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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



(Mark One)

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

Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2004



| | or
| | --



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

Securities Exchange Act of 1934

for the transition period from
             to



Commission File Number 001-13769



CHITTENDEN CORPORATION

(Exact name of
Registrant as specified in its charter)



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



Registrants
telephone number: 802-658-4000



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



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



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

NONE



Indicate by check mark whether the registrant: (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, 2004 was $1,274,226,305.



At January 31, 2005, there were 46,400,617 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 2005 Annual Meeting and Proxy Statement: Part III, Items 10, 11, 12, 13 and 14.
| | -- | -----------------------------------------------------------------------------------------



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TABLE OF CONTENTS



|                                                  |  |                                                                                                 |  |   
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --
|Item No.                                          |  | Page No.                                                                                       
|SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS |  | 2                                                                                              
|                                                  | 
|PART I                                            |  |                                                                                                
|                                                  |  |                                                                                                
|1.                                                |  | Business                                                                                        |  | 3 
|                                                  |  | Regulation of the Company                                                                       |  | 6 
|                                                  |  | Regulation of the Banks                                                                         |  | 8 
|                                                  |  | Capital Requirements and FDICIA                                                                 |  | 10
|                                                  |  | Sarbanes-Oxley Act                                                                              |  | 14
|                                                  |  | Employees                                                                                       |  | 15
|                                                  |  | Company Website                                                                                 |  | 15
|2.                                                |  | Properties                                                                                      |  | 15
|3.                                                |  | Legal proceedings                                                                               |  | 16
|4.                                                |  | Submission of Matters to a Vote of Security Holders                                             |  | 16
|                                                  | 
|PART II                                           |  |                                                                                                
|                                                  |  |                                                                                                
|5.                                                |  | Market for Registrants Common Equity and Related Stockholder Matters                           |  | 17
|6.                                                |  | Selected Financial Data                                                                         |  | 18
|7.                                                |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 19
|7A.                                               |  | Qualitative and Quantitative Disclosures about Market Risk                                      |  | 38
|8.                                                |  | Financial Statements and Supplementary Data                                                     |  | 41
|9.                                                |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure            |  | 84
|9A.                                               |  | Controls and Procedures                                                                         |  | 84
|                                                  |  | Managements Annual Report on Internal Control Over Financial Reporting                         |  | 84
|                                                  |  | Attestation Report of the Registered Public Accounting Firm                                     |  | 84
|9B.                                               |  | Other Information                                                                               |  | 84
|                                                  | 
|PART III                                          |  |                                                                                                
|                                                  |  |                                                                                                
|*10.                                              |  | Directors and Executive Officers of the Registrant                                              |  | 85
|*11.                                              |  | Executive Compensation                                                                          |  | 85
|*12.                                              |  | Security Ownership of Certain Beneficial Owners and Management and Related Stock-Holder Matters |  | 85
|*13.                                              |  | Certain Relationships and Related Transactions                                                  |  | 85
|*14.                                              |  | Principal Accounting Fees and Services                                                          |  | 85
|                                                  | 
|PART IV                                           |  |                                                                                                
|                                                  |  |                                                                                                
|15.                                               |  | Exhibits and Financial Statement Schedules                                                      |  | 86
|                                                  | 
|SIGNATURES                                        |  |                                                                                                
|CERTIFICATIONS                                    |  |                                                                                                

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|* | Incorporated by reference to the Proxy Statement for the Registrants Annual Meeting of Stockholders to be held on April 21, 2005.
|- | ----------------------------------------------------------------------------------------------------------------------------------



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FORWARD-LOOKING STATEMENTS



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



Readers are cautioned
that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed in this document, including the documents incorporated by reference in this document. 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 Chittenden), a Vermont corporation organized in 1971, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2004, the Company had total
consolidated assets of approximately $6.1 billion. The Company is the holding company parent and owns 100% of the outstanding common stock of Chittenden Trust Company (CTC), Flagship Bank and Trust Company (FBT), The Bank of
Western Massachusetts (BWM), Maine Bank & Trust (MBT), and Ocean National Bank (ONB) (collectively the Banks).



The following table summarizes Chittendens recent acquisition history. The Vermont Financial acquisition and Granite
State Bancshares are also included as they were significant in-market transactions that were merged into existing franchise banks:



|               |  |                                  |  |                                            |  |                     |  |                                |  |                  |  |           
|-------------- |  | -------------------------------- |  | ------------------------------------------ |  | ------------------- |  | ------------------------------ |  | ---------------- |  | ----------
|Date Announced |  | Acquisition                      |  | SubsidiaryBank(s)                          |  | State(s) ofBusiness |  | ConsiderationPaid(in millions) |  | AccountingMethod |  | DateClosed
|11/2/2002      |  | Granite State Bancshares, Inc.   |  | Granite Bank (4)                           |  | NH                  |  | $239 stock & cash              |  | Purchase(1)      |  | 2/28/03   
|               |  |                                  |  |                                            |  |                    
|10/5/2001      |  | Ocean National Corporation       |  | OceanNational 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 the acquired companies are included in the financial statements from their dates of
acquisition.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(4) | Granite Bank merged into Ocean National Bank in the second quarter of 2004, and Granites insurance operation was consolidated into Chittenden Insurance Group in the second
quarter of 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company engages in one
line of business, that of providing financial services through its banking subsidiaries. Through its subsidiaries, the Company offers a variety of lending services, with loans totaling approximately $4.1 billion at December 31, 2004. The largest
loan categories are commercial loans and residential real estate loans. Commercial loans include the following loan categories: commercial, municipal, multi-family residential real estate, commercial real estate and construction. Commercial loans
amounted to approximately 70% of the total loans outstanding at December 31, 2004.



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Residential real estate loans include those collateralized by 1-4 family units and home equity loans, and
comprised 24% of total loans outstanding at December 31, 2004. 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. Consumer loans at December 31, 2004 were 6% of total loans outstanding. Approximately 79% 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 amount.



The Banks offer a wide range of banking services, including the acceptance of demand, savings, NOW, money market, cash management and time deposits. As of
December 31, 2004, total interest-bearing deposits and noninterest-bearing demand deposits amounted to approximately $4.1 billion and $891 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 $8.2 billion at December 31, 2004, which included $2.0 billion under full discretionary management.



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



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



CHITTENDEN TRUST COMPANY



CTC was chartered by the Vermont Legislature as a commercial bank in 1904. It is the largest bank headquartered in Vermont, based on total assets of
approximately $3.1 billion, total loans of approximately $2.0 billion and total deposits of approximately $2.7 billion. CTCs principal offices are located in Burlington, Vermont and it has fifty additional locations in Vermont. The trade name
Chittenden 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), CSI 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, 2004, BWM had
total assets of $617 million, total loans of $557 million and total deposits of $478 million. BWMs principal offices are located in Springfield, Massachusetts and it has eleven 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, 2004, FBT had total assets of $494 million, total loans of $286 million and total deposits of $449 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, 2004, MBT had total assets of $317 million, total loans of $246 million and total deposits of $252 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. During
the second quarter of 2004, the Company completed the merger of the former Granite Bank into Ocean National Bank. In addition, Granites former insurance subsidiary was consolidated into Chittenden Insurance Group. At December 31, 2004, ONB had
total assets of $1.6 billion, total loans of $974 million and total deposits of $1.2 billion. ONBs principal offices are located in Portsmouth, New Hampshire and it has thirty-seven additional locations in southern Maine and New Hampshire.



ECONOMY



The Northern New England economy continued to improve and strengthen throughout the year. On average, retailers in New
England reported year-over-year increases for 2004. Travel and tourism revenues in Northern New England were reportedly stronger in 2004 compared with the same period a year ago. Manufacturers generally expect their domestic capital expenditures to
rise in the coming year. Northern New Englands commercial and commercial real estate markets continue to develop. Federal Reserve policymakers increased their target over night lending rate 125 basis points in 2004. The increases were intended
by the Federal Reserve to establish a rate that will head off inflation without restraining economic growth. Changes in the economy are difficult to predict, and this discussion 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.



COMPETITION



There is vigorous competition in the Companys marketplace for all aspects of banking and related financial service
activities. The Banks compete with other banks, credit unions, and finance companies for banking business in Northern New England. 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 expansion of financial institutions both within and outside our primary banking markets have increased the competition in our markets.



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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 our 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 (the
Interstate Act). The Interstate Act permits adequately capitalized and adequately managed bank holding companies, as determined by the Federal Reserve Board, to acquire banks in any state subject to certain concentration limits and
other conditions. The Interstate Act also generally authorizes the interstate merger of banks. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis provided that the law of the host state
specifically authorizes such action.



Gramm-Leach-Bliley Act
(1999). The Gramm-Leach-Bliley Act (the GLBA) repealed 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
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



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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.
Covered transactions as well as other types of transactions between a bank and a bank holding company must be on market terms and not otherwise unduly favorable to the holding company or an affiliate 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 to support such subsidiaries. This support of its subsidiary banks may be required at
times when, absent such Federal Reserve Board policy, the Company might not otherwise be inclined to provide it. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits
and certain other indebtedness of such subsidiary banks. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.



