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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A





(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, 2003

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 0-7974



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 by Chittenden Capital Trust I, Guaranteed by Chittenden
Corporation |  | New York Stock Exchange                  



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

NONE



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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES x NO ̈



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, 2003 was $973,721,920



At February 29, 2004 there were 36,722,381 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 2004 Annual Meeting and Proxy Statement: Part III, Items 10, 11, 12, 13.
| | -- | ----------------------------------------------------------------------------------



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Explanatory Note



Chittenden Corporation is filing this Form 10-K/A to amend its Annual Report on Form 10-K for the year ended December 31,
2003, which was filed with the Securities and Exchange Commission on March 5, 2004, to correct certain typographical errors in the chart appearing on page 35 in Item 7, Managements Discussion and Analysis of Financial Condition and
Results of OperationsNet Interest Income. The corrected numbers are set forth in the columns entitled 2002 Average Balance and 2002 Average Yield/Rate for the following line items under Interest-earning
assets: LoansCommercial, Real EstateResidential, Real EstateCommercial, Real EstateConstruction, Total Real Estate and LoansConsumer. As a
result of these changes, revisions have also been made to the chart on page 36 to the Change in Net Interest Income Due to Average Rate and Average Balance, in the 2003 compared with 2002 and 2002 compared with 2001 columns. The changes to these
columns correspond to the line items changed on page 35. The remaining Items of the original report are not amended hereby and are repeated herein only for the readers convenience. Except as expressly noted herein, this report speaks as of the
original date of filing.



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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 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. Control of the risks inherent in our business is essential for financial performance and creating long-term value. These risks
include changes in general, national or regional economic conditions, changes in loan default and charge-off rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in interest rates, changes in
levels of income and expense in noninterest income and expense related activities and other risk factors identified from time to time in Chittendens periodic filings with the Securities and Exchange Commission. Chittenden has a system of
processes to aid in the identification and assessment of the above risks, to establish necessary controls, and to monitor compliance with levels deemed acceptable by the Company. This management system includes a series of committees to provide
oversight.



The factors referred to above include many, but not
all, of the factors that could impact the Companys ability to achieve the results described in any forward-looking statements. You should not place undue reliance on forward-looking statements. You should be aware that the occurrence of the
events described above and elsewhere 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 CC), 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, 2003, the Company had total consolidated assets of approximately $5.9 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), Ocean National Bank (ONB), Granite Bank (GB)
(collectively The Banks).



The following table
summarizes Chittendens acquisition history related to its other banking franchises. The Vermont Financial acquisition is also included as it was a significant in-market transaction that was merged into existing franchise banks:



|               |  |                                  |  |                                            |  |                     |  |                                  |  |                   |  |           
|-------------- |  | -------------------------------- |  | ------------------------------------------ |  | ------------------- |  | -------------------------------- |  | ----------------- |  | ----------
|Date Announced |  | Acquisition                      |  | Subsidiary Bank(s)                         |  | State(s) ofBusiness |  | Consideration Paid (in millions) |  | Accounting Method |  | DateClosed
|11/2/2002      |  | Granite State Bancshares, Inc    |  | Granite Bank                               |  | NH                  |  | $239 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, Inc. |  | Vermont National Bank (3), United Bank (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 of Western Massachusetts              |  | 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 operations of 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 was merged into Chittenden Trust Company in the first quarter of 2000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 $3.7 billion at December 31, 2003. The largest loan categories are
commercial loans and residential real estate loans. Commercial loans include those secured by commercial real estate, and others made to a variety of businesses and municipalities. Commercial loans amounted to approximately 60% of the total loans
outstanding at December 31, 2003.



Loans secured by residential
properties, including home equity loans, comprised 31% of total loans outstanding at December 31, 2003. 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. Variable or adjustable rate mortgage loans are typically held in portfolio.



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Consumer loans at December 31, 2003 were 7% of total loans outstanding. The majority 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 and Connecticut. 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. Farmers
Home Administration 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.



The Banks offer a wide range of banking services, including the acceptance of
demand, savings, money market, cash management and time deposits. As of December 31, 2003, total interest-bearing deposits and noninterest-bearing demand deposits amounted to approximately $4.1 billion and $899 million, respectively. 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 provided for both personal and corporate trust clients. Trust assets under administration totaled $6.7 billion at December 31, 2003, which included $1.9 billion under full discretionary management.



The Company also sells various business services products including payroll
processing, merchant credit card processing, business credit cards, insurance 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, Inc., and various
insurance related products through Chittenden Insurance Group and GSBI Insurance Group. Chittenden Securities and Chittenden Insurance Group are subsidiaries of Chittenden Trust Company. GSBI Insurance Group is a subsidiary of Granite Bank.



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 $3.0 billion, total loans of approximately $1.8 million and total deposits of approximately $2.6 billion.
CTCs principal offices are in Burlington, Vermont and it has fifty-two 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 Mortgage Service Center trade name.



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



CTC, through its subsidiary Chittenden Insurance Group, offers various
insurance related products including commercial, personal and life/health policies, as well as specialized coverages and risk management services.



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THE BANK OF WESTERN MASSACHUSETTS



BWM was chartered by the Commonwealth of Massachusetts as a commercial bank in 1986. At December 31, 2003, BWM had total
assets of $545 million, total loans of $457 million and total deposits of $472 million. BWMs principal offices are located in Springfield, Massachusetts and it has twelve additional locations in western Massachusetts.



FLAGSHIP BANK AND TRUST COMPANY



FBT was chartered by the Commonwealth of Massachusetts as a commercial bank
in 1986. At December 31, 2003, FBT had total assets of $500 million, total loans of $268 million and total deposits of $446 million. FBTs principal offices are located in Worcester, Massachusetts and it has six 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, 2003, MBT had total assets of $302 million, total loans of $229 million and total deposits of $254 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, 2003, ONB had total assets of $578 million, total loans of $434 million and total deposits of $485 million. ONBs principal offices are located in Kennebunk, Maine and it has twenty additional locations in southern Maine and southeastern
New Hampshire.



GRANITE BANK



GB was chartered by the State of New Hampshire as a commercial bank in 1895.
At December 31, 2003, GB had total assets of $1.0 billion, total loans of $527 million and total deposits of $718 million. GBs principal offices are located in Keene, New Hampshire and it has seventeen additional locations in southern New
Hampshire. The Company plans to merge Granite into Ocean National Bank in the second quarter of 2004, and move the headquarters of the combined bank to Portsmouth, New Hampshire.



GB, through its subsidiary GSBI Insurance Group, offers various insurance related products including personal, commercial
and life/health policies.



ECONOMY



The Northern New England economy continued to improve and strengthen
throughout the year. Demand for residential real estate within the region is still strong primarily due to historical lows in long-term interest rates and limited inventory. Retailers in New England reported increases in sales in the fourth quarter
compared with prior-year sales. Contacts in the lumber and homebuilder sector indicate residential construction and home improvements continue to positively affect their business. Along with the increase in overall economic activity, there were
modest improvements in labor markets. These improvements took the form of reduced layoffs or modestly increased hiring, although new hiring was still quite minimal. Changes in the economy are difficult to predict, and the discussion above may or may
not be indicative of whether the Northern New England economy is improving or will continue to strengthen. A downturn in the local economies that the Company serves or adverse changes in the real estate markets could negatively impact the
Companys business and financial condition.



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COMPETITION



There is vigorous competition in the Companys marketplace for all aspects of banking and related financial service activities. The asset management
and trust business which provides financial and estate advice is proving to be a necessity in todays complex world. 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. The
Companys operations are impacted by state and federal regulations which are applicable to the banking industry.



SUPERVISION AND REGULATION



The Company and its banking subsidiaries 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 its stockholders. As a bank holding company, the Company is subject to 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 authority to take a broad range of enforcement actions, including the issuance of cease and desist orders to terminate or
prevent unsafe or unsound banking practices or violations of laws or regulations, the assessment of civil money penalties against bank holding companies and their non-bank subsidiaries, officers, directors and other institution-affiliated parties,
and the removal of officers and directors.



Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (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.



Gramm-Leach-Bliley Act (1999). The Gramm-Leach-Bliley Act (the GLBA) repeals provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve member banks with
firms engaged principally in specified securities activities; and Section 32, which restricted officer, director, or employee interlocks between a member bank and any company or person primarily engaged in specified
securities activities. In addition, the GLBA also contains provisions that expressly preempt any state law restricting certain insurance activities. The general effect of the law is to establish a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a bank holding company, such as the Company, to engage in a full range of financial activities
through a new entity known as a financial holding



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company. Financial activities is broadly defined to include not only banking, insurance, and securities activities, but also merchant
banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the financial system generally. In sum, the GLBA permits a BHC that qualifies and elects to be treated as a financial holding company to engage in a significantly broader
range of financial activities than bank holding companies.



In
order to become a financial holding company and engage in these broader activities, a bank holding company, must meet certain tests. Specifically, all of a bank holding companys banks must be well-capitalized and well-managed, as measured by
regulatory guidelines, and each of the bank holding companys banks must have been rated satisfactory or better in its most recent Community Reinvestment Act evaluation. See Supervision and Regulation, Regulation of the
BanksCRA Regulations. A bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an
agreement with the Federal Reserve Board, which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to expand significantly or acquire less than
well-capitalized and well-managed institutions. At this time, as noted above, the Company has not elected to become a financial holding company.



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. 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 thereof. 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



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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), an FDIC-insured depository institution, such as The Banks can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) 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 Administration of the State of Vermont, in the case of CTC; the Maine Superintendent
of the Bureau of Banking in the case of MBT (the Superintendent); the Commissioner of Banks of the Commonwealth of Massachusetts in the case of BWM and FBT and the Commissioner of Banks of the State of New Hampshire in the case of GB
(individually, a Commissioner and collectively, 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 Bank Insurance Fund (BIF), 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, Massachusetts and New Hampshire 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. New Hampshire statutes impose similar restrictions on the payment of dividends by GB. 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,



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without the Superintendents approval, authorize dividends that reduce capital below certain standards established by the 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 preceeding two years.
Massachusetts banking laws require each of BWM and FBT to maintain a capital structure with a surplus account amounting to at least 50% of its capital stock and to transfer to its surplus account each year from net profits one-quarter of one percent
of its deposit liabilities.



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 Bank as the terms of comparable transactions between the Bank and non-affiliates. Further, federal
and applicable 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 BIF of the FDIC to the legal maximum of $100,000 for
each insured depositor. The FDI Act provides that the FDIC shall 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%, and to maintain
that ratio. Although current assessment levels are low, BIF insurance assessments may be increased in the future if necessary to maintain BIF reserves at the required level. 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 Banks interest-bearing assets. As of December 31,
2003, The Banks aggregate reserve requirement was approximately $10.6 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.



9



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USA PATRIOT Act. The USA Patriot Act of 2001 (the USA PATRIOT Act), 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. Management believes that the Company is in compliance with all the requirements
prescribed by the USA PATRIOT Act and all applicable final implementing regulations.



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 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 and GB 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 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
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. 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 or the
Federal Reserve Board, respectively, 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.



10



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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 (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 losses on loans and leases, 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.



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%, respectively. 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 its
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: (i) a banking organizations Supplementary Capital eligible for inclusion in
Total Capital is limited to no more than 100% of Core Capital; and (ii) 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 Banks believe, based on their level of interest rate risk exposure, that this provision will not have a material adverse effect on them.



On December 31, 2003, the Companys consolidated Total and Tier 1 Risk-Based Capital Ratios were 11.32% and 10.07%,
respectively, and its Leverage Capital Ratio was 7.79%. Based on the above figures and accompanying discussion, the Company exceeds all regulatory capital requirements and is 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



11



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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% 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 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% 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 (i) subject to increased
monitoring by its primary federal banking regulator; (ii) 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; (iii) subject to strict asset growth limitations; and (iv) 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 (i) require sale or re-capitalization of the
bank, (ii) impose additional restrictions on transactions between the bank and its affiliates, (iii) limit interest rates paid by the bank on deposits, (iv) limit asset growth and other activities, (v) require divestiture of subsidiaries, (vi)
require replacement of directors and officers, and (vii) 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 Banks financial condition and the risk posed to the BIF.
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 BIF insurance premiums again in 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.



12



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Assessment rates in 2003 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 0.27% of domestic deposits for institutions in the highest risk category (i.e., undercapitalized and unhealthy from a supervisory standpoint). The Deposit Insurance Funds
Act of 1996 eliminates the minimum assessment and authorizes the Financing Corporation (FICO) to levy assessments on BIF-assessable deposits. The actual assessment rates for FICO are adjusted on a quarterly basis to reflect changes in the assessment
bases of the insurance funds. Based on the 1996 Act, the Banks paid assessments totaling $838,302 or 0.0167 cents per $100 of deposits in 2003.



Brokered Deposits and Pass-Through Deposit Insurance Limitations. Under FDICIA, a bank cannot accept brokered deposits unless it either (i) is
Well Capitalized or (ii) 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 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 (i) consent to such action by the board of directors of the institution; (ii) cessation of the
institutions status as an insured depository institution; (iii) 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 (iv) 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: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. 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; (i) maximum
classified assets to capital ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; and (iii) 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, FBT and GB 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



13



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pose a significant risk to the BIF, 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 GBLA 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, Maine and New Hampshire 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, the Maine Superintendent of
Banking or the New Hampshire Commissioner of Banks. Thus, MBT, BWM, FBT and GB 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, the OCC and other bank regulatory agencies have established standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the Guidelines). Among other
things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security
program designed to ensure the security and confidentiality of customer information, to protect against any 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.



Privacy. The FDIC, the OCC and other regulatory agencies have published final privacy rules pursuant to provisions of the GLBA (Privacy Rules). The Privacy Rules, which govern the treatment of
nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to customers (and other consumers in some circumstances) about its privacy policies and practices, describe the conditions
under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties and provide a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties
by opting-out of that disclosure, subject to certain exceptions.



FDIC Waiver of Certain Regulatory Requirements. 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.



The Sarbanes-Oxley Act



The Sarbanes-Oxley Act of 2002 (S-O Act) implements a broad range of corporate governance and accounting measures for public companies
(including publicly-held bank holding companies such as the



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Company) designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate wrongdoings that occurred
at Enron and WorldCom, among other companies. The S-O Acts principal provisions, many of which have been interpreted through regulations released in 2003, provide for and include, among other things:



| |  | The creation of an independent accounting oversight board;
| | - | ----------------------------------------------------------



| |  | Auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients;
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | Additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify
financial statements;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuers securities by directors and senior officers in the twelve month period
following initial publication of any financial statements that later require restatement;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | An increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the companys independent
auditors;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Requirements that companies disclose whether at least one member of the audit committee is a financial expert (as such term is defined by the SEC) and if not, why not;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension
blackout periods;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, such as The Banks, on nonpreferential terms and in compliance
with other bank regulatory requirements;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; and
| | - | ---------------------------------------------------------------------------------------------



| |  | A range of enhanced penalties for fraud and other violations.
| | - | -------------------------------------------------------------



The Company has taken steps to comply with and anticipates that it will incur additional expenses in continuing to comply with the provisions of the S-O
Act and its underlying regulations. Management believes that such compliance efforts have strengthened the Companys overall corporate governance structure and does not expect that such compliance has to date, or will in the future have a
material impact on the Companys results of operations or financial condition.



EMPLOYEES



At December 31, 2003, the Company
and its subsidiaries employed 2,223 persons, with a full-time equivalency of 2,058 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 officers and employees.



COMPANY WEBSITE



The Company maintains a website on the World Wide Web at www.chittendencorp.com. The Company makes available, free of charge, on its website its 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 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.



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ITEM 2 PROPERTIES



The offices of the Company are located in an owned facility at Two Burlington Square in Burlington, Vermont. CTCs principal offices are in
Burlington, Vermont and it has fifty-two additional locations in Vermont. BWMs principal offices are in Springfield, Massachusetts and it has twelve additional locations in the western Massachusetts area. FBTs principal offices are in
Worcester, Massachusetts and it has six additional locations in the greater Worcester, Massachusetts area. MBTs principal offices are in Portland, Maine and it has eleven additional locations in southern Maine. ONBs principal offices are
in Kennebunk, Maine and it has twenty additional locations in southern Maine and New Hampshire. GBs principal offices are in Keene, New Hampshire and it has seventeen additional locations in southern 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, 2003. 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.



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PART II



ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER

MATTERS



The $1 par
value common stock of Chittenden Corporation has been publicly traded since November 14, 1974. As of January 31, 2004, there were 5,235 holders of record of the Companys common stock.



The Companys 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
|2003          |  |      |       |     |   |               |  |   |     
|March 31      |  | $    | 27.86 |     | $ | 24.80         |  | $ | 0.20
|June 30       |  |      | 28.50 |     |   | 25.65         |  |   | 0.20
|September 30  |  |      | 31.00 |     |   | 26.72         |  |   | 0.20
|December 31   |  |      | 34.50 |     |   | 29.75         |  |   | 0.20
|              |  |      |      
|2002          |  |      |       |     |   |               |  |   |     
|March 31      |  | $    | 30.05 |     | $ | 26.75         |  | $ | 0.19
|June 30       |  |      | 34.18 |     |   | 27.10         |  |   | 0.20
|September 30  |  |      | 32.15 |     |   | 23.18         |  |   | 0.20
|December 31   |  |      | 30.35 |     |   | 24.66         |  |   | 0.20



For a discussion of dividend
restrictions on the Companys common stock, see Dividends under the caption BusinessSupervision and Regulation on page 8 of this report.



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ITEM 6 SELECTED FINANCIAL DATA



|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|---------------------------------------------------------------- |  | -------------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | --
|                                                                 |  | Years Ended December 31,                           |           
|                                                                 |  | 2003                                               |            |   | 2002 |   |            | 2001 |  |   | 2000       |   |  | 1999 |           
|                                                                 |  | (In thousands, except share and per share amounts) |           
|Statements of operations:                                        |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Interest income                                                  |  | $                                                  | 271,442    |   |      | $ | 259,019    |      |  | $ | 266,497    |   |  | $    | 288,102    |   |  | $ | 288,737    |   
|Interest expense                                                 |  |                                                    | 53,379     |   |      |   | 66,404     |      |  |   | 96,192     |   |  |      | 121,030    |   |  |   | 113,252    |   
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Net interest income                                              |  |                                                    | 218,063    |   |      |   | 192,615    |      |  |   | 170,305    |   |  |      | 167,072    |   |  |   | 175,485    |   
|Provision for loan losses                                        |  |                                                    | 7,175      |   |      |   | 8,331      |      |  |   | 8,041      |   |  |      | 8,700      |   |  |   | 8,700      |   
|Noninterest income                                               |  |                                                    | 97,031     |   |      |   | 65,060     |      |  |   | 63,733     |   |  |      | 53,109     |   |  |   | 63,403     |   
|Noninterest expense                                              |  |                                                    | 191,371    |   |      |   | 151,544    |      |  |   | 135,760    |   |  |      | 124,761    |   |  |   | 203,609    |   
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Income before income taxes                                       |  |                                                    | 116,548    |   |      |   | 97,800     |      |  |   | 90,237     |   |  |      | 86,720     |   |  |   | 26,579     |   
|Income tax expense                                               |  |                                                    | 41,749     |   |      |   | 34,155     |      |  |   | 31,736     |   |  |      | 28,033     |   |  |   | 29,075     |   
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Net income (loss)                                                |  | $                                                  | 74,799     |   |      | $ | 63,645     |      |  | $ | 58,501     |   |  | $    | 58,687     |   |  | $ | (2,496     | ) 
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Total assets at year-end                                         |  | $                                                  | 5,900,644  |   |      | $ | 4,920,544  |      |  | $ | 4,153,714  |   |  | $    | 3,769,861  |   |  | $ | 3,828,296  |   
|Common shares outstanding at year-end                            |  |                                                    | 36,636,550 |   |      |   | 31,939,470 |      |  |   | 32,070,446 |   |  |      | 32,621,355 |   |  |   | 35,472,790 |   
|Balance sheetsaverage daily balances:                           |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Total assets                                                     |  | $                                                  | 5,777,538  |   |      | $ | 4,551,879  |      |  | $ | 3,871,017  |   |  | $    | 3,813,366  |   |  | $ | 4,104,497  |   
|Net loans                                                        |  |                                                    | 3,568,323  |   |      |   | 2,969,430  |      |  |   | 2,871,899  |   |  |      | 2,902,303  |   |  |   | 2,834,961  |   
|Investment securities                                            |  |                                                    | 1,696,982  |   |      |   | 1,264,156  |      |  |   | 729,027    |   |  |      | 643,837    |   |  |   | 931,076    |   
|Deposits                                                         |  |                                                    | 4,758,388  |   |      |   | 3,896,968  |      |  |   | 3,407,439  |   |  |      | 3,207,857  |   |  |   | 3,528,426  |   
|Borrowings                                                       |  |                                                    | 413,339    |   |      |   | 194,118    |      |  |   | 52,752     |   |  |      | 214,777    |   |  |   | 139,340    |   
|Stockholders equity                                             |  |                                                    | 538,217    |   |      |   | 394,740    |      |  |   | 353,529    |   |  |      | 341,081    |   |  |   | 373,742    |   
|Per common share:                                                |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Basic earnings (loss)                                            |  | $                                                  | 2.09       |   |      | $ | 1.98       |      |  | $ | 1.82       |   |  | $    | 1.74       |   |  | $ | (0.07      | ) 
|Diluted earnings (loss)                                          |  |                                                    | 2.07       |   |      |   | 1.96       |      |  |   | 1.80       |   |  |      | 1.72       |   |  |   | (0.07      | ) 
|Cash dividends declared                                          |  |                                                    | 0.80       |   |      |   | 0.79       |      |  |   | 0.76       |   |  |      | 0.75       |   |  |   | 0.65       |   
|Book value                                                       |  |                                                    | 15.82      |   |      |   | 13.11      |      |  |   | 11.56      |   |  |      | 10.49      |   |  |   | 10.22      |   
|Weighted average common shares outstanding                       |  |                                                    | 35,775,768 |   |      |   | 32,105,864 |      |  |   | 32,163,734 |   |  |      | 33,760,531 |   |  |   | 35,215,531 |   
|Weighted average common and common equivalent shares outstanding |  |                                                    | 36,120,108 |   |      |   | 32,495,402 |      |  |   | 32,547,029 |   |  |      | 34,100,113 |   |  |   | 35,215,531 |   
|Selected financial ratios:                                       |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Return on average stockholders equity                           |  |                                                    | 13.90      | % |      |   | 16.12      | %    |  |   | 16.55      | % |  |      | 17.21      | % |  |   | (0.67      | )%
|Return on average total assets                                   |  |                                                    | 1.29       |   |      |   | 1.40       |      |  |   | 1.51       |   |  |      | 1.54       |   |  |   | (0.06      | ) 
|Common stock dividend payout ratio                               |  |                                                    | 37.84      |   |      |   | 39.88      |      |  |   | 42.15      |   |  |      | 43.42      |   |  |   | (914.06    | ) 
|Net yield on earning assets                                      |  |                                                    | 4.12       |   |      |   | 4.53       |      |  |   | 4.74       |   |  |      | 4.73       |   |  |   | 4.67       |   
|Interest rate spread                                             |  |                                                    | 3.90       |   |      |   | 4.16       |      |  |   | 4.08       |   |  |      | 3.95       |   |  |   | 3.98       |   
|Net charge-offs as a percent of average loans                    |  |                                                    | 0.16       |   |      |   | 0.28       |      |  |   | 0.24       |   |  |      | 0.32       |   |  |   | 0.31       |   
|Nonperforming assets ratio (1)                                   |  |                                                    | 0.39       |   |      |   | 0.49       |      |  |   | 0.46       |   |  |      | 0.42       |   |  |   | 0.33       |   
|Allowance for loan losses as a percent of year-end loans         |  |                                                    | 1.54       |   |      |   | 1.62       |      |  |   | 1.59       |   |  |      | 1.41       |   |  |   | 1.42       |   
|Leverage capital ratio                                           |  |                                                    | 7.79       |   |      |   | 9.28       |      |  |   | 7.99       |   |  |      | 8.65       |   |  |   | 8.17       |   
|Risk-based capital ratios:                                       |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Tier 1                                                           |  |                                                    | 10.07      |   |      |   | 12.25      |      |  |   | 10.32      |   |  |      | 10.82      |   |  |   | 11.96      |   
|Total                                                            |  |                                                    | 11.32      |   |      |   | 13.50      |      |  |   | 11.57      |   |  |      | 12.08      |   |  |   | 13.23      |   
|Average Equity / Average Assets                                  |  |                                                    | 9.32       |   |      |   | 8.67       |      |  |   | 9.13       |   |  |      | 8.94       |   |  |   | 9.11       |   
|Tangible capital ratio                                           |  |                                                    | 6.02       |   |      |   | 7.29       |      |  |   | 8.19       |   |  |      | 8.69       |   |  |   | 9.03       |   
|Supplemental information (2):                                    |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   
|Operating net income                                             |  | $                                                  | 74,799     |   |      | $ | 63,645     |      |  | $ | 58,501     |   |  | $    | 59,479     |   |  | $ | 54,909     |   
|Operating return on average stockholders equity                 |  |                                                    | 13.90      | % |      |   | 16.12      | %    |  |   | 16.55      | % |  |      | 17.44      | % |  |   | 14.69      | % 
|Operating return on average total assets                         |  |                                                    | 1.29       |   |      |   | 1.40       |      |  |   | 1.51       |   |  |      | 1.56       |   |  |   | 1.34       |   
|Common stock dividend payout ratio (3)                           |  |                                                    | 37.84      |   |      |   | 39.88      |      |  |   | 42.15      |   |  |      | 42.85      |   |  |   | 41.55      |   

---

|(1) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Supplemental information is presented after adding back the impact of one-time special charges (net of the effect of income taxes) of $792,000 and $57.4 million in
2000 and 1999, respectively, to net income. One-time special charges are
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



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| | related to the acquisition of VFSC in 1999 and included gains and losses on branch sales mandated as part of the acquisition, impaired goodwill of VFSC
relating to CHZ market areas which was written off upon consummation of the merger, other merger costs including severance payments, legal fees, etc, and the related tax effects of taxable income or deductible expense. Management considers these
non-GAAP operating measures to be appropriate for comparison to operational performance of other fiscal periods in which these unique revenues and expenses did not occur. A reconciliation is presented below:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                               |  |      |        |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                                               |  | 2000 |        |   | 1999 |  
|Net income (loss), as reported                 |  | $    | 58,687 |   |      | $ | (2,496  | )
|Less:                                          |  |      |        |   |      |   |         |  
|Gain(loss) on branch sales                     |  |      | (833   | ) |      |   | 12,523  |  
|Impaired goodwill off upon merger              |  |      |       |   |      |   | (21,129 | )
|Merger costs                                   |  |      |       |   |      |   | (49,866 | )
|Tax effect on merger costs                     |  |      |       |   |      |   | 14,465  |  
|Tax effect of gain (loss) on branch sales      |  |      | 41     |   |      |   | (13,398 | )
|                                               |  |      |        |   |      |   |         |  
|Operating net income                           |  | $    | 59,479 |   |      | $ | 54,909  |  
|                                               |  |      |        |   |      |   |         |  
|After tax impact of special charges, per share |  | $    | 0.02   |   |      | $ | 1.61    |  



|(3) | Common stock cash dividends declared divided by net income after adding back one time special charges described in note (2). Management believes the presentation of the preceding
measures enhance the understanding of readers of this report and its impact on Chittendens business.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS



For the Years Ended December 31, 2003, 2002, and 2001



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 Loan Losses.The allowance for loan losses is established through a charge against current earnings to
the provision 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 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 loan losses. The Companys methodology with respect to the assessment of the adequacy of the allowance for loan losses is more fully discussed on pages
24-27 of Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A).



Goodwill Impairment.The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles, effective
January 1, 2002. The statement addresses the method of identifying and measuring goodwill and other intangible assets acquired in a business combination, eliminates further amortization of goodwill, and requires periodic impairment evaluations of
goodwill. Impairment evaluations are required to be performed annually and may be required more frequently if certain conditions indicating potential impairment exist. In the event that the Company determined that its goodwill was impaired, the
recognition of an impairment charge could have an adverse impact on its results of operations in the period that the impairment occurred or on its financial position.



Mortgage Servicing Rights (MSRs). Servicing assets are recognized as separate assets when rights are acquired through
purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying
financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates
and original loan terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds
its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment speeds can adversely
impact the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets were to increase in the future, the Company can recognize the increased fair value to the extent of the
impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in managements assessment of the impairment of these servicing assets, as a result of changes in



20



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observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact the Companys financial condition and
results of operations either positively or adversely.



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 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 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.



Income Taxes.The Company estimates its income taxes for each of the jurisdictions in which it operates to determine an appropriate expense against current earnings. This involves estimating the Companys actual current tax
exposure 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, 2003, there were no valuation allowances set aside against any deferred tax assets.



Restructuring Charges.The Company recognizes
restructuring charges in accordance with Statement of Financial Accounting Standard No. 146 Accounting for Costs Associated with Exit or Disposal Activities and SEC Staff Accounting Bulletin No. 10 Restructuring and Impairment Charges,
which contain specific guidance regarding the types of, and circumstances under which, certain expenses can be accrued. In general, the Statements require that the Company have a detailed plan in place, which has been communicated to substantially
all the employees affected in the staff reduction, branch closures/sales, or computer conversions. Significant management judgment is required in estimating the amount of expense that is appropriate to recognize in relation to these plans.



Executive Overview



Net income for 2003 was $74.8 million, an increase of $11.2 million from
2002 and $16.3 million from 2001. Diluted earnings per share for 2003 were $2.07 compared to $1.96 for 2002 and $1.80 for 2001.



Return on average assets (ROA) and return on average equity (ROE) are two industry measures on which the financial performance of a banking institution is
generally measured. During 2003, the Companys ROA was 1.29% compared to 1.40% in 2002 and 1.51% in 2001. During 2003, the Companys ROE was 13.90% compared to 16.12% and 16.55% in 2002 and 2001, respectively. The decreases in ROE and ROA
in 2003 and 2002 were primarily attributable to the Granite Bank and Ocean National Bank acquisitions, and the intangibles recognized and equity issued in conjunction with those transactions.



