ethics and Professional Standards was approved by the Companys Board of Directors on September 17, 2003 and is available on www.chittendencorp.com. A copy
of the code of ethics will be provided to any person without charge upon request to the Secretary of the Company.
|       | 
|*21    |  | List of subsidiaries of the Registrant.                                                                                                                                                                                                                                                              
|       | 
|*23    |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                               
|       | 
|*31.1  |  | Certification of Chairman, President and Chief Executive Officer Paul A. Perrault required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                         
|       | 
|*31.2  |  | Certification of Executive Vice President and Chief Financial Officer Kirk W. Walters required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                     
|       | 
|*32.1  |  | Certification of Chairman, President and Chief Executive Officer Paul A. Perrault required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                         
|       | 
|*32.2  |  | Certification of Executive Vice President and Chief Financial Officer Kirk W. Walters required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                     

---

|* | Filed / furnished herewith
|- | --------------------------



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EXHIBIT 21   LIST OF SUBSIDIARIES OF CHITTENDEN CORPORATION

Chittenden Trust Company, Vermont, d/b/a Chittenden Bank, and Chittenden Mortgage Services, Chittenden Trust Companys subsidiaries Chittenden
Securities, LLC, Chittenden Insurance, LLC, and Chittenden Commercial Finance

The Bank of Western Massachusetts, Massachusetts

Flagship Bank and Trust Company, Massachusetts

Maine Bank & Trust, Maine

Ocean National Bank, New Hampshire and Maine

EXHIBIT 23   CONSENT OF PRICEWATERHOUSECOOPERS HAS BEEN FILED AS AN EXHIBIT



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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.



|                        |  |  |  |                        |  |                         |  |                                                                          
|----------------------- |  |  |  | ---------------------- |  | ----------------------- |  | -------------------------------------------------------------------------
|Date: February 21, 2007 |  |  |  | CHITTENDEN CORPORATION
|                        |  |  | 
|                        |  |  |  | By:                    |  | /s/    PAUL A. PERRAULT
|                        |  |  |  |                        |  |                         |  | Paul A. Perrault                                                         
|                        |  |  |  |                        |  |                         |  | President, Chief Executive Officer and Chairman of the Board of Directors



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                           |  |                                                                              |  |        
|-------------------------- |  | ---------------------------------------------------------------------------- |  | -------
|NAME                       |  | TITLE                                                                        |  | DATE   
|                           |  |                                                                             
|/s/    PAUL A. PERRAULT    |  | President, Chief Executive Officer and
Chairman of the Board of Directors    |  | 2/21/07
|                           |  |                                                                             
|                           |  |                                                                             
|/s/    KIRK W. WALTERS     |  | Executive Vice President, Chief                                              |  | 2/21/07
|                           |  | Financial Officer and Treasurer (principal financial and accounting officer) | 
|                           |  |                                                                             
|/s/     SALLY W. CRAWFORD  |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|PHILIP M. DRUMHELLER       |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|/s/    JOHN K. DWIGHT      |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|/s/    LYN HUTTON          |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|/s/    JAMES C. PIZZAGALLI |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|/s/    ERNEST A. POMERLEAU |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|/s/    MARK W. RICHARDS    |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|CHARLES W. SMITH, JR.      |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|/s/    PALL D. SPERA       |  | Director                                                                     |  | 2/21/07
|                           |  |                                                                             
|/s/    OWEN W. WELLS       |  | Director                                                                     |  | 2/21/07





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CHITTENDEN CORPORATION

SKU-#002CS-13457