Liability of Commonly Controlled Depository Institutions. Under the Federal Deposit Insurance Act, as amended (FDI Act), FDIC-insured depository institutions, such as any of the Banks, can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a



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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 Commissioner); 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 together with the Commissioner and the Superintendent, 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, and Massachusetts banking law restrictions. Payment of dividends by CTC is subject to Vermont banking law restrictions, which require that CTC may not, without the Commissioners approval, authorize dividends that reduce
capital below certain standards established by the Commissioner. Payment of dividends by BWM and FBT is subject to Massachusetts banking law restrictions, which require that each banks capital not be impaired and limits the amount of dividends
that may be paid during a calendar year to net profit for that year plus retained net profits from the prior two years. Payments of dividends by MBT are subject to Maine banking law restrictions, which require that they may not, without the
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 preceding two years.



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



Affiliate Transactions. As noted above, banks are subject to restrictions imposed by federal law on extensions of credit to, purchases of assets
from, and certain other transactions with affiliates and on investments



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in stock or other securities issued by affiliates. Such restrictions prevent the Banks from making loans to affiliates unless the loans are secured by
collateral in specified amounts and have terms at least as favorable to the Banks as the terms of comparable transactions between the Banks and non-affiliates. Further, applicable federal and state laws significantly restrict extensions of credit by
the Banks to directors, executive officers and principal stockholders and related interests of such persons.



Deposit Insurance. The Banks deposits are insured by the 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 Banks interest-bearing assets. As of December 31, 2004, The
Banks aggregate reserve requirement was approximately $26.1 million.



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



USA PATRIOT Act. The USA Patriot Act of 2001 (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.



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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 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, the OCC 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. 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



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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 their retail banking activities include proportionally more residential mortgage loans and certain investment securities with a lower risk weighting and relatively smaller
off-balance sheet obligations.



The risk-based capital
regulations require all banks to maintain a minimum ratio of Total Capital to Risk-Adjusted Assets of 8.0%, of which at least one-half (4.0%) must be Core (Tier 1) Capital. For the purpose of calculating these ratios: (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 May 6, 2004, the Federal Reserve Board proposed a rule that
would retain trust preferred securities in Tier 1 capital of bank holding companies, but with stricter quantitative limits and clearer standards. Under the proposal, after a three-year transition period, which would end on March 31, 2007, the
aggregate amount of trust preferred securities would be limited to 25 percent of Tier 1 capital elements, net of goodwill. 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 under the new rules. The regulatory capital treatment of the trust preferred securities in the Companys total capital ratio is expected to be unchanged.



On December 31, 2004, the Companys consolidated Total and Tier 1 Risk-Based Capital Ratios were 11.64% and 10.44%,
respectively, and its Leverage Capital Ratio was 8.42%. Based on the above figures and accompanying discussion, the Company exceeded all regulatory capital requirements and was considered well capitalized.



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



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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 2.0% is deemed to be critically undercapitalized. A bank may be deemed to be in a capital category lower than is indicated by
its actual capital position if it is determined to be in an unsafe or unsound condition or receives an unsatisfactory examination rating. FDICIA generally prohibits a bank from making capital distributions (including payment of dividends) or paying
management fees to controlling stockholders or their affiliates if, after such payment, the bank would be undercapitalized.



Under FDICIA and the applicable implementing regulations, an undercapitalized bank will be (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 Banks 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.



Assessment rates in 2004 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



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(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 $808,025 or 0.0158 cents per $100 of deposits in 2004.



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, and FBT may not engage as a principal, directly or through a subsidiary, in any activity that is not permissible for a national bank,
such as ONB, unless the FDIC determines that the activity does not pose a significant risk to the 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



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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 and Maine permit banks chartered by those states to engage in activities which are permissible for a national bank and that are approved by the Massachusetts Commissioner of Banks or the Maine Superintendent of Banking. Thus,
MBT, BWM, and FBT would only be permitted to engage in the activities authorized by the GLBA that are also approved by the states banking regulatory agency or otherwise by state law. In order to form a financial subsidiary, a state bank must
be well-capitalized, and the state bank would be subject to certain capital deduction, risk management and affiliate transaction rules, which are applicable to national banks.



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



Customer Information Security. The FDIC, 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) implemented 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). The S-O Acts principal provisions, many of which have been interpreted through regulations promulgated thereunder, 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;
| | - |  | -----------------------------------------------------------------------------------------



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



| |  |  | Requirements that companies report on their internal control.
| | - |  | -------------------------------------------------------------



EMPLOYEES



At December 31, 2004,
the Company and its subsidiaries employed 2,077 persons, with a full-time equivalency of 1,926 employees. The Company enjoys good relations with its employees. A variety of employee benefits, including health, group life and disability income
replacement insurance, a funded, non-contributory pension plan, and an incentive savings and profit sharing plan, are available to qualifying employees.



COMPANY WEBSITE



The Company
maintains a website at www.chittendencorp.com. The Company makes available, free of charge, on its website 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 well as all Section 16 reports on Forms 3, 4, and 5, as soon as reasonably practicable after such reports are electronically filed with, or furnished
to, the SEC. The Companys reports filed with, or furnished to, the SEC are also available at the SECs website at www.sec.gov. Information contained on the Companys website does not constitute a part of this report.



ITEM 2 PROPERTIES



The
offices of the Company are located in a facility owned by CTC at Two Burlington Square in Burlington, Vermont. CTCs principal offices are also located in Burlington, Vermont and it has fifty additional locations in



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Vermont. BWMs principal offices are located in Springfield, Massachusetts and it has eleven additional locations in the western Massachusetts area.
FBTs principal offices are located in Worcester, Massachusetts and it has six additional locations in the greater Worcester, Massachusetts area. MBTs principal offices are located in Portland, Maine and it has eleven additional locations
in southern Maine. ONBs principal offices are located in Portsmouth, New Hampshire and it has thirty-seven additional locations in southern Maine and New Hampshire. The offices of all subsidiaries are in good physical condition with modern
equipment and facilities considered by management to be adequate to meet the banking needs of customers in the communities served.



ITEM 3 LEGAL PROCEEDINGS



A
number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2004. Management, after reviewing these claims with legal counsel, is of the opinion that these matters, when resolved, will not
have a material effect on the Companys consolidated financial statements.



ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None



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PART II



|ITEM 5(a) | 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,
2005, there were 4,944 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. Prior year numbers have been adjusted to reflect the Companys 5-for-4 common stock split. The record date of the stock split was as of the close of business on August 27, 2004.



|              |  |      |       |     |   |               |  |   |     
|------------- |  | ---- | ----- | --- | - | ------------- |  | - | ----
|Quarter ended |  | High |       | Low |   | DividendsPaid
|2003          |  |      |       |     |   |               |  |   |     
|March 31      |  | $    | 22.29 |     | $ | 19.84         |  | $ | 0.16
|June 30       |  |      | 22.80 |     |   | 20.52         |  |   | 0.16
|September 30  |  |      | 24.80 |     |   | 21.38         |  |   | 0.16
|December 31   |  |      | 27.60 |     |   | 23.80         |  |   | 0.16
|              |  |      |      
|2004          |  |      |       |     |   |               |  |   |     
|March 31      |  | $    | 27.41 |     | $ | 25.14         |  | $ | 0.16
|June 30       |  |      | 28.12 |     |   | 22.64         |  |   | 0.18
|September 30  |  |      | 30.36 |     |   | 26.59         |  |   | 0.18
|December 31   |  |      | 30.28 |     |   | 26.26         |  |   | 0.18



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



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ITEM 6 SELECTED FINANCIAL DATA