Chittendens net interest income increased $25.4 million from
2002s level of $192.6 million to $218.1 million in 2003. The increase was due to higher average earning assets, which offset a declining net interest margin. The growth in earning assets was primarily attributable to the acquisition of GB and
continued strong deposit growth. The provision for loan losses was approximately $1.2 million lower in 2003 due to continued improvement in the Companys asset quality and stronger economic conditions throughout the Companys primary
market areas. Noninterest income increased $32.0 million in 2003 due to higher gains on sales of mortgage loans, improved results on mortgage servicing and stronger fee income. Gains on sales of mortgage loans were $11.7 million higher in 2003 due
to significantly higher volumes of loans sold as a result of a precipitous decline in long-term interest rates in the first six months of 2003. Mortgage servicing income was approximately $6.7 million higher in 2003 due to lower required impairment
reserves on the Companys capitalized mortgage servicing rights. The reduction in the required reserves resulted from declines in market based forward prepayment rates used to estimate the fair value of these assets. Gains on sale of securities



21



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increased in 2003 by $6.8 million due primarily to the early redemption of long-term borrowings, which was funded by the sale of securities and portfolio
reconfigurations to reduce extension risk. Penalties paid on the early prepayment of borrowings were $3.1 million and the weighted average cost of funds was 3.50%. Noninterest income, excluding securities gains, prepayment penalties, mortgage
servicing and gains on sales of loans increased $9.8 million from 2002. The Company continued to realize solid increases in its fee income businesses due to its broader footprint and an expanded customer base. The GB acquisition accounted for $1.5
million of the increase in service charges and $2.3 million of the increase in net insurance commissions. Noninterest expenses were up $39.8 million from 2002 primarily due to the acquisition of GB, one time expenses related to the conversion of the
Companys information technology (IT) platform as well as other restructuring activities and higher incentive expenses driven by a significant increase in the origination of mortgage loans.



In early 2003, the Company preformed an extensive review of its IT systems
and software, including its core banking system. The review was driven by the Companys significant growth over the past seven years and the continued expansion of its product lines. The Company performed an extensive analysis of IT vendors to
determine which could provide the best service and support to the Company and its customers. After completing this thorough analysis, Jack Henry & Associates, Inc., was selected to be the Companys future IT provider for a period of five
years. During 2003, the Company recognized expenses of $7.2 million relating to the IT conversion, including $3.1 million in payments to terminate the Companys existing IT contract, and $3.7 million in impairment of computer equipment which
will not be portable to the new operating platform. The remaining costs related to travel, training, overtime and external project management.



In the latter half of 2003, the Company formulated and began executing certain restructuring plans related to: 1) consolidation or closure of certain
branch locations, the majority of which related to the anticipated merger of Granite Bank into Ocean National Bank in the second quarter of 2004; 2) the closure of certain offsite ATM locations, primarily in New Hampshire and southern Maine; and 3)
severance related to the branch consolidations and closures, and the centralization of back office functions planned as part of the IT platform conversion in May 2004. Chittenden recognized a restructuring charge relating to these three categories
of $1.8 million in the fourth quarter of 2003.



Overall, net
income was $63.6 million in 2002 compared to $58.5 million in 2001. Net interest income increased $22.3 million primarily as a result of the acquisitions of ONB and MBT and strong growth in deposits. The provision for loan losses was $290,000 higher
in 2002 due to declining economic conditions and increased net charge-offs. Noninterest income increased $1.3 million in 2002 primarily due to increases in service charges on deposits, insurance commissions, and gains on sales of securities, which
was substantially offset by lower mortgage servicing income. The reduction in mortgage servicing income was due to a significant decline in longterm interest rates in the fourth quarter of 2002, which led to the recognition of an $8.5 million
impairment charge against the carrying value of the Companys MSR portfolio. The increase of $1.7 million in service charges on deposits was attributed to the ONB acquisition as well as strong deposit flows throughout 2002 and higher cash
management fees. Noninterest expenses were up $15.7 million from 2001 primarily due to the acquisitions of ONB and MBT and higher incentive expenses, which was partially offset by a reduction in amortization of intangibles.



Financial Condition



Loans



Chittendens loan portfolio at December 31, 2003 totaled $3.7 billion compared to $3.0 billion at year-end 2002. The
classification of the Companys loan portfolio is based on underlying collateral utilizing bank regulatory definitions. Acquired in the GB transaction were loans totaling $626 million, consisting primarily of commercial and residential loans.
Commercial real estate loans, representing 38.4% of Chittendens year-end portfolio, increased $327 million or 29.6% to $1.431 billion at year-end 2003. The Granite acquisition accounted for approximately $182 million in commercial real estate
loans while continued strong originations throughout the Companys existing banking franchises accounted for the remainder of the growth.



At December 31, 2003, commercial loans secured by non-real estate business assets totaled $746 million an increase of 15.4% from 2002. The increase of
$99.7 million was primarily attributable to continued strong



22



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organic growth throughout the Companys banking operations and the acquisition of GB, which contributed $36 million at the time of acquisition. Included
in the commercial portfolio are business credit cards, which amounted to $7.9 million in 2003 compared to $7.0 million in 2002.



Construction loans totaled $141 million at December 31, 2003, up $55 million from the year before. The GB acquisition contributed approximately $14
million of the increase. The primary emphasis in the construction portfolio relates to the financing of projects for the Companys commercial customers, as well as individual consumer loans. The construction loan portfolio is comprised of
approximately 38% in loans to commercial customers for owner-occupied properties, 29% in individual consumer construction loans, 17% to residential developers, and 16% for commercial customers for investor properties.



Residential real estate loans totaled $1.148 billion in 2003, an increase of
$286 million from 2002. The 2003 total included $335 million from the GB acquisition. Total paydowns of the residential real estate portfolio were $387 million in 2003 compared with $227 million in 2002. New originations added to the portfolio did
not keep pace with paydowns because the majority of loans originated in 2003 were fixed rate loans sold on the secondary market. Included in the real estate portfolio are outstanding balances under home equity credit lines, totaling $271 million at
December 31, 2003 compared to $204 million the previous year. The unused portion of these lines totaled $292.8 million at December 31, 2003 compared to $220.2 million at year-end 2002.



Consumer loans increased $16.4 million in 2003, or 7.4% from the prior year-end. Indirect installment lending through auto
dealers increased $22.2 million from year-end 2002 to $203.1 million at the end of 2003. Direct installment balances at December 31, 2003 stood at $32.6 million (of which approximately $4.0 million related to the GB acquisition) compared with $37.1
million at the end of 2002.



Lease financing receivables
outstanding at December 31, 2003 were $20.2 million, down from $54.2 million a year earlier. The residual value of leased vehicles represented $16.1 million and $40.1 million, respectively of the balances at those dates. The large decline in lease
financing receivables was a result of the Companys late 2001 decision to exit this market and the continuing maturity of the remaining portfolio. The contractual maturities of the remaining lease portfolio at December 31, 2003 are: $13.6
million in 2004, $5.8 million in 2005, and $766,000 in 2006.



The Companys lending activities are conducted in market areas focused in Vermont, western and central Massachusetts, southern Maine, and New Hampshire, with additional activity related to nearby trading areas in New York and
Connecticut. In addition to the geographic portfolio diversification described above, the loans are widely diversified by borrowers and industry groups.



The following table shows the composition of the loan portfolio for the five years ended December 31, 2003:



|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------- |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                          |  | December 31,   |          
|                          |  | 2003           |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                          |  | (in thousands) |          
|Commercial                |  | $              | 658,615   |   |      | $ | 568,224   |      |  | $ | 559,752   |   |  | $    | 515,926   |   |  | $ | 501,727   |  
|Municipal                 |  |                | 87,080    |   |      |   | 77,820    |      |  |   | 85,479    |   |  |      | 83,566    |   |  |   | 90,148    |  
|Real estate:              |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|1-4 family                |  |                | 700,671   |   |      |   | 561,330   |      |  |   | 618,033   |   |  |      | 839,258   |   |  |   | 878,497   |  
|Multi-family              |  |                | 176,478   |   |      |   | 96,494    |      |  |   | 54,623    |   |  |      | 44,766    |   |  |   | 39,002    |  
|Home Equity               |  |                | 270,959   |   |      |   | 203,882   |      |  |   | 182,905   |   |  |      | 140,150   |   |  |   | 149,353   |  
|Commercial                |  |                | 1,430,945 |   |      |   | 1,103,897 |      |  |   | 903,819   |   |  |      | 723,339   |   |  |   | 641,494   |  
|Construction              |  |                | 140,801   |   |      |   | 85,512    |      |  |   | 79,801    |   |  |      | 57,701    |   |  |   | 55,448    |  
|Consumer                  |  |                | 238,982   |   |      |   | 222,547   |      |  |   | 255,343   |   |  |      | 314,914   |   |  |   | 414,173   |  
|Lease financing           |  |                | 20,153    |   |      |   | 54,157    |      |  |   | 98,422    |   |  |      | 136,478   |   |  |   | 134,967   |  
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total gross loans         |  |                | 3,724,684 |   |      |   | 2,973,863 |      |  |   | 2,838,177 |   |  |      | 2,856,098 |   |  |   | 2,904,809 |  
|Allowance for loan losses |  |                | (57,464   | ) |      |   | (48,197   | )    |  |   | (45,268   | ) |  |      | (40,255   | ) |  |   | (41,079   | )
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loans                 |  | $              | 3,667,220 |   |      | $ | 2,925,666 |      |  | $ | 2,792,909 |   |  | $    | 2,815,843 |   |  | $ | 2,863,730 |  
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loans held for sale       |  | $              | 25,262    |   |      | $ | 94,874    |      |  | $ | 50,208    |   |  | $    | 44,950    |   |  | $ | 2,926     |  



23



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Mortgage Banking Operations



Residential mortgages originated during 2003 totaled $1.513 billion, compared to $860 million during 2002. This increase was
due to continued high volumes of fixed rate residential loans caused by increasingly lower market rates, through mid-2003. After hitting their recent all time lows in June, rates stabilized in the second half of the year but volumes remained heavy
into the fourth quarter as the pipeline of loan applications was processed and closed. An uptick in market rates late in October slowed the flow of applications so that loans held for sale at year end was considerably lower than a year ago as well
as from the interim quarter ends. The Company underwrites its residential mortgages to secondary market standards and continues to follow its policy of selling substantially all of its fixed-rate residential mortgage production on a
servicing-retained non-recourse basis. Secondary market sales of mortgage loans totaled $1.395 billion in 2003, compared to $720 million in 2002.



The portfolio of residential mortgages serviced for investors totaled $2.335 billion at December 31, 2003 compared to $1.837 billion at year-end 2002.
Serviced loans obtained in the GB acquisition were $319 million. These assets are owned by investors other than Chittenden and therefore are not included in the Companys consolidated balance sheets. In accordance with Statement of Financial
Accounting Standards No. 140, the Company has recorded an originated mortgage servicing rights asset for all mortgages sold on a servicing retained basis. As noted under Application of Critical Accounting Policies, the Company evaluates the MSR
asset for impairment on a quarterly basis. At December 31, 2003 the MSRs amortized cost of $15.0 million was reduced by an impairment reserve of $2.7 million, so that the carrying value of each stratum of the MSR asset did not exceed its fair
value at that date.



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 was to exceed 90 days past due, no further interest would be accrued on the guaranteed portion, as it 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 formally acquired through foreclosure and is carried at the lower of cost or fair value.



24



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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, 2003:



|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                              |  | December 31,   |       
|                                                                              |  | 2003           |        |   | 2002 |   |        | 2001 |  |   | 2000   |   |  | 1999 |       
|                                                                              |  | (in thousands) |       
|Loans on nonaccrual                                                           |  | $              | 14,331 |   |      | $ | 14,576 |      |  | $ | 12,374 |   |  | $    | 11,376 |   |  | $ | 9,172  |  
|Troubled debt restructurings                                                  |  |                |       |   |      |   | 225    |      |  |   |       |   |  |      |       |   |  |   |       |  
|Other real estate owned                                                       |  |                | 100    |   |      |   | 158    |      |  |   | 703    |   |  |      | 513    |   |  |   | 416    |  
|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                                    |  | $              | 14,431 |   |      | $ | 14,959 |      |  | $ | 13,077 |   |  | $    | 11,889 |   |  | $ | 9,588  |  
|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans past due 90 days or more and still accruing                             |  | $              | 4,029  |   |      | $ | 2,953  |      |  | $ | 4,583  |   |  | $    | 4,595  |   |  | $ | 5,016  |  
|Percentage of nonperforming assets to total loans and other real estate owned |  |                | 0.39   | % |      |   | 0.49   | %    |  |   | 0.46   | % |  |      | 0.42   | % |  |   | 0.33   | %
|Nonperforming assets to total assets                                          |  |                | 0.24   |   |      |   | 0.30   |      |  |   | 0.31   |   |  |      | 0.32   |   |  |   | 0.25   |  
|Allowance for loan losses to nonperforming loans, excluding OREO              |  |                | 400.99 |   |      |   | 325.64 |      |  |   | 365.83 |   |  |      | 353.86 |   |  |   | 447.87 |  



Nonaccrual loans at
December 31, 2003 consisted of approximately 146 loans, which were diversified across a range of industries, sectors and geography. Of the 146 loans, only two loans had balances over $1 million (the two loans totaled $2.6 million). Nonaccrual loans
with payments less than 30 days past due represent 59% of total loans on nonaccrual at December 31, 2003.



Allowance for loan losses



Adequacy of the allowance is determined using a consistent, systematic methodology, which analyzes the 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 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 Companys historical loss experience, industry trends, and the impact of the local and regional economy on the Companys borrowers, were considered by management in determining the adequacy of the allowance for
loan losses.



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-performing loans, changes in economic conditions, 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 examination
process. Such agencies may require the Company to record additions to the allowance based on judgements 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 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. The level of allowance allocable to each group of



25



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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, 2003, impaired loans with specific reserves totaled $5,666,000 (all of these loans were on nonaccrual status) and the amount of such reserves were $1,725,000.



Results and recommendations from these processes provide senior management
and the Board of Directors with independent information on loan portfolio condition. The Board of Directors monitors asset quality throughout the year.



26



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The following table summarizes the activity in the Companys allowance for loan losses for the five
years ended December 31, 2003:



|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------------ |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                   |  | December 31,   |          
|                                                                   |  | 2003           |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                                                   |  | (in thousands) |          
|Balance of allowance for possible loan losses at beginning of year |  | $              | 48,197    |   |      | $ | 45,268    |      |  | $ | 40,255    |   |  | $    | 41,079    |   |  | $ | 41,209    |  
|Allowance acquired through acquisitions                            |  |                | 7,936     |   |      |   | 2,972     |      |  |   | 4,083     |   |  |      |          |   |  |   |          |  
|Provision charged to expense                                       |  |                | 7,175     |   |      |   | 8,331     |      |  |   | 8,041     |   |  |      | 8,700     |   |  |   | 8,700     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Balance of allowance for possible loan losses after provision      |  |                | 63,308    |   |      |   | 56,571    |      |  |   | 52,379    |   |  |      | 49,779    |   |  |   | 49,909    |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loans charged off:                                                 |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial                                                         |  |                | 3,653     |   |      |   | 4,340     |      |  |   | 2,881     |   |  |      | 4,335     |   |  |   | 4,747     |  
|Real estate:                                                       |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential                                                        |  |                | 187       |   |      |   | 487       |      |  |   | 402       |   |  |      | 454       |   |  |   | 600       |  
|Commercial                                                         |  |                | 1,794     |   |      |   | 554       |      |  |   | 1,073     |   |  |      | 332       |   |  |   | 248       |  
|Construction                                                       |  |                |          |   |      |   |          |      |  |   | 60        |   |  |      |          |   |  |   |          |  
|Home equity                                                        |  |                | 21        |   |      |   | 138       |      |  |   | 263       |   |  |      | 120       |   |  |   | 124       |  
|Consumer                                                           |  |                | 4,383     |   |      |   | 6,048     |      |  |   | 5,780     |   |  |      | 8,198     |   |  |   | 7,697     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total loans charged off                                            |  |                | 10,038    |   |      |   | 11,567    |      |  |   | 10,459    |   |  |      | 13,439    |   |  |   | 13,416    |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Recoveries of loans previously charged off:                        |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial                                                         |  |                | 1,287     |   |      |   | 1,048     |      |  |   | 806       |   |  |      | 720       |   |  |   | 1,661     |  
|Real estate:                                                       |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential                                                        |  |                | 333       |   |      |   | 71        |      |  |   | 130       |   |  |      | 164       |   |  |   | 116       |  
|Commercial                                                         |  |                | 189       |   |      |   | 232       |      |  |   | 349       |   |  |      | 230       |   |  |   | 272       |  
|Construction                                                       |  |                | 64        |   |      |   | 19        |      |  |   | 66        |   |  |      | 112       |   |  |   | 64        |  
|Home equity                                                        |  |                | 90        |   |      |   | 36        |      |  |   | 15        |   |  |      | 51        |   |  |   | 67        |  
|Consumer                                                           |  |                | 2,231     |   |      |   | 1,787     |      |  |   | 1,982     |   |  |      | 2,638     |   |  |   | 2,406     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total recoveries                                                   |  |                | 4,194     |   |      |   | 3,193     |      |  |   | 3,348     |   |  |      | 3,915     |   |  |   | 4,586     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loans charged off                                              |  |                | 5,844     |   |      |   | 8,374     |      |  |   | 7,111     |   |  |      | 9,524     |   |  |   | 8,830     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Balance of allowance for possible loan losses at year end          |  | $              | 57,464    |   |      | $ | 48,197    |      |  | $ | 45,268    |   |  | $    | 40,255    |   |  | $ | 41,079    |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loans outstanding at end of year                                   |  | $              | 3,724,865 |   |      | $ | 2,973,863 |      |  | $ | 2,838,177 |   |  | $    | 2,856,098 |   |  | $ | 2,904,809 |  
|Average loans outstanding during the year                          |  |                | 3,550,648 |   |      |   | 2,974,370 |      |  |   | 2,885,228 |   |  |      | 2,912,975 |   |  |   | 2,877,218 |  
|Ratio of net charge-offs during year to average loans outstanding  |  |                | 0.16      | % |      |   | 0.28      | %    |  |   | 0.24      | % |  |      | 0.32      | % |  |   | 0.31      | %
|Allowance as a percent of loans outstanding at end of year         |  |                | 1.54      |   |      |   | 1.62      |      |  |   | 1.59      |   |  |      | 1.41      |   |  |   | 1.42      |  



Management strives for
directional consistency between its provision for loans losses, the balance of its allowance, and the other numeric indicators of its asset quality. The provision was flat on a year over year basis from 1999 to 2000. In 2001, the provision was
$659,000 lower than in the previous year, primarily due to lower levels of charge-offs that year compared to 2000. The allowance as a percentage of loans climbed to 1.59%, as a result of the MBT acquisition and lower commercial charge-offs. In 2002,
the provision was increased by approximately $300,000, primarily due to higher levels of commercial charge-offs and the ONB acquisition, which brought a concentration of commercial real estate loans that was higher than the Company had carried
previously. Finally in 2003, the provision was reduced by $1.156 million, primarily due to improved credit quality evidenced by much lower net charge-offs, which declined $2.5 million. The allowance as a percentage of loans declined from 1.62% to
1.54% as a result of the reduced provision and because of the low levels of nonperforming assets (NPAs). The level of NPAs at December 31, 2003, were down slightly from 2002 and up



27



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slightly from 2001. However, due to strong loan growth during the period NPAs as a percentage of loans plus OREO declined from the mid to upper 40 basis
point range in 2001-2002, to 39 basis points in 2003. Based on these qualitative factors, the lower provision in 2003 was considered appropriate.



The allowance for loan losses is allocated to various loan categories as part of the Companys process of evaluating the adequacy of the allowance
for loan losses. Allocated reserves increased by approximately $9.5 million to $52.8 million at December 31, 2003. Changes in the distribution of the allocated allowance principally occurred due to the acquisition of GB.



The following table summarizes the allocation of the allowance for loan
losses for the five years ended December 31, 2003:



|                                       |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  
|-------------------------------------- |  | --------------- | ------ | ---------------- | ---- | - | --------------- | ---- | ---------------- |  | ---- | --------------- |  | ---------------- | ------ |  | --------------- | - | ---------------- | - | ------ | --------------- | --- | ---------------- |  | - | ------ |  | --- | -
|                                       |  | December 31,    |       
|                                       |  | 2003            |        |                  | 2002 |   |                 | 2001 |                  |  | 2000 |                 |  | 1999             |       
|                                       |  | AmountAllocated |        | LoanDistribution |      |   | AmountAllocated |      | LoanDistribution |  |      | AmountAllocated |  | LoanDistribution |        |  | AmountAllocated |   | LoanDistribution |   |        | AmountAllocated |     | LoanDistribution | 
|                                       |  | (in thousands)  |       
|Commercial                             |  | $               | 13,302 |                  | 20   | % |                 | $    | 11,252           |  | 22   | %               |  | $                | 9,381  |  | 23              | % |                  | $ | 7,861  |                 | 21  | %                |  | $ | 8,207  |  | 20  | %
|Real estate:                           |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  
|Residential                            |  |                 | 1,763  |                  | 24   |   |                 |      | 1,733            |  | 22   |                 |  |                  | 1,950  |  | 24              |   |                  |   | 2,276  |                 | 31  |                  |  |   | 2,985  |  | 32  |  
|Commercial                             |  |                 | 25,832 |                  | 38   |   |                 |      | 19,429           |  | 37   |                 |  |                  | 15,637 |  | 32              |   |                  |   | 13,510 |                 | 25  |                  |  |   | 11,333 |  | 22  |  
|Construction                           |  |                 | 2,240  |                  | 4    |   |                 |      | 1,257            |  | 3    |                 |  |                  | 1,250  |  | 3               |   |                  |   | 865    |                 | 2   |                  |  |   | 882    |  | 2   |  
|Home equity                            |  |                 | 966    |                  | 7    |   |                 |      | 748              |  | 7    |                 |  |                  | 671    |  | 6               |   |                  |   | 566    |                 | 5   |                  |  |   | 616    |  | 5   |  
|Consumer and leasing.                  |  |                 | 4,454  |                  | 7    |   |                 |      | 4,821            |  | 9    |                 |  |                  | 5,139  |  | 12              |   |                  |   | 7,290  |                 | 16  |                  |  |   | 7,912  |  | 19  |  
|Unfunded commitments and contingencies |  |                 | 4,207  |                  |     |   |                 |      | 4,106            |  |     |                 |  |                  | 3,570  |  |                |   |                  |   | 3,536  |                 |    |                  |  |   | 3,191  |  |    |  
|Other                                  |  |                 | 4,700  |                  |     |   |                 |      | 4,851            |  |     |                 |  |                  | 7,670  |  |                |   |                  |   | 4,351  |                 |    |                  |  |   | 5,953  |  |    |  
|                                       |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  
|                                       |  | $               | 57,464 |                  | 100  | % |                 | $    | 48,197           |  | 100  | %               |  | $                | 45,268 |  | 100             | % |                  | $ | 40,255 |                 | 100 | %                |  | $ | 41,079 |  | 100 | %
|                                       |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  



During 2003, the
allowance for loan loss allocated to commercial loans increased by $2.1 million, the amount allocated to commercial real estate loans increased by $6.4 million, and the amount allocated to construction loans increased $1.0 million. These increases
were primarily attributed to the GB acquisition and to loan growth in these categories. During 2003, the amount allocated to the consumer and leasing portfolios declined by approximately $367,000, while the overall percentage of portfolio loans in
these categories declined from 9% to 7%. Amounts allocated to unfunded include reserves for certain contingencies such as letters of credit and merchant processing.



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.



Investment Securities



The investment portfolio is used to meet liquidity demands, mitigate
interest rate sensitivity, invest excess liquidity, and generate interest income. At December 31, 2003, the Company held investments available for sale totaling $1.6 billion, an increase of 6% from 2002. The increase from 2002 to 2003 is primarily
attributable to the GB acquisition as well as continued deposit growth throughout the Company. At December 31, 2003, net unrealized gains were $23.7 million compared with net unrealized gains of $44.3 million at December 31, 2002. The decline is
primarily due to higher interest rates at year-end and sales of securities during 2003. In 2003, the financial markets experienced significant interest rate volatility with the two, five and ten year treasuries hitting lows of 1.10%, 2.08% and 3.13%
and highs of 2.12%, 3.63% and 4.61% respectively. This volatility primarily



28



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impacted mortgage backed securities and callable agencies both in terms of accelerated paydowns as well as duration. Unrealized losses that are considered
other than temporary are recorded as an impairment expense against earnings. There was no impairment in the available for sale portfolio at December 31, 2003.



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



|                                                 |  |              |           |      |   |           |  |      |         |      |   |         |  |   |        
|------------------------------------------------ |  | ------------ | --------- | ---- | - | --------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                 |  | December 31,
|                                                 |  | 2003         |           | 2002 |   | 2001      |  | 2000 |         | 1999
|Securities available for sale (at book value)    |  |              |           |      |   |           |  |      |         |      |   |         |  |   |        
|U.S. Treasury securities                         |  | $            | 7,797     |      | $ | 51,989    |  | $    | 3,296   |      | $ | 4,696   |  | $ | 18,946 
|U.S. government agency obligations               |  |              | 497,573   |      |   | 475,268   |  |      | 228,189 |      |   | 251,778 |  |   | 235,326
|Obligations of states and political subdivisions |  |              | 1,297     |      |   | 1,571     |  |      | 4,663   |      |   | 6,133   |  |   | 8,345  
|Mortgage-backed securities                       |  |              | 537,033   |      |   | 453,855   |  |      | 371,631 |      |   | 152,377 |  |   | 200,414
|Corporate bonds and notes                        |  |              | 519,890   |      |   | 469,301   |  |      | 172,636 |      |   | 163,948 |  |   | 196,402
|Government bond mutual funds                     |  |              | 3         |      |   |          |  |      | 31,700  |      |   | 5,250   |  |   | 274    
|Other debt securities                            |  |              | 840       |      |   | 874       |  |      | 923     |      |   | 833     |  |   | 642    
|                                                 |  |              |           |      |   |           |  |      |         |      |   |         |  |   |        
|Total securities available for sale              |  | $            | 1,564,433 |      | $ | 1,452,858 |  | $    | 813,038 |      | $ | 585,015 |  | $ | 660,349
|                                                 |  |              |           |      |   |           |  |      |         |      |   |         |  |   |        



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, 2003, with comparative totals for 2002. Expected
maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain investments:



|                                                 |  |                 |         |          |                                 |   |        |                                 |           |  |                 |        |  |          |         |  |        |   |          |   |        |        |      |          |  |   |           |  |      |  
|------------------------------------------------ |  | --------------- | ------- | -------- | ------------------------------- | - | ------ | ------------------------------- | --------- |  | --------------- | ------ |  | -------- | ------- |  | ------ | - | -------- | - | ------ | ------ | ---- | -------- |  | - | --------- |  | ---- | -
|                                                 |  | Within One Year |         |          | After One But Within Five Years |   |        | After Five But Within Ten Years |           |  | After Ten Years |        |  | Total    |        
|                                                 |  | Amount          |         | Yield(2) |                                 |   | Amount |                                 | Yield(2)  |  |                 | Amount |  | Yield(2) |         |  | Amount |   | Yield(2) |   |        | Amount |      | Yield(2) | 
|                                                 |  | (in thousands)  |        
|SECURITIES AVAILABLEFOR SALE                     |  |                 |         |          |                                 |   |        |                                 |           |  |                 |        |  |          |         |  |        |   |          |   |        |        |      |          |  |   |           |  |      |  
|U.S. Treasury securities                         |  | $               | 2,279   |          | 2.07                            | % |        | $                               | 5,518     |  | 2.75            | %      |  | $        | 0       |  | 0.00   | % |          | $ | 0      |        | 0.00 | %        |  | $ | 7,797     |  | 2.55 | %
|U.S. government agency obligations               |  |                 | 42,486  |          | 2.11                            | % |        |                                 | 418,582   |  | 3.15            | %      |  |          | 36,505  |  | 6.23   | % |          |   |       |        |     |          |  |   | 497,573   |  | 3.29 | %
|Obligations of states and political subdivisions |  |                 | 3       |          | 8.79                            | % |        |                                 | 1,175     |  | 5.97            | %      |  |          | 60      |  | 8.79   | % |          |   | 59     |        | 8.79 | %        |  |   | 1,297     |  | 6.25 | %
|Mortgage-backed securities(1)                    |  |                 | 114,886 |          | 4.40                            | % |        |                                 | 291,841   |  | 4.41            | %      |  |          | 124,340 |  | 4.41   | % |          |   | 5,966  |        | 4.48 | %        |  |   | 537,033   |  | 4.41 | %
|Corporate bonds and notes                        |  |                 | 50,065  |          | 5.50                            | % |        |                                 | 436,473   |  | 5.02            | %      |  |          | 33,352  |  | 3.94   | % |          |   |       |        |     |          |  |   | 519,890   |  | 5.00 | %
|Other debt securities                            |  |                 | 510     |          | 6.50                            | % |        |                                 | 320       |  | 7.27            | %      |  |          | 10      |  | 6.75   | % |          |   |       |        |     |          |  |   | 840       |  | 6.71 | %
|Marketable equity securities                     |  |                 |        |          |                                |   |        |                                 |          |  |                |        |  |          |        |  |       |   |          |   | 3      |        | 0.00 | %        |  |   | 3         |  | 0.00 | %
|                                                 |  |                 |         |          |                                 |   |        |                                 |           |  |                 |        |  |          |         |  |        |   |          |   |        |        |      |          |  |   |           |  |      |  
|Total available for sale                         |  | $               | 210,229 |          | 4.18                            | % |        | $                               | 1,150,919 |  | 4.18            | %      |  | $        | 197,257 |  | 4.67   | % |          | $ | 6,025  |        | 4.52 | %        |  | $ | 1,564,433 |  | 4.24 | %
|                                                 |  |                 |         |          |                                 |   |        |                                 |           |  |                 |        |  |          |         |  |        |   |          |   |        |        |      |          |  |   |           |  |      |  
|Comparative totals for 2002                      |  | $               | 162,347 |          | 3.98                            | % |        | $                               | 1,027,560 |  | 4.98            | %      |  | $        | 248,916 |  | 5.38   | % |          | $ | 14,035 |        | 4.87 | %        |  | $ | 1,452,858 |  | 4.94 | %

---

|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



29



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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. The following table shows the rating distribution of the investment portfolio on December 31, 2003 with comparative totals for 2002 (in thousands):



|                                              |  |     |           |    |   |         |  |     |         |     |   |        |  |          |   |       |   |   |  |   |     |  |   |          
|--------------------------------------------- |  | --- | --------- | -- | - | ------- |  | --- | ------- | --- | - | ------ |  | -------- | - | ----- | - | - |  | - | --- |  | - | ---------
|                                              |  | AAA |           | AA |   | A       |  | Baa |         | BBB |   | B      |  | Notrated |   | TOTAL
|Securities available for sale (at book value) |  |     |           |    |   |         |  |     |         |     |   |        |  |          |   |       |   |   |  |   |     |  |   |          
|U.S. Treasury securities                      |  | $   | 7,797     |    | $ |        |  | $   |        |     | $ |       |  | $        |  |       | $ |  |  | $ |    |  | $ | 7,797    
|U.S. government agency obligations            |  |     | 497,573   |    |   |        |  |     |        |     |   |       |  |          |  |       |   |  |  |   |    |  |   | 497,573  
|Corporate bonds notes                         |  |     | 32,777    |    |   | 104,400 |  |     | 382,713 |     |   |       |  |          |  |       |   |  |  |   |    |  |   | 519,890  
|Mortgage-backed securities                    |  |     | 537,033   |    |   |        |  |     |        |     |   |       |  |          |  |       |   |  |  |   |    |  |   | 537,033  
|Other debt securities                         |  |     | 410       |    |   | 1,600   |  |     |         |     |   |        |  |          |   |       |   |   |  |   | 130 |  |   | 2,140    
|                                              |  |     |           |    |   |         |  |     |         |     |   |        |  |          |   |       |   |   |  |   |     |  |   |          
|TOTAL                                         |  | $   | 1,075,590 |    | $ | 106,000 |  | $   | 382,713 |     | $ |       |  | $        |  |       | $ |  |  | $ | 130 |  | $ | 1,564,433
|                                              |  |     |           |    |   |         |  |     |         |     |   |        |  |          |   |       |   |   |  |   |     |  |   |          
|Comparative totals for 2002                   |  | $   | 1,007,166 |    | $ | 90,283  |  | $   | 343,259 |     | $ | 11,990 |  | $        |  |       | $ |  |  | $ | 160 |  | $ | 1,452,858



Deposits



During 2003, total deposits averaged $4.8 billion, up from $3.9 billion in
2002. The increase is primarily attributable to the acquisition of GB, which contributed a total of $783 million in deposits at the date of acquisition as well as continued strong deposit growth throughout the Company. Approximately, 45% of the
Companys deposit base is comprised of demand deposits, savings and NOW accounts, which have an overall weighted average cost of 17 basis points. In addition, approximately 32% of the Companys total deposits are held in CMA/money market
accounts that are primarily from its commercial customers. The Companys jumbo CDs are within the franchise and offered to customers primarily through its captive insurance and government banking operations. The overall cost of interest bearing
deposits in 2003 was 1.04% and all in cost of funds was 1.03% compared to 1.80% and 1.62% respectively in 2002. During 2003, time accounts (retirement and certificates of deposit) averaged $1.1 billion, compared to $900 million in 2002. Depositors
in this category tend to seek bids regularly, and the Company raises or lowers the interest rates it offers depending on its liquidity needs and investment opportunities.



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



|                                           |  |                          |           |      |   |           |  |   |          
|------------------------------------------ |  | ------------------------ | --------- | ---- | - | --------- |  | - | ---------
|                                           |  | Years Ended December 31,
|                                           |  | 2003                     |           | 2002 |   | 2001     
|                                           |  | (in thousands)          
|Demands                                    |  | $                        | 793,877   |      | $ | 624,305   |  | $ | 545,664  
|Savings                                    |  |                          | 517,003   |      |   | 387,080   |  |   | 325,824  
|NOWs                                       |  |                          | 825,947   |      |   | 518,492   |  |   | 426,956  
|CMA/Money Market                           |  |                          | 1,551,136 |      |   | 1,467,230 |  |   | 1,268,082
|Certificates of deposit less than $100,000 |  |                          | 814,089   |      |   | 676,350   |  |   | 630,779  
|Certificates of deposit $100,000 and over  |  |                          | 256,336   |      |   | 223,511   |  |   | 210,134  
|                                           |  |                          |           |      |   |           |  |   |          
|Total deposits                             |  | $                        | 4,758,388 |      | $ | 3,896,968 |  | $ | 3,407,439
|                                           |  |                          |           |      |   |           |  |   |          



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



|                                 |  |                          |         |      |   |         |  |      |         |      |   |         |  |   |        
|-------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                 |  | Years Ended December 31,
|                                 |  | 2003                     |         | 2002 |   | 2001    |  | 2000 |         | 1999
|                                 |  | (in thousands)          
|Three months or less             |  | $                        | 130,067 |      | $ | 126,062 |  | $    | 119,696 |      | $ | 135,263 |  | $ | 135,371
|Over three months to six months  |  |                          | 38,440  |      |   | 54,448  |  |      | 42,179  |      |   | 35,065  |  |   | 39,647 
|Over six months to twelve months |  |                          | 73,370  |      |   | 57,433  |  |      | 39,770  |      |   | 42,433  |  |   | 45,439 
|Over twelve months               |  |                          | 61,782  |      |   | 33,748  |  |      | 21,828  |      |   | 28,100  |  |   | 15,252 
|                                 |  |                          |         |      |   |         |  |      |         |      |   |         |  |   |        
|                                 |  | $                        | 303,659 |      | $ | 271,691 |  | $    | 223,473 |      | $ | 240,861 |  | $ | 235,709
|                                 |  |                          |         |      |   |         |  |      |         |      |   |         |  |   |        



30



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Borrowings



During 2003, borrowings averaged $413.3 million, up from $194 million in 2002. This funding consists of proceeds from the issuance of trust-preferred
securities, borrowings from the US Treasury, securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) borrowings, and federal funds purchased. FHLB borrowings averaged $177.5 million for 2003, up from $83.9 million in 2002. The
increase in average FHLB borrowings was attributable to the Granite acquisition, which contributed $155 million at date of acquisition. Treasury borrowings averaged $435,000 for 2003 compared with $555,000 during 2002. Repurchase agreements,
consisting entirely of retail agreements, averaged $97.5 million for 2003, up from $29.9 million in 2002. The Companys FHLB borrowings decreased by $42.5 million or 35.1% from December 31, 2002. As discussed earlier the Company sold securities
to fund the prepayment of borrowings totaling $164 million subsequent to the GB acquisition primarily in the fourth quarter of 2003.



On May 21, 2002, a wholly-owned subsidiary of the Company, Chittenden Capital Trust I, 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 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 Chittenden Capital Trust I. Concurrent
with the issuance of these securities, the Company entered into interest rate swap agreements with two counterparties, in which the Company will receive 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.



As part of the Companys first quarter 2004 adoption of FIN 46 (revised December 2003), Consolidations of Variable Interest Entities, the
Company will no longer consolidate the trust subsidiary in its financial statements. However, the $125 million of junior subordinate debentures issued by the Company to the Trust will continue to be classified as borrowings on the Companys
balance sheet, and the related interest expense will continue to be so classified in the future. Certain immaterial balances between the Company and the Trust, which are currently eliminated in consolidation, may be recognized in the Companys
financial statements. However, management does not expect that the deconsolidation of the Trust subsidiary will have a material impact on the Companys financial position or results of operations in 2004.



Capital Resources



The Companys capital is the foundation for developing programs for growth and new activities. Total capital at
December 31, 2003 was $580 million an increase of $161 million from December 31, 2002. The current level reflects the issuance of $116 million in common stock on February 28, 2003 as consideration in the Granite Bank transaction. Net income of $74.8
million increased the Companys capital position in 2003, while dividend payments of $28.3 million reduced it. The increase in capital was also affected by decreases in accumulated other comprehensive income which were primarily driven by lower
net unrealized gains on securities available for sale of $8.7 million. This decrease was partially offset by a reduction in the net accrued minimum pension liability.



The Company periodically repurchased its own stock under a share repurchase program originally authorized by the Board of
Directors on January 19, 2000, which expired on December 31, 2003. The Company repurchased 4,131,800 shares at a total cost of $92.9 million under this program.



Net income of $63.6 million increased the capital position in 2002, while dividend payments of $25.4 million and share repurchases of $9.9 million
(331,800 shares) reduced it. The increase in capital was also affected by increases in accumulated other comprehensive income of $20.0 million.



The FRB, FDIC and OCC have defined leverage capital requirements, which measure Tier I capital (as defined below) against average total assets without
regard to risk weighting. Additionally, the FRB and the FDIC have a risk-based capital standard. Under this measure of capital, banks are required to hold more capital against



31



---

certain assets perceived as higher risk, such as commercial loans, than against other assets perceived as lower risk, such as residential mortgage loans and
U.S. Treasury securities. Further, off-balance sheet items such as unfunded loan commitments and standby letters of credit, are included for the 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 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, 2003:



|                  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |         |  
|----------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ------- | -
|                  |  | CTC   |   |  | BWM   |   |  | FBT   |   |  | MBT   |   |  | ONB   |   |  | GB    |   |  | COMPANY |  
|Leverage          |  | 6.91  | % |  | 8.16  | % |  | 7.12  | % |  | 9.62  | % |  | 8.30  | % |  | 7.54  | % |  | 7.79    | %
|Tier 1 Risk-Based |  | 9.20  |   |  | 9.15  |   |  | 9.47  |   |  | 9.65  |   |  | 9.57  |   |  | 11.24 |   |  | 10.07   |  
|Total Risk-Based  |  | 10.42 |   |  | 10.40 |   |  | 10.73 |   |  | 10.90 |   |  | 10.82 |   |  | 12.49 |   |  | 11.32   |  



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.



As noted previously,
the trust subsidiary that issued the Companys trust preferred securities will no longer be consolidated into the Companys financial statements upon adoption of FIN 46R in the first quarter of 2004. However, the Company will continue to
reflect the amounts payable to the trusts preferred shareholders as debt in its financial statements. At some future point, this accounting change may result in the exclusion of the Trust Preferred securities from Tier 1 capital; however, the
FRB has indicated that it will continue to qualify as such until further notice and that it may be grandfathered for some period of time in the event that it were to conclude that it should no longer qualify as Tier 1 capital. The Company has
evaluated the potential impact of such a change on its Tier 1 capital ratio and has concluded that it would remain well capitalized in the event the FRB were to change the regulatory capital treatment of these securities to Tier II. The regulatory
treatment of the TPS will not impact in the Companys total capital ratio.



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



|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------ |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                         |  | December 31,   |          
|                         |  | 2003           |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                         |  | (in thousands) |          
|Leverage                 |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Stockholders equity     |  | $              | 445,778   |   |      | $ | 445,581   |      |  | $ | 324,363   |   |  | $    | 322,929   |   |  | $ | 350,715   |  
|Total average assets (1) |  |                | 5,720,890 |   |      |   | 4,804,216 |      |  |   | 4,057,839 |   |  |      | 3,735,584 |   |  |   | 4,294,030 |  
|                         |  |                | 7.79      | % |      |   | 9.28      | %    |  |   | 7.99      | % |  |      | 8.65      | % |  |   | 8.17      | %
|Risk-based               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Capital components:      |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Tier 1                   |  | $              | 445,778   |   |      | $ | 445,581   |      |  | $ | 324,363   |   |  | $    | 322,929   |   |  | $ | 350,715   |  
|Tier 2 (2)               |  |                | 55,359    |   |      |   | 45,509    |      |  |   | 39,357    |   |  |      | 37,301    |   |  |   | 36,647    |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total                    |  | $              | 501,137   |   |      | $ | 491,090   |      |  | $ | 363,720   |   |  | $    | 360,230   |   |  | $ | 387,362   |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Risk-weighted assets:    |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|On-balance sheet         |  | $              | 4,199,347 |   |      | $ | 3,448,755 |      |  | $ | 2,960,493 |   |  | $    | 2,787,046 |   |  | $ | 2,824,133 |  
|Off-balance sheet        |  |                | 229,382   |   |      |   | 191,897   |      |  |   | 188,079   |   |  |      | 212,812   |   |  |   | 126,100   |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                         |  | $              | 4,428,729 |   |      | $ | 3,640,652 |      |  | $ | 3,148,572 |   |  | $    | 2,999,858 |   |  | $ | 2,950,233 |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Ratios:                  |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Tier 1                   |  |                | 10.07     | % |      |   | 12.25     | %    |  |   | 10.32     | % |  |      | 10.82     | % |  |   | 11.96     | %
|Total (including Tier 2) |  |                | 11.32     |   |      |   | 13.50     |      |  |   | 11.57     |   |  |      | 12.08     |   |  |   | 13.23     |  

---

|(1) | Total average assets for the most recent quarter.
|--- | -------------------------------------------------

|(2) | Allowable portion of allowance for loan losses.
|--- | -----------------------------------------------



32



---

The components of capital under GAAP that are not considered capital for regulatory purposes include
goodwill, unrealized gains (losses) on investments and directors deferred compensation to be settled in stock.



Liquidity



The
Companys liquidity and rate sensitivity are monitored by the asset and liability committee, based upon policies approved by the Board of Directors. 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 Companys affiliate banks generate significant amounts of low cost funds through their deposit gathering operations. For the year ended December
31, 2003, the Companys ratio of average loans to average deposits was approximately 76.2%. At December 31, 2003, the Company maintained cash balances and short-term investments of approximately $174.9 million, compared with $192.1 million at
December 31, 2002. Borrowings at December 31, 2003 were $287.4 million compared to $298.7 million on December 31, 2002.



In addition, the Company has available borrowing capacity under certain programs including the FHLB, U.S. Treasury, repurchase agreements lines, and
advised Fed Funds lines totaling more than $723 million. The Company also has an effective shelf registration statement under which an additional $225 million in debt securities, common stock, preferred stock, or warrants may be offered from time to
time.



Aggregate Contractual Obligations



|                                                      |  |                        |         |                 |   |           |  |          |        |                  |   |       |  |   |        
|----------------------------------------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | -------- | ------ | ---------------- | - | ----- |  | - | -------
|                                                      |  | Payments due by period
|                                                      |  | (in thousands)        
|                                                      |  |                        |         |                 |  
|Contractual Obligations                               |  | Total                  |         | Less than1 year |   | 1-3 years |  | 3-5years |        | More than5 years
|FHLB borrowings                                       |  | $                      | 77,567  |                 | $ |          |  | $        |       |                  | $ |      |  | $ | 77,567 
|Trust preferred securities                            |  |                        | 125,000 |                 |   |          |  |          |       |                  |   |      |  |   | 125,000
|Data processing contract                              |  |                        | 14,117  |                 |   | 6,911     |  |          | 6,110  |                  |   | 1,096 |  |   |       
|Equity investment commitments to limited partnerships |  |                        | 8,769   |                 |   | 2,557     |  |          | 6,212  |                  |   |      |  |   |       
|Operating leases                                      |  |                        | 19,681  |                 |   | 4,765     |  |          | 10,360 |                  |   | 1,439 |  |   | 3,117  
|                                                      |  |                        |         |                 |   |           |  |          |        |                  |   |       |  |   |        
|Total                                                 |  | $                      | 245,134 |                 | $ | 14,233    |  | $        | 22,682 |                  | $ | 2,535 |  | $ | 205,684
|                                                      |  |                        |         |                 |   |           |  |          |        |                  |   |       |  |   |        



No minimum required
pension contribution is expected for 2004. Due to recent contributions made in excess of the minimum required amounts, the Company does not anticipate a required contribution during 2004. However, it is possible that the Company, if appropriate in
its tax and cash position, will make a voluntary contribution during 2004 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.



33



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FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK



In the normal
course of business, to meet the financing needs of their customers 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 to the financial instrument, 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 loans. 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, property, plant and equipment, and income-producing commercial properties.



Commitments to originate loans, unused lines of credit, and unadvanced
portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment
of a fee. 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.



Financial instruments
whose contractual amounts represent off-balance sheet risk at December 31, 2003 and 2002 are as follows:



|                                                                          |  |                |         |      |   |        
|------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                                          |  | 2003           |         | 2002
|                                                                          |  | (in thousands)
|Loans and Other Commitments                                               |  |                |        
|Commitments to originate loans                                            |  | $              | 131,610 |      | $ | 181,344
|Unused home equity lines of credit                                        |  |                | 292,823 |      |   | 220,289
|Unused portions of credit card lines                                      |  |                | 37,554  |      |   | 32,917 
|Unadvanced portions of construction loans                                 |  |                | 192,826 |      |   | 153,160
|Equity investment commitments to limited partnerships                     |  |                | 8,769   |      |   | 9,314  
|                                                                          |  |               
|Standby Letters of Credit                                                 |  |                |         |      |   |        
|Notional amount of standby letters of credit fully collateralized by cash |  |                | 65,051  |      |   | 45,909 
|Notional amount of other standby letters of credit                        |  |                | 40,812  |      |   | 47,599 
|Liability associated with letters of credit recorded on balance sheet     |  |                | 290     |      |   |       



Results of Operations



Comparison of Years Ended December 31, 2003 and 2002



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 2003, net interest income was $218.1 million, up $25.4
million from the 2002 level. On a fully tax equivalent basis, net interest income increased $25.1 million from 2002, to $219.3 million in 2003. These increases resulted from higher levels of interest earning assets, which were up $1.040 billion from
2002, to $5.322 billion for 2003. The increased level of earning assets offset a decrease in the net yield on earning assets from 4.53% in 2002 to 4.12% in 2003. The significant declines noted in the yield on earning assets and the costs of
interest-bearing liabilities relate to the numerous reductions in federal funds rates by the Federal Reserve during 2002 and 2003 and the resulting declines in market interest rates, as well as to the Granite acquisition.



34



---

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



|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|----------------------------------------------------------------------- |  | -------------- | --------- | - | -------------------------- | - | --------------------- | ---- | ---- | -------------- |  | - | -------------------------- | - | --------------------- | - | ------- | -------------- | ---- | - | -------------------------- | - | --------------------- | - |  | - | ------- |  | ---- | -
|                                                                        |  | 2003           |           |   | 2002                       |   |                       | 2001 |     
|                                                                        |  | 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                                                              |  | $              | 619,658   |   |                            | $ | 34,101                |      | 5.50 | %              |  | $ | 565,153                    |   |                       | $ | 33,998  |                | 6.02 | % |                            | $ | 571,310               |   |  | $ | 44,477  |  | 7.79 | %
|Municipal                                                               |  |                | 89,974    |   |                            |   | 2,937                 |      | 3.26 |                |  |   | 90,421                     |   |                       |   | 3,683   |                | 4.07 |   |                            |   | 97,965                |   |  |   | 5,766   |  | 5.89 |  
|Real Estate:                                                            |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Residential                                                             |  |                | 1,218,033 |   |                            |   | 64,981                |      | 5.33 |                |  |   | 940,162                    |   |                       |   | 61,741  |                | 6.57 |   |                            |   | 1,003,199             |   |  |   | 76,294  |  | 7.61 |  
|Commercial                                                              |  |                | 1,308,792 |   |                            |   | 73,086                |      | 5.58 |                |  |   | 1,028,853                  |   |                       |   | 65,951  |                | 6.41 |   |                            |   | 781,778               |   |  |   | 62,298  |  | 7.97 |  
|Construction                                                            |  |                | 117,293   |   |                            |   | 6,539                 |      | 5.57 |                |  |   | 85,149                     |   |                       |   | 6,536   |                | 7.68 |   |                            |   | 59,220                |   |  |   | 4,848   |  | 8.19 |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total Real Estate                                                       |  |                | 2,644,118 |   |                            |   | 144,606               |      | 5.47 |                |  |   | 2,054,164                  |   |                       |   | 134,228 |                | 6.53 |   |                            |   | 1,844,197             |   |  |   | 143,440 |  | 7.78 |  
|Consumer & leasing                                                      |  |                | 271,109   |   |                            |   | 18,909                |      | 6.97 |                |  |   | 308,230                    |   |                       |   | 23,522  |                | 7.63 |   |                            |   | 401,798               |   |  |   | 31,918  |  | 7.94 |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total Loans                                                             |  |                | 3,624,859 |   |                            |   | 200,553               |      | 5.53 |                |  |   | 3,017,968                  |   |                       |   | 195,431 |                | 6.48 |   |                            |   | 2,915,271             |   |  |   | 225,601 |  | 7.74 |  
|                                                                        |  |                |           |   |                            |   |                       |      |     
|Investments:                                                            |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Taxable                                                                 |  |                | 1,660,119 |   |                            |   | 71,552                |      | 4.31 |                |  |   | 1,232,543                  |   |                       |   | 64,238  |                | 5.21 |   |                            |   | 682,494               |   |  |   | 41,201  |  | 6.04 |  
|Tax-favored equity securities                                           |  |                | 9,569     |   |                            |   | 231                   |      | 2.42 |                |  |   | 22,065                     |   |                       |   | 694     |                | 3.15 |   |                            |   | 30,303                |   |  |   | 1,393   |  | 4.60 |  
|Interest-bearing deposits in banks                                      |  |                | 182       |   |                            |   | 3                     |      | 1.91 |                |  |   | 225                        |   |                       |   | 7       |                | 3.06 |   |                            |   | 225                   |   |  |   | 8       |  | 3.56 |  
|Federal funds sold                                                      |  |                | 27,112    |   |                            |   | 291                   |      | 1.07 |                |  |   | 9,323                      |   |                       |   | 162     |                | 1.74 |   |                            |   | 16,005                |   |  |   | 632     |  | 3.95 |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-earning assets                                           |  |                | 5,321,841 |   |                            |   | 272,630               |      | 5.12 |                |  |   | 4,282,124                  |   |                       |   | 260,532 |                | 6.08 |   |                            |   | 3,644,298             |   |  |   | 268,835 |  | 7.38 |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Noninterest-earning assets                                              |  |                | 512,233   |   |                            |   |                       |      |      |                |  |   | 318,293                    |   |                       |   |         |                |      |   |                            |   | 270,091               |   |  |   |         |  |      |  
|Allowance for loan losses                                               |  |                | (56,536   | ) |                            |   |                       |      |      |                |  |   | (48,538                    | ) |                       |   |         |                |      |   |                            |   | (43,372               | ) |  |   |         |  |      |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total assets                                                            |  | $              | 5,777,538 |   |                            |   |                       |      |      |                |  | $ | 4,551,879                  |   |                       |   |         |                |      |   |                            | $ | 3,871,017             |   |  |   |         |  |      |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Interest-bearing liabilities:                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Savings                                                                 |  | $              | 517,003   |   |                            | $ | 2,121                 |      | 0.41 | %              |  | $ | 387,080                    |   |                       | $ | 4,125   |                | 1.07 | % |                            | $ | 325,824               |   |  | $ | 6,585   |  | 2.02 | %
|NOWs                                                                    |  |                | 825,947   |   |                            |   | 3,121                 |      | 0.38 |                |  |   | 518,492                    |   |                       |   | 1,994   |                | 0.38 |   |                            |   | 426,956               |   |  |   | 3,045   |  | 0.71 |  
|CMA / Money Market                                                      |  |                | 1,551,136 |   |                            |   | 13,333                |      | 0.86 |                |  |   | 1,467,230                  |   |                       |   | 23,976  |                | 1.63 |   |                            |   | 1,268,082             |   |  |   | 41,887  |  | 3.30 |  
|CDs under $100,000                                                      |  |                | 814,089   |   |                            |   | 17,798                |      | 2.19 |                |  |   | 676,350                    |   |                       |   | 22,684  |                | 3.35 |   |                            |   | 630,779               |   |  |   | 31,443  |  | 4.98 |  
|CDs $100,000 and over                                                   |  |                | 256,336   |   |                            |   | 4,799                 |      | 1.87 |                |  |   | 223,511                    |   |                       |   | 6,034   |                | 2.69 |   |                            |   | 210,134               |   |  |   | 10,086  |  | 4.80 |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-bearing deposits                                         |  |                | 3,964,511 |   |                            |   | 41,172                |      | 1.04 |                |  |   | 3,272,663                  |   |                       |   | 58,813  |                | 1.80 |   |                            |   | 2,861,775             |   |  |   | 93,046  |  | 3.25 |  
|Borrowings                                                              |  |                | 288,339   |   |                            |   | 8,302                 |      | 2.88 |                |  |   | 117,063                    |   |                       |   | 4,752   |                | 4.06 |   |                            |   | 52,752                |   |  |   | 3,146   |  | 5.96 |  
|Company obligated mandatorily redeemable securities of subsidiary trust |  |                | 125,000   |   |                            |   | 3,905                 |      | 3.12 |                |  |   | 77,055                     |   |                       |   | 2,839   |                | 3.68 |   |                            |   |                      |   |  |   |        |  |     |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-bearing liabilities                                      |  |                | 4,377,850 |   |                            |   | 53,379                |      | 1.22 |                |  |   | 3,466,781                  |   |                       |   | 66,404  |                | 1.92 |   |                            |   | 2,914,527             |   |  |   | 96,192  |  | 3.30 |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Noninterest-bearing liabilities:                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Demands                                                                 |  |                | 793,877   |   |                            |   |                       |      |      |                |  |   | 624,305                    |   |                       |   |         |                |      |   |                            |   | 545,664               |   |  |   |         |  |      |  
|Other liabilities                                                       |  |                | 67,594    |   |                            |   |                       |      |      |                |  |   | 66,053                     |   |                       |   |         |                |      |   |                            |   | 57,297                |   |  |   |         |  |      |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total liabilities                                                       |  |                | 5,239,321 |   |                            |   |                       |      |      |                |  |   | 4,157,139                  |   |                       |   |         |                |      |   |                            |   | 3,517,488             |   |  |   |         |  |      |  
|Stockholders equity                                                    |  |                | 538,217   |   |                            |   |                       |      |      |                |  |   | 394,740                    |   |                       |   |         |                |      |   |                            |   | 353,529               |   |  |   |         |  |      |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total liabilities and stockholders equity                              |  | $              | 5,777,538 |   |                            |   |                       |      |      |                |  | $ | 4,551,879                  |   |                       |   |         |                |      |   |                            | $ | 3,871,017             |   |  |   |         |  |      |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Net interest income                                                     |  |                |           |   |                            | $ | 219,251               |      |      |                |  |   |                            |   |                       | $ | 194,128 |                |      |   |                            |   |                       |   |  | $ | 172,643 |  |      |  
|                                                                        |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Interest rate spread (2)                                                |  |                |           |   |                            |   |                       |      | 3.90 | %              |  |   |                            |   |                       |   |         |                | 4.16 | % |                            |   |                       |   |  |   |         |  | 4.08 | %
|Net yield on earning assets (3)                                         |  |                |           |   |                            |   |                       |      | 4.12 | %              |  |   |                            |   |                       |   |         |                | 4.53 | % |                            |   |                       |   |  |   |         |  | 4.74 | %

---

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

|(2) | Interest rate spread is the average rate earned on total interest-earning assets less the average rate paid on interest-bearing liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Net yield on earning assets is net interest income divided by total interest-earning assets.
|--- | --------------------------------------------------------------------------------------------



35



---

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.



|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------ |  | -------------------------------------------------------- | ------- | - | ------------------------ | - | ------- | -------------------------------------------------------- | ----------- | - | ------------------------ | -------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                           |  | 2003 Compared With 2002                                  |         |   | 2002 Compared With 2001  |  
|                                           |  | Increase (Decrease) Due to Change in NetInterest Income: |         |   | Total Increase(Decrease) |   |         | Increase (Decrease) Due to Change in NetInterest Income: |             |   | Total Increase(Decrease) |               
|                                           |  | Average Rate                                             |         |   | Average Balance          |   |         |                                                          | AverageRate |   |                          | AverageBalance |  |  
|                                           |  | (in thousands)                                           |        
|Interest income:                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Loans                                      |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Commercial                                 |  | $                                                        | (2,897  | ) |                          | $ | 3,000   |                                                          |             | $ | 103                      |                |  | $ | (10,109 | ) |  | $ | (370    | ) |  | $ | (10,479 | )
|Municipals                                 |  |                                                          | (731    | ) |                          |   | (15     | )                                                        |             |   | (746                     | )              |  |   | (1,776  | ) |  |   | (307    | ) |  |   | (2,083  | )
|Real estate:                               |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Residential                                |  |                                                          | (3,857  | ) |                          |   | 7,097   |                                                          |             |   | 3,240                    |                |  |   | (10,418 | ) |  |   | (4,185  | ) |  |   | (14,553 | )
|Commercial                                 |  |                                                          | (8,495  | ) |                          |   | 15,630  |                                                          |             |   | 7,135                    |                |  |   | (12,227 | ) |  |   | 15,880  |   |  |   | 3,653   |  
|Construction                               |  |                                                          | 10,281  |   |                          |   | (10,278 | )                                                        |             |   | 3                        |                |  |   | (305    | ) |  |   | 1,993   |   |  |   | 1,688   |  
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Total real estate                          |  |                                                          | (2,071  | ) |                          |   | 12,449  |                                                          |             |   | 10,378                   |                |  |   | (22,950 | ) |  |   | 13,738  |   |  |   | (9,212  | )
|Consumer                                   |  |                                                          | (2,021  | ) |                          |   | (2,592  | )                                                        |             |   | (4,613                   | )              |  |   | (1,243  | ) |  |   | (7,153  | ) |  |   | (8,396  | )
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Total loans                                |  |                                                          | (7,720  | ) |                          |   | 12,842  |                                                          |             |   | 5,122                    |                |  |   | (36,078 | ) |  |   | 5,908   |   |  |   | (30,170 | )
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Investments:                               |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Taxable                                    |  |                                                          | (11,216 | ) |                          |   | 18,530  |                                                          |             |   | 7,314                    |                |  |   | (5,631  | ) |  |   | 28,668  |   |  |   | 23,037  |  
|Tax-favored debt securities                |  |                                                          | (161    | ) |                          |   | (302    | )                                                        |             |   | (463                     | )              |  |   | (440    | ) |  |   | (259    | ) |  |   | (699    | )
|Interest-bearing deposits                  |  |                                                          | (4      | ) |                          |   |        |                                                          |             |   | (4                       | )              |  |   | (1      | ) |  |   |        |   |  |   | (1      | )
|Federal funds sold                         |  |                                                          | (62     | ) |                          |   | 191     |                                                          |             |   | 129                      |                |  |   | (354    | ) |  |   | (116    | ) |  |   | (470    | )
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Total interest income                      |  |                                                          | (19,163 | ) |                          |   | 31,261  |                                                          |             |   | 12,098                   |                |  |   | (42,504 | ) |  |   | 34,201  |   |  |   | (8,303  | )
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Interest expense:                          |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Savings                                    |  |                                                          | 2,537   |   |                          |   | (533    | )                                                        |             |   | 2,004                    |                |  |   | 3,113   |   |  |   | (653    | ) |  |   | 2,460   |  
|NOW                                        |  |                                                          | 35      |   |                          |   | (1,162  | )                                                        |             |   | (1,127                   | )              |  |   | 1,403   |   |  |   | (352    | ) |  |   | 1,051   |  
|Money market                               |  |                                                          | 11,364  |   |                          |   | (721    | )                                                        |             |   | 10,643                   |                |  |   | 21,165  |   |  |   | (3,254  | ) |  |   | 17,911  |  
|CDs under $100,000 and other time deposits |  |                                                          | 7,897   |   |                          |   | (3,011  | )                                                        |             |   | 4,886                    |                |  |   | 10,288  |   |  |   | (1,529  | ) |  |   | 8,759   |  
|CDs $100,000 and over                      |  |                                                          | 1,850   |   |                          |   | (615    | )                                                        |             |   | 1,235                    |                |  |   | 4,413   |   |  |   | (361    | ) |  |   | 4,052   |  
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Total deposits                             |  |                                                          | 23,683  |   |                          |   | (6,042  | )                                                        |             |   | 17,641                   |                |  |   | 40,382  |   |  |   | (6,149  | ) |  |   | 34,233  |  
|Borrowings                                 |  |                                                          | 1,813   |   |                          |   | (6,429  | )                                                        |             |   | (4,616                   | )              |  |   | 1,005   |   |  |   | (5,450  | ) |  |   | (4,445  | )
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Total interest expense                     |  |                                                          | 25,496  |   |                          |   | (12,471 | )                                                        |             |   | 13,025                   |                |  |   | 41,387  |   |  |   | (11,599 | ) |  |   | 29,788  |  
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  
|Change in net interest income              |  | $                                                        | 6,333   |   |                          | $ | 18,790  |                                                          |             | $ | 25,123                   |                |  | $ | (1,117  | ) |  | $ | 22,602  |   |  | $ | 21,485  |  
|                                           |  |                                                          |         |   |                          |   |         |                                                          |             |   |                          |                |  |   |         |   |  |   |         |   |  |   |         |  



Noninterest Income and Noninterest
Expense



Noninterest income was $97.0 million in 2003, up
$31.9 million from the $65.1 million reported in 2002. The increase was primarily due to higher gains on the sale of mortgage loans, mortgage servicing income and a variety of fee income businesses. The underlying factors driving these increases are
described further on pp. 20-21, under the Executive Overview section.