|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|---------------------------------------------------------------- |  | -------------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                 |  | Years Ended December 31,                           |           
|                                                                 |  | 2004                                               |            |   | 2003 |   |            | 2002 |  |   | 2001       |   |  | 2000 |           
|                                                                 |  | (In thousands, except share and per share amounts) |           
|Statements of income:                                            |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Interest income                                                  |  | $                                                  | 269,767    |   |      | $ | 271,442    |      |  | $ | 259,019    |   |  | $    | 266,497    |   |  | $ | 288,102    |  
|Interest expense                                                 |  |                                                    | 44,269     |   |      |   | 53,379     |      |  |   | 66,404     |   |  |      | 96,192     |   |  |   | 121,030    |  
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net interest income                                              |  |                                                    | 225,498    |   |      |   | 218,063    |      |  |   | 192,615    |   |  |      | 170,305    |   |  |   | 167,072    |  
|Provision for loan losses                                        |  |                                                    | 4,377      |   |      |   | 7,175      |      |  |   | 8,331      |   |  |      | 8,041      |   |  |   | 8,700      |  
|Noninterest income                                               |  |                                                    | 73,405     |   |      |   | 97,031     |      |  |   | 65,060     |   |  |      | 63,733     |   |  |   | 53,109     |  
|Noninterest expense                                              |  |                                                    | 176,372    |   |      |   | 191,371    |      |  |   | 151,544    |   |  |      | 135,760    |   |  |   | 124,761    |  
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Income before income taxes                                       |  |                                                    | 118,154    |   |      |   | 116,548    |      |  |   | 97,800     |   |  |      | 90,237     |   |  |   | 86,720     |  
|Income tax expense                                               |  |                                                    | 43,027     |   |      |   | 41,749     |      |  |   | 34,155     |   |  |      | 31,736     |   |  |   | 28,033     |  
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income                                                       |  | $                                                  | 75,127     |   |      | $ | 74,799     |      |  | $ | 63,645     |   |  | $    | 58,501     |   |  | $ | 58,687     |  
|                                                                 |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total assets at year-end                                         |  | $                                                  | 6,070,210  |   |      | $ | 5,900,644  |      |  | $ | 4,920,544  |   |  | $    | 4,153,714  |   |  | $ | 3,769,861  |  
|Common shares outstanding at year-end                            |  |                                                    | 46,341,819 |   |      |   | 45,795,688 |      |  |   | 39,924,338 |   |  |      | 40,088,058 |   |  |   | 40,776,694 |  
|Balance sheetsaverage daily balances:                           |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total assets                                                     |  | $                                                  | 5,895,720  |   |      | $ | 5,777,538  |      |  | $ | 4,551,879  |   |  | $    | 3,871,017  |   |  | $ | 3,813,366  |  
|Net loans                                                        |  |                                                    | 3,842,719  |   |      |   | 3,568,323  |      |  |   | 2,969,430  |   |  |      | 2,871,899  |   |  |   | 2,902,303  |  
|Investment securities                                            |  |                                                    | 1,478,989  |   |      |   | 1,696,982  |      |  |   | 1,264,156  |   |  |      | 729,027    |   |  |   | 643,837    |  
|Deposits                                                         |  |                                                    | 4,956,450  |   |      |   | 4,758,388  |      |  |   | 3,896,968  |   |  |      | 3,407,439  |   |  |   | 3,207,857  |  
|Borrowings                                                       |  |                                                    | 293,583    |   |      |   | 413,339    |      |  |   | 194,118    |   |  |      | 52,752     |   |  |   | 214,777    |  
|Stockholders equity                                             |  |                                                    | 591,693    |   |      |   | 538,217    |      |  |   | 394,740    |   |  |      | 353,529    |   |  |   | 341,081    |  
|Per common share:                                                |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Basic earnings                                                   |  | $                                                  | 1.63       |   |      | $ | 1.67       |      |  | $ | 1.58       |   |  | $    | 1.46       |   |  | $ | 1.39       |  
|Diluted earnings                                                 |  |                                                    | 1.61       |   |      |   | 1.66       |      |  |   | 1.57       |   |  |      | 1.44       |   |  |   | 1.38       |  
|Cash dividends declared                                          |  |                                                    | 0.70       |   |      |   | 0.64       |      |  |   | 0.63       |   |  |      | 0.61       |   |  |   | 0.60       |  
|Book value                                                       |  |                                                    | 13.38      |   |      |   | 12.66      |      |  |   | 10.49      |   |  |      | 9.25       |   |  |   | 8.39       |  
|Weighted average common shares outstanding                       |  |                                                    | 46,106,057 |   |      |   | 44,719,710 |      |  |   | 40,132,330 |   |  |      | 40,204,668 |   |  |   | 42,200,664 |  
|Weighted average common and common equivalent shares outstanding |  |                                                    | 46,731,304 |   |      |   | 45,150,135 |      |  |   | 40,619,253 |   |  |      | 40,683,786 |   |  |   | 42,625,141 |  
|Selected financial ratios:                                       |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Return on average stockholders equity                           |  |                                                    | 12.70      | % |      |   | 13.90      | %    |  |   | 16.12      | % |  |      | 16.55      | % |  |   | 17.21      | %
|Return on average tangible stockholders equity (1)              |  |                                                    | 21.43      |   |      |   | 22.92      |      |  |   | 19.27      |   |  |      | 18.54      |   |  |   | 18.47      |  
|Return on average total assets                                   |  |                                                    | 1.27       |   |      |   | 1.29       |      |  |   | 1.40       |   |  |      | 1.51       |   |  |   | 1.54       |  
|Return on average tangible total assets (1)                      |  |                                                    | 1.36       |   |      |   | 1.37       |      |  |   | 1.44       |   |  |      | 1.57       |   |  |   | 1.58       |  
|Common stock dividend payout ratio (2)                           |  |                                                    | 42.45      |   |      |   | 37.84      |      |  |   | 39.88      |   |  |      | 42.15      |   |  |   | 43.42      |  
|Net yield on earning assets                                      |  |                                                    | 4.21       |   |      |   | 4.12       |      |  |   | 4.53       |   |  |      | 4.74       |   |  |   | 4.73       |  
|Interest rate spread                                             |  |                                                    | 4.02       |   |      |   | 3.90       |      |  |   | 4.16       |   |  |      | 4.08       |   |  |   | 3.95       |  
|Net charge-offs as a percent of average loans                    |  |                                                    | 0.07       |   |      |   | 0.16       |      |  |   | 0.28       |   |  |      | 0.24       |   |  |   | 0.32       |  
|Nonperforming assets ratio (3)                                   |  |                                                    | 0.49       |   |      |   | 0.39       |      |  |   | 0.49       |   |  |      | 0.46       |   |  |   | 0.42       |  
|Allowance for loan losses as a percent of year-end loans         |  |                                                    | 1.45       |   |      |   | 1.54       |      |  |   | 1.62       |   |  |      | 1.59       |   |  |   | 1.41       |  
|Leverage capital ratio                                           |  |                                                    | 8.42       |   |      |   | 7.79       |      |  |   | 9.28       |   |  |      | 7.99       |   |  |   | 8.65       |  
|Risk-based capital ratios:                                       |  |                                                    |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Tier 1                                                           |  |                                                    | 10.44      |   |      |   | 10.07      |      |  |   | 12.25      |   |  |      | 10.32      |   |  |   | 10.82      |  
|Total                                                            |  |                                                    | 11.64      |   |      |   | 11.32      |      |  |   | 13.50      |   |  |      | 11.57      |   |  |   | 12.08      |  
|Average equity / Average assets                                  |  |                                                    | 10.04      |   |      |   | 9.32       |      |  |   | 8.67       |   |  |      | 9.13       |   |  |   | 8.94       |  
|Tangible capital ratio                                           |  |                                                    | 6.58       |   |      |   | 6.02       |      |  |   | 7.29       |   |  |      | 8.19       |   |  |   | 8.69       |  



18



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---

|(1.) | Reconciliation of non-GAAP measurements to GAAP
|---- | -----------------------------------------------



|                                                   |  |   |           |   |  |   |           |   |  |   |           |   |  |   |           |   |  |   |           |  
|-------------------------------------------------- |  | - | --------- | - |  | - | --------- | - |  | - | --------- | - |  | - | --------- | - |  | - | --------- | -
|Net Income (GAAP)                                  |  | $ | 75,127    |   |  | $ | 74,799    |   |  | $ | 63,645    |   |  | $ | 58,501    |   |  | $ | 58,687    |  
|Amortization of identified intangibles, net of tax |  |   | 2,000     |   |  |   | 1,786     |   |  |   | 831       |   |  |   | 1,925     |   |  |   | 1,349     |  
|Tangible Net Income (A)                            |  | $ | 77,127    |   |  | $ | 76,585    |   |  | $ | 64,476    |   |  | $ | 60,426    |   |  | $ | 60,036    |  
|                                                   |  |   |           |   | 
|Average Equity (GAAP)                              |  |   | 591,693   |   |  |   | 538,217   |   |  |   | 394,740   |   |  |   | 353,529   |   |  |   | 341,081   |  
|Average Identified Intangibles                     |  |   | 21,741    |   |  |   | 22,493    |   |  |   | 9,108     |   |  |   | 0         |   |  |   | 2,057     |  
|Average Deferred Tax on Identified Intangibles     |  |   | (6,392    | ) |  |   | (5,763    | ) |  |   | (2,280    | ) |  |   | (594      | ) |  |   | (868      | )
|Average Goodwill                                   |  |   | 216,519   |   |  |   | 187,369   |   |  |   | 53,293    |   |  |   | 28,147    |   |  |   | 14,882    |  
|Average Tangible Equity (B)                        |  |   | 359,825   |   |  |   | 334,118   |   |  |   | 334,619   |   |  |   | 325,976   |   |  |   | 325,010   |  
|Return on Average Tangible Equity (A) / (B)        |  |   | 21.43     | % |  |   | 22.92     | % |  |   | 19.27     | % |  |   | 18.54     | % |  |   | 18.47     | %
|                                                   |  |   |           |   | 
|Average Assets (GAAP)                              |  |   | 5,895,720 |   |  |   | 5,777,538 |   |  |   | 4,551,879 |   |  |   | 3,871,017 |   |  |   | 3,813,366 |  
|Average Identified Intangibles                     |  |   | 21,741    |   |  |   | 22,493    |   |  |   | 9,108     |   |  |   | 0         |   |  |   | 2,057     |  
|Average Deferred Tax on Identified Intangibles     |  |   | (6,392    | ) |  |   | (5,763    | ) |  |   | (2,280    | ) |  |   | (594      | ) |  |   | (868      | )
|Average Goodwill                                   |  |   | 216,519   |   |  |   | 187,369   |   |  |   | 53,293    |   |  |   | 28,147    |   |  |   | 14,882    |  
|Average Tangible Assets (C)                        |  |   | 5,663,852 |   |  |   | 5,573,439 |   |  |   | 4,491,759 |   |  |   | 3,843,464 |   |  |   | 3,797,295 |  
|Return on Average Tangible Assets (A) / (C)        |  |   | 1.36      | % |  |   | 1.37      | % |  |   | 1.44      | % |  |   | 1.57      | % |  |   | 1.58      | %



|(2) | Common stock cash dividends declared divided by net income.
|--- | -----------------------------------------------------------

|(3) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Prior year per share amounts have been adjusted to reflect the Companys 5-for-4 common stock split.
|--- | ----------------------------------------------------------------------------------------------------



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



For the Years Ended December 31, 2004, 2003, and 2002



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 in later
sections of Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A).



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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 regularly 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, original loan terms and whether the loans are fixed or adjustable rate mortgages. 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 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.



Income Taxes.The Company estimates its income taxes for each of the jurisdictions in which it operates to determine an appropriate expense against current pre-tax earnings. This involves estimating the Companys actual current 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, 2004, there were no valuation allowances set aside against any deferred tax assets.



Interest Income Recognition.Interest on loans is included in
income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on loans 90 days or more past due unless they are adequately secured and 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 nonaccural status could have an adverse impact on interest income recognized in future periods.



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.



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##### Table of Contents

Executive Overview



Chittenden posted 2004 net income of $75.1 million, compared to $74.8 million in 2003. Diluted earnings per share for 2004 were $1.61 compared to $1.66
for 2003, and $1.57 for 2002. The decrease in diluted earnings per share from 2003 was primarily due to the increased weighted average common shares resulting from the Granite acquisition.



Chittendens total loans at December 31, 2004, were approximately $4.1
billion or approximately 70% of total earning assets. The Company experienced loan growth of approximately 10% in 2004 with strong growth of 14% in its commercial portfolios. The average yield on loans declined to 5.39% or 14 basis points from 2003.
The Companys average deposits for 2004 increased 4% from 2003 and the average cost of deposits decreased from 87 basis points in 2003 to 74 basis points in 2004.



The yield on earning assets was 4.21% for the year-ended December 31, 2004, an increase of 9 basis points from the prior
year. In the third quarter of 2003, the Company recognized accelerated purchase accounting amortization of $1.7 million primarily due to heavy prepayments on Granites residential mortgages. The accelerated amortization accounted for 3 basis
points of the increase from that period.



The Companys
noninterest income declined $23.6 million primarily due to lower gains on sales of mortgage loans and investment securities. This decrease in noninterest income was partially offset by a lower provision for loan losses of $2.8 million and reduced
noninterest expense of $15.0 million. The reduction in noninterest expense was primarily attributable to lower conversion and restructuring charges of $6.6 million, reductions in salaries expense of $4.8 million and a decrease in data processing
expense of $3.2 million.



The Company incurred conversion and
restructuring charges of $2.3 million in 2004, down from $8.9 million in 2003. During 2004, the Company completed the conversion of its core banking applications, for all of its banking subsidiaries, to the Jack Henry Silverlake System. At the same
time, the former Granite Bank was merged into Ocean National Bank. In addition, Granites former insurance subsidiary was consolidated into Chittenden Insurance Group during the quarter. As a result of these activities, conversion and
restructuring charges for 2004 were $2.3 million. The conversion and restructuring charges in 2003 included $3.1 million in payments to terminate the Companys existing information technology contract, $3.7 million in impairment of computer
equipment, which was not portable to the new operating platform, and $1.8 million for the consolidation of 11 branches and the closure of 30 offsite ATMs.



Return on average equity (ROE) was 12.70% for the year-ended December 31, 2004 compared with 13.90% and 16.12% in 2003 and 2002. Return on average assets
(ROA) was 1.27% for 2004 a decrease from 1.29% in 2003 and 1.40% in 2002. The decline in ROE for 2004 and 2003 was primarily attributable to the Granite Bank acquisition, and the common equity issued in conjunction with the transaction.



In 2004, one of the Companys primary goals was to strengthen its
operating platform and improve the efficiency of its banks. The following accomplishments were instrumental in meeting this goal:



| |  |  | The Company completed the most comprehensive information technology conversion in its history during the second quarter of 2004. The Company believes that completion of this project
positions Chittenden to more effectively serve its customers, and enhance efficiencies in providing Chittendens high-quality service.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company merged the former Granite Bank into Ocean National Bank, and consolidated Granites insurance operation into Chittenden Insurance Group. In addition, the Company
consolidated 11 of Granites branches into Ocean branches. Oceans total assets as of December 31, 2004 were $1.6 billion, and the Portsmouth, New Hampshire based franchise stretches from Kennebunk, Maine to Keene and Concord, New
Hampshire.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Lending Activity



Loan Portfolio



Commercial Loans.The Company offers a range of banking services, including residential real estate, consumer, and commercial loans to businesses
with revenues of approximately $1 million to $100 million, and to individuals and families. 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 total commercial loan portfolio, defined as commercial, municipal, multi-family, commercial real estate and construction loans, constituted $2.855 billion, or 70% of Chittendens loan portfolio at
December 31, 2004. The Companys commercial loans grew 14% from 2003 with the strongest growth coming from the commercial (C&I) portfolio of 22% and the commercial real estate (CRE) portfolio of 11%. In addition, the
Company experienced growth of 22% in its municipal portfolio and 24% in the construction portfolio. The multi-family real estate portfolio was up slightly from the prior year. The continued growth came primarily from the Companys Vermont,
Western Massachusetts and New Hampshire markets and was not specifically concentrated in any one industry. The following graph shows the industry diversification of the commercial loan portfolios at December 31, 2004:



LOGO



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. At December 31, 2004, the construction portfolio was comprised of approximately 41% in loans to commercial
customers for owner-occupied properties, 24% for commercial customers for investor properties, 19% in individual consumer construction loans, and 16% to residential developers.



Residential Real Estate Loans.Residential real estate loans, comprised of 1-4 family and home equity lines of
credit, totaled $982.7 million at December 31, 2004 an increase of $11.0 million from 2003. The increase is attributable to the home equity lines of credit, which totaled $294.7 million at December 31, 2004 compared with $270.9 million at the end of
2003. Total paydowns on the residential real estate portfolio were $110 million in



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##### Table of Contents

2004 compared with $387 million in 2003. New originations of portfolio residential real estate loans did not keep pace with paydowns because the majority of
loans originated in 2004 were fixed rate loans sold on the secondary market.



Consumer Loans.Consumer loans constituted $240 million, or 6% of Chittendens loan portfolio at December 31, 2004, a decrease of $20.0 million from 2003. Approximately 79% of these loans were indirect
installment loans while the remaining loans consisted of direct installment and revolving credit. All of the Companys indirect installment loans were originated from dealers within the Banks operating areas. The primary reason for the
decline from 2003 was the rapid reduction in lease financing receivables. The Company decided in 2001 to exit this product and the remaining portfolio at December 31, 2004 was $4.6 million or a decrease of $15.6 million from 2003. The contractual
maturities of the remaining lease portfolio at December 31, 2004 for the next twelve months are $3.6 million.



The following table shows the composition of the loan portfolio (based on underlying collateral utilizing bank regulatory definitions) for the five years
ended December 31, 2004:



|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------- |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                          |  | December 31,   |          
|                          |  | 2004           |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                          |  | (in thousands) |          
|Commercial                |  | $              | 801,369   |   |      | $ | 658,615   |      |  | $ | 568,224   |   |  | $    | 559,752   |   |  | $ | 515,926   |  
|Municipal                 |  |                | 106,120   |   |      |   | 87,080    |      |  |   | 77,820    |   |  |      | 85,479    |   |  |   | 83,566    |  
|Real estate:              |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|1-4 family                |  |                | 688,017   |   |      |   | 700,671   |      |  |   | 561,330   |   |  |      | 618,033   |   |  |   | 839,258   |  
|Multi-family              |  |                | 182,541   |   |      |   | 176,478   |      |  |   | 96,494    |   |  |      | 54,623    |   |  |   | 44,766    |  
|Home equity.              |  |                | 294,656   |   |      |   | 270,959   |      |  |   | 203,882   |   |  |      | 182,905   |   |  |   | 140,150   |  
|Commercial                |  |                | 1,590,457 |   |      |   | 1,430,945 |      |  |   | 1,103,897 |   |  |      | 903,819   |   |  |   | 723,339   |  
|Construction              |  |                | 174,283   |   |      |   | 140,801   |      |  |   | 85,512    |   |  |      | 79,801    |   |  |   | 57,701    |  
|Consumer                  |  |                | 239,750   |   |      |   | 259,135   |      |  |   | 276,704   |   |  |      | 353,765   |   |  |   | 451,392   |  
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total gross loans         |  |                | 4,077,193 |   |      |   | 3,724,684 |      |  |   | 2,973,863 |   |  |      | 2,838,177 |   |  |   | 2,856,098 |  
|Allowance for loan losses |  |                | (59,031   | ) |      |   | (57,464   | )    |  |   | (48,197   | ) |  |      | (45,268   | ) |  |   | (40,255   | )
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loans                 |  | $              | 4,018,162 |   |      | $ | 3,667,220 |      |  | $ | 2,925,666 |   |  | $    | 2,792,909 |   |  | $ | 2,815,843 |  
|                          |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  



Mortgage Banking Operations



Residential mortgages originated during 2004 totaled $688
million, compared to $1.513 billion during 2003. This decline was due to lower volumes of fixed rate residential loans caused by gradually increasing market rates during 2004 and lower volumes of refinancing activity. The Company underwrites its
residential mortgages to secondary market standards and sells substantially all of its fixed-rate residential mortgage production on a servicing-retained non-recourse basis. Secondary market sales of mortgage loans totaled $491 million in 2004,
compared to $1.395 billion in 2003. The originations that are not sold consist of hybrid adjustable and private banking loans, which are retained by the Banks.