Noninterest expense totaled $191.4 million in 2003, compared to $151.5 million in 2002, an increase of $39.9 million. The primary drivers of this increase in noninterest expenses was the acquisition of GB, higher
commissions and sales-based incentive expenses, and the conversion and restructuring charges which are described further on pp. 20-21, under the Executive Overview section.



36



---

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



|                                 |  |                |        |   |      |   |        |      |  |      |        |      |   |        |  |   |        |  
|-------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|                                 |  | 2003           |        |   | 2002 |   |        | 2001 |  | 2000 |        | 1999 |  
|                                 |  | (in thousands) |       
|Legal and professional           |  | $              | 1,569  |   |      | $ | 854    |      |  | $    | 1,320  |      | $ | 1,522  |  | $ | 2,216  |  
|Marketing                        |  |                | 3,282  |   |      |   | 2,942  |      |  |      | 2,746  |      |   | 2,749  |  |   | 3,143  |  
|Software and supplies            |  |                | 7,288  |   |      |   | 4,924  |      |  |      | 4,884  |      |   | 4,722  |  |   | 4,755  |  
|Net OREO and collection expenses |  |                | (129   | ) |      |   | (293   | )    |  |      | 86     |      |   | 48     |  |   | (147   | )
|Telephone                        |  |                | 3,210  |   |      |   | 3,071  |      |  |      | 2,799  |      |   | 3,118  |  |   | 3,979  |  
|Postage                          |  |                | 3,009  |   |      |   | 2,561  |      |  |      | 2,338  |      |   | 2,553  |  |   | 3,147  |  
|Other                            |  |                | 18,776 |   |      |   | 17,131 |      |  |      | 14,599 |      |   | 15,171 |  |   | 17,155 |  
|                                 |  |                |        |   |      |   |        |      |  |      |        |      |   |        |  |   |        |  
|                                 |  | $              | 37,005 |   |      | $ | 31,190 |      |  | $    | 28,772 |      | $ | 29,883 |  | $ | 34,248 |  
|                                 |  |                |        |   |      |   |        |      |  |      |        |      |   |        |  |   |        |  



Income Taxes



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. The State of Vermont levies franchise taxes on banking institutions based upon average deposit levels in lieu of taxing income. Franchise taxes are included in income tax expense in the
consolidated statements of operations.



Income Tax Provision



For the years ended December 31, 2003 and 2002, Federal and state income
tax provisions amounted to $41.7 million and $34.2 million, respectively. The effective tax rates for the respective periods were 35.8% and 34.9%. 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 paid, net of benefit on Federal taxes, and the proportion of interest income from state and municipal securities and loans and corporate
dividends 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 as a means of managing its effective tax rate and targets its
investments in communities where they qualify for inclusion as CRA eligible investments.



Results of Operations



Comparison of Years Ended December 31, 2002 and 2001



Net
Interest Income



For 2002, net interest income was $192.6
million, compared with $170.3 million for 2001. On a fully taxable equivalent basis, net interest income increased $21.5 million from 2001 to $194.1 million in 2002. These increases resulted from higher levels of interest earning assets, which were
up $637.8 million from 2001, to $4.282 billion for 2002. The increased level of earning assets offset a decrease in the net yield on earning assets from 4.74% in 2001, to 4.53% in 2002.



Noninterest Income and Noninterest Expense



Noninterest income was $65.1 million in 2002, up $1.3 million from the $63.7 million reported in 2001. Service charges on deposits increased $1.7
million to $16.0 million in 2002. The increase was due to higher levels of deposits and the acquisition of ONB. Gains on sales of mortgage loans increased by $3.5 million over 2001 due to strong mortgage refinancing activity throughout 2002. This
strong refinancing activity and the associated increase in prepayments led to the recognition of $8.5 million in impairment reserves against the Companys mortgage servicing rights in 2002. Excluding this impairment reserve, mortgage-servicing
income



37



---

was down approximately $1.5 million, due to higher levels of amortization on MSRs. Gains on sales of securities of $10.6 million resulted from the
rebalancing of the Companys available for sale securities portfolio caused by accelerated paydowns on mortgage-backed securities and callable agencies.



Noninterest expense totaled $151.5 million in 2002, an increase of $15.8 million, compared to $135.8 million in 2001. Salaries and benefits increased
$13.2 million from $74.8 million in 2001. Approximately $6.8 million of the variance in salaries and employee benefits was due to the acquisition of ONB and MBT. Also, incentive accruals for the year were $1.5 million higher in 2002 than 2001 and
sales-based incentive payments were $1.9 million higher.



Income Taxes



For the years ended December 31, 2002 and 2001, Federal
and state income tax provisions amounted to $34.2 million and $31.7 million, respectively. The effective tax rates for the respective periods were 34.9% for 2002 and 35.2% for 2001. 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 paid, net of benefit on Federal taxes; the proportion of interest income from state and municipal securities and loans
and corporate dividends, which are partially exempt from Federal taxation and tax credits on investments in qualified low income housing projects.



ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK



Market risk is the sensitivity of income to changes in interest rates, foreign exchanges, 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 management is to control this risk within limits approved by the 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 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.



38



---

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 neither improve or 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



|                          |  |                                                                             |   |  |           |   
|------------------------- |  | --------------------------------------------------------------------------- | - |  | --------- | --
|                          |  | Calculated increase (decrease) in projected net interest incomeDecember
31, |  
|                          |  | 2003                                                                        |   |  | 2002      |   
|Changes in interest rates |  |                                                                             |   |  |           |   
|+ 200 bps                 |  | 2.05                                                                        | % |  | (0.17     | )%
|+ 100 bps                 |  | 1.00                                                                        |   |  |          |   
|- 100 bps                 |  | (2.36                                                                       | ) |  |          |   
|- 200 bps (1)             |  | (9.28                                                                       | ) |  | (0.44     | ) 
|                          |  |                                                                            
|Policy Limit              |  | +/- 10.00                                                                   | % |  | +/- 20.00 | % 

---

|(1) | The 200 basis point shock down scenario has a very remote probability of occurring; therefore the results are only for informational purposes.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



As noted above, one of the tools used to measure rate sensitivity is the
funds gap. The funds 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 and indicates that a greater volume of liabilities than assets will reprice during the period. In this case, a rising rate environment will inhibit earnings and declining rates will improve earnings.
Notwithstanding this general description of the effect on 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 15% of total assets. As of December 31, 2003, the estimated exposure was 1.15% and the Company was asset-sensitive.



39



---

The following table shows the amounts of interest-earning assets and interest-bearing liabilities at
December 31, 2003 that reprice during the periods indicated:



|                                    |  |                      |           |   |                           |   |          |                            |  |                 |           |  |       |           |   |  |   |          
|----------------------------------- |  | -------------------- | --------- | - | ------------------------- | - | -------- | -------------------------- |  | --------------- | --------- |  | ----- | --------- | - |  | - | ---------
|                                    |  | Repricing Date      
|                                    |  | One Day To SixMonths |           |   | Over SixMonths ToOne Year |   |          | Over One Year ToFive Years |  | Over Five Years |           |  | Total
|                                    |  | (in thousands)      
|Interest-earning assets:            |  |                      |          
|Loans (1)                           |  | $                    | 2,152,763 |   |                           | $ | 394,458  |                            |  | $               | 1,082,908 |  | $     | 119,817   |   |  | $ | 3,749,946
|Investment securities (2)           |  |                      | 201,765   |   |                           |   | 161,414  |                            |  |                 | 1,082,161 |  |       | 163,564   |   |  |   | 1,608,904
|Interest-bearing cash equivalents   |  |                      | 3,500     |   |                           |   | 160      |                            |  |                 | 20        |  |       | 10        |   |  |   | 3,690    
|                                    |  |                      |           |   |                           |   |          |                            |  |                 |           |  |       |           |   |  |   |          
|Total interest-earning assets       |  |                      | 2,358,028 |   |                           |   | 556,032  |                            |  |                 | 2,165,089 |  |       | 283,391   |   |  |   | 5,362,540
|                                    |  |                      |           |   |                           |   |          |                            |  |                 |           |  |       |           |   |  |   |          
|Interest-bearing liabilities:       |  |                      |           |   |                           |   |          |                            |  |                 |           |  |       |           |   |  |   |          
|Deposits                            |  |                      | 2,270,268 |   |                           |   | 310,954  |                            |  |                 | 514,932   |  |       | 974,817   |   |  |   | 4,070,971
|Borrowings                          |  |                      | 264,895   |   |                           |   | 31       |                            |  |                 | 262       |  |       | 22,246    |   |  |   | 287,434  
|                                    |  |                      |           |   |                           |   |          |                            |  |                 |           |  |       |           |   |  |   |          
|Total interest-bearing liabilities  |  |                      | 2,535,163 |   |                           |   | 310,985  |                            |  |                 | 515,194   |  |       | 997,063   |   |  |   | 4,358,405
|                                    |  |                      |           |   |                           |   |          |                            |  |                 |           |  |       |           |   |  |   |          
|Net interest rate sensitivity gap   |  | $                    | (177,135  | ) |                           | $ | 245,047  |                            |  | $               | 1,649,895 |  | $     | (713,672  | ) |  | $ | 1,004,135
|                                    |  |                      |           |   |                           |   |          |                            |  |                 |           |  |       |           |   |  |   |          
|Cumulative gap at December 31, 2003 |  | $                    | (177,135  | ) |                           | $ | 67,912   |                            |  | $               | 1,717,807 |  | $     | 1,004,135 |   |  |   |          
|Cumulative gap at December 31, 2002 |  | $                    | (344,541  | ) |                           | $ | (133,400 | )                          |  | $               | 1,323,235 |  | $     | 865,349   |   |  |   |          

---

|(1) | Total includes loans held for sale and total loans.
|--- | ---------------------------------------------------

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



The following table shows scheduled maturities of selected loans at December
31, 2003:



|                                        |  |                   |         |                       |   |                |  |       |         |  |   |          
|--------------------------------------- |  | ----------------- | ------- | --------------------- | - | -------------- |  | ----- | ------- |  | - | ---------
|                                        |  | Less ThanOne Year |         | One Year ToFive Years |   | Over FiveYears |  | Total
|                                        |  | (in thousands)   
|Predetermined rates:                    |  |                   |         |                       |   |                |  |       |         |  |   |          
|Commercial (1)                          |  | $                 | 111,624 |                       | $ | 69,664         |  | $     | 31,483  |  | $ | 212,771  
|Commercial real estate and construction |  |                   | 61,905  |                       |   | 335,338        |  |       | 156,317 |  |   | 553,560  
|                                        |  |                   |         |                       |   |                |  |       |         |  |   |          
|                                        |  | $                 | 173,529 |                       | $ | 405,002        |  | $     | 187,800 |  | $ | 766,331  
|                                        |  |                   |         |                       |   |                |  |       |         |  |   |          
|Comparative totals for 2002             |  | $                 | 162,278 |                       | $ | 343,937        |  | $     | 222,444 |  | $ | 728,659  
|                                        |  |                   |         |                      
|Floating or adjustable rates:           |  |                   |         |                       |   |                |  |       |         |  |   |          
|Commercial (1)                          |  | $                 | 188,079 |                       | $ | 204,859        |  | $     | 139,986 |  | $ | 532,924  
|Commercial real estate and construction |  |                   | 157,127 |                       |   | 494,850        |  |       | 366,209 |  |   | 1,018,186
|                                        |  |                   |         |                       |   |                |  |       |         |  |   |          
|                                        |  | $                 | 345,206 |                       | $ | 699,709        |  | $     | 506,195 |  | $ | 1,551,110
|                                        |  |                   |         |                       |   |                |  |       |         |  |   |          
|Comparative totals for 2002             |  | $                 | 262,444 |                       | $ | 526,617        |  | $     | 317,733 |  | $ | 1,106,794

---

|(1) | Total includes commercial and municipal loans.
|--- | ----------------------------------------------



40



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41



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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



CHITTENDEN CORPORATION



CONSOLIDATED BALANCE SHEETS



|                                                                                                                          |  |                |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                          |  | December 31,   |          
|                                                                                                                          |  | 2003           |           |   | 2002 |  
|                                                                                                                          |  | (in thousands) |          
|Assets                                                                                                                    |  |                |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                 |  | $              | 174,939   |   |      | $ | 192,142   |  
|Securities available for sale                                                                                             |  |                | 1,588,151 |   |      |   | 1,497,111 |  
|FHLB stock                                                                                                                |  |                | 20,753    |   |      |   | 17,030    |  
|Loans held for sale                                                                                                       |  |                | 25,262    |   |      |   | 94,874    |  
|Loans                                                                                                                     |  |                | 3,724,684 |   |      |   | 2,973,863 |  
|Less: Allowance for loan losses                                                                                           |  |                | (57,464   | ) |      |   | (48,197   | )
|                                                                                                                          |  |                |           |   |      |   |           |  
|Net loans                                                                                                                 |  |                | 3,667,220 |   |      |   | 2,925,666 |  
|                                                                                                                          |  |               
|Accrued interest receivable                                                                                               |  |                | 29,124    |   |      |   | 27,992    |  
|Other assets                                                                                                              |  |                | 68,587    |   |      |   | 35,427    |  
|Premises and equipment, net                                                                                               |  |                | 75,179    |   |      |   | 57,074    |  
|Mortgage servicing rights                                                                                                 |  |                | 12,265    |   |      |   | 8,491     |  
|Identified intangibles                                                                                                    |  |                | 22,733    |   |      |   | 9,480     |  
|Goodwill                                                                                                                  |  |                | 216,431   |   |      |   | 55,257    |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total assets                                                                                                              |  | $              | 5,900,644 |   |      | $ | 4,920,544 |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Liabilities and Stockholders Equity                                                                                      |  |                |           |   |      |   |           |  
|LIABILITIES:                                                                                                              |  |                |           |   |      |   |           |  
|Deposits:                                                                                                                 |  |                |           |   |      |   |           |  
|Demand                                                                                                                    |  | $              | 898,920   |   |      | $ | 684,077   |  
|Savings                                                                                                                   |  |                | 517,789   |   |      |   | 400,616   |  
|NOW                                                                                                                       |  |                | 899,018   |   |      |   | 578,272   |  
|Cash Management and Money Market                                                                                          |  |                | 1,604,138 |   |      |   | 1,540,267 |  
|Certificates of deposit less than $100,000 and other time deposits                                                        |  |                | 789,066   |   |      |   | 691,467   |  
|Certificates of deposit $100,000 and over                                                                                 |  |                | 260,960   |   |      |   | 231,393   |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total deposits                                                                                                            |  |                | 4,969,891 |   |      |   | 4,126,092 |  
|                                                                                                                          |  |               
|Borrowings                                                                                                                |  |                | 162,434   |   |      |   | 173,654   |  
|Company obligated, manditorily redeemable securities of subsidiary trust                                                  |  |                | 125,000   |   |      |   | 125,000   |  
|Accrued expenses and other liabilities                                                                                    |  |                | 63,368    |   |      |   | 77,006    |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total liabilities                                                                                                         |  |                | 5,320,693 |   |      |   | 4,501,752 |  
|STOCKHOLDERS EQUITY:                                                                                                     |  |                |           |   |      |   |           |  
|Preferred stock$100 par valueauthorized: 1,000,000 sharesissued and outstanding: none                                  |  |                |          |   |      |   |          |  
|Common stock$1 par valueauthorized: 60,000,000 sharesissued and outstanding: 40,142,289 in 2003 and 35,748,653 in
2002 |  |                | 40,142    |   |      |   | 35,749    |  
|Surplus                                                                                                                   |  |                | 256,974   |   |      |   | 145,191   |  
|Retained earnings                                                                                                         |  |                | 341,441   |   |      |   | 294,943   |  
|Treasury stock, at cost3,505,739 shares in 2003 and 3,809,183 shares in 2002                                             |  |                | (78,579   | ) |      |   | (85,382   | )
|Accumulated other comprehensive income                                                                                    |  |                | 15,595    |   |      |   | 24,289    |  
|Directors deferred compensation to be settled in stock                                                                   |  |                | 4,413     |   |      |   | 4,052     |  
|Unearned portion of employee restricted stock                                                                             |  |                | (35       | ) |      |   | (50       | )
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total stockholders equity                                                                                                |  |                | 579,951   |   |      |   | 418,792   |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                |  | $              | 5,900,644 |   |      | $ | 4,920,544 |  
|                                                                                                                          |  |                |           |   |      |   |           |  



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



42



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CHITTENDEN CORPORATION



CONSOLIDATED STATEMENTS OF INCOME



|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                 |  | Years Ended December 31,                |        
|                                                                 |  | 2003                                    |         |   | 2002 |   |         | 2001 | 
|                                                                 |  | (in thousands, except per shareamounts) |        
|INTEREST INCOME:                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Interest on loans                                                |  | $                                       | 199,436 |   |      | $ | 194,121 |      |  | $ | 223,661 |  
|Interest on investment securities:                               |  |                                         |         |   |      |   |         |      |  |   |         |  
|Taxable                                                          |  |                                         | 71,551  |   |      |   | 64,238  |      |  |   | 41,201  |  
|Tax-favored                                                      |  |                                         | 162     |   |      |   | 491     |      |  |   | 995     |  
|Short-term investments                                           |  |                                         | 293     |   |      |   | 169     |      |  |   | 640     |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total interest income                                            |  |                                         | 271,442 |   |      |   | 259,019 |      |  |   | 266,497 |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|INTEREST EXPENSE:                                                |  |                                         |         |   |      |   |         |      |  |   |         |  
|Deposits                                                         |  |                                         | 41,172  |   |      |   | 58,813  |      |  |   | 93,046  |  
|Borrowings                                                       |  |                                         | 12,207  |   |      |   | 7,591   |      |  |   | 3,146   |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total interest expense                                           |  |                                         | 53,379  |   |      |   | 66,404  |      |  |   | 96,192  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Net interest income                                              |  |                                         | 218,063 |   |      |   | 192,615 |      |  |   | 170,305 |  
|Provision for loan losses                                        |  |                                         | 7,175   |   |      |   | 8,331   |      |  |   | 8,041   |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Net interest income after provision for loan losses              |  |                                         | 210,888 |   |      |   | 184,284 |      |  |   | 162,264 |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|NONINTEREST INCOME:                                              |  |                                         |         |   |      |   |         |      |  |   |         |  
|Investment management and trust                                  |  |                                         | 15,956  |   |      |   | 15,601  |      |  |   | 15,722  |  
|Service charges on deposits                                      |  |                                         | 18,396  |   |      |   | 16,026  |      |  |   | 14,294  |  
|Mortgage servicing                                               |  |                                         | 281     |   |      |   | (6,442  | )    |  |   | 3,564   |  
|Gains on sales of loans, net                                     |  |                                         | 21,765  |   |      |   | 10,068  |      |  |   | 11,207  |  
|Gains (losses) on sales of securities                            |  |                                         | 17,380  |   |      |   | 10,562  |      |  |   | (72     | )
|Loss on prepayments of borrowings                                |  |                                         | (3,070  | ) |      |   |        |      |  |   |        |  
|Credit card income, net                                          |  |                                         | 4,079   |   |      |   | 3,656   |      |  |   | 3,964   |  
|Insurance commissions, net                                       |  |                                         | 6,686   |   |      |   | 3,733   |      |  |   | 3,391   |  
|Retail investment services                                       |  |                                         | 4,621   |   |      |   | 2,370   |      |  |   | 1,906   |  
|Other                                                            |  |                                         | 10,937  |   |      |   | 9,486   |      |  |   | 9,757   |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total noninterest income                                         |  |                                         | 97,031  |   |      |   | 65,060  |      |  |   | 63,733  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|NONINTEREST EXPENSE:                                             |  |                                         |         |   |      |   |         |      |  |   |         |  
|Salaries                                                         |  |                                         | 89,431  |   |      |   | 72,595  |      |  |   | 61,425  |  
|Employee benefits                                                |  |                                         | 20,578  |   |      |   | 15,478  |      |  |   | 13,426  |  
|Net occupancy expense                                            |  |                                         | 23,256  |   |      |   | 19,526  |      |  |   | 17,744  |  
|Data processing                                                  |  |                                         | 9,384   |   |      |   | 11,476  |      |  |   | 11,430  |  
|Amortization of intangibles                                      |  |                                         | 2,748   |   |      |   | 1,279   |      |  |   | 2,963   |  
|Conversion and restructuring charges                             |  |                                         | 8,969   |   |      |   |        |      |  |   |        |  
|Other                                                            |  |                                         | 37,005  |   |      |   | 31,190  |      |  |   | 28,772  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total noninterest expense                                        |  |                                         | 191,371 |   |      |   | 151,544 |      |  |   | 135,760 |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Income before income taxes                                       |  |                                         | 116,548 |   |      |   | 97,800  |      |  |   | 90,237  |  
|Income tax expense                                               |  |                                         | 41,749  |   |      |   | 34,155  |      |  |   | 31,736  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                       |  | $                                       | 74,799  |   |      | $ | 63,645  |      |  | $ | 58,501  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Basic earnings per share                                         |  | $                                       | 2.09    |   |      | $ | 1.98    |      |  | $ | 1.82    |  
|Diluted earnings per share                                       |  |                                         | 2.07    |   |      |   | 1.96    |      |  |   | 1.80    |  
|Dividends per share                                              |  |                                         | 0.80    |   |      |   | 0.79    |      |  |   | 0.76    |  
|Weighted average common shares outstanding                       |  |                                         | 35,776  |   |      |   | 32,106  |      |  |   | 32,164  |  
|Weighted average common and common equivalent shares outstanding |  |                                         | 36,120  |   |      |   | 32,495  |      |  |   | 32,547  |  



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



43



---

CHITTENDEN CORPORATION



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

Years ended December 31, 2003, 2002 and 2001

(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 DECEMBER31, 2000          |  |                        |        |   |              | $ | 35,736  |  | $ | 146,327           |   |  | $              | 222,140 |   |                                           | $ | (65,637 | )                               |  | $ | 163                                           |   |  | $                            | 3,414 |   |  | $ | (78 | ) |  | $ | 342,065 |  
|Comprehensive income:                |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Net income                           |  | $                      | 58,501 |   |              |   |        |  |   |                  |   |  |                | 58,501  |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 58,501  |  
|Other comprehensive income (Note 9)  |  |                        | 8,457  |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   | 8,457                                         |   |  |                              |      |   |  |   |    |   |  |   | 8,457   |  
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Total comprehensive income           |  | $                      | 66,958 |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Cash dividends ($0.76 per share)     |  |                        |        |   |              |   |        |  |   |                  |   |  |                | (24,661 | ) |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (24,661 | )
|Shares issued under stock plans, net |  |                        |        |   |              |   | 7       |  |   | (640              | ) |  |                | 697     |   |                                           |   | 2,377   |                                 |  |   |                                              |   |  |                              | (143  | ) |  |   | (66 | ) |  |   | 2,232   |  
|Amortization of for restricted stock |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   | 57  |   |  |   | 57      |  
|Directors deferred compensation     |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              | 475   |   |  |   |    |   |  |   | 475     |  
|Purchase of treasury stock           |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   | (16,473 | )                               |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (16,473 | )
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2001         |  |                        |        |   |              |   | 35,743  |  |   | 145,687           |   |  |                | 256,677 |   |                                           |   | (79,733 | )                               |  |   | 8,620                                         |   |  |                              | 3,746 |   |  |   | (87 | ) |  |   | 370,653 |  
|Comprehensive Income:                |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Net income                           |  | $                      | 63,645 |   |              |   |        |  |   |                  |   |  |                | 63,645  |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 63,645  |  
|Other comprehensive income (Note 9)  |  |                        | 15,669 |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   | 15,669                                        |   |  |                              |      |   |  |   |    |   |  |   | 15,669  |  
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Total comprehensive income           |  | $                      | 79,314 |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Cash dividends ($0.79 per share)     |  |                        |        |   |              |   |        |  |   |                  |   |  |                | (25,379 | ) |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |     |   |  |   | (25,379 | )
|Shares issued under stock plans, net |  |                        |        |   |              |   | 6       |  |   | (496              | ) |  |                |        |   |                                           |   | 4,255   |                                 |  |   |                                              |   |  |                              | (183  | ) |  |   |    |   |  |   | 3,582   |  
|Amortization of for restricted stock |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   | 37  |   |  |   | 37      |  
|Directors deferred compensation     |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              | 489   |   |  |   |    |   |  |   | 489     |  
|Purchase of treasury stock           |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   | (9,904  | )                               |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (9,904  | )
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER31, 2002          |  |                        |        |   |              |   | 35,749  |  |   | 145,191           |   |  |                | 294,943 |   |                                           |   | (85,382 | )                               |  |   | 24,289                                        |   |  |                              | 4,052 |   |  |   | (50 | ) |  |   | 418,792 |  
|Comprehensive income:                |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Net income                           |  | $                      | 74,799 |   |              |   |        |  |   |                  |   |  |                | 74,799  |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 74,799  |  
|Other comprehensive income (Note 9)  |  |                        | (8,694 | ) |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   | (8,694                                        | ) |  |                              |      |   |  |   |    |   |  |   | (8,694  | )
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Total comprehensive income           |  | $                      | 66,105 |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Cash dividends ($0.80 per share)     |  |                        |        |   |              |   |        |  |   |                  |   |  |                | (28,301 | ) |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (28,301 | )
|Shares issued under stock plans, net |  |                        |        |   |              |   | 9       |  |   | 241               |   |  |                |        |   |                                           |   | 6,803   |                                 |  |   |                                              |   |  |                              | (15   | ) |  |   |    |   |  |   | 7,038   |  
|Shares issued in Granite acquisition |  |                        |        |   |              |   | 4,384   |  |   | 111,542           |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 115,926 |  
|Amortization of restricted stock     |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   | 15  |   |  |   | 15      |  
|Directors deferred compensation      |  |                        |        |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              | 376   |   |  |   |    |   |  |   | 376     |  
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2003         |  |                        |        |   |              | $ | 40,142  |  | $ | 256,974           |   |  | $              | 341,441 |   |                                           | $ | (78,579 | )                               |  | $ | 15,595                                        |   |  | $                            | 4,413 |   |  | $ | (35 | ) |  | $ | 579,951 |  
|                                     |  |                        |        |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  