The portfolio of residential mortgages serviced for investors totaled $2.142 billion at December 31, 2004 compared to $2.285 billion at year-end 2003.
These assets are owned by investors other than Chittenden and therefore are not included in the Companys consolidated balance sheets. The net MSRs relating to this servicing portfolio at December 31, 2004 and 2003 were $11.8 million and $12.3
million, respectively. As noted under Application of Critical Accounting Policies, the Company evaluates the MSR asset for impairment on a regular basis. At December 31, 2004, the MSRs amortized cost of $12.8 million was reduced by an
impairment reserve of $1.0 million, as compared to an impairment reserve of $2.7 million at the end of 2003.



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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 generally would not be reimbursed by the guarantor.) Consumer and residential loans are included when management considers it to be
appropriate, based upon evidence of collectibility, the value of any underlying collateral and other general criteria. Generally, a loan remains on nonaccrual status until the factors which indicated doubtful collectibility no longer exist or the
loan is determined to be uncollectible and is charged off against the allowance for loan losses.



A loan is classified as a restructured loan when its interest rate is reduced and/or other terms are modified because of the inability of the borrower to
service debt at current market rates and terms. Other real estate owned (OREO) is real estate that has been formally acquired through foreclosure and is carried at the lower of cost or fair value.



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, 2004:



|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                              |  | December 31,   |       
|                                                                              |  | 2004           |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                                              |  | (in thousands) |       
|Loans on nonaccrual                                                           |  | $              | 19,915 |   |      | $ | 14,331 |      |  | $ | 14,576 |   |  | $    | 12,374 |   |  | $ | 11,376 |  
|Troubled debt restructurings                                                  |  |                |       |   |      |   |       |      |  |   | 225    |   |  |      |       |   |  |   |       |  
|Other real estate owned                                                       |  |                | 109    |   |      |   | 100    |      |  |   | 158    |   |  |      | 703    |   |  |   | 513    |  
|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                                    |  | $              | 20,024 |   |      | $ | 14,431 |      |  | $ | 14,959 |   |  | $    | 13,077 |   |  | $ | 11,889 |  
|                                                                              |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans past due 90 days or more and still accruing                             |  | $              | 2,604  |   |      | $ | 4,029  |      |  | $ | 2,953  |   |  | $    | 4,583  |   |  | $ | 4,595  |  
|Percentage of nonperforming assets to total loans and other real estate owned |  |                | 0.49   | % |      |   | 0.39   | %    |  |   | 0.49   | % |  |      | 0.46   | % |  |   | 0.42   | %
|Nonperforming assets to total assets                                          |  |                | 0.33   |   |      |   | 0.24   |      |  |   | 0.30   |   |  |      | 0.31   |   |  |   | 0.32   |  
|Allowance for loan losses to nonperforming loans, excluding OREO              |  |                | 296.41 |   |      |   | 400.99 |      |  |   | 325.64 |   |  |      | 365.83 |   |  |   | 353.86 |  



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##### Table of Contents

The following graph compares the Companys nonperforming assets with the composite of banks included
in SNL Securities $5-$10 billion bank index.



LOGO



The percentage of nonperforming
assets to total loans and OREO was unusually low at the end of 2003 as compared with the Companys historical experiences, which has averaged approximately 50 basis points over the last six years. Nonaccrual loans at December 31, 2004 consisted
of approximately 160 loans, which were diversified across a range of industries, sectors and geography. Nonaccrual loans with payments less than 30 days past due represent 48% of total loans on nonaccrual at December 31, 2004.



Allowance for loan losses



Adequacy of the allowance for loan losses is determined using a consistent,
systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectibility of specific loans when determining the adequacy of the allowance for loan losses, management also takes into consideration
other factors such as changes in the mix and size of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, and economic trends. The adequacy of the allowance for loan losses is assessed by an
allocation process whereby specific loss allocations are made against certain adversely classified loans, and general loss allocations are made against segments of the loan portfolio which have similar attributes. The 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 collectability 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, growth in loan portfolios, or for other reasons. Any future
additions to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Companys allowance for loan losses as an integral part of their
examination process. Such agencies may require the Company to record additions to the allowance based on judgments different from those of management.



Credit quality of the commercial portfolios is quantified by a corporate credit rating system designed to parallel regulatory criteria and categories of
loan risk. Individual loan officers monitor their loans to ensure



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appropriate rating assignments are made on a timely basis. Risk ratings and quality of 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 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, 2004, impaired loans with specific reserves totaled $6,541,000 (all of these loans were on nonaccrual status) and the amount of such reserves were $2,040,000.



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Results and recommendations from these processes provide senior management and the Board of Directors
with independent information on loan portfolio condition. The following table summarizes the activity in the Companys allowance for loan losses for the five years ended December 31, 2004:



|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------------ |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                   |  | December 31,   |          
|                                                                   |  | 2004           |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                                                                   |  | (in thousands) |          
|Balance of allowance for possible loan losses at beginning of year |  | $              | 57,464    |   |      | $ | 48,197    |      |  | $ | 45,268    |   |  | $    | 40,255    |   |  | $ | 41,079    |  
|Allowance acquired through acquisitions                            |  |                |          |   |      |   | 7,936     |      |  |   | 2,972     |   |  |      | 4,083     |   |  |   |          |  
|Provision charged to expense                                       |  |                | 4,377     |   |      |   | 7,175     |      |  |   | 8,331     |   |  |      | 8,041     |   |  |   | 8,700     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Balance of allowance for possible loan losses after provision      |  |                | 61,841    |   |      |   | 63,308    |      |  |   | 56,571    |   |  |      | 52,379    |   |  |   | 49,779    |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loans charged off:                                                 |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial                                                         |  |                | 2,755     |   |      |   | 3,653     |      |  |   | 4,340     |   |  |      | 2,881     |   |  |   | 4,335     |  
|Real estate:                                                       |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential                                                        |  |                | 143       |   |      |   | 187       |      |  |   | 487       |   |  |      | 402       |   |  |   | 454       |  
|Home equity                                                        |  |                | 11        |   |      |   | 21        |      |  |   | 138       |   |  |      | 263       |   |  |   | 120       |  
|Commercial                                                         |  |                | 248       |   |      |   | 1,794     |      |  |   | 554       |   |  |      | 1,073     |   |  |   | 332       |  
|Construction                                                       |  |                | 4         |   |      |   |          |      |  |   |          |   |  |      | 60        |   |  |   |          |  
|Consumer                                                           |  |                | 3,989     |   |      |   | 4,383     |      |  |   | 6,048     |   |  |      | 5,780     |   |  |   | 8,198     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total loans charged off                                            |  |                | 7,150     |   |      |   | 10,038    |      |  |   | 11,567    |   |  |      | 10,459    |   |  |   | 13,439    |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Recoveries of loans previously charged off:                        |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial                                                         |  |                | 1,986     |   |      |   | 1,287     |      |  |   | 1,048     |   |  |      | 806       |   |  |   | 720       |  
|Real estate:                                                       |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential                                                        |  |                | 158       |   |      |   | 333       |      |  |   | 71        |   |  |      | 130       |   |  |   | 164       |  
|Home equity                                                        |  |                | 18        |   |      |   | 90        |      |  |   | 36        |   |  |      | 15        |   |  |   | 51        |  
|Commercial                                                         |  |                | 246       |   |      |   | 189       |      |  |   | 232       |   |  |      | 349       |   |  |   | 230       |  
|Construction                                                       |  |                | 5         |   |      |   | 64        |      |  |   | 19        |   |  |      | 66        |   |  |   | 112       |  
|Consumer                                                           |  |                | 1,927     |   |      |   | 2,231     |      |  |   | 1,787     |   |  |      | 1,982     |   |  |   | 2,638     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total recoveries                                                   |  |                | 4,340     |   |      |   | 4,194     |      |  |   | 3,193     |   |  |      | 3,348     |   |  |   | 3,915     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loans charged off                                              |  |                | 2,810     |   |      |   | 5,844     |      |  |   | 8,374     |   |  |      | 7,111     |   |  |   | 9,524     |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Balance of allowance for possible loan losses at year end          |  | $              | 59,031    |   |      | $ | 57,464    |      |  | $ | 48,197    |   |  | $    | 45,268    |   |  | $ | 40,255    |  
|                                                                   |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loans outstanding at end of year                                   |  | $              | 4,077,193 |   |      | $ | 3,724,865 |      |  | $ | 2,973,863 |   |  | $    | 2,838,177 |   |  | $ | 2,856,098 |  
|Average loans outstanding during the year                          |  |                | 3,874,107 |   |      |   | 3,550,648 |      |  |   | 2,974,370 |   |  |      | 2,885,228 |   |  |   | 2,912,975 |  
|Ratio of net charge-offs during year to average loans outstanding  |  |                | 0.07      | % |      |   | 0.16      | %    |  |   | 0.28      | % |  |      | 0.24      | % |  |   | 0.32      | %
|Allowance as a percent of loans outstanding at end of year         |  |                | 1.45      |   |      |   | 1.54      |      |  |   | 1.62      |   |  |      | 1.59      |   |  |   | 1.41      |  



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. 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% in 2001, 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. 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.
This trend continued in 2004 when the provision declined $2.8 million to $4.4 million, primarily due to



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significantly lower net charge-offs, which declined $3.0 million from 2003. The allowance as a percentage of loans has declined from 1.62% at year-end 2002
to 1.45% at December 31, 2004 as a result of the reduced provision and because of strong loan growth over the period.



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 $2.9 million to $55.7 million at December 31, 2004.



The following table summarizes the allocation of the allowance for loan losses for the five years ended December 31, 2004:



|                                       |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  
|-------------------------------------- |  | --------------- | ------ | ---------------- | ---- | - | --------------- | ---- | ---------------- |  | ---- | --------------- |  | ---------------- | ------ |  | --------------- | - | ---------------- | - | ------ | --------------- | --- | ---------------- |  | - | ------ |  | --- | -
|                                       |  | December 31,    |       
|                                       |  | 2004            |        |                  | 2003 |   |                 | 2002 |                  |  | 2001 |                 |  | 2000             |       
|                                       |  | AmountAllocated |        | LoanDistribution |      |   | AmountAllocated |      | LoanDistribution |  |      | AmountAllocated |  | LoanDistribution |        |  | AmountAllocated |   | LoanDistribution |   |        | AmountAllocated |     | LoanDistribution | 
|                                       |  | (in thousands)  |       
|Commercial                             |  | $               | 13,028 |                  | 22   | % |                 | $    | 13,302           |  | 20   | %               |  | $                | 11,252 |  | 22              | % |                  | $ | 9,381  |                 | 23  | %                |  | $ | 7,861  |  | 21  | %
|Real estate:                           |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  
|Residential                            |  |                 | 1,756  |                  | 21   |   |                 |      | 1,763            |  | 24   |                 |  |                  | 1,733  |  | 22              |   |                  |   | 1,950  |                 | 24  |                  |  |   | 2,276  |  | 31  |  
|Home equity                            |  |                 | 1,064  |                  | 7    |   |                 |      | 966              |  | 7    |                 |  |                  | 748    |  | 7               |   |                  |   | 671    |                 | 6   |                  |  |   | 566    |  | 5   |  
|Commercial                             |  |                 | 28,479 |                  | 40   |   |                 |      | 25,832           |  | 38   |                 |  |                  | 19,429 |  | 37              |   |                  |   | 15,637 |                 | 32  |                  |  |   | 13,510 |  | 25  |  
|Construction                           |  |                 | 2,742  |                  | 4    |   |                 |      | 2,240            |  | 4    |                 |  |                  | 1,257  |  | 3               |   |                  |   | 1,250  |                 | 3   |                  |  |   | 865    |  | 2   |  
|Consumer                               |  |                 | 3,905  |                  | 6    |   |                 |      | 4,454            |  | 7    |                 |  |                  | 4,821  |  | 9               |   |                  |   | 5,139  |                 | 12  |                  |  |   | 7,290  |  | 16  |  
|Unfunded commitments and contingencies |  |                 | 4,729  |                  |     |   |                 |      | 4,207            |  |     |                 |  |                  | 4,106  |  |                |   |                  |   | 3,570  |                 |    |                  |  |   | 3,536  |  |    |  
|Other                                  |  |                 | 3,328  |                  |     |   |                 |      | 4,700            |  |     |                 |  |                  | 4,851  |  |                |   |                  |   | 7,670  |                 |    |                  |  |   | 4,351  |  |    |  
|                                       |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  
|                                       |  | $               | 59,031 |                  | 100  | % |                 | $    | 57,464           |  | 100  | %               |  | $                | 48,197 |  | 100             | % |                  | $ | 45,268 |                 | 100 | %                |  | $ | 40,255 |  | 100 | %
|                                       |  |                 |        |                  |      |   |                 |      |                  |  |      |                 |  |                  |        |  |                 |   |                  |   |        |                 |     |                  |  |   |        |  |     |  



During 2004, the
allowance for loan loss allocated to commercial loans decreased by $274,000, commercial real estate loans increased by $2.6 million, the construction loans allocation increased by $502,000 and the amount allocated to consumer loans declined by
approximately $549,000. The increased allocations to commercial real estate and construction loans reflected strong growth in the portfolio balances in these categories. While growth was also noted in the commercial portfolio, continued strong
credit quality kept the amount allocated to this portfolio relatively flat. The decline in the allocation to consumer loans reflects the change in the overall portfolio balances in that category year over year.



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, invest excess liquidity, generate interest income and mitigate interest rate sensitivity. At December 31, 2004, the Company held investments available for sale totaling $1.4 billion, a decline of 9% from 2003. The decline from
2003 to 2004 is primarily attributable to the utilization of cash flows from the securities portfolio to fund growth in the loan portfolio. At December 31, 2004, net unrealized gains were $1.1 million compared with net unrealized gains of $23.7
million at December 31, 2003. The decline is primarily due to higher market interest rates at year-end. There was no other than temporary impairment in the available for sale portfolio at December 31, 2004.



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



|                                                  |  |              |           |      |   |           |  |      |           |      |   |         |  |   |        
|------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | ------- |  | - | -------
|                                                  |  | December 31,
|                                                  |  | 2004         |           | 2003 |   | 2002      |  | 2001 |           | 2000
|Securities available for sale (at amortized cost) |  |              |           |      |   |           |  |      |           |      |   |         |  |   |        
|U.S. Treasury securities                          |  | $            | 6,612     |      | $ | 7,797     |  | $    | 51,989    |      | $ | 3,296   |  | $ | 4,696  
|U.S. government agency obligations                |  |              | 452,150   |      |   | 497,573   |  |      | 475,268   |      |   | 228,189 |  |   | 251,778
|Obligations of states and political subdivisions  |  |              | 1,294     |      |   | 1,297     |  |      | 1,571     |      |   | 4,663   |  |   | 6,133  
|Mortgage-backed securities                        |  |              | 499,891   |      |   | 537,033   |  |      | 453,855   |      |   | 371,631 |  |   | 152,377
|Corporate bonds and notes                         |  |              | 484,309   |      |   | 519,890   |  |      | 469,301   |      |   | 172,636 |  |   | 163,948
|Other debt securities                             |  |              | 834       |      |   | 843       |  |      | 874       |      |   | 32,623  |  |   | 6,083  
|                                                  |  |              |           |      |   |           |  |      |           |      |   |         |  |   |        
|Total securities available for sale               |  | $            | 1,445,090 |      | $ | 1,564,433 |  | $    | 1,452,858 |      | $ | 813,038 |  | $ | 585,015
|                                                  |  |              |           |      |   |           |  |      |           |      |   |         |  |   |        



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, 2004, with comparative totals for 2003. 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 AVAILABLE FOR SALE                    |  |                 |         |          |                                 |   |        |                                 |           |  |                 |        |  |          |         |  |        |   |          |   |       |        |      |          |  |   |           |  |      |  
|U.S. Treasury securities                         |  | $               | 1,273   |          | 1.57                            | % |        | $                               | 5,339     |  | 3.22            | %      |  | $        |        |  |       | % |          | $ |      |        |     | %        |  | $ | 6,612     |  | 2.90 | %
|U.S. government agency obligations               |  |                 | 42,406  |          | 2.40                            |   |        |                                 | 395,229   |  | 3.32            |        |  |          | 14,515  |  | 4.56   |   |          |   |      |        |     |          |  |   | 452,150   |  | 3.27 |  
|Obligations of states and political subdivisions |  |                 | 683     |          | 5.92                            |   |        |                                 | 495       |  | 6.13            |        |  |          | 60      |  | 8.79   |   |          |   | 56    |        | 8.79 |          |  |   | 1,294     |  | 6.26 |  
|Mortgage-backed securities(1)                    |  |                 | 115,121 |          | 4.27                            |   |        |                                 | 278,643   |  | 4.33            |        |  |          | 102,497 |  | 4.41   |   |          |   | 3,630 |        | 4.76 |          |  |   | 499,891   |  | 4.34 |  
|Corporate bonds and notes                        |  |                 | 94,956  |          | 5.98                            |   |        |                                 | 379,418   |  | 4.50            |        |  |          | 9,935   |  | 4.14   |   |          |   |      |        |     |          |  |   | 484,309   |  | 4.78 |  
|Other debt securities                            |  |                 | 200     |          | 7.44                            |   |        |                                 | 631       |  | 5.13            |        |  |          |        |  |       |   |          |   | 3     |        |     |          |  |   | 834       |  | 5.69 |  
|                                                 |  |                 |         |          |                                 |   |        |                                 |           |  |                 |        |  |          |         |  |        |   |          |   |       |        |      |          |  |   |           |  |      |  
|Total available for sale                         |  | $               | 254,639 |          | 4.59                            | % |        | $                               | 1,059,755 |  | 4.01            | %      |  | $        | 127,007 |  | 4.40   | % |          | $ | 3,689 |        | 4.82 | %        |  | $ | 1,445,090 |  | 4.15 | %
|                                                 |  |                 |         |          |                                 |   |        |                                 |           |  |                 |        |  |          |         |  |        |   |          |   |       |        |      |          |  |   |           |  |      |  
|Comparative totals for 2003                      |  | $               | 210,229 |          | 4.18                            | % |        | $                               | 1,150,919 |  | 4.18            | %      |  | $        | 197,257 |  | 4.67   | % |          | $ | 6,025 |        | 4.52 | %        |  | $ | 1,564,433 |  | 4.24 | %