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



44



---

CHITTENDEN CORPORATION



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|----------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                          |  | Years Ended December 31, |           
|                                                                                          |  | 2003                     |            |   | 2002 |   |            | 2001 | 
|                                                                                          |  | (in thousands)           |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                          |            |   |      |   |            |      |  |   |          |  
|Net income                                                                                |  | $                        | 74,799     |   |      | $ | 63,645     |      |  | $ | 58,501   |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                          |            |   |      |   |            |      |  |   |          |  
|Provision for loan losses                                                                 |  |                          | 7,175      |   |      |   | 8,331      |      |  |   | 8,041    |  
|Depreciation                                                                              |  |                          | 8,362      |   |      |   | 7,428      |      |  |   | 6,130    |  
|Amortization of intangible assets                                                         |  |                          | 2,748      |   |      |   | 1,279      |      |  |   | 2,963    |  
|Amortization of premiums, fees, and discounts, net                                        |  |                          | 11,457     |   |      |   | 4,564      |      |  |   | 2,514    |  
|Provision for (recovery of) impairment of MSR asset                                       |  |                          | (5,732     | ) |      |   | 8,464      |      |  |   |         |  
|Investment securities (gains) losses                                                      |  |                          | (17,380    | ) |      |   | (10,562    | )    |  |   | 72       |  
|Deferred (prepaid) income taxes                                                           |  |                          | (6,385     | ) |      |   | (9,990     | )    |  |   | 7,808    |  
|Loans originated for sale                                                                 |  |                          | (1,312,649 | ) |      |   | (764,259   | )    |  |   | (485,516 | )
|Proceeds from sales of loans                                                              |  |                          | 1,416,877  |   |      |   | 729,661    |      |  |   | 491,465  |  
|Gains on sales of loans, net                                                              |  |                          | (21,765    | ) |      |   | (10,068    | )    |  |   | (11,207  | )
|Changes in assets and liabilities:                                                        |  |                          |            |   |      |   |            |      |  |   |          |  
|Accrued interest receivable                                                               |  |                          | 5,388      |   |      |   | (3,173     | )    |  |   | 3,153    |  
|Other assets                                                                              |  |                          | (1,044     | ) |      |   | 11,211     |      |  |   | (6,555   | )
|Accrued expenses and other liabilities                                                    |  |                          | (3,927     | ) |      |   | 4,559      |      |  |   | 15,550   |  
|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|Net cash provided by operating activities                                                 |  |                          | 157,924    |   |      |   | 41,090     |      |  |   | 92,919   |  
|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                          |            |   |      |   |            |      |  |   |          |  
|Cash acquired, net of cash paid in acquisitions                                           |  |                          | (90,468    | ) |      |   | (41,481    | )    |  |   | 8,001    |  
|Proceeds from sale (purchase) of Federal Home Loan Bank stock                             |  |                          | 4,545      |   |      |   | (2,211     | )    |  |   | (616     | )
|Proceeds from sales of securities available for sale                                      |  |                          | 677,467    |   |      |   | 650,966    |      |  |   | 203,485  |  
|Proceeds from maturing securities and principal payments on securities available for sale |  |                          | 627,407    |   |      |   | 405,384    |      |  |   | 387,374  |  
|Purchases of securities available for sale                                                |  |                          | (1,014,748 | ) |      |   | (1,647,249 | )    |  |   | (814,214 | )
|Loans originated, net of principal repayments                                             |  |                          | (146,798   | ) |      |   | 51,848     |      |  |   | 179,533  |  
|Purchases of premises and equipment                                                       |  |                          | (13,143    | ) |      |   | (5,464     | )    |  |   | (3,478   | )
|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|Net cash provided by (used in) investing activities                                       |  |                          | 44,262     |   |      |   | (588,207   | )    |  |   | (39,915  | )
|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                          |            |   |      |   |            |      |  |   |          |  
|Net increase in deposits                                                                  |  |                          | 60,904     |   |      |   | 220,395    |      |  |   | 165,014  |  
|Net increase (decrease) in borrowings                                                     |  |                          | (258,322   | ) |      |   | 122,570    |      |  |   | (49,348  | )
|Proceeds from issuance of trust preferred securities, net                                 |  |                          |           |   |      |   | 120,321    |      |  |   |         |  
|Proceeds from issuance of treasury and common stock                                       |  |                          | 6,330      |   |      |   | 3,233      |      |  |   | 1,866    |  
|Dividends on common stock                                                                 |  |                          | (28,301    | ) |      |   | (25,379    | )    |  |   | (24,661  | )
|Repurchase of common stock                                                                |  |                          |           |   |      |   | (9,904     | )    |  |   | (16,473  | )
|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|Net cash provided by (used in) financing activities                                       |  |                          | (219,389   | ) |      |   | 431,236    |      |  |   | 76,398   |  
|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                          | (17,203    | ) |      |   | (115,881   | )    |  |   | 129,402  |  
|Cash and cash equivalents at beginning of year                                            |  |                          | 192,142    |   |      |   | 308,023    |      |  |   | 178,621  |  
|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|Cash and cash equivalents at end of year                                                  |  | $                        | 174,939    |   |      | $ | 192,142    |      |  | $ | 308,023  |  
|                                                                                          |  |                          |            |   |      |   |            |      |  |   |          |  
|Supplemental disclosure of cash flow information:                                         |  |                          |            |   |      |   |            |      |  |   |          |  
|Cash paid during the year for:                                                            |  |                          |            |   |      |   |            |      |  |   |          |  
|Interest                                                                                  |  | $                        | 51,755     |   |      | $ | 66,905     |      |  | $ | 97,923   |  
|Income taxes                                                                              |  |                          | 61,228     |   |      |   | 27,712     |      |  |   | 27,213   |  
|Non-cash investing and financing activities:                                              |  |                          |            |   |      |   |            |      |  |   |          |  
|Loans transferred to other real estate owned                                              |  |                          | 380        |   |      |   | 1,104      |      |  |   | 2,014    |  
|Issuance of treasury and restricted stock                                                 |  |                          | 6,803      |   |      |   | 183        |      |  |   | 612      |  
|Assets acquired and liabilities assumed through acquisitions:                             |  |                          |            |   |      |   |            |      |  |   |          |  
|Fair value of assets acquired                                                             |  |                          | 1,122,089  |   |      |   | 267,310    |      |  |   | 239,253  |  
|Fair value of liabilities assumed                                                         |  |                          | 1,044,334  |   |      |   | 242,968    |      |  |   | 212,389  |  
|Equity issued                                                                             |  |                          | 115,931    |   |      |   |           |      |  |   |         |  
|Cash paid                                                                                 |  |                          | 122,998    |   |      |   | 53,250     |      |  |   | 47,452   |  
|Excess of cost over fair value of net assets acquired                                     |  |                          | 161,174    |   |      |   | 28,908     |      |  |   | 20,590   |  



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



45



---

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 (CIG) and Chittenden Securities, Inc. (CSI); The Bank of Western Massachusetts (BWM); Flagship
Bank and Trust Company (FBT); Maine Bank & Trust (MBT); Ocean National Bank (ONB); Granite Bank (GB) and its subsidiary GSBI and Chittenden Connecticut Corporation (CCC). (CTC, BWM, FBT, MBT, ONB and GB 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. CCC is a mortgage banking operation with offices in Brattleboro, Vermont. CIG is an independent insurance agency with offices in Waterbury, Rutland and Burlington, Vermont, as well as Springfield, Massachusetts and
Manchester, New Hampshire. CSI is a registered broker/dealer providing brokerage services to its customers through existing branch locations in Vermont, Massachusetts, New Hampshire, and Maine. GB operates GSBI Insurance Group, which offers various
insurance related products.



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 loan losses, the goodwill impairment, income tax expenses, mortgage-servicing rights, the recognition of interest income on loans, and the recognition of restructuring charges.



Restructuring Charges



Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standard No. 146 Accounting for Costs Associated with Exit or Disposal Activities, which contains specific guidance regarding the types of, and circumstances under which, certain expenses related to restructuring activities that
can be accrued. In general, the Statements require that the Company have a detailed plan in place, which has been communicated to employees affected in the staff reduction, branch closures/sales, or computer conversions. Significant management
judgement is required in estimating the amount of expense that is appropriate to recognize in relation to these plans.



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



46



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



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 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 methods that approximate 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 below, 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 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 assesses the adequacy of the allowance for loan losses, and general loss allocations are made against segments of the loan portfolio, which have similar attributes.



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.



47



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recoveries on loans previously charged off are credited to the allowance. Management believes that the allowance for loan losses was adequate at December 31,
2003. 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 judgements 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 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 loan portfolio condition. The Board of Directors monitors asset quality throughout the year. 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 $5,104,000 and $5,517,000 at December 31, 2003 and 2002, 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 two components: 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 into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying
mortgage loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to 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.



48



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



Identified Intangible Assets & Goodwill



Intangible assets include the excess of the purchase price over the fair value of net assets acquired (goodwill) in the acquisitions of BWM, MBT, ONB, GB
and CIG, as well as core deposit intangibles (CDI) related to BWM, ONB and GB, an acquired trust relationship and a customer list intangible related to the acquisition of GSBI Insurance Group. The core deposit intangibles for ONB and GB are
amortized straight-line over 10 years and the CDI for BWM is amortized using the sum of the years digits method over 10 years. The customer list intangibles are amortized straight-line over 10 years for the trust acquisitions and 10 years for
the insurance agency acquisitions. 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.



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 $6.7 billion and $5.9
billion at December 31, 2003 and 2002, 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 basis) in accordance with industry practice.



49



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Credit Card Income



Credit card income includes interchange income from 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.



Insurance Commissions



Insurance commissions income is recognized when billed to the customer, net of commissions paid to the producing agent. In addition, CIG and GSBI may
receive additional commissions based on achieving specific sales goals and loss experience targets. These performance-based commissions are recognized in income on a cash basis.



Stock-Based Compensation



Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,encourages but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees,and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Companys stock at the date of the grant over
the amount an employee must pay to acquire the stock.



If
compensation cost for these plans had been determined in accordance with SFAS 123, the Companys net income and earnings per share would have been reduced to the following pro forma amounts:



|                                                                                                                                            |  |                                      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                            |  | 2003                                 |        |   | 2002 |   |        | 2001 | 
|                                                                                                                                            |  | (in thousands, except per sharedata) |       
|Net Income :                                                                                                                                |  |                                      |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | $                                    | 74,799 |   |      | $ | 63,645 |      |  | $ | 58,501 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                      | (2,546 | ) |      |   | (2,043 | )    |  |   | (2,001 | )
|                                                                                                                                            |  |                                      |        |   |      |   |        |      |  |   |        |  
|Pro forma                                                                                                                                   |  | $                                    | 72,253 |   |      | $ | 61,602 |      |  | $ | 56,500 |  
|                                                                                                                                            |  |                                      |        |   |      |   |        |      |  |   |        |  
|Earnings Per Share:                                                                                                                         |  |                                      |        |   |      |   |        |      |  |   |        |  
|Basic:                                                                                                                                      |  |                                      |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | $                                    | 2.09   |   |      | $ | 1.98   |      |  | $ | 1.82   |  
|Pro forma                                                                                                                                   |  |                                      | 2.02   |   |      |   | 1.92   |      |  |   | 1.76   |  
|Diluted:                                                                                                                                    |  |                                      |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | $                                    | 2.07   |   |      | $ | 1.96   |      |  | $ | 1.80   |  
|Pro forma                                                                                                                                   |  |                                      | 2.00   |   |      |   | 1.90   |      |  |   | 1.74   |  



The SFAS 123 method of
accounting has not been applied to options granted prior to January 1, 1995; the resulting pro forma compensation cost may not be representative for future years.



50



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The fair value of each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001:



|                      |  |      |      |   |      |   |      |      |  |   |      |  
|--------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                      |  | 2003 |      |   | 2002 |   |      | 2001 | 
|Expected life (years) |  |      | 5.13 |   |      |   | 4.94 |      |  |   | 7.49 |  
|Volatility            |  |      | 23.9 |   |      |   | 23.7 |      |  |   | 21.9 |  
|Interest rate         |  |      | 3.11 | % |      |   | 4.14 | %    |  |   | 4.92 | %
|Dividend yield        |  |      | 2.96 | % |      |   | 2.64 | %    |  |   | 3.11 | %
|Fair value per share  |  | $    | 5.05 |   |      | $ | 6.00 |      |  | $ | 5.35 |  



Business Combinations



In July 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). The Company adopted SFAS 141 as of July 1, 2001, which
required that the purchase accounting method be used for all business combinations initiated after June 30, 2001. The Company adopted SFAS 142 as of January 1, 2002. SFAS 142 addresses the method of identifying and measuring goodwill and other
intangible assets acquired in a business combination, eliminates further amortization of goodwill, and requires periodic impairment evaluations of goodwill.



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 process that effectively required amendments to Statement 133, (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. The Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristics of a derivative discussed in paragraph 6(b) of Statement 133, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and amends certain other existing pronouncements. This statement is
effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Statement 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of
financial position and 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 currently in noninterest income. If a derivative has ceased to be highly effective, hedge accounting is discontinued prospectively.



Accounting Policies Adopted in the Current Period



At its November 25, 2003 meeting, the Emerging Issues Task Force
(EITF) ratified the consensus reached with regard to Issue 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus provides guidance regarding the meaning of
other-than-temporary impairment and its application to investments accounted for under Statement of Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities. The consensus also requires certain
quantitative and qualitative disclosures relating to investments with unrealized losses that have not been recognized as other-than-temporary impairments.



51



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In December 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standard No. 132R, Employers Disclosures about Pensions and Other Postretirement Benefits (SFAS 132R). SFAS 132R is an amendment to Statements of Financial Accounting Standards No. 87, 88, and 106 and a revision of FASB
Statement No. 132. This statement requires disclosures about defined benefit pension plans and other postretirement benefit plan assets, obligations, cash flows, and net cost. The adoption of SFAS 132R did not have a significant impact on either of
the Companys financial position or results of operations but it did result in the enhanced disclosures presented in Note 11.



In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity(SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.
In addition, the Statement requires an issuer to classify certain instruments with specific characteristics described in it as liabilities. The adoption of SFAS 150 did not have a significant impact on either the Companys financial position or
results of operations.



In December 2002, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure.This statement amends SFAS 123 and provides alternative methods of transition for
companies that voluntarily change to the fair value method of accounting for stock-based employee compensation. The disclosure requirements of SFAS 123 were also amended to include disclosure in quarterly financial statements of compensation expense
calculated under the fair value method.



Note 2 ACQUISITIONS



Granite Bank



On February 28, 2003, Chittenden acquired Granite State Bankshares, Inc.,
headquartered in Keene, New Hampshire, and its subsidiary, Granite Bank for $239 million in cash and stock. The transaction has been accounted for as a purchase and, accordingly, the operations of Granite Bank are included in the Companys
consolidated financial statements from the date of acquisition.



The purchase price has been allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. The excess of purchase price over the fair value of net tangible and intangible assets acquired
has been recorded as goodwill. The fair value of these assets and liabilities is summarized as follows (in thousands):



|                                       |  |   |          |  
|-------------------------------------- |  | - | -------- | -
|Cash and cash equivalents              |  | $ | 32,530   |  
|FHLB Stock                             |  |   | 8,271    |  
|Securities available for sale          |  |   | 395,443  |  
|Loans, Net                             |  |   | 626,238  |  
|Prepaid expenses and other assets      |  |   | 26,907   |  
|Premises and equipment                 |  |   | 13,387   |  
|Identified intangibles                 |  |   | 19,313   |  
|Goodwill                               |  |   | 161,174  |  
|Deposits                               |  |   | (782,894 | )
|Borrowings                             |  |   | (247,102 | )
|Accrued expenses and other liabilities |  |   | (14,338  | )
|                                       |  |   |          |  
|Total acquisition cost                 |  | $ | 238,929  |  
|                                       |  |   |          |  



52



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Ocean National Bank



On February 28, 2002, Chittenden acquired Ocean National Corporation, headquartered in Kennebunk, Maine and its subsidiary Ocean National Bank for
$53.25 million in cash. The transaction has been accounted for as a purchase and, accordingly, the operations of Ocean National Bank are included in the Companys consolidated financial statements from the date of acquisition.



The purchase price has been allocated to assets acquired and liabilities
assumed based on estimates of fair value at the date of acquisition. The excess of purchase price over the fair value of net tangible and intangible assets acquired has been recorded as goodwill. The fair value of these assets and liabilities is
summarized as follows (in thousands):



|                                       |  |   |          |  
|-------------------------------------- |  | - | -------- | -
|Cash and cash equivalents              |  | $ | 11,769   |  
|FHLB Stock                             |  |   | 1,256    |  
|Securities available for sale          |  |   | 41,498   |  
|Loans, Net                             |  |   | 207,443  |  
|Prepaid expenses and other assets      |  |   | (5,341   | )
|Premises and equipment                 |  |   | 3,934    |  
|Identified intangibles                 |  |   | 6,751    |  
|Goodwill                               |  |   | 28,908   |  
|Deposits                               |  |   | (235,851 | )
|Accrued expenses and other liabilities |  |   | (7,117   | )
|                                       |  |   |          |  
|Total acquisition cost                 |  | $ | 53,250   |  
|                                       |  |   |          |  



Maine Bank & Trust



On April 30, 2001, the Company acquired Maine Bank Corp.,
headquartered in Portland, Maine and its subsidiary, Maine Bank & Trust for $49.25 million in cash. In accordance with the purchase agreement, certain transaction related costs borne by the seller were deducted from the purchase price, so that
the net amount paid was $47.5 million. The acquisition has been accounted for as a purchase and, accordingly, the operations of Maine Bank & Trust are included in the Companys financial statements from the date of acquisition.



The purchase price has been allocated to assets acquired and liabilities
assumed based on estimates of fair value at the date of acquisition. The excess of purchase price over the fair value of net tangible and intangible assets acquired has been recorded as goodwill. The fair value of these assets and liabilities is
summarized as follows (in thousands):



|                                       |  |   |          |  
|-------------------------------------- |  | - | -------- | -
|Cash and cash equivalents              |  | $ | 55,453   |  
|FHLB Stock                             |  |   | 686      |  
|Securities available for sale          |  |   | 5,034    |  
|Loans, Net                             |  |   | 168,860  |  
|Prepaid expenses and other assets      |  |   | 3,422    |  
|Premises and equipment                 |  |   | 5,798    |  
|Goodwill                               |  |   | 20,590   |  
|Deposits                               |  |   | (212,425 | )
|Accrued expenses and other liabilities |  |   | 34       |  
|                                       |  |   |          |  
|Total acquisition cost                 |  | $ | 47,452   |  
|                                       |  |   |          |  



53



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Following is unaudited supplemental information, reflecting selected pro forma results as if each of
these acquisitions had been consummated as of January 1, 2001 (in thousands, except EPS):



|                                 |  |                                  |         |      |   |         |  |   |        
|-------------------------------- |  | -------------------------------- | ------- | ---- | - | ------- |  | - | -------
|                                 |  | For the years ended December 31,
|                                 |  | 2003                             |         | 2002 |   | 2001   
|Total revenue                    |  | $                                | 326,571 |      | $ | 292,129 |  | $ | 289,068
|Income before income taxes       |  |                                  | 122,759 |      |   | 113,178 |  |   | 108,712
|Net income                       |  |                                  | 78,350  |      |   | 72,532  |  |   | 73,941 
|Diluted earnings per share (EPS) |  |                                  | 2.13    |      |   | 1.97    |  |   | 2.00   



Total revenue includes
net interest income and noninterest income.



Note 3
INTANGIBLE ASSETS AND GOODWILL



Identified Intangible Assets



|                             |  |                                        |        |                         |   |                    |  |   |       
|---------------------------- |  | -------------------------------------- | ------ | ----------------------- | - | ------------------ |  | - | ------
|                             |  | As of December 31, 2003 (in thousands)
|                             |  | Gross CarryingAmount                   |        | AccumulatedAmortization |   | Net CarryingAmount
|Amortized intangible assets: |  |                                        |        |                         |   |                    |  |   |       
|Core deposit intangibles     |  | $                                      | 28,541 |                         | $ | 10,320             |  | $ | 18,221
|Customer list intangible     |  |                                        | 2,733  |                         |   | 250                |  |   | 2,483 
|Acquired trust relationships |  |                                        | 4,000  |                         |   | 1,971              |  |   | 2,029 
|                             |  |                                        |        |                         |   |                    |  |   |       
|Total                        |  | $                                      | 35,274 |                         | $ | 12,541             |  | $ | 22,733
|                             |  |                                        |        |                         |   |                    |  |   |       



|                                 |  |                |      
|-------------------------------- |  | -------------- | -----
|                                 |  | (in thousands)
|Aggregate Amortization Expense:  |  |                |      
|For year ended December 31, 2003 |  | $              | 2,748
|                                 | 
|Estimated Amortization Expense:  |  |                |      
|For year ended December 31, 2004 |  | $              | 3,347
|For year ended December 31, 2005 |  |                | 3,019
|For year ended December 31, 2006 |  |                | 2,910
|For year ended December 31, 2007 |  |                | 2,910
|For year ended December 31, 2008 |  |                | 2,910



Goodwill



The changes in the carrying amount of goodwill for the year ended December
31, 2003 are as follows (in thousands):



|                                |  |                           |         |              |   |       |  |   |        
|------------------------------- |  | ------------------------- | ------- | ------------ | - | ----- |  | - | -------
|                                |  | Commercial BankingSegment |         | OtherSegment |   | Total
|Balance as of December 31, 2002 |  | $                         | 50,205  |              | $ | 5,052 |  | $ | 55,257 
|Goodwill acquired during year   |  |                           | 161,174 |              |   |      |  |   | 161,174
|Impairment losses               |  |                           |        |              |   |      |  |   |       
|                                |  |                           |         |              |   |       |  |   |        
|Balance as of December 31, 2003 |  | $                         | 211,379 |              | $ | 5,052 |  | $ | 216,431
|                                |  |                           |         |              |   |       |  |   |        



54



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Goodwill and Other Intangible AssetsAdoption of Statement 142



The following table presents pro forma results of the Companys
net income from prior periods adjusted to exclude amortization expense net of any taxes recognized in those periods relating to goodwill that is no longer being amortized in accordance with SFAS 142.



|                                |  |                                             |        |      |   |        |  |   |       
|------------------------------- |  | ------------------------------------------- | ------ | ---- | - | ------ |  | - | ------
|                                |  | As of December 31, 2003                    
|                                |  | 2003                                        |        | 2002 |   | 2001  
|                                |  | (in thousands except per share information)
|Net Income: As reported         |  | $                                           | 74,799 |      | $ | 63,645 |  | $ | 58,501
|Add back: goodwill amortization |  |                                             |       |      |   |       |  |   | 2,134 
|                                |  |                                             |        |      |   |        |  |   |       
|Net Income: As adjusted         |  | $                                           | 74,799 |      | $ | 63,645 |  | $ | 60,635
|                                |  |                                             |        |      |   |        |  |   |       
|Basic earnings per share:       |  |                                             |        |      |   |        |  |   |       
|Net Income: As reported         |  | $                                           | 2.09   |      | $ | 1.98   |  | $ | 1.82  
|Add back: goodwill amortization |  |                                             |       |      |   |       |  |   | 0.07  
|                                |  |                                             |        |      |   |        |  |   |       
|Net Income: As adjusted         |  | $                                           | 2.09   |      | $ | 1.98   |  | $ | 1.89  
|                                |  |                                             |        |      |   |        |  |   |       
|Diluted earnings per share:     |  |                                             |        |      |   |        |  |   |       
|Net Income: As reported         |  | $                                           | 2.07   |      | $ | 1.96   |  | $ | 1.80  
|Add back: goodwill amortization |  |                                             |       |      |   |       |  |   | 0.06  
|                                |  |                                             |        |      |   |        |  |   |       
|Net Income: As adjusted         |  | $                                           | 2.07   |      | $ | 1.96   |  | $ | 1.86  
|                                |  |                                             |        |      |   |        |  |   |       



Note 4 INVESTMENTS



Investment securities at December 31, 2003 and 2002 are
as follows:



|                                    |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|----------------------------------- |  | -------------- | --------- | ---------------- | - | ----------------- |  | - | ---------- | - |  | - | ---------
|                                    |  | Amortized Cost |           | Unrealized Gains |   | Unrealized Losses |  |   | Fair Value
|                                    |  | (in thousands)
|2003                                |  |                |          
|SECURITIES AVAILABLE FOR SALE:      |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|U.S. Treasury securities            |  | $              | 7,797     |                  | $ | 79                |  | $ | (3         | ) |  | $ | 7,873    
|U.S. government agency obligations  |  |                | 497,573   |                  |   | 3,616             |  |   | (2,859     | ) |  |   | 498,330  
|Mortgage-backed securities          |  |                | 537,033   |                  |   | 6,279             |  |   | (5,544     | ) |  |   | 537,768  
|Corporate bonds and notes           |  |                | 519,890   |                  |   | 22,199            |  |   | (106       | ) |  |   | 541,983  
|Other debt securities               |  |                | 2,137     |                  |   | 57                |  |   |           |   |  |   | 2,194    
|Marketable equity securities        |  |                | 3         |                  |   |                  |  |   |           |   |  |   | 3        
|                                    |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|Total securities available for sale |  | $              | 1,564,433 |                  | $ | 32,230            |  | $ | (8,512     | ) |  | $ | 1,588,151
|                                    |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|2002                                |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|SECURITIES AVAILABLE FOR SALE:      |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|U.S. Treasury securities            |  | $              | 51,989    |                  | $ | 106               |  | $ |           |   |  | $ | 52,095   
|U.S. government agency obligations  |  |                | 475,268   |                  |   | 11,639            |  |   |           |   |  |   | 486,907  
|Mortgage-backed securities          |  |                | 453,855   |                  |   | 12,046            |  |   |           |   |  |   | 465,901  
|Corporate bonds and notes           |  |                | 469,301   |                  |   | 20,661            |  |   | (276       | ) |  |   | 489,686  
|Other debt securities               |  |                | 2,445     |                  |   | 77                |  |   |           |   |  |   | 2,522    
|                                    |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|Total securities available for sale |  | $              | 1,452,858 |                  | $ | 44,529            |  | $ | (276       | ) |  | $ | 1,497,111
|                                    |  |                |           |                  |   |                   |  |   |            |   |  |   |          



55



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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 last
three year periods ended December 31,:



|                |  |                |         |      |   |         |  |   |        
|--------------- |  | -------------- | ------- | ---- | - | ------- |  | - | -------
|                |  | 2003           |         | 2002 |   | 2001   
|                |  | (in thousands)
|Proceeds        |  | $              | 677,467 |      | $ | 650,966 |  | $ | 203,485
|Realized losses |  |                | 1,895   |      |   |        |  |   | 1,234  
|Realized gains  |  |                | 19,275  |      |   | 10,562  |  |   | 1,162  



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 $314,391,000 and $273,652,000 at December 31, 2003 and 2002, respectively.



The following table shows the maturity distribution of the
amortized cost of the Companys investment securities at December 31, 2003, with comparative totals for 2002. 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 |         | No FixedMaturity |   | Total 
|                                   |  | (in thousands)
|Investment securities:             |  |                |         |                               |   |                               |  |                |         |                  |   |        |  |   |   |  |   |          
|U.S. Treasury securities           |  | $              | 2,279   |                               | $ | 5,518                         |  | $              |        |                  | $ |       |  | $ |  |  | $ | 7,797    
|U.S. government agency obligations |  |                | 42,486  |                               |   | 418,582                       |  |                | 36,505  |                  |   |       |  |   |  |  |   | 497,573  
|Mortgage-backed securities (1)     |  |                | 114,886 |                               |   | 291,841                       |  |                | 124,340 |                  |   | 5,966  |  |   |  |  |   | 537,033  
|Corporate bonds and notes          |  |                | 50,065  |                               |   | 436,473                       |  |                | 33,352  |                  |   |       |  |   |  |  |   | 519,890  
|Other debt securities              |  |                | 513     |                               |   | 1,495                         |  |                | 70      |                  |   | 59     |  |   |  |  |   | 2,137    
|Marketable equity securities       |  |                |        |                               |   |                              |  |                |        |                  |   |       |  |   | 3 |  |   | 3        
|                                   |  |                |         |                               |   |                               |  |                |         |                  |   |        |  |   |   |  |   |          
|Total investment securities        |  | $              | 210,229 |                               | $ | 1,153,909                     |  | $              | 194,267 |                  | $ | 6,025  |  | $ | 3 |  | $ | 1,564,433
|                                   |  |                |         |                               |   |                               |  |                |         |                  |   |        |  |   |   |  |   |          
|Comparative totals for 2002        |  | $              | 162,347 |                               | $ | 1,027,560                     |  | $              | 248,916 |                  | $ | 14,035 |  | $ |  |  | $ | 1,452,858

---

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



The following table shows the maturity distribution of the fair value of the
Companys investment securities at December 31, 2003, with comparative totals for 2002. 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 |         | No FixedMaturity |   | Total 
|                                   |  | (in thousands)
|INVESTMENT SECURITIES:             |  |                |         |                               |   |                               |  |                |         |                  |   |        |  |   |   |  |   |          
|U.S. Treasury securities           |  | $              | 2,291   |                               | $ | 5,582                         |  | $              |        |                  | $ |       |  | $ |  |  | $ | 7,873    
|U.S. government agency obligations |  |                | 42,724  |                               |   | 418,871                       |  |                | 36,735  |                  |   |       |  |   |  |  |   | 498,330  
|Mortgage-backed securities (1)     |  |                | 115,044 |                               |   | 292,240                       |  |                | 124,510 |                  |   | 5,974  |  |   |  |  |   | 537,768  
|Corporate bonds and notes          |  |                | 50,964  |                               |   | 457,515                       |  |                | 33,504  |                  |   |       |  |   |  |  |   | 541,983  
|Other debt securities              |  |                | 513     |                               |   | 1,552                         |  |                | 70      |                  |   | 59     |  |   |  |  | $ | 2,194    
|Marketable equity securities       |  |                |        |                               |   |                              |  |                |        |                  |   |       |  |   | 3 |  |   | 3        
|                                   |  |                |         |                               |   |                               |  |                |         |                  |   |        |  |   |   |  |   |          
|Total investment securities        |  | $              | 211,536 |                               | $ | 1,175,760                     |  | $              | 194,819 |                  | $ | 6,033  |  | $ | 3 |  | $ | 1,588,151
|                                   |  |                |         |                               |   |                               |  |                |         |                  |   |        |  |   |   |  |   |          
|Comparative totals for 2002        |  | $              | 165,205 |                               | $ | 1,062,247                     |  | $              | 255,252 |                  | $ | 14,407 |  | $ |  |  | $ | 1,497,111

---

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



56



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Temporarily Impaired Investment Securities



|                                      |  |                     |         |                  |                     |        |            |  |                  |   |            |   |                  |  |   |         |  |   |        |  
|------------------------------------- |  | ------------------- | ------- | ---------------- | ------------------- | ------ | ---------- |  | ---------------- | - | ---------- | - | ---------------- |  | - | ------- |  | - | ------ | -
|                                      |  | Less than 12 months |         |                  | 12 months or longer |        | Total      | 
|                                      |  | Fair Value          |         | UnrealizedLosses |                     |        | Fair Value |  | UnrealizedLosses |   | Fair Value |   | UnrealizedLosses | 
|Description of Investment Securities  |  |                     |         |                  |                     |        |            |  |                  |   |            |   |                  |  |   |         |  |   |        |  
|U.S. Treasury securities              |  | $                   | 2,252   |                  | $                   | (3     | )          |  | $                |  |            | $ |                 |  | $ | 2,252   |  | $ | (3     | )
|U.S. government agency obligations    |  |                     | 147,381 |                  |                     | (2,859 | )          |  |                  |  |            |   |                 |  |   | 147,381 |  |   | (2,859 | )
|Mortgage-backed securities            |  |                     | 324,959 |                  |                     | (5,544 | )          |  |                  |  |            |   |                 |  |   | 324,959 |  |   | (5,544 | )
|Corporate bonds and notes             |  |                     | 45,700  |                  |                     | (106   | )          |  |                  |  |            |   |                 |  |   | 45,700  |  |   | (106   | )
|Other debt securities                 |  |                     |        |                  |                     |       |            |  |                  |  |            |   |                 |  |   |        |  |   |       |  
|                                      |  |                     |         |                  |                     |        |            |  |                  |   |            |   |                  |  |   |         |  |   |        |  
|Total temporarily impaired securities |  | $                   | 520,292 |                  | $                   | (8,512 | )          |  | $                |  |            | $ |                 |  | $ | 520,292 |  | $ | (8,512 | )
|                                      |  |                     |         |                  |                     |        |            |  |                  |   |            |   |                  |  |   |         |  |   |        |  



Note 5 LOANS



Major classifications of loans at December 31, 2003 and
2002 are as follows:



|                          |  |                |           |   |      |   |           |  
|------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                          |  | 2003           |           |   | 2002 |  
|                          |  | (in thousands) |          
|Commercial                |  | $              | 658,615   |   |      | $ | 568,224   |  
|Municipal                 |  |                | 87,080    |   |      |   | 77,820    |  
|Real estate:              |  |                |           |   |      |   |           |  
|Residential               |  |                |           |   |      |   |           |  
|1-4 family                |  |                | 700,671   |   |      |   | 561,330   |  
|Multi-family              |  |                | 176,478   |   |      |   | 96,494    |  
|Home equity               |  |                | 270,959   |   |      |   | 203,882   |  
|Commercial                |  |                | 1,430,945 |   |      |   | 1,103,897 |  
|Construction              |  |                | 140,801   |   |      |   | 85,512    |  
|                          |  |                |           |   |      |   |           |  
|Total real estate         |  |                | 2,719,854 |   |      |   | 2,051,115 |  
|Consumer                  |  |                | 238,982   |   |      |   | 222,547   |  
|Lease financing           |  |                | 20,153    |   |      |   | 54,157    |  
|                          |  |                |           |   |      |   |           |  
|Total gross loans         |  |                | 3,724,684 |   |      |   | 2,973,863 |  
|Allowance for loan losses |  |                | (57,464   | ) |      |   | (48,197   | )
|                          |  |                |           |   |      |   |           |  
|Net loans                 |  | $              | 3,667,220 |   |      | $ | 2,925,666 |  
|                          |  |                |           |   |      |   |           |  
|Loans held for sale       |  | $              | 25,262    |   |      | $ | 94,874    |  
|                          |  |                |           |   |      |   |           |  



Lease financing
receivable includes the estimated residual value of leased vehicles of approximately $16,070,000 and $40,131,000 at December 31, 2003 and 2002, respectively, and is net of unearned interest income of approximately $1,654,000 and $5,646,000 at those
dates.



The Companys lending activities are conducted
primarily in Vermont, New Hampshire, Massachusetts and Maine, with additional activity relating to nearby trading areas in New York and Connecticut. The Banks make single-family and multi-family residential loans, commercial real estate loans,
commercial loans, 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.



57



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                        |  |                |         |   |      |   |         |      |  |   |         |  
|--------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                        |  | 2003           |         |   | 2002 |   |         | 2001 | 
|                                        |  | (in thousands) |        
|Balance at beginning of year            |  | $              | 48,197  |   |      | $ | 45,268  |      |  | $ | 40,255  |  
|Allowance acquired through acquisitions |  |                | 7,936   |   |      |   | 2,972   |      |  |   | 4,083   |  
|Provision for loan losses               |  |                | 7,175   |   |      |   | 8,331   |      |  |   | 8,041   |  
|Loan recoveries                         |  |                | 4,194   |   |      |   | 3,193   |      |  |   | 3,348   |  
|Loans charged off                       |  |                | (10,038 | ) |      |   | (11,567 | )    |  |   | (10,459 | )
|                                        |  |                |         |   |      |   |         |      |  |   |         |  
|Balance at end of year                  |  | $              | 57,464  |   |      | $ | 48,197  |      |  | $ | 45,268  |  
|                                        |  |                |         |   |      |   |         |      |  |   |         |  



The principal amount
of loans on nonaccrual status was $14,331,000 and $14,576,000 at December 31, 2003 and 2002, respectively. Loans whose terms have been substantially modified in troubled debt restructurings were $0 at December 31, 2003 and $225,000 at December 31,
2002. At December 31, 2003, the Banks were not committed to lend any additional funds to borrowers with loans whose terms have been restructured.



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 was as follows:



|                                                       |  |                |       |      |   |       |  |   |      
|------------------------------------------------------ |  | -------------- | ----- | ---- | - | ----- |  | - | -----
|                                                       |  | 2003           |       | 2002 |   | 2001 
|                                                       |  | (in thousands)
|Interest income in accordance with original loan terms |  | $              | 1,937 |      | $ | 1,872 |  | $ | 1,375
|Interest income recognized                             |  |                | 1,497 |      |   | 730   |  |   | 535  
|                                                       |  |                |       |      |   |       |  |   |      
|Reduction in interest income                           |  | $              | 440   |      | $ | 1,142 |  | $ | 840  
|                                                       |  |                |       |      |   |       |  |   |      



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



|                                                         |  |                |        |      |   |       |  |   |      
|-------------------------------------------------------- |  | -------------- | ------ | ---- | - | ----- |  | - | -----
|                                                         |  | December 31,  
|                                                         |  | 2003           |        | 2002 |   | 2001 
|                                                         |  | (in thousands)
|Investment in impaired loans                             |  | $              | 9,863  |      | $ | 9,060 |  | $ | 7,177
|Impaired loans with no specific reserve                  |  |                | 4,197  |      |   | 5,517 |  |   | 1,562
|Impaired loans with a specific reserve                   |  |                | 5,666  |      |   | 3,543 |  |   | 5,615
|Specific reserve for impaired loans                      |  |                | 1,725  |      |   | 2,290 |  |   | 1,900
|Average investment in impaired loans during the year     |  |                | 10,130 |      |   | 8,365 |  |   | 7,415
|Cash-basis interest income recognized during the year    |  |                | 2      |      |   | 27    |  |   | 90   
|Accrual-basis interest income recognized during the year |  |                | 14     |      |   | 56    |  |   | 86   



Residential mortgage
loans serviced for others, which are not reflected in the consolidated balance sheets, totaled approximately $2.314 billion and $1.837 billion at December 31, 2003 and 2002, respectively. No recourse provisions exist in connection with such
servicing.



58



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table is a summary of activity for mortgage servicing rights purchased and originated
for the three years ended December 31, 2003:



|                                      |  |                |        |   |            |   |        |       |  |   |         |  
|------------------------------------- |  | -------------- | ------ | - | ---------- | - | ------ | ----- |  | - | ------- | -
|                                      |  | Purchased      |        |   | Originated |   |        | Total | 
|                                      |  | (in thousands) |       
|Balance at December 31, 2000          |  | $              | 3,626  |   |            | $ | 10,543 |       |  | $ | 14,169  |  
|Additions                             |  |                |       |   |            |   | 4,080  |       |  |   | 4,080   |  
|Amortization                          |  |                | (575   | ) |            |   | (1,654 | )     |  |   | (2,229  | )
|                                      |  |                |        |   |            |   |        |       |  |   |         |  
|Balance at December 31, 2001          |  |                | 3,051  |   |            |   | 12,969 |       |  |   | 16,020  |  
|Additions                             |  |                |       |   |            |   | 4,440  |       |  |   | 4,440   |  
|Amortization                          |  |                | (728   | ) |            |   | (2,777 | )     |  |   | (3,505  | )
|Provision for impairment              |  |                | (1,341 | ) |            |   | (7,123 | )     |  |   | (8,464  | )
|                                      |  |                |        |   |            |   |        |       |  |   |         |  
|Balance at December 31, 2002          |  |                | 982    |   |            |   | 7,509  |       |  |   | 8,491   |  
|MSRs obtained in Granite acquisition |  |                |       |   |            |   | 1,480  |       |  |   | 1,480   |  
|Additions                             |  |                |       |   |            |   | 7,839  |       |  |   | 7,839   |  
|Amortization                          |  |                | (1,279 | ) |            |   | (9,998 | )     |  |   | (11,277 | )
|Provision for impairment              |  |                |       |   |            |   |       |       |  |   |        |  
|Recovery of impairment                |  |                | 921    |   |            |   | 4,811  |       |  |   | 5,732   |  
|                                      |  |                |        |   |            |   |        |       |  |   |         |  
|Balance at December 31, 2003          |  | $              | 624    |   |            | $ | 11,641 |       |  | $ | 12,265  |  
|                                      |  |                |        |   |            |   |        |       |  |   |         |  



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, 2003 include discount rate (9%), weighted average prepayment speed (348 PSA/20.9 CPR), weighted average
servicing fee (25.90 basis points) and net cost to service loans ($18/loan).



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, 2003 and 2002 the impairment valuation allowance was $2,732,000 and $8,464,000 respectively.



Note 6 PREMISES AND EQUIPMENT



Premises and equipment at December 31, 2003 and 2002 are summarized as
follows:



|                                          |  |                |         |   |      |   |         |                               |  |            
|----------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ----------------------------- |  | -----------
|                                          |  | 2003           |         |   | 2002 |   |         | EstimatedOriginalUseful Lives
|                                          |  | (in thousands)
|Land                                      |  | $              | 11,667  |   |      | $ | 8,664   |                               |  |           
|Buildings and improvements                |  |                | 55,565  |   |      |   | 32,104  |                               |  | 25-50 years
|Leasehold improvements                    |  |                | 12,762  |   |      |   | 21,384  |                               |  | 2-50 years 
|Furniture and equipment                   |  |                | 49,783  |   |      |   | 37,898  |                               |  | 3-15 years 
|Construction in progress                  |  |                | 9,381   |   |      |   | 1,506   |                               |  |           
|                                          |  |                |         |   |      |   |         |                               |  |            
|Premises and equipment, gross             |  |                | 139,158 |   |      |   | 101,556 |                               |  |            
|Accumulated depreciation and amortization |  |                | (63,979 | ) |      |   | (44,482 | )                             |  |            
|                                          |  |                |         |   |      |   |         |                               |  |            
|Premises and equipment, net               |  | $              | 75,179  |   |      | $ | 57,074  |                               |  |            
|                                          |  |                |         |   |      |   |         |                               |  |            



59



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Total depreciation expense amounted to approximately $8,362,000, $7,428,000 and $6,130,000 in 2003,
2002 and 2001.



The Company is obligated under various
noncancelable operating leases for premises and equipment expiring in various years through the year 2021. Total lease expense, net of income from subleases, amounted to approximately $4,480,000, $4,056,000 and $3,646,000 in 2003, 2002, and 2001,
respectively.



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, 2003 are as follows:



|                             |  |                  |       
|---------------------------- |  | ---------------- | ------
|Year                         |  | LeaseObligations
|                             |  | (in thousands)  
|2004                         |  | $                | 4,765 
|2005                         |  |                  | 4,258 
|2006                         |  |                  | 3,405 
|2007                         |  |                  | 2,697 
|2008                         |  |                  | 1,439 
|Thereafter                   |  |                  | 3,117 
|                             |  |                  |       
|Total minimum lease payments |  | $                | 19,681
|                             |  |                  |       



Note 7 BORROWINGS



Borrowings at December 31, 2003 and 2002 consisted of the
following:



|                                                                         |  |                |         |      |   |        
|------------------------------------------------------------------------ |  | -------------- | ------- | ---- | - | -------
|                                                                         |  | 2003           |         | 2002
|                                                                         |  | (in thousands)
|Federal funds purchased, rate at 12/31/03 of 0.94% and 12/31/02 of 1.16% |  | $              | 4,652   |      | $ | 7,254  
|Securities sold under agreements to repurchase:                          |  |                |         |      |   |        
|Customer Repurchase agreements                                           |  |                | 78,980  |      |   |       
|Due through June 10, 2003, weighted average rate of 2.48%                |  |                |        |      |   | 20,243 
|Due through December 12, 2003, weighted average rate of 3.05%            |  |                |        |      |   | 23,995 
|U.S. Treasury borrowings, 0.99% in 2002, due on demand                   |  |                |        |      |   | 875    
|Note Payable, 4.12% in 2003 and 4.67% in 2002, due January 1, 2015       |  |                | 261     |      |   | 251    
|FHLB Advances:                                                           |  |                |         |      |   |        
|Maturing February 27, 2003 @ 5.77%                                       |  |                |        |      |   | 11,925 
|Maturing December 8, 2003 @ 3.06%                                        |  |                |        |      |   | 27,000 
|Maturing June 07, 2004 @ 3.45%                                           |  |                |        |      |   | 40,000 
|Maturing June 06, 2005 @ 4.14%                                           |  |                |        |      |   | 20,000 
|Maturing December 27, 2010 @ 4.80%,                                      |  |                | 20,000  |      |   | 20,000 
|Maturing February 7, 2011 @ 4.58%                                        |  |                | 5,208   |      |   |       
|Maturing February 7, 2011 @ 4.82%                                        |  |                | 5,282   |      |   |       
|Maturing March 28, 2011 @ 3.99%                                          |  |                | 10,036  |      |   |       
|Maturing April 19, 2011 @ 3.50%                                          |  |                | 1,507   |      |   | 1,551  
|Maturing May 9, 2011 @ 4.47%                                             |  |                | 5,165   |      |   |        
|Maturing August 1, 2011 @ 5.00%                                          |  |                | 560     |      |   | 560    
|Maturing August 12, 2011 @ 4.55%                                         |  |                | 10,373  |      |   |       
|Maturing January 17, 2012 @ 3.95%                                        |  |                | 19,910  |      |   |       
|Maturing December 29, 2023 @ 0.13%                                       |  |                | 500     |      |   |       
|                                                                         |  |                |         |      |   |        
|Total Borrowings                                                         |  | $              | 162,434 |      | $ | 173,654
|                                                                         |  |                |         |      |   |        



60



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Short-term borrowings, securities sold under agreements to repurchase and U.S. treasury borrowings
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 $89,727,000 and $89,038,000 respectively, at December 31, 2003, and
$47,460,000 and $48,573,000, respectively, at December 31, 2002. The borrowings from the Federal Home Loan Bank of Boston are secured by residential mortgage loans held in the Companys loan portfolio. Federal funds purchased and the note
payable are unsecured.



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



|                                            |  |                |         |   |      |   |        |      |  |   |        |  
|------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                            |  | 2003           |         |   | 2002 |   |        | 2001 | 
|                                            |  | (in thousands) |        
|Average balance outstanding during the year |  | $              | 97,508  |   |      | $ | 29,947 |      |  | $ | 10,000 |  
|Average interest rate during the year       |  |                | 1.42    | % |      |   | 3.95   | %    |  |   | 9.20   | %
|Maximum amount outstanding at any month-end |  | $              | 123,131 |   |      | $ | 54,238 |      |  | $ | 10,000 |  





The following information relates to U.S. Treasury borrowings:



|                                            |  |                |      |   |      |   |      |      |  |   |        |  
|------------------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                            |  | 2003           |      |   | 2002 |   |      | 2001 | 
|                                            |  | (in thousands) |     
|Average balance outstanding during the year |  | $              | 435  |   |      | $ | 555  |      |  | $ | 4,672  |  
|Average interest rate during the year.      |  |                | 0.93 | % |      |   | 1.40 | %    |  |   | 4.81   | %
|Maximum amount outstanding at any month-end |  | $              | 875  |   |      | $ | 915  |      |  | $ | 20,664 |  



The following
information relates to FHLB borrowings:



|                                            |  |                |         |   |      |   |         |      |  |   |        |  
|------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                            |  | 2003           |         |   | 2002 |   |         | 2001 | 
|                                            |  | (in thousands) |        
|Average balance outstanding during the year |  | $              | 177,494 |   |      | $ | 83,870  |      |  | $ | 37,468 |  
|Average interest rate during the year       |  |                | 3.81    | % |      |   | 4.21    | %    |  |   | 5.26   | %
|Maximum amount outstanding at any month-end |  | $              | 272,644 |   |      | $ | 121,057 |      |  | $ | 40,063 |  

|
|



On May
21, 2002, a wholly-owned subsidiary of the Company, Chittenden Capital Trust I, issued $125 million of 8% trust preferred securities (Securities) 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 GB
acquisition. The Securities 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 Chittenden Capital Trust I.



Concurrent with the issuance
of these securities, the Company entered into interest rate swap agreements with two counterparties, in which the Company will receive 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 following information relates to Trust Preferred Securities borrowings:



|                                                                             |  |                |         |   |      |   |         |      |  |  
|---------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | -
|                                                                             |  | 2003           |         |   | 2002 |   |         | 2001
|                                                                             |  | (in thousands)
|Average balance outstanding during the year                                  |  | $              | 125,000 |   |      | $ | 77,055  |      |  | 
|Average effective interest rate during the year (net of interest rate swaps) |  |                | 2.48    | % |      |   | 3.11    | %    |  | 
|Maximum amount outstanding at any month-end                                  |  | $              | 125,000 |   |      | $ | 125,000 |      |  | 



61



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 8 INCOME TAXES



Income tax expense consists of the following:



|                   |  |                |        |   |      |   |        |      |  |   |        |  
|------------------ |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                   |  | 2003           |        |   | 2002 |   |        | 2001 | 
|                   |  | (in thousands) |       
|Current payable    |  |                |        |   |      |   |        |      |  |   |        |  
|Federal            |  | $              | 41,260 |   |      | $ | 40,369 |      |  | $ | 20,600 |  
|State              |  |                | 6,874  |   |      |   | 3,776  |      |  |   | 3,328  |  
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|                   |  |                | 48,134 |   |      |   | 44,145 |      |  |   | 23,928 |  
|Deferred (prepaid) |  |                |        |   |      |   |        |      |  |   |        |  
|Federal            |  |                | (5,471 | ) |      |   | (9,811 | )    |  |   | 7,851  |  
|State              |  |                | (914   | ) |      |   | (179   | )    |  |   | (43    | )
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|                   |  |                | (6,385 | ) |      |   | (9,990 | )    |  |   | 7,808  |  
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|Income tax expense |  | $              | 41,749 |   |      | $ | 34,155 |      |  | $ | 31,736 |  
|                   |  |                |        |   |      |   |        |      |  |   |        |  



Current income taxes
receivable, included in other assets, were $2,298,563 and $238,786 at December 31, 2003 and 2002, respectively. The State of Vermont assesses a franchise tax for banks in lieu of a bank income tax. The franchise tax, assessed based on deposits,
amounted to approximately $2,757,000, $2,694,000, and $2,592,000 in 2003, 2002, and 2001, respectively. These amounts are included in income tax expense in the accompanying consolidated statements of income. The Company is also taxed on income in
the other states in which it operates.



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



|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | 2003           |        |   | 2002 |   |        | 2001 | 
|                                              |  | (in thousands) |       
|Computed tax at statutory Federal rate of 35% |  | $              | 40,792 |   |      | $ | 34,230 |      |  | $ | 31,583 |  
|Increase (decrease) in taxes from:            |  |                |        |   |      |   |        |      |  |   |        |  
|Amortization of intangible assets             |  |                | 98     |   |      |   | 98     |      |  |   | 709    |  
|Tax-exempt interest, net                      |  |                | (825   | ) |      |   | (970   | )    |  |   | (1,275 | )
|Dividends received deduction                  |  |                | (25    | ) |      |   | (86    | )    |  |   | (208   | )
|State taxes, net of Federal tax benefit       |  |                | 3,874  |   |      |   | 2,338  |      |  |   | 2,135  |  
|Tax credits                                   |  |                | (1,562 | ) |      |   | (1,555 | )    |  |   | (1,282 | )
|Other, net                                    |  |                | (603   | ) |      |   | 100    |      |  |   | 74     |  
|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|Total                                         |  | $              | 41,749 |   |      | $ | 34,155 |      |  | $ | 31,736 |  
|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|Effective income tax rate                     |  |                | 35.8   | % |      |   | 34.9   | %    |  |   | 35.2   | %



62



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The components of the net deferred tax liability at December 31, 2003 and 2002 are as follows:



|                                                        |  |                |         |   |      |   |         |  
|------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                        |  | 2003           |         |   | 2002 |  
|                                                        |  | (in thousands) |        
|Allowance for loan losses                               |  | $              | 22,829  |   |      | $ | 17,932  |  
|Deferred compensation and pension                       |  |                | 6,653   |   |      |   | 5,305   |  
|Depreciation                                            |  |                | (392    | ) |      |   | (2,461  | )
|Accrued liabilities                                     |  |                | 565     |   |      |   | 3,192   |  
|Unrealized (gain) loss on securities available for sale |  |                | (10,298 | ) |      |   | (15,848 | )
|Basis differences, purchase accounting                  |  |                | (4,268  | ) |      |   | (374    | )
|Core deposit intangible                                 |  |                | (6,392  | ) |      |   | (2,617  | )
|Lease financing                                         |  |                | (6,408  | ) |      |   | (15,393 | )
|Mortgage servicing                                      |  |                | (3,434  | ) |      |   | (2,620  | )
|Other                                                   |  |                | (3,328  | ) |      |   | (3,528  | )
|                                                        |  |                |         |   |      |   |         |  
|                                                        |  | $              | (4,473  | ) |      | $ | (16,412 | )
|                                                        |  |                |         |   |      |   |         |  



Note 9
STOCKHOLDERS EQUITY



Treasury Stock



The Company periodically repurchased its own stock under
a share repurchase program authorized by the Board of Directors on January 19, 2000, which expired on December 31, 2003. The Company repurchased no shares in 2003, 331,800 shares at a cost of $9.9 million during 2002, and 666,000 shares at a cost of
$16.5 million in 2001. Over the four-year period the program was outstanding, the Company repurchased 4,122,800 shares at a cost of $92.9 million.



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 of $28,301,000, $25,379,000 and $24,661,000 during 2003, 2002, and
2001, respectively. These amounts represented $0.80, $0.79, and $0.76 per share.



Surplus



The payment of dividends by BWM and
FBT to the Company are subject to Massachusetts banking law restrictions, which requires that the capital stock and surplus accounts of the banks must amount, in the aggregate, to at least 10% of the banks deposit liability or there shall be
transferred from net profits to the surplus account: (1) the amount required to increase the surplus account so that it, together with the capital stock, will amount to at least 10% of deposit liability, or (2) the amount required to increase the
surplus account so that it shall amount to 50% of the common stock, and thereafter, the amount, not exceeding 50% of net profits, required to increase the surplus account so that it shall amount to 100% of capital stock. Because one or both of these
tests were met at the individual banks, no transfers were made during the year.



63



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Earnings Per Share



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



|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------- |  | ------------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                 |  | 2003                                       |        |   | 2002 |   |        | 2001 | 
|                                                                 |  | (in thousands except per shareinformation) |       
|Net income                                                       |  | $                                          | 74,799 |   |      | $ | 63,645 |      |  | $ | 58,501 |  
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|Weighted average common shares outstanding                       |  |                                            | 35,776 |   |      |   | 32,106 |      |  |   | 32,164 |  
|Dilutive effect of common stock equivalents                      |  |                                            | 344    |   |      |   | 389    |      |  |   | 383    |  
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|Weighted average common and common equivalent shares outstanding |  |                                            | 36,120 |   |      |   | 32,495 |      |  |   | 32,547 |  
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|Basic earnings per share                                         |  | $                                          | 2.09   |   |      | $ | 1.98   |      |  | $ | 1.82   |  
|Dilutive effect of common stock equivalents                      |  |                                            | (0.02  | ) |      |   | (0.02  | )    |  |   | (0.02  | )
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|Diluted earnings per share                                       |  | $                                          | 2.07   |   |      | $ | 1.96   |      |  | $ | 1.80   |  
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  



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:



|                                |  |      |         |      |   |         |  |   |        
|------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                |  | 2003 |         | 2002 |   | 2001   
|Anti-dilutive options           |  |      | 614,663 |      |   | 695,451 |  |   | 569,712
|Weighted average exercise price |  | $    | 31.13   |      | $ | 30.50   |  | $ | 29.37  





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,:



|                                                                                          |  |                |         |   |      |   |        |      |  |   |      
|----------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------ | ---- |  | - | -----
|                                                                                          |  | 2003           |         |   | 2002 |   |        | 2001
|                                                                                          |  | (in thousands)
|Unrealized gains (losses) on securities available for sale for period, net of tax         |  | $              | (1,681  | ) |      | $ | 26,818 |      |  | $ | 8,410
|Reclassification adjustment for realized (gains) losses arising during period, net of tax |  |                | (11,297 | ) |      |   | (6,865 | )    |  |   | 47   
|Accrued minimum pension liability, net of tax                                             |  |                | 4,284   |   |      |   | (4,284 | )    |  |   |     
|                                                                                          |  |                |         |   |      |   |        |      |  |   |      
|Total other comprehensive income                                                          |  | $              | (8,694  | ) |      | $ | 15,669 |      |  | $ | 8,457
|                                                                                          |  |                |         |   |      |   |        |      |  |   |      



Note 10 STOCK
PLANS



The Company has the following three
stock option plans: 2001 Employee Stock Option plan, 1993 Stock Incentive Plan, and the Directors Omnibus Long-term Incentive Plan. The Company accounts for these plans in accordance with APB Opinion No. 25, under which no compensation cost
for stock options has been recognized, since all options qualify for fixed plan accounting and all options are granted at fair market value, or higher in the case of stepped options.



Under the plans, certain key employees and directors are eligible to receive various types of stock incentives, including
options to purchase a specified number of shares of stock at a specified price (including incentive stock options and non-qualified stock options); restricted stock which vests after a specified period of



64



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



time; and non-employee directors stock options to purchase stock at predetermined fixed prices. There were a total of 4,550,659 and 3,550,659 shares at
December 31, 2003 and 2002, respectively, available to be issued under the plans and 3,495,894 and 2,720,459 had been issued.



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



|                  |  |                                           |       |         |   |           |  
|----------------- |  | ----------------------------------------- | ----- | ------- | - | --------- | -
|                  |  | Weighted Average Exercise Price Per Share |       | Options |  
|December 31, 2000 |  | $                                         | 21.16 |         |   | 1,186,892 |  
|Granted           |  |                                           | 25.21 |         |   | 599,988   |  
|Exercised         |  |                                           | 15.62 |         |   | (106,788  | )
|Expired           |  |                                           | 28.03 |         |   | (39,677   | )
|                  |  |                                           |       |         |   |           |  
|December 31, 2001 |  |                                           | 22.82 |         |   | 1,640,415 |  
|Granted           |  |                                           | 29.08 |         |   | 525,500   |  
|Exercised         |  |                                           | 16.91 |         |   | (187,540  | )
|Expired           |  |                                           | 30.68 |         |   | (19,064   | )
|                  |  |                                           |       |         |   |           |  
|December 31, 2002 |  |                                           | 24.98 |         |   | 1,959,311 |  
|Granted           |  |                                           | 27.18 |         |   | 811,000   |  
|Exercised         |  |                                           | 19.97 |         |   | (294,571  | )
|Expired           |  |                                           |      |         |   |          |  
|                  |  |                                           |       |         |   |           |  
|December 31, 2003 |  | $                                         | 26.36 |         | $ | 2,475,740 |  
|                  |  |                                           |       |         |   |           |  





OPTIONS OUTSTANDING AND EXERCISABLE



December 31, 2003



|                          |  |                     |  |                                           |  |                                |  |                    |  |                               
|------------------------- |  | ------------------- |  | ----------------------------------------- |  | ------------------------------ |  | ------------------ |  | ------------------------------
|                          |  | Options Outstanding |  | Options Exercisable                      
|Range of Exercise Prices: |  | OptionsOutstanding  |  | WeightedAverageRemaining Contractual Life |  | WeightedAverage Exercise Price |  | OptionsOutstanding |  | WeightedAverage Exercise Price
|$  6.85 - $23.90          |  | 530,352             |  | 4.35                                      |  | $19.82                         |  | 530,352            |  | $19.82                        
|$24.04 - $25.19           |  | 419,967             |  | 8.36                                      |  | $24.92                         |  | 419,967            |  | $24.92                        
|$25.30 - $27.71           |  | 450,008             |  | 7.34                                      |  | $26.62                         |  | 447,008            |  | $26.62                        
|$27.80 - $28.67           |  | 459,500             |  | 7.80                                      |  | $28.57                         |  | 459,500            |  | $25.57                        
|$28.70 - $31.69           |  | 476,779             |  | 8.99                                      |  | $29.64                         |  | 476,779            |  | $29.64                        
|$31.98 - $45.02           |  | 139,134             |  | 5.03                                      |  | $36.24                         |  | 139,134            |  | $36.24                        
|                          |  |                     |  |                                           |  |                                |  |                    |  |                               
|$  6.85 - $45.02          |  | 2,475,740           |  | 7.15                                      |  | $26.36                         |  | 2,472,740          |  | $26.36                        
|                          |  |                     |  |                                           |  |                                |  |                    |  |                               



|Note | 11 EMPLOYEE BENEFITS
|---- | --------------------



Pension Plan



The Company sponsors two qualified defined benefit pension plans that together cover substantially all of its employees. The Chittenden Pension Account
Plan (Chittenden Plan) covers substantially all employees other than employees of Granite Bank and GSBI Insurance Group (GSBI) who meet minimum age and service requirements and provides benefits based on years of service and
compensation earned during those years of service. The Retirement Plan of Granite State Bankshares, Inc. in RSI Retirement Trust (Granite Plan) covers



65



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



substantially all employees of Granite Bank and GSBI who meet minimum age and service requirements and provides benefits based on years of service and final
average compensation. Granite Bank and GSBI were acquired by the Company effective February 28, 2003.