---

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

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



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The Company evaluates and monitors the credit risk of its investments utilizing a variety of resources
including external credit rating agencies (predominantly Moodys and S&P). The following table shows the rating distribution of the investment portfolio on December 31, 2004 with comparative totals for 2003 (in thousands):



|                                                 |  |     |           |    |   |         |  |     |         |          |   |        |  |   |     |  |   |          
|------------------------------------------------ |  | --- | --------- | -- | - | ------- |  | --- | ------- | -------- | - | ------ |  | - | --- |  | - | ---------
|                                                 |  | AAA |           | AA |   | A       |  | Baa |         | Notrated |   | TOTAL 
|Securities available for sale(at amortized cost) |  |     |           |    |   |         |  |     |         |          |   |        |  |   |     |  |   |          
|U.S. Treasury securities                         |  | $   | 6,612     |    | $ |        |  | $   |        |          | $ |       |  | $ |    |  | $ | 6,612    
|U.S. government agency obligations               |  |     | 452,150   |    |   |        |  |     |        |          |   |       |  |   |    |  |   | 452,150  
|Corporate bonds notes                            |  |     | 23,562    |    |   | 136,006 |  |     | 276,443 |          |   | 48,298 |  |   |    |  |   | 484,309  
|Mortgage-backed securities                       |  |     | 499,891   |    |   |        |  |     |        |          |   |       |  |   |    |  |   | 499,891  
|Other debt securities                            |  |     | 411       |    |   | 1,591   |  |     |        |          |   |       |  |   | 126 |  |   | 2,128    
|                                                 |  |     |           |    |   |         |  |     |         |          |   |        |  |   |     |  |   |          
|TOTAL                                            |  | $   | 982,626   |    | $ | 137,597 |  | $   | 276,443 |          | $ | 48,298 |  | $ | 126 |  | $ | 1,445,090
|                                                 |  |     |           |    |   |         |  |     |         |          |   |        |  |   |     |  |   |          
|Comparative totals for2003                       |  | $   | 1,075,590 |    | $ | 106,000 |  | $   | 382,713 |          | $ |       |  | $ | 130 |  | $ | 1,564,433

---

|1) | If a security is split rated by the external rating agency this table reflects the higher of the two ratings.
|-- | -------------------------------------------------------------------------------------------------------------



Deposits



During 2004, total deposits averaged $5 billion, up from $4.8 billion in 2003. The increase from the prior year-end was
attributable to higher levels of jumbo CDs. Approximately 46% of the Companys deposit base is comprised of demand deposits, savings and NOW accounts, which had an overall weighted average cost of 18 basis points in 2004. In addition,
approximately 31% of the Companys total deposits are held in CMA/money market accounts that are primarily from its commercial customers. The remaining deposits consist of CDs less than $100,000 and jumbo CDs with an average weighted cost of
1.89% and 1.85% respectively for 2004. The overall cost of interest bearing deposits in 2004 was 0.89% and the all in cost of funds, including demand deposits at 0%, was 0.83% compared to 1.04% and 1.03% respectively in 2003. The increase in average
deposits primarily related to the Granite Bank acquisition, which closed on February 28, 2003.



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



|                                             |  |                          |           |      |   |           |  |   |          
|-------------------------------------------- |  | ------------------------ | --------- | ---- | - | --------- |  | - | ---------
|                                             |  | Years Ended December 31,
|                                             |  | 2004                     |           | 2003 |   | 2002     
|                                             |  | (in thousands)          
|Demands                                      |  | $                        | 882,408   |      | $ | 793,877   |  | $ | 624,305  
|Savings                                      |  |                          | 528,480   |      |   | 517,003   |  |   | 387,080  
|NOWs                                         |  |                          | 887,801   |      |   | 825,947   |  |   | 518,492  
|CMA/Money Market                             |  |                          | 1,550,528 |      |   | 1,551,136 |  |   | 1,467,230
|Certificates of deposit less than $100,000   |  |                          | 769,222   |      |   | 814,089   |  |   | 676,350  
|Certificates of deposit of $100,000 and over |  |                          | 338,011   |      |   | 256,336   |  |   | 223,511  
|                                             |  |                          |           |      |   |           |  |   |          
|Total deposits                               |  | $                        | 4,956,450 |      | $ | 4,758,388 |  | $ | 3,896,968
|                                             |  |                          |           |      |   |           |  |   |          



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,
|                                 |  | 2004                     |         | 2003 |   | 2002    |  | 2001 |         | 2000
|                                 |  | (in thousands)          
|Three months or less             |  | $                        | 182,892 |      | $ | 130,067 |  | $    | 126,062 |      | $ | 119,696 |  | $ | 135,263
|Over three months to six months  |  |                          | 73,835  |      |   | 38,440  |  |      | 54,448  |      |   | 42,179  |  |   | 35,065 
|Over six months to twelve months |  |                          | 95,151  |      |   | 73,370  |  |      | 57,433  |      |   | 39,770  |  |   | 42,433 
|Over twelve months               |  |                          | 81,722  |      |   | 61,782  |  |      | 33,748  |      |   | 21,828  |  |   | 28,100 
|                                 |  |                          |         |      |   |         |  |      |         |      |   |         |  |   |        
|                                 |  | $                        | 433,600 |      | $ | 303,659 |  | $    | 271,691 |      | $ | 223,473 |  | $ | 240,861
|                                 |  |                          |         |      |   |         |  |      |         |      |   |         |  |   |        



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Borrowings



Borrowings and repos were $356.5 million at December 31, 2004 an increase of $69.0 million from the end of 2003. During 2004, borrowings averaged $293.6
million, down from $413.3 million in 2003. This funding consists of proceeds from securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) borrowings, federal funds purchased and the trust-preferred securities. FHLB borrowings
averaged $52.9 million for 2004, down from $177.5 million in 2003. The decline from 2003 related to the repayment of borrowings acquired in the Granite Bank transaction. Treasury borrowings were not utilized in 2004 while they average $435,000
during 2003. Repurchase agreements, consisting entirely of customer agreements, averaged $73.9 million for 2004, down from $97.5 million in 2003.



On May 21, 2002, a wholly-owned subsidiary of the Company, Chittenden Capital Trust I (the Trust), issued $125 million of 8% trust preferred
securities (TPS) to the public and invested the proceeds from this offering in an equivalent amount of junior subordinated debentures issued by the Company. These debentures are the sole asset of the trust subsidiary. The TPS pay
interest quarterly, are mandatorily redeemable on July 1, 2032 and may be redeemed by the Trust at par any time on or after July 1, 2007. The Company has fully and unconditionally guaranteed the securities issued by the Trust. Concurrent with the
issuance of these securities, the Company entered into interest rate swap agreements with two counterparties, in which the Company receives 8% fixed on the notional amount of $125 million, while paying the counterparties a variable rate based on the
three month LIBOR (London Interbank Offered Rate), plus approximately 122 basis points.



As part of the Companys first quarter 2004 adoption of FIN 46R, the Company no longer consolidates the Trust in its financial statements. However, the $125 million of junior subordinated debentures issued by the
Company to the Trust continue to be classified as borrowings on the Companys balance sheet, and the related interest expense continues to be so classified on the Companys statements of income. Certain balances between the Company and the
Trust, which were previously eliminated in consolidation, have been recognized in the Companys financial statements.



Capital Resources



The Companys capital is the foundation for developing programs for growth and new activities. Total capital at December 31, 2004 was $620
million, an increase of $40 million from December 31, 2003. Net income of $75.1 million increased the Companys capital position in 2004, while dividend payments of $31.9 million reduced it. The increase in capital was also affected by a
decrease in accumulated other comprehensive income which was the result of lower net unrealized gains of $14.9 million on securities available for sale. Net income of $74.8 million increased the capital position in 2003, while dividend payments of
$28.3 million reduced it. In addition, $116 million in common stock issued in the Granite acquisition increased equity in 2003.



The FRB, FDIC and OCC have defined leverage capital requirements, which measure Tier 1 capital (as defined below) against average total assets without
regard to risk weighting. Additionally, these regulators have a risk-based capital standard. Under this measure of capital, banks are required to hold more capital against certain assets perceived as higher risk, such as commercial loans, than
against other assets perceived as lower risk, such 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 and OCC regulations pertaining to capital adequacy, which apply to the Banks, require a minimum 3% leverage capital
ratio for those institutions with the most favorable composite regulatory examination rating. In addition, a 4% Tier 1 risk-based capital ratio, and an 8% total risk-based capital ratio are required for a bank to



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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, 2004:



|                  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |         |  
|----------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ------- | -
|                  |  | CTC   |   |  | BWM   |   |  | FBT   |   |  | MBT   |   |  | ONB   |   |  | COMPANY |  
|Leverage          |  | 7.49  | % |  | 8.31  | % |  | 7.42  | % |  | 9.19  | % |  | 7.75  | % |  | 8.42    | %
|Tier 1 Risk-Based |  | 9.52  | % |  | 8.90  | % |  | 9.70  | % |  | 9.27  | % |  | 9.73  | % |  | 10.44   | %
|Total Risk-Based  |  | 10.70 | % |  | 10.15 | % |  | 10.82 | % |  | 10.52 | % |  | 10.96 | % |  | 11.64   | %



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.