Effective December 31, 2003, benefits earned under the Granite Plan were frozen. The Company expects to merge the Granite Plan into the Chittenden Plan in
early 2004 once a favorable determination letter is received from the IRS relative to the Granite Plan. Effective January 1, 2004, eligible employees of Granite Bank and GSBI will begin to earn benefits under the Chittenden Plan.



The changes in the benefit obligation for the years ended December 31, 2003
and 2002 are as follows:



|                                                  |  |                |        |   |      |   |        |  
|------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                  |  | 2003           |        |   | 2002 |  
|                                                  |  | (in thousands) |       
|Projected benefit obligation at beginning of year |  | $              | 45,847 |   |      | $ | 40,126 |  
|Service cost                                      |  |                | 2,817  |   |      |   | 1,926  |  
|Interest cost                                     |  |                | 3,376  |   |      |   | 2,903  |  
|Plan amendments                                   |  |                | (800   | ) |      |   | 294    |  
|Actuarial loss                                    |  |                | 3,392  |   |      |   | 2,218  |  
|Disbursements                                     |  |                | (1,675 | ) |      |   | (1,620 | )
|Granite Acquisition                               |  |                | 6,956  |   |      |   |       |  
|                                                  |  |                |        |   |      |   |        |  
|Projected benefit obligation at end of year       |  | $              | 59,913 |   |      | $ | 45,847 |  
|                                                  |  |                |        |   |      |   |        |  



The accumulated
benefit obligation for the U.S. pension plans at the end of 2003 and 2002 was $52,676,050 and $40,359,492, respectively.



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



|                              |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | -
|                              |  | 2003 |   |  | 2002 |  
|Discount rate                 |  | 6.00 | % |  | 6.50 | %
|Rate of compensation increase |  | 4.50 | % |  | 4.50 | %



The changes in the
plan assets for the years ended December 31, 2003 and 2002 are as follows:



|                                          |  |                |        |   |      |   |        |  
|----------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                          |  | 2003           |        |   | 2002 |  
|                                          |  | (in thousands) |       
|Fair value of assets at beginning of year |  | $              | 34,287 |   |      | $ | 38,138 |  
|Actual return on plan assets              |  |                | 6,237  |   |      |   | (3,855 | )
|Company contributions                     |  |                | 13,277 |   |      |   | 1,624  |  
|Disbursements                             |  |                | (1,675 | ) |      |   | (1,620 | )
|Granite Acquisition                       |  |                | 5,020  |   |      |   |       |  
|                                          |  |                |        |   |      |   |        |  
|Fair value of assets at end of year       |  | $              | 57,146 |   |      | $ | 34,287 |  
|                                          |  |                |        |   |      |   |        |  



The asset allocation
for the Companys pension plans at December 31, 2002 and 2003, and the target asset allocation for 2004, by asset category are as follows:



|                  |  |      |   |  |      |   |  |                              |  
|----------------- |  | ---- | - |  | ---- | - |  | ---------------------------- | -
|Asset Category    |  | 2002 |   |  | 2003 |   |  | Target Asset Allocation 2004 |  
|Equity securities |  | 60   | % |  | 52   | % |  | 40-65                        | %
|Debt securities   |  | 35   | % |  | 25   | % |  | 30-55                        | %
|Cash              |  | 5    | % |  | 23   | % |  | 0-20                         | %
|                  |  |      |   |  |      |   |  |                              |  
|Total             |  | 100  | % |  | 100  | % |  |                              |  



66



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Chittenden uses a measurement date of September 30 for its pension plans. The cash positions shown in
the actual allocation are due to significant contributions made just prior to the measurement date, which at the time had not yet been allocated into other asset categories.



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. Current guidelines specify
generally that 30-55% of plan assets be invested in corporate bonds and other fixed income securities and 40-65% of plan assets be invested in equity securities.



The funded status of the plans, reconciled to the amount on the statement of financial position, follows:



|                                                                        |  |                |        |   |      |   |         |  
|----------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | -
|                                                                        |  | 2003           |        |   | 2002 |  
|                                                                        |  | (in thousands) |       
|Funded status                                                           |  | $              | (2,766 | ) |      | $ | (11,559 | )
|Prior service cost not yet recognized in net periodic pension cost      |  |                | (3,396 | ) |      |   | (3,186  | )
|Unrecognized net transition asset amortized over participants service  |  |                | (111   | ) |      |   | (240    | )
|Unrecognized net loss from actual experience versus assumptions         |  |                | 16,255 |   |      |   | 15,556  |  
|                                                                        |  |                |        |   |      |   |         |  
|Accrued pension cost included in accrued expenses and other liabilities |  | $              | 9,982  |   |      | $ | 571     |  
|                                                                        |  |                |        |   |      |   |         |  



|                                       |  |                |        |   |      |   |        |  
|-------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                       |  | 2003           |        |   | 2002 |  
|                                       |  | (in thousands) |       
|Prepaid benefit cost                   |  | $              | 12,159 |   |      | $ | 571    |  
|Accrued benefit cost                   |  |                | (2,177 | ) |      |   | (6,642 | )
|Accumulated other comprehensive income |  |                |       |   |      |   | 6,642  |  
|                                       |  |                |        |   |      |   |        |  
|Net amount recognized                  |  | $              | 9,982  |   |      | $ | 571    |  
|                                       |  |                |        |   |      |   |        |  



At the end of 2003 and
2002 the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and for pension plans with an accumulated benefit obligation
in excess of plan assets were as follows:



|                               |  |                                                                    |       |      |   |       
|------------------------------ |  | ------------------------------------------------------------------ | ----- | ---- | - | ------
|                               |  | Accumulated BenefitObligation exceeds theFair Value of Plan Assets
|                               |  | 2003                                                               |       | 2002
|Projected benefit obligation   |  | $                                                                  | 7,000 |      | $ | 45,847
|Accumulated benefit obligation |  |                                                                    | 7,000 |      |   | 40,359
|Fair value of plan assets      |  |                                                                    | 5,731 |      |   | 34,287



Amounts disclosed in
the above table reflect the Chittenden Plan in 2002 and the Granite Plan in 2003. The Chittenden plan is not reflected in the 2003 amounts due to the contribution made during the year which led to the present value of the plan assets to exceed the
accumulated benefit obligation at September 30, 2003.



67



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Employer contributions for the years ended December 31, 2002 and 2003, and expected contributions for
2004 are as follows:



|                      |  |      |       |      |   |                |  |   |    
|--------------------- |  | ---- | ----- | ---- | - | -------------- |  | - | ---
|                      |  | 2002 |       | 2003 |   | Projected 2004
|Employer contribution |  | $    | 1,624 |      | $ | 13,277         |  | $ |   
|Benefit disbursements |  |      | 1,620 |      |   | 1,675          |  |   | N/A



No minimum required
contribution is expected for 2004. Due to recent contributions made in excess of the minimum required amounts, the Company does not anticipate a required contribution during 2004. However, it is possible that the Company, if appropriate to its tax
and cash position, will make a voluntary contribution during 2004 to respond to changes in pension funding legislation and/or to further improve the plans funded status.



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



|                               |  |                |        |   |      |   |        |      |  |   |        |  
|------------------------------ |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                               |  | December 31,   |       
|                               |  | 2003           |        |   | 2002 |   |        | 2001 | 
|                               |  | (in thousands) |       
|Service cost                   |  | $              | 2,817  |   |      | $ | 1,926  |      |  | $ | 1,679  |  
|Interest cost                  |  |                | 3,376  |   |      |   | 2,903  |      |  |   | 2,905  |  
|Expected return on plan assets |  |                | (3,544 | ) |      |   | (3,970 | )    |  |   | (4,141 | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Net amortization:              |  |                |        |   |      |   |        |      |  |   |        |  
|Prior service cost             |  |                | (590   | ) |      |   | (618   | )    |  |   | (622   | )
|Net actuarial loss/(gain)      |  |                |       |   |      |   |       |      |  |   | (145   | )
|Transition amount              |  |                | (129   | ) |      |   | (129   | )    |  |   | (128   | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Total amortization             |  |                | (719   | ) |      |   | (747   | )    |  |   | (895   | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Net pension (income) expense   |  | $              | 1,930  |   |      | $ | 112    |      |  | $ | (452   | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  



Weighted-average
assumptions used to determine net cost:



|                                         |  |      |   |  |      |  
|---------------------------------------- |  | ---- | - |  | ---- | -
|                                         |  | 2003 |   |  | 2002 |  
|Discount rate                            |  | 6.50 | % |  | 6.50 | %
|Expected long term return on plan assets |  | 7.25 | % |  | 7.25 | %
|Rate of compensation increase            |  | 4.50 | % |  | 4.50 | %



Based on
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.



CTC has supplemental pension arrangements with certain retired employees. The
liability, included in accrued expenses and other liabilities, related to such arrangements was $1,677,000 and $1,889,000 at December 31, 2003 and 2002, respectively.



68



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 SERPs, included in accrued expenses and other liabilities was
$3,771,000 and $3,157,000 at December 31, 2003 and 2002 respectively. Expenses related to this plan were $614,000, $577,000 and $483,000 in 2003, 2002 and 2001, 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 10% 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.



The Company made an incentive savings contribution in an amount equal to 35%
of each employees basic contribution in 2003, 2002 and 2001, of $1,184,000, $1,202,000, and $1,005,000, respectively, which was charged to benefit expense. The Company may also make an additional matching contribution 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. Benefit expense related to the additional matching contribution totaled $761,000, $643,000, and $501,000, in
2003, 2002, and 2001, respectively. In 2003, 2002, and 2001, 132,796, 94,891, and 60,477 shares, respectively, of the Companys common stock were purchased through the incentive savings and profit sharing plan.



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 $29,000, $29,000 and $33,000 in 2003, 2002 and 2001, 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 profitability and individual performance, with incentive awards ranging from zero to 100% of
annual compensation. Expenses for this plan totaled $2,169,000, $2,155,000 and $1,144,000 in 2003, 2002, and 2001, 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 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 $879,000, $713,000, and $787,000 for 2003, 2002, and 2001, respectively. Based on these elections, shares which could be issued under the plan, totaled 335,400 at December
31, 2003.



69



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 12 FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK



In the normal course of business, to meet the financing needs of their customers 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 to the financial instrument, 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 loans. 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, property, plant and equipment, and income-producing commercial properties.



Commitments to originate loans, unused lines of credit, and
unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. 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.



Financial instruments whose contractual amounts represent off-balance sheet risk at December 31, 2003 and 2002 are as follows:



|                                                                          |  |                |         |      |   |        
|------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                                          |  | 2003           |         | 2002
|                                                                          |  | (in thousands)
|Loans and Other Commitments                                               |  |                |         |      |   |        
|Commitments to originate loans                                            |  | $              | 131,610 |      | $ | 181,344
|Unused home equity lines of credit                                        |  |                | 292,823 |      |   | 220,289
|Unused portions of credit card lines                                      |  |                | 37,554  |      |   | 32,917 
|Unadvanced portions of construction loans                                 |  |                | 192,826 |      |   | 153,160
|Equity investment commitments to limited partnerships                     |  |                | 8,769   |      |   | 9,314  
|                                                                          |  |               
|Standby Letters of Credit                                                 |  |                |         |      |   |        
|Notional amount of standby letters of credit fully collateralized by cash |  |                | 65,051  |      |   | 45,909 
|Notional amount of other standby letters of credit                        |  |                | 40,812  |      |   | 47,599 
|Liability associated with letters of credit recorded on balance sheet     |  |                | 290     |      |   |       



Note 13 COMMITMENTS
AND CONTINGENCIES



As
nonmembers of the Federal Reserve System, the Banks are required 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 $10,592,000 and $11,647,000 at December 31, 2003 and 2002, respectively.



70



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 2.99 times annual salary for the Chief Executive Officer and from 1 to 2 times annual salary for the individual
participating members of senior management.



Various legal
claims against the Company arising in the normal course of business were outstanding at December 31, 2003. 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.



Note 14 OTHER NONINTEREST EXPENSE



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



|                                 |  |                |        |   |      |   |        |      |  |   |       
|-------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------
|                                 |  | 2003           |        |   | 2002 |   |        | 2001
|                                 |  | (in thousands)
|Legal and professional           |  |                | 1,569  |   |      |   | 854    |      |  |   | 1,320 
|Marketing                        |  |                | 3,282  |   |      |   | 2,942  |      |  |   | 2,746 
|Software and supplies            |  |                | 7,288  |   |      |   | 4,924  |      |  |   | 4,884 
|Net OREO and collection expenses |  |                | (129   | ) |      |   | (293   | )    |  |   | 86    
|Telephone                        |  |                | 3,210  |   |      |   | 3,071  |      |  |   | 2,799 
|Postage                          |  |                | 3,009  |   |      |   | 2,561  |      |  |   | 2,338 
|Other                            |  |                | 18,776 |   |      |   | 17,131 |      |  |   | 14,599
|                                 |  |                |        |   |      |   |        |      |  |   |       
|                                 |  | $              | 37,005 |   |      | $ | 31,190 |      |  | $ | 28,772
|                                 |  |                |        |   |      |   |        |      |  |   |       



Note 15 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, is based on quoted market prices. The carrying value of FHLB
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: commercial, municipal, residential real estate, commercial real estate, construction, home equity, lease financing and other consumer loans.



The fair value of performing commercial and real estate 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 and real estate loans is estimated using
historical net charge-off experience applied to the nonperforming balances. For performing residential mortgage 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



71



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



amortized cost since most of these loans mature within six months. The fair value of home equity, lease financing and other 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.



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 carrying amounts for short-term borrowings approximate fair value because they mature or are callable in ten days or
less and do not present unanticipated valuation risk. 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.



72



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                                   |  |                |           |            |   |                |  |            |           |  |   |          
|------------------------------------------------------------------ |  | -------------- | --------- | ---------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                                                                   |  | December 31,  
|                                                                   |  | 2003           |           | 2002      
|                                                                   |  | CarryingAmount |           | Fair Value |   | CarryingAmount |  | Fair Value
|                                                                   |  | (in thousands)
|Financial assets:                                                  |  |                |           |            |   |                |  |            |           |  |   |          
|Cash and cash equivalents                                          |  | $              | 174,939   |            | $ | 174,939        |  | $          | 192,142   |  | $ | 192,142  
|Securities available for sale                                      |  |                | 1,588,151 |            |   | 1,588,151      |  |            | 1,497,111 |  |   | 1,497,111
|FHLB stock                                                         |  |                | 20,753    |            |   | 20,753         |  |            | 17,030    |  |   | 17,030   
|Loans, net                                                         |  |                | 3,667,220 |            |   | 3,682,159      |  |            | 2,925,666 |  |   | 2,961,324
|Loans held for sale                                                |  |                | 25,262    |            |   | 25,262         |  |            | 94,874    |  |   | 94,874   
|Mortgage servicing rights                                          |  |                | 12,265    |            |   | 18,015         |  |            | 8,491     |  |   | 8,491    
|Financial liabilities:                                             |  |                |           |            |   |                |  |            |           |  |   |          
|Deposits:                                                          |  |                |           |            |   |                |  |            |           |  |   |          
|Demand                                                             |  |                | 898,920   |            |   | 898,920        |  |            | 684,077   |  |   | 684,077  
|Savings                                                            |  |                | 517,789   |            |   | 517,789        |  |            | 400,616   |  |   | 400,616  
|NOW                                                                |  |                | 899,018   |            |   | 899,018        |  |            | 578,272   |  |   | 578,272  
|Money markets & cash management                                    |  |                | 1,604,138 |            |   | 1,604,138      |  |            | 1,540,267 |  |   | 1,540,267
|Certificates of deposit less than $100,000 and other time deposits |  |                | 789,066   |            |   | 797,365        |  |            | 691,467   |  |   | 698,822  
|Certificates of deposit $100,000 and over                          |  |                | 260,960   |            |   | 262,454        |  |            | 231,393   |  |   | 233,023  
|Borrowings                                                         |  |                | 162,434   |            |   | 163,940        |  |            | 173,654   |  |   | 178,046  
|Commitments                                                        |  |                | 290       |            |   | 827            |  |            |          |  |   | 867      



Note 16 PARENT
COMPANY FINANCIAL STATEMENTS



Chittenden Corporation (Parent Company Only)



|                                                                         |  |                |         |      |   |        
|------------------------------------------------------------------------ |  | -------------- | ------- | ---- | - | -------
|BALANCE SHEETS                                                           |  | December 31,  
|                                                                         |  | 2003           |         | 2002
|                                                                         |  | (in thousands)
|Assets                                                                   |  |                |         |      |   |        
|Cash and cash equivalents                                                |  | $              | 34,342  |      | $ | 95,322 
|Investment in subsidiaries                                               |  |                | 682,694 |      |   | 453,171
|Other assets                                                             |  |                | 17,483  |      |   | 3,408  
|                                                                         |  |                |         |      |   |        
|Total assets                                                             |  | $              | 734,519 |      | $ | 551,901
|                                                                         |  |                |         |      |   |        
|Liabilities and stockholders equity                                     |  |                |         |      |   |        
|Liabilities:                                                             |  |                |         |      |   |        
|Accrued expenses and other liabilities                                   |  |                | 29,568  |      |   | 5,793  
|Subordinated debentures supporting mandatory redeemable trust securities |  |                | 125,000 |      |   | 127,316
|                                                                         |  |                |         |      |   |        
|Total liabilities                                                        |  |                | 154,568 |      |   | 133,109
|                                                                         |  |                |         |      |   |        
|Total stockholders equity                                               |  |                | 579,951 |      |   | 418,792
|                                                                         |  |                |         |      |   |        
|Total liabilities and stockholders equity                               |  | $              | 734,519 |      | $ | 551,901
|                                                                         |  |                |         |      |   |        



73



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|STATEMENTS OF INCOME                                                              |  | Years Ended December 31, |         
|                                                                                  |  | 2003                     |          |   | 2002 |   |         | 2001 | 
|                                                                                  |  | (in thousands)           |         
|Operating income:                                                                 |  |                          |          |  
|Dividends from bank subsidiaries                                                  |  | $                        | 78,350   |   |      | $ | 53,700  |      |  | $ | 88,900  |  
|Interest income                                                                   |  |                          | 607      |   |      |   | 597     |      |  |   | 168     |  
|Other operating income                                                            |  |                          |         |   |      |   |        |      |  |   | 7       |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Total operating income                                                            |  |                          | 78,957   |   |      |   | 54,297  |      |  |   | 89,075  |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Operating expense:                                                                |  |                          |          |   |      |   |         |      |  |   |         |  
|Interest expense                                                                  |  |                          | 2,795    |   |      |   | 2,203   |      |  |   |        |  
|Other operating expense                                                           |  |                          | 3,823    |   |      |   | 1,388   |      |  |   | 1,384   |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Total expense                                                                     |  |                          | 6,618    |   |      |   | 3,591   |      |  |   | 1,384   |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Income before income taxes and equity in undistributed earnings of subsidiaries   |  |                          | 72,339   |   |      |   | 50,706  |      |  |   | 87,691  |  
|Income tax benefit                                                                |  |                          | 2,301    |   |      |   | 1,143   |      |  |   | 381     |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Income before equity in undistributed earnings of subsidiaries                    |  |                          | 74,640   |   |      |   | 51,849  |      |  |   | 88,072  |  
|Equity in undistributed earnings of subsidiaries                                  |  |                          | 159      |   |      |   | 11,796  |      |  |   | (29,571 | )
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $                        | 74,799   |   |      | $ | 63,645  |      |  | $ | 58,501  |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|                                                                                  | 
|STATEMENTS OF CASH FLOWS                                                          |  | Years Ended December 31, |         
|                                                                                  |  | 2003                     |          |   | 2002 |   |         | 2001 | 
|                                                                                  |  | (in thousands)           |         
|Cash flows from operating activities:                                             |  |                          |          |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $                        | 74,799   |   |      | $ | 63,645  |      |  | $ | 58,501  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |         |      |  |   |         |  
|Equity in undistributed earnings of bank subsidiaries                             |  |                          | (159     | ) |      |   | (11,796 | )    |  |   | 29,571  |  
|Decrease in other assets                                                          |  |                          | 2,438    |   |      |   | 2,647   |      |  |   | 206     |  
|Increase in accrued expenses and other liabilities                                |  |                          | 7,159    |   |      |   | 8,691   |      |  |   | 622     |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  |                          | 84,237   |   |      |   | 63,187  |      |  |   | 88,900  |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                             |  |                          |          |   |      |   |         |      |  |   |         |  
|Investments in and advanced to subsidiaries                                       |  |                          | (122,998 | ) |      |   | (69,249 | )    |  |   | (47,452 | )
|Proceeds from the sale of securities                                              |  |                          |         |   |      |   |        |      |  |   | 250     |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                             |  |                          | (122,998 | ) |      |   | (69,249 | )    |  |   | (47,202 | )
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                             |  |                          |          |   |      |   |         |      |  |   |         |  
|Proceeds from subordinated debentures of trust subsidiary                         |  |                          |         |   |      |   | 120,321 |      |  |   |        |  
|Proceeds from issuance of treasury and common stock                               |  |                          | 6,082    |   |      |   | 3,233   |      |  |   | 1,531   |  
|Dividends paid on common stock                                                    |  |                          | (28,301  | ) |      |   | (25,379 | )    |  |   | (24,661 | )
|Repurchase of common stock                                                        |  |                          |         |   |      |   | (9,904  | )    |  |   | (16,473 | )
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                               |  |                          | (22,219  | ) |      |   | 88,271  |      |  |   | (39,603 | )
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                          | (60,980  | ) |      |   | 82,209  |      |  |   | 2,095   |  
|Cash and cash equivalents at beginning of year                                    |  |                          | 95,322   |   |      |   | 13,113  |      |  |   | 11,018  |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                          |  | $                        | 34,342   |   |      | $ | 95,322  |      |  | $ | 13,113  |  
|                                                                                  |  |                          |          |   |      |   |         |      |  |   |         |  



74



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 17 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, 2003, that the Company and the Banks meet all capital adequacy requirements.



As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company
and the Banks as 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 I risk-based, and
Tier I 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 CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions: |      
|                                          |  | Amount |         | Ratio |                              |   | Amount |                                                                | Ratio |      |   | Amount |         | Ratio |      
|As of December 31, 2003                   |  |        |         |       |                              |   |        |                                                                |       |      |   |        |         |       |       |  
|Total Capital (to Risk Weighted Assets):  |  |        |         |       |                              |   |        |                                                                |       |      |   |        |         |       |       |  
|Consolidated                              |  | $      | 501,137 |       | 11.32                        | % |        | 354,130                                                        |       | 8.00 | % |        | 442,662 |       | 10.00 | %
|Chittenden Trust Company                  |  |        | 233,991 |       | 10.42                        |   |        | 179,593                                                        |       | 8.00 |   |        | 222,491 |       | 10.00 |  
|Bank of Western Massachusetts             |  |        | 49,495  |       | 10.40                        |   |        | 38,070                                                         |       | 8.00 |   |        | 47,600  |       | 10.00 |  
|Flagship Bank and Trust                   |  |        | 39,781  |       | 10.73                        |   |        | 29,670                                                         |       | 8.00 |   |        | 37,087  |       | 10.00 |  
|Maine Bank & Trust                        |  |        | 29,581  |       | 10.90                        |   |        | 21,715                                                         |       | 8.00 |   |        | 27,144  |       | 10.00 |  
|Ocean National Bank                       |  |        | 52,566  |       | 10.82                        |   |        | 38,868                                                         |       | 8.00 |   |        | 48,585  |       | 10.00 |  
|Granite Bank                              |  |        | 75,257  |       | 12.49                        |   |        | 48,188                                                         |       | 8.00 |   |        | 60,234  |       | 10.00 |  
|Tier 1 Capital (to Risk Weighted Assets): |  |        |         |       |                              |   |        |                                                                |       |      |   |        |         |       |       |  
|Consolidated                              |  |        | 445,778 |       | 10.07                        |   |        | 177,065                                                        |       | 4.00 |   |        | 265,597 |       | 6.00  |  
|Chittenden Trust Company                  |  |        | 206,464 |       | 9.20                         |   |        | 88,797                                                         |       | 4.00 |   |        | 134,695 |       | 6.00  |  
|Bank of Western Massachusetts             |  |        | 43,532  |       | 9.15                         |   |        | 19,040                                                         |       | 4.00 |   |        | 28,560  |       | 6.00  |  
|Flagship Bank and Trust                   |  |        | 35,140  |       | 9.47                         |   |        | 14,835                                                         |       | 4.00 |   |        | 22,252  |       | 6.00  |  
|Maine Bank & Trust                        |  |        | 26,184  |       | 9.65                         |   |        | 10,858                                                         |       | 4.00 |   |        | 16,286  |       | 6.00  |  
|Ocean National Bank                       |  |        | 46,488  |       | 9.57                         |   |        | 19,434                                                         |       | 4.00 |   |        | 29,151  |       | 6.00  |  
|Granite Bank                              |  |        | 67,726  |       | 11.24                        |   |        | 24,094                                                         |       | 4.00 |   |        | 36,141  |       | 6.00  |  
|Tier 1 Capital (to Average Assets):       |  |        |         |       |                              |   |        |                                                                |       |      |   |        |         |       |       |  
|Consolidated                              |  |        | 445,778 |       | 7.79                         |   |        | 228,836                                                        |       | 4.00 |   |        | 286,045 |       | 5.00  |  
|Chittenden Trust Company                  |  |        | 206,464 |       | 6.91                         |   |        | 119,523                                                        |       | 4.00 |   |        | 149,404 |       | 5.00  |  
|Bank of Western Massachusetts             |  |        | 43,532  |       | 8.16                         |   |        | 21,344                                                         |       | 4.00 |   |        | 26,680  |       | 5.00  |  
|Flagship Bank and Trust                   |  |        | 35,140  |       | 7.12                         |   |        | 19,754                                                         |       | 4.00 |   |        | 24,692  |       | 5.00  |  
|Maine Bank & Trust                        |  |        | 26,184  |       | 9.62                         |   |        | 10,882                                                         |       | 4.00 |   |        | 13,602  |       | 5.00  |  
|Ocean National Bank                       |  |        | 46,488  |       | 8.30                         |   |        | 22,397                                                         |       | 4.00 |   |        | 27,996  |       | 5.00  |  
|Granite Bank                              |  |        | 67,726  |       | 7.54                         |   |        | 35,916                                                         |       | 4.00 |   |        | 44,895  |       | 5.00  |  



75



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                          |  |        |         |       |                              |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|----------------------------------------- |  | ------ | ------- | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------- | ------- |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                                          |  | Actual |         |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions: |        
|                                          |  | Amount |         | Ratio |                              |   | Amount |                                                                | Ratio   |  |      | Amount |  | Ratio |        
|As of December 31, 2002:                  |  |        |         |       |                              |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Total Capital (to Risk Weighted Assets):  |  |        |         |       |                              |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  | $      | 491,090 |       | 13.50                        | % |        | $                                                              | 291,037 |  | 8.00 | %      |  | $     | 363,796 |  | 10.00 | %
|Chittenden Trust Company                  |  |        | 241,035 |       | 11.01                        |   |        |                                                                | 175,068 |  | 8.00 |        |  |       | 218,835 |  | 10.00 |  
|Bank of Western Massachusetts             |  |        | 45,829  |       | 10.64                        |   |        |                                                                | 34,461  |  | 8.00 |        |  |       | 43,076  |  | 10.00 |  
|Flagship Bank and Trust                   |  |        | 37,723  |       | 10.97                        |   |        |                                                                | 27,500  |  | 8.00 |        |  |       | 34,375  |  | 10.00 |  
|Maine Bank & Trust                        |  |        | 25,364  |       | 10.57                        |   |        |                                                                | 19,196  |  | 8.00 |        |  |       | 23,995  |  | 10.00 |  
|Ocean National Bank                       |  |        | 50,409  |       | 11.39                        |   |        |                                                                | 35,419  |  | 8.00 |        |  |       | 44,274  |  | 10.00 |  
|Tier 1 Capital (to Risk Weighted Assets): |  |        |         |       |                              |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  |        | 445,581 |       | 12.25                        |   |        |                                                                | 145,519 |  | 4.00 |        |  |       | 218,278 |  | 6.00  |  
|Chittenden Trust Company                  |  |        | 214,458 |       | 9.80                         |   |        |                                                                | 87,534  |  | 4.00 |        |  |       | 131,301 |  | 6.00  |  
|Bank of Western Massachusetts             |  |        | 40,434  |       | 9.39                         |   |        |                                                                | 17,230  |  | 4.00 |        |  |       | 25,845  |  | 6.00  |  
|Flagship Bank and Trust                   |  |        | 33,426  |       | 9.72                         |   |        |                                                                | 13,750  |  | 4.00 |        |  |       | 20,625  |  | 6.00  |  
|Maine Bank & Trust                        |  |        | 22,345  |       | 9.31                         |   |        |                                                                | 9,598   |  | 4.00 |        |  |       | 14,397  |  | 6.00  |  
|Ocean National Bank                       |  |        | 44,863  |       | 10.13                        |   |        |                                                                | 17,710  |  | 4.00 |        |  |       | 26,564  |  | 6.00  |  
|Tier 1 Capital (to Average Assets):       |  |        |         |       |                              |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  |        | 445,581 |       | 9.28                         |   |        |                                                                | 192,169 |  | 4.00 |        |  |       | 240,211 |  | 5.00  |  
|Chittenden Trust Company                  |  |        | 214,458 |       | 7.13                         |   |        |                                                                | 120,339 |  | 4.00 |        |  |       | 150,424 |  | 5.00  |  
|Bank of Western Massachusetts             |  |        | 40,434  |       | 7.94                         |   |        |                                                                | 20,362  |  | 4.00 |        |  |       | 25,453  |  | 5.00  |  
|Flagship Bank and Trust                   |  |        | 33,426  |       | 7.06                         |   |        |                                                                | 18,949  |  | 4.00 |        |  |       | 23,686  |  | 5.00  |  
|Maine Bank & Trust                        |  |        | 22,345  |       | 8.87                         |   |        |                                                                | 10,076  |  | 4.00 |        |  |       | 12,595  |  | 5.00  |  
|Ocean National Bank                       |  |        | 44,863  |       | 7.68                         |   |        |                                                                | 23,367  |  | 4.00 |        |  |       | 29,208  |  | 5.00  |  



Note 18 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 six Commercial Banking subsidiaries and CCC, 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.



76



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The accounting policies used in the disclosure of business segments are the same as those described
in the summary of significant accounting policies. The consolidation adjustments reflect certain eliminations of inter-segment revenue, cash and Parent Company investments in subsidiaries.



The following tables present the results of the Companys reportable
operating business segments as of December 31, 2003, 2002 and 2001:



|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|------------------------------------- |  | ------------------ | --------- | - | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                      |  | Commercial Banking |           |   | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated |  
|Year Ended December 31, 2003          |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net interest revenue (1)              |  | $                  | 221,353   |   |           | $ | (3,290  | )                         |  | $ |             |   |  | $ | 218,063   |  
|Non interest income:                  |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Investment management income          |  |                    | 15,956    |   |           |   |        |                           |  |   |             |   |  |   | 15,956    |  
|Service charges on deposits           |  |                    | 18,396    |   |           |   |        |                           |  |   |             |   |  |   | 18,396    |  
|Mortgage servicing                    |  |                    | 281       |   |           |   |        |                           |  |   |             |   |  |   | 281       |  
|Gains on sales of loans, net          |  |                    | 21,765    |   |           |   |        |                           |  |   |             |   |  |   | 21,765    |  
|Gains (losses) on sales of securities |  |                    | 17,380    |   |           |   |        |                           |  |   |             |   |  |   | 17,380    |  
|Loss on prepayment of borrowings      |  |                    | (3,070    | ) |           |   |        |                           |  |   |             |   |  |   | (3,070    | )
|Credit card income, net               |  |                    | 4,079     |   |           |   |        |                           |  |   |             |   |  |   | 4,079     |  
|Insurance commissions, net            |  |                    |           |   |           |   | 6,870   |                           |  |   | (184         | ) |  |   | 6,686     |  
|Retail investment services            |  |                    | 4,621     |   |           |   |        |                           |  |   |             |   |  |   | 4,621     |  
|Other non-interest income             |  |                    | 10,957    |   |           |   | (20     | )                         |  |   |             |   |  |   | 10,937    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest income             |  |                    | 90,365    |   |           |   | 6,850   |                           |  |   | (184         | ) |  |   | 97,031    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total income                          |  |                    | 311,718   |   |           |   | 3,560   |                           |  |   | (184         | ) |  |   | 315,094   |  
|Provision for loan losses             |  |                    | 7,175     |   |           |   |        |                           |  |   |             |   |  |   | 7,175     |  
|Depreciation and amortization expense |  |                    | 11,027    |   |           |   | 82      |                           |  |   |             |   |  |   | 11,109    |  
|Salaries and employee benefits        |  |                    | 95,995    |   |           |   | 14,014  |                           |  |   |             |   |  |   | 110,009   |  
|Other non-interest expense            |  |                    | 76,107    |   |           |   | (5,670  | )                         |  |   | (184         | ) |  |   | 70,253    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest expense            |  |                    | 183,129   |   |           |   | 8,426   |                           |  |   | (184         | ) |  |   | 191,371   |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Income (loss) before income taxes     |  |                    | 121,414   |   |           |   | (4,866  | )                         |  |   |             |   |  |   | 116,548   |  
|Income tax expense (benefit)          |  |                    | 43,015    |   |           |   | (1,266  | )                         |  |   |             |   |  |   | 41,749    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net income (loss)                     |  | $                  | 78,399    |   |           | $ | (3,600  | )                         |  |   |             |   |  | $ | 74,799    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|End of period assets                  |  | $                  | 5,917,806 |   |           | $ | 880,403 |                           |  | $ | (897,565     | ) |  | $ | 5,900,644 |  
|End of period loans, net              |  |                    | 3,667,220 |   |           |   |        |                           |  |   |             |   |  |   | 3,667,220 |  
|End of period deposits                |  |                    | 5,004,303 |   |           |   |        |                           |  |   | (34,412      | ) |  |   | 4,969,891 |  
|Expenditures for long-lived assets    |  |                    | 13,090    |   |           |   | 53      |                           |  |   |             |   |  |   | 13,143    |  



77



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|------------------------------------- |  | ------------------ | --------- | - | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                      |  | Commercial Banking |           |   | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated |  
|Year Ended December 31, 2002          |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net interest revenue (1)              |  | $                  | 194,158   |   |           | $ | (1,543  | )                         |  | $ |             |   |  | $ | 192,615   |  
|                                      |  |                    |           |  
|Non interest income:                  |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Investment management income          |  |                    | 15,601    |   |           |   |        |                           |  |   |             |   |  |   | 15,601    |  
|Service charges on deposits           |  |                    | 16,026    |   |           |   |        |                           |  |   |             |   |  |   | 16,026    |  
|Mortgage servicing                    |  |                    | (6,442    | ) |           |   |        |                           |  |   |             |   |  |   | (6,442    | )
|Gains on sales of loans, net          |  |                    | 10,068    |   |           |   |        |                           |  |   |             |   |  |   | 10,068    |  
|Credit card income, net               |  |                    | 3,656     |   |           |   |        |                           |  |   |             |   |  |   | 3,656     |  
|Insurance commissions, net            |  |                    |          |   |           |   | 3,816   |                           |  |   | (83          | ) |  |   | 3,733     |  
|Other non-interest income             |  |                    | 22,416    |   |           |   | 2       |                           |  |   |             |   |  |   | 22,418    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest income             |  |                    | 61,325    |   |           |   | 3,818   |                           |  |   | (83          | ) |  |   | 65,060    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total income                          |  |                    | 255,483   |   |           |   | 2,275   |                           |  |   | (83          | ) |  |   | 257,675   |  
|Provision for loan losses             |  |                    | 8,331     |   |           |   |        |                           |  |   |             |   |  |   | 8,331     |  
|Depreciation and amortization expense |  |                    | 8,631     |   |           |   | 75      |                           |  |   |             |   |  |   | 8,706     |  
|Salaries and employee benefits        |  |                    | 86,112    |   |           |   | 1,961   |                           |  |   |             |   |  |   | 88,073    |  
|Other non-interest expense            |  |                    | 52,724    |   |           |   | 2,041   |                           |  |   |             |   |  |   | 54,765    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest expense            |  |                    | 147,467   |   |           |   | 4,077   |                           |  |   |             |   |  |   | 151,544   |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Income (loss) before income taxes     |  |                    | 99,685    |   |           |   | (1,802  | )                         |  |   | (83          | ) |  |   | 97,800    |  
|Income tax expense (benefit)          |  |                    | 34,025    |   |           |   | 130     |                           |  |   |             |   |  |   | 34,155    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net income (loss)                     |  | $                  | 65,660    |   |           | $ | (1,932  | )                         |  | $ | (83          | ) |  | $ | 63,645    |  
|                                      |  |                    |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|End of period assets                  |  | $                  | 4,909,890 |   |           | $ | 675,853 |                           |  | $ | (665,199     | ) |  | $ | 4,920,544 |  
|End of period loans, net              |  |                    | 2,925,666 |   |           |   |        |                           |  |   |             |   |  |   | 2,925,666 |  
|End of period deposits                |  |                    | 4,221,455 |   |           |   |        |                           |  |   | (95,363      | ) |  |   | 4,126,092 |  
|Expenditures for long-lived assets    |  |                    | 5,427     |   |           |   | 37      |                           |  |   |             |   |  |   | 5,464     |  



78



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|------------------------------------- |  | ------------------ | --------- | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | ---------
|                                      |  | Commercial Banking |           | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated
|Year Ended December 31, 2001          |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|Net interest revenue (1)              |  | $                  | 170,025   |           | $ | 280     |                           |  | $ |             |   |  | $ | 170,305  
|Non interest income:                  |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|Investment management income          |  |                    | 15,722    |           |   |        |                           |  |   |             |   |  |   | 15,722   
|Service charges on deposits           |  |                    | 14,294    |           |   |        |                           |  |   |             |   |  |   | 14,294   
|Mortgage servicing                    |  |                    | 3,564     |           |   |        |                           |  |   |             |   |  |   | 3,564    
|Gains on sales loans, net             |  |                    | 11,207    |           |   |        |                           |  |   |             |   |  |   | 11,207   
|Credit card income, net               |  |                    | 3,964     |           |   |        |                           |  |   |             |   |  |   | 3,964    
|Insurance commissions, net            |  |                    |          |           |   | 3,466   |                           |  |   | (75          | ) |  |   | 3,391    
|Other non-interest income             |  |                    | 11,575    |           |   | 16      |                           |  |   |             |   |  |   | 11,591   
|                                      |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|Total non-interest income             |  |                    | 60,326    |           |   | 3,482   |                           |  |   | (75          | ) |  |   | 63,733   
|                                      |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|Total income                          |  |                    | 230,351   |           |   | 3,762   |                           |  |   | (75          | ) |  |   | 234,038  
|Provision for loan losses             |  |                    | 8,041     |           |   |        |                           |  |   |             |   |  |   | 8,041    
|Depreciation and amortization expense |  |                    | 8,708     |           |   | 385     |                           |  |   |             |   |  |   | 9,093    
|Salaries and employee benefits        |  |                    | 73,019    |           |   | 1,831   |                           |  |   |             |   |  |   | 74,851   
|Other non-interest expense            |  |                    | 49,917    |           |   | 1,900   |                           |  |   |             |   |  |   | 51,816   
|                                      |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|Total non-interest expense            |  |                    | 131,644   |           |   | 4,116   |                           |  |   |             |   |  |   | 135,760  
|                                      |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|Income (loss) before income taxes     |  |                    | 90,666    |           |   | (354    | )                         |  |   | (75          | ) |  |   | 90,237   
|Income tax expense (benefit)          |  |                    | 31,770    |           |   | (34     | )                         |  |   |             |   |  |   | 31,736   
|                                      |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|Net income (loss)                     |  | $                  | 58,896    |           | $ | (320    | )                         |  | $ | (75          | ) |  | $ | 58,501   
|                                      |  |                    |           |           |   |         |                           |  |   |              |   |  |   |          
|End of period assets                  |  | $                  | 4,130,079 |           | $ | 385,132 |                           |  | $ | (361,497     | ) |  | $ | 4,153,714
|End of period loans, net              |  |                    | 2,792,909 |           |   |        |                           |  |   |             |   |  |   | 2,792,909
|End of period deposits                |  |                    | 3,683,056 |           |   |        |                           |  |   | (13,210      | ) |  |   | 3,669,846
|Expenditures for long-lived assets    |  |                    | 3,457     |           |   | 21      |                           |  |   |             |   |  |   | 3,478    

---

|(1) | The Commercial Banking segment derives a majority of its revenue from interest. 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 19 RECENT
ACCOUNTING PRONOUNCEMENTS



In December 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (or VIEs) which addresses consolidation by business enterprises of
variable interest entities. FIN 46R expands upon existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Under previous guidance, a company
generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The Interpretation requires a variable interest entity to be consolidated by a company if that company is the
primary beneficiary of that entity. The primary beneficiary is subject to a majority of the risk of loss from the VIEs activities, or is entitled to receive a majority of the VIEs residual returns, or both. The Company has
evaluated all of the variable interest entities with which it is associated., Based upon that evaluation, no VIEs meeting the definition of a primary beneficiary were identified.



79



---

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Therefore the Company does not expect the adoption of FIN 46R to have a material effect on the
Companys financial position or results of operations.



As
part of the Companys first quarter 2004 adoption of FIN 46R, the Company will no longer consolidate the Trust subsidiary in its financial statements. However, the $125 million of junior subordinated debentures issued by the Company to the
Trust will continue to be classified as borrowings on the Companys balance sheet, and the related interest expense will continue to be so classified in the future. Certain balances between the Company and the Trust, which are currently
eliminated in consolidation, will be recognized in the Companys financial statements. However, management does not expect that the deconsolidation of the Trust subsidiary will have a material impact on the Companys financial position or
results of operations in 2004 or prior years.



80



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REPORT OF INDEPENDENT AUDITORS



TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF CHITTENDEN CORPORATION:



In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders equity, and
cash flows present fairly, in all material respects, the financial position of Chittenden Corporation and its subsidiaries at December 31, 2003 and December 31, 2002, and the results of their operations and their cash flows for the two years in the
period ended December 31, 2003, 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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. The financial statements of the Corporation as of
December 31, 2001, and for the year ended December 31, 2001, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated
January 11, 2002 (except with respect to a subsequent event as to which the date is February 28, 2002.)



As discussed in Note 3 to the financial statements, on January 1, 2002 the Corporation adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142.) These financial statements have been revised to include the transitional disclosures required by SFAS 142, which were audited by us. In our opinion, the transitional disclosures for 2001
included in Note 3 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Corporation other than with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 financial statements taken as a whole.



LOGO

Montpelier, VT

January 16, 2004



81



---

REPORT OF INDEPENDENT ACCOUNTANTS



The following report is a copy of a report previously issued by Arthur Andersen LLP. This report has not been reissued by
Arthur Andersen LLP and Arthur Andersen LLP did not consent to the use of this report in this Form 10-K.



TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CHITTENDEN
CORPORATION:



We have audited the
accompanying consolidated balance sheets of Chittenden Corporation and its subsidiaries as of December 31, 2001 and 2000*, and the related consolidated statements of operations, changes in stockholders equity and comprehensive income, and cash
flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.



We conducted our audits in
accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Chittenden Corporation and its subsidiaries as of December 31, 2001 and 2000*, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.



|                                                                  |  | 
|----------------------------------------------------------------- |  | 
|/s/    ARTHUR ANDERSEN LLP                                       
|                                                                 
|Boston, Massachusetts                                            
|January 11, 2002 (except with respect to the matter              
|Discussed in Note 21**, as to which the date isFebruary 28, 2002)



---

|* | Financial statements for the period ended December 31, 2000 are not presented in the accompanying consolidated financial statements.
|- | ------------------------------------------------------------------------------------------------------------------------------------

|** | Note 21 can be found in Chittendens 2001 Annual Report on Form 10-K
|-- | --------------------------------------------------------------------



82



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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 judgements. 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 generally accepted 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, 2003, 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 auditing standards generally accepted in the United States of America. An independent audit provides an
objective review of managements responsibility to report operating results and financial condition. Their reports appear on page 81 and 82.







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



83



---

QUARTERLY FINANCIAL DATA (Unaudited)



A summary of quarterly financial data for 2003 and 2002 is presented below:



|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|-------------------------- |  | ---------------------------------------- | ------ | ------- | - | -------- |  | ------- | ------ |  | - | ------
|                           |  | Three Months Ended                      
|                           |  | March 31                                 |        | June 30 |   | Sept. 30 |  | Dec. 31
|                           |  | (in thousands, except per share amounts)
|2003                       |  |                                          |        |         |   |          |  |         |        |  |   |       
|Total interest income      |  | $                                        | 65,854 |         | $ | 71,219   |  | $       | 67,231 |  | $ | 67,138
|Total interest expense     |  |                                          | 14,906 |         |   | 15,119   |  |         | 12,570 |  |   | 10,784
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net interest income        |  |                                          | 50,948 |         |   | 56,100   |  |         | 54,661 |  |   | 56,354
|Provision for loan losses  |  |                                          | 2,050  |         |   | 2,050    |  |         | 2,050  |  |   | 1,025 
|Noninterest income         |  |                                          | 19,256 |         |   | 29,784   |  |         | 24,998 |  |   | 22,994
|Noninterest expense        |  |                                          | 42,176 |         |   | 54,260   |  |         | 46,858 |  |   | 48,077
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Income before income taxes |  |                                          | 25,978 |         |   | 29,574   |  |         | 30,751 |  |   | 30,246
|Income tax expense         |  |                                          | 9,387  |         |   | 10,947   |  |         | 10,887 |  |   | 10,528
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net income                 |  | $                                        | 16,591 |         | $ | 18,627   |  | $       | 19,864 |  | $ | 19,718
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Basic earnings per share   |  | $                                        | 0.50   |         | $ | 0.51     |  | $       | 0.54   |  | $ | 0.54  
|Diluted earnings per share |  |                                          | 0.49   |         |   | 0.51     |  |         | 0.54   |  |   | 0.53  
|Dividends paid per share   |  |                                          | 0.20   |         |   | 0.20     |  |         | 0.20   |  |   | 0.20  



|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|-------------------------- |  | ---------------------------------------- | ------ | ------- | - | -------- |  | ------- | ------ |  | - | ------
|                           |  | Three Months Ended                      
|                           |  | March 31                                 |        | June 30 |   | Sept. 30 |  | Dec. 31
|                           |  | (in thousands, except per share amounts)
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|2002                       |  |                                          |        |         |   |          |  |         |        |  |   |       
|Total interest income      |  | $                                        | 61,240 |         | $ | 65,104   |  | $       | 66,867 |  | $ | 65,808
|Total interest expense     |  |                                          | 16,726 |         |   | 16,767   |  |         | 17,206 |  |   | 15,704
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net interest income        |  |                                          | 44,514 |         |   | 48,337   |  |         | 49,661 |  |   | 50,104
|Provision for loan losses  |  |                                          | 2,075  |         |   | 1,691    |  |         | 2,315  |  |   | 2,250 
|Noninterest income         |  |                                          | 16,160 |         |   | 15,563   |  |         | 13,776 |  |   | 19,561
|Noninterest expense        |  |                                          | 36,046 |         |   | 38,597   |  |         | 37,046 |  |   | 39,855
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Income before income taxes |  |                                          | 22,553 |         |   | 23,612   |  |         | 24,076 |  |   | 27,560
|Income tax expense         |  |                                          | 7,730  |         |   | 8,297    |  |         | 8,364  |  |   | 9,764 
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net income                 |  | $                                        | 14,823 |         | $ | 15,315   |  | $       | 15,712 |  | $ | 17,796
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Basic earnings per share   |  | $                                        | 0.46   |         | $ | 0.48     |  | $       | 0.49   |  | $ | 0.56  
|Diluted earnings per share |  |                                          | 0.46   |         |   | 0.47     |  |         | 0.48   |  |   | 0.55  
|Dividends paid per share   |  |                                          | 0.19   |         |   | 0.20     |  |         | 0.20   |  |   | 0.20  



84



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ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE



Effective June 19, 2002, the Audit Committee of the Board of Directors of the Company appointed PricewaterhouseCoopers LLP
(PricewaterhouseCoopers) as the Companys independent public accountants, replacing Arthur Andersen LLP (Arthur Andersen) who was dismissed.



Arthur Andersens report on the Companys consolidated financial statements for the years ended December 31, 2001
did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.



During the Companys fiscal year 2001 and the interim period preceding the appointment of PricewaterhouseCoopers, there were no disagreements between
the Company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Arthur Andersen, would have caused it
to make a reference to the subject matter of the disagreement(s) in connection with its report.



ITEM 9A CONTROLS AND PROCEDURES



As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of December 31, 2003, 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. There was no change in the Companys internal control over financial reporting that occurred during the
period ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include
its internal controls 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.



85



---

PART III



ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Information regarding the directors of the Registrant is included in the Companys Definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders of Chittenden Corporation at pages 5-8, and is specifically incorporated herein by reference.



At December 31, 2003, the principal officers of the Company with their ages, positions, and years of appointment, were as follows:



|                    |  |     |  |               |  |                                                                 
|------------------- |  | --- |  | ------------- |  | ----------------------------------------------------------------
|NAME                |  | AGE |  | YEARAPPOINTED |  | POSITIONS                                                       
|Paul A. Perrault    |  | 52  |  | 1990          |  | Chairman, President and Chief Executive Officer                 
|                    |  |     | 
|John P. Barnes      |  | 48  |  | 1990          |  | Executive Vice President                                        
|                    |  |     | 
|Lawrence W. DeShaw  |  | 58  |  | 1990          |  | President and Chief Executive Officer of Chittenden Bank        
|                    |  |     | 
|John W. Kelly       |  | 54  |  | 1990          |  | Executive Vice President and Chief Banking Officer              
|                    |  |     | 
|Kirk W. Walters     |  | 48  |  | 1996          |  | Executive Vice President, Chief Financial Officer, and Treasurer
|                    |  |     | 
|F. Sheldon Prentice |  | 53  |  | 1985          |  | Senior Vice President, General Counsel, and Secretary           
|                    |  |     | 
|Howard L. Atkinson  |  | 59  |  | 1996          |  | Chief Auditor                                                   



All of the current
officers have been principally employed in executive positions with the Company for more than five years.



In accordance with the provisions of the Companys By-laws, the officers, with the exception of the Secretary, hold office at the pleasure of the
Board of Directors. The Secretary is elected annually by the Board of Directors.



AUDIT COMMITTEE FINANCIAL EXPERT



Information
regarding the disclosure of the Audit Committee Financial Experts and the independence of such experts are included in the Companys Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders of Chittenden Corporation at page 8 and
is specifically incorporated herein by reference.



CODE OF ETHICS AND
FINANCIAL EXPERT



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 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 regarding remuneration of the directors and officers of the
Company is included in the Companys Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders of Chittenden Corporation at page 8 and is specifically incorporated herein by reference.



ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Information regarding the security ownership of directors and
director-nominees of the Company, all directors and officers of the Company as a group, and certain beneficial owners of the Companys common stock, as of January 31, 2004, is included in the Companys Definitive Proxy Statement for its
2004 Annual Meeting of Stockholders of Chittenden Corporation at pages 2-3, and is specifically incorporated herein by reference.



86



---

There are no arrangements known to the registrant that may, at a subsequent date, result in a change of
control of the registrant.



ITEM 13 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS



Information regarding certain relationships
and transactions between the Company and its Directors, Director-Nominees, Executive Officers, and family members of these individuals, is included in the Companys Definitive Proxy Statement for its 2004 Annual Meeting of Stockholders of
Chittenden Corporation at page 21, and is specifically incorporated herein by reference.



ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES



The fees paid to the principal auditor, as well as other information regarding its services, is included in the Companys Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders of Chittenden
Corporation on pages 21 and is incorporated herein by reference.



87



---

PART IV



ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(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 Proxy Statement for the 1999 Annual Meeting of Stockholders.                                                
|         | 
|3 (ii).1 |  | By-laws of the Company, as amended and restated as of October 18, 1997 and further amended as of January 21, 2004.                                                                                                 
|         | 
|4.       |  | Statement of the Company regarding its Dividend Reinvestment Plan is incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31,
1993.                            
|         | 
|10.1     |  | Directors Deferred Compensation Plan, dated April 1972, as amended May 20, 1992, incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended
December 31, 1992.               
|         | 
|10.2     |  | Amended and Restated Pension Plan, incorporated herein by reference to the Companys Annual Report on Form 10-Q for the period ended September 30, 1996.                                                           
|         | 
|10.3     |  | Incentive Savings and Profit Sharing Plan, attached to the Companys Annual Report on Form 10-K for the year ended December 31, 1994, as amended for the year ended December 31,
1995.                             
|         | 
|10.4     |  | Letter from the Company to Paul A. Perrault, dated July 26, 1990, regarding terms of employment, incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended December 31, 1990.
|         | 
|10.5     |  | The Companys 1988 Stock Option Plan, incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 1987.                                                           
|         | 
|10.6     |  | The Companys Restricted Stock Plan, incorporated herein by reference to the Companys Proxy Statement in connection with the 1986 Annual Meeting of Stockholders.                                                 
|         | 
|10.7     |  | Executive Management Incentive Compensation Plan (EMICP), incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31,
1994.                                     
|         | 
|10.8     |  | Amendment to EMICP to increase cap on awards from 60% to 100% of base salary, incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended
December 31, 1996.                   
|         | 
|10.9     |  | The Companys Stock Incentive Plan, amended and restated February 21, 2001, incorporated herein by reference to the Companys Proxy Statement for the 2001 Annual Meeting of
Stockholders.                         
|         | 
|10.10    |  | Compensation plan of Paul A. Perrault, incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 1996.                                                          



88



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|      |  |                                                                                                                                                                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.11 |  | Supplemental Executive Retirement Plan of Paul A. Perrault incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31,
2002.                                                                                                                         
|      | 
|10.12 |  | Supplemental Executive Cash Balance Restoration Plan incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.                                                                                                                               
|      | 
|10.13 |  | Supplemental Executive Savings Plan, incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.                                                                                                                                               
|      | 
|10.14 |  | The Companys Amended and Restated Directors Omnibus Long-Term Incentive Plan incorporated herein by reference to the Companys Proxy Statement for the 2002 Annual Meeting of
Stockholders.                                                                                                         
|      | 
|14    |  | 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 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.                                                                                                                                                      



(b) REPORTS ON FORM 8-K



|         |  |                                                                                                                                                           
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|10/16/03 |  | The Companys quarterly earnings release and attached financial statements, as well as quarterly comparative financial statements were filed under item 5.
|         | 
|10/31/03 |  | The Companys quarterly slide presentation was furnished pursuant to Regulation FD under item 9.                                                          
|         | 
|11/26/03 |  | A press release announcing Chittendens presentation at the FBR Annual Investor Conference was furnished under Item 9.                                    



89



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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:  March 12, 2004 |  |  |  | CHITTENDEN CORPORATION
|                      |  |  |  |                       
|                      |  |  |  |                        |  | By: |  | /s/     PAUL A.
PERRAULT                                                                  
|                      |  |  |  |                        |  |     |  | Paul A. Perrault President, Chief Executive Officer and Chairman of the Board of Directors



90



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|                |  |                                                                                                                                                 
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT 3(ii).1 |  | BY-LAWS OF THE COMPANY, AS AMENDED AND RESTATED AS OF OCTOBER 18, 1997 AND FURTHER AMENDED AS OF JANUARY 21, 2004, HAS BEEN FILED AS AN EXHIBIT.
|                | 
|EXHIBIT 21      |  | LIST OF SUBSIDIARIES OF CHITTENDEN CORPORATION                                                                                                  



Chittenden Trust
Company, Vermont, d/b/a Chittenden Bank, Mortgage Service Center, and CUMEX Mortgage Service Center, and Chittenden Trust Companys subsidiaries Chittenden Securities, Inc. and Chittenden Insurance Products and Services, Inc, d/b/a The
Chittenden Insurance Group



The Bank of Western Massachusetts,
Massachusetts



Flagship Bank and Trust Company, Massachusetts



Maine Bank & Trust, Maine



Ocean National Bank, Maine



Granite Bank, New Hampshire



Chittenden Connecticut Corporation, Vermont, d/b/a Mortgage Service Center
and CUMEX Mortgage Service Center



|           |  |                                                               
|---------- |  | --------------------------------------------------------------
|EXHIBIT 23 |  | CONSENT OF PRICEWATERHOUSECOOPERS HAS BEEN FILED AS AN EXHIBIT



91



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Exhibit 31.1



CERTIFICATION



I, Paul A. Perrault, certify that:



1. I have reviewed this annual report on Form 10-K/A of Chittenden Corporation;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4. The registrants other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b) [omitted]



c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



d) disclosed in this report any change in the
registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter fiscal quarter in the case of an annual report) that has materially affected, or
is reasonable likely to materially affect, the registrants internal control over financial reporting; and



5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):



a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and



b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal control over financial reporting.



|                      |  |  |  |                         |  |                                                 
|--------------------- |  |  |  | ----------------------- |  | ------------------------------------------------
|Date:  March 12, 2004 |  |  |  | /s/    PAUL A.
PERRAULT
|                      |  |  |  |                         |  | Chairman, President, and Chief Executive Officer



92



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Exhibit 31.2



CERTIFICATION



I, Kirk W. Walters, certify that:



1. I have reviewed this annual report on Form 10-K/A of Chittenden Corporation;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4. The registrants other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b) [omitted]



c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



d) disclosed in this report any change in the
registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter fiscal quarter in the case of an annual report) that has materially affected, or
is reasonable likely to materially affect, the registrants internal control over financial reporting; and



5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):



a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and



b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal control over financial reporting.



|                      |  |  |  |                        |  |                                                     
|--------------------- |  |  |  | ---------------------- |  | ----------------------------------------------------
|Date:  March 12, 2004 |  |  |  | /s/    KIRK W.
WALTERS
|                      |  |  |  |                        |  | Executive Vice President and Chief Financial Officer



93



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Exhibit 32.1



CERTIFICATION OF PERIODIC FINANCIAL REPORT

PURSUANT TO 18 U.S.C. SECTION 1350



The undersigned officer of Chittenden Corporation (the Company) hereby certifies that the Companys annual report on Form 10-K/A for the period ended December 31, 2003 to which this certification is
being furnished as an exhibit (the Report), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934,
as amended (the Exchange Act), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided pursuant to 18
U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (Item 601(b)(32)) promulgated under the Securities Act of 1933, as amended (the Securities Act), and the Exchange Act. In accordance with clause (ii) of Item
601(b)(32), this certification (A) shall not be deemed filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.



|                       |  |  |  |                         |  |                                                 
|---------------------- |  |  |  | ----------------------- |  | ------------------------------------------------
|Dated:  March 12, 2004 |  |  |  | /s/    PAUL A.
PERRAULT
|                       |  |  |  |                         |  | Chairman, President, and Chief Executive Officer



94



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Exhibit 32.2



CERTIFICATION OF PERIODIC FINANCIAL REPORT

PURSUANT TO 18 U.S.C. SECTION 1350



The undersigned officer of Chittenden Corporation (the Company) hereby certifies that the Companys annual report on Form 10-K/A for the period ended December 31, 2003 to which this certification
is being furnished as an exhibit (the Report), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of
1934, as amended (the Exchange Act), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided pursuant to
18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (Item 601(b)(32)) promulgated under the Securities Act of 1933, as amended (the Securities Act), and the Exchange Act. In accordance with clause (ii) of Item
601(b)(32), this certification (A) shall not be deemed filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.



|                       |  |  |  |                        |  |                                                     
|---------------------- |  |  |  | ---------------------- |  | ----------------------------------------------------
|Dated:  March 12, 2004 |  |  |  | /s/    KIRK W.
WALTERS
|                       |  |  |  |                        |  | Executive Vice President and Chief Financial Officer



95



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CHITTENDEN CORPORATION





SKU - #0667 -TK - 04