On May 6, 2004 the
Federal Reserve Board proposed a rule that would retain trust preferred securities in Tier 1 capital of bank holding companies, but with stricter quantitative limits and clearer standards. Under the proposal, after a three-year transition period
which would end on March 31, 2007, the aggregate amount of trust preferred securities would be limited to 25 percent of Tier 1 capital elements, net of goodwill. 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 under the new regulatory capital treatment of these securities. The regulatory capital treatment of the TPS in the Companys total capital ratio will be unchanged.



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



|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------ |  | -------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                         |  | December 31,   |          
|                         |  | 2004           |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                         |  | (in thousands) |          
|Leverage                 |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Stockholders equity     |  | $              | 503,097   |   |      | $ | 445,778   |      |  | $ | 445,581   |   |  | $    | 324,363   |   |  | $ | 322,929   |  
|Total average assets (1) |  |                | 5,978,058 |   |      |   | 5,720,890 |      |  |   | 4,804,216 |   |  |      | 4,057,839 |   |  |   | 3,735,584 |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                         |  |                | 8.42      | % |      |   | 7.79      | %    |  |   | 9.28      | % |  |      | 7.99      | % |  |   | 8.65      | %
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Risk-based               |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Capital components:      |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Tier 1                   |  | $              | 503,097   |   |      | $ | 445,778   |      |  | $ | 445,581   |   |  | $    | 324,363   |   |  | $ | 322,929   |  
|Tier 2 (2)               |  |                | 57,949    |   |      |   | 55,359    |      |  |   | 45,509    |   |  |      | 39,357    |   |  |   | 37,301    |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total                    |  | $              | 561,046   |   |      | $ | 501,137   |      |  | $ | 491,090   |   |  | $    | 363,720   |   |  | $ | 360,230   |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Risk-weighted assets:    |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|On-balance sheet         |  | $              | 4,575,988 |   |      | $ | 4,199,347 |      |  | $ | 3,448,755 |   |  | $    | 2,960,493 |   |  | $ | 2,787,046 |  
|Off-balance sheet        |  |                | 243,837   |   |      |   | 229,382   |      |  |   | 191,897   |   |  |      | 188,079   |   |  |   | 212,812   |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                         |  | $              | 4,819,825 |   |      | $ | 4,428,729 |      |  | $ | 3,640,652 |   |  | $    | 3,148,572 |   |  | $ | 2,999,858 |  
|                         |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Ratios:                  |  |                |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Tier 1                   |  |                | 10.44     | % |      |   | 10.07     | %    |  |   | 12.25     | % |  |      | 10.32     | % |  |   | 10.82     | %
|Total (including Tier 2) |  |                | 11.64     |   |      |   | 11.32     |      |  |   | 13.50     |   |  |      | 11.57     |   |  |   | 12.08     |  

---

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

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



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



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Liquidity



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



The primary source of funding for the parent company is dividends received
from the Banks. For the Banks, primary sources of funding include customer deposits, and wholesale funding. The Banks generate significant amounts of low cost funds through their deposit gathering operations. For the year ended December 31, 2004,
the Companys ratio of average loans to average deposits was approximately 78.7%. At December 31, 2004, the Company maintained cash and cash equivalents of approximately $136.5 million, compared with $174.9 million at December 31, 2003. In
addition, the Companys securities available for sale were $1.4 billion at December 31, 2004 with expected cash flow of $304.9 million in 2005 from maturities and normal MBS prepayments.



The Companys borrowing costs and its ability to raise wholesale funds
can be impacted by its credit ratings and changes thereto. Chittenden Corporations credit ratings at December 31, 2004 were an A3 from Moodys and a BBB from S&P. An adverse change in one or both of Chittendens credit ratings
could inhibit the Companys ability to raise additional wholesale funds or increase costs related to the Companys capital raising activities.



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 $577 million as of December 31, 2004. 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 |   | 1-3years |  | 3-5years |        | More than5 years
|FHLB borrowings                                       |  | $                      | 126,508 |                 | $ | 74,000   |  | $        |       |                  | $ | 20,000 |  | $ | 32,508 
|Trust preferred securities                            |  |                        | 125,000 |                 |   |         |  |          |       |                  |   |       |  |   | 125,000
|Data processing contract                              |  |                        | 4,717   |                 |   | 1,048    |  |          | 3,145  |                  |   | 524    |  |   |       
|Equity investment commitments to limited partnerships |  |                        | 4,785   |                 |   | 700      |  |          | 4,085  |                  |   |       |  |   |       
|Operating leases                                      |  |                        | 16,308  |                 |   | 4,640    |  |          | 7,956  |                  |   | 712    |  |   | 3,000  
|                                                      |  |                        |         |                 |   |          |  |          |        |                  |   |        |  |   |        
|Total                                                 |  | $                      | 277,318 |                 | $ | 80,388   |  | $        | 15,186 |                  | $ | 21,236 |  | $ | 160,508
|                                                      |  |                        |         |                 |   |          |  |          |        |                  |   |        |  |   |        



Due to recent
contributions made in excess of the minimum required amounts, the Company does not anticipate a required pension contribution during 2005. However, it is possible that the Company could make a voluntary contribution during 2005 to respond to changes
in pension funding legislation and/or to further improve the plans funded status. No pension contributions are reflected beyond 12 months because these depend on a variety of factors that cannot be easily predicted.



FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK



In the normal course of business, to meet 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



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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, 2004 and 2003 are as follows:



|                                                                          |  |                |         |      |   |        
|------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                                          |  | 2004           |         | 2003
|                                                                          |  | (in thousands)
|Loans and Other Commitments                                               |  |                |         |      |   |        
|Commitments to originate loans                                            |  | $              | 204,193 |      | $ | 131,610
|Unused home equity lines of credit                                        |  |                | 313,526 |      |   | 292,823
|Unused portions of credit card lines                                      |  |                | 39,921  |      |   | 37,554 
|Unadvanced portions of construction loans                                 |  |                | 173,878 |      |   | 192,826
|Equity investment commitments to limited partnerships                     |  |                | 4,785   |      |   | 8,769  
|                                                                          |  |               
|Standby Letters of Credit                                                 |  |                |         |      |   |        
|Notional amount of standby letters of credit fully collateralized by cash |  |                | 71,880  |      |   | 65,051 
|Notional amount of other standby letters of credit                        |  |                | 29,938  |      |   | 40,812 
|Liability associated with letters of credit recorded on balance sheet     |  |                | 510     |      |   | 290    



Results of Operations



Comparison of Years Ended December 31, 2004 and 2003



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 2004, net interest income was $225.5 million, up $7.4
million from the 2003 level. On a fully tax equivalent basis, net interest income increased $7.6 million from 2003, to $226.9 million in 2004. The yield on earning assets was 4.21%, a 9 basis points increase from 2003. The increase in the net yield
on earning assets from 2003 was primarily attributable to 1) increases totaling 1.25% during 2004 in the Fed funds rate by the Federal Reserve which led to a corresponding increase in the Companys prime rate and 2) an improvement in the
Companys earning asset mix with proportionally fewer investments and more loans. The acquisition of Granite Bank in the second quarter of 2003, coupled with continued reductions in interest rates by the Federal Reserve were the primary reasons
for the decline in net interest margin from 2002.



34



---

##### Table of Contents

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



|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|------------------------------------------ |  | -------------- | --------- | - | -------------------------- | - | --------------------- | ---- | ---- | -------------- |  | - | -------------------------- | - | --------------------- | - | ------- | -------------- | ---- | - | -------------------------- | - | --------------------- | - |  | - | ------- |  | ---- | -
|                                           |  | 2004           |           |   | 2003                       |   |                       | 2002 |     
|                                           |  | 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                                 |  | $              | 726,467   |   |                            | $ | 39,635                |      | 5.46 | %              |  | $ | 619,658                    |   |                       | $ | 34,101  |                | 5.50 | % |                            | $ | 565,153               |   |  | $ | 33,998  |  | 6.02 | %
|Municipal                                  |  |                | 98,462    |   |                            |   | 3,070                 |      | 3.12 |                |  |   | 89,974                     |   |                       |   | 2,937   |                | 3.26 |   |                            |   | 90,421                |   |  |   | 3,683   |  | 4.07 |  
|Real estate:                               |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Residential (4)                            |  |                | 1,174,944 |   |                            |   | 62,231                |      | 5.30 |                |  |   | 1,218,033                  |   |                       |   | 64,981  |                | 5.33 |   |                            |   | 940,162               |   |  |   | 61,741  |  | 6.57 |  
|Commercial                                 |  |                | 1,510,458 |   |                            |   | 82,914                |      | 5.49 |                |  |   | 1,308,792                  |   |                       |   | 73,086  |                | 5.58 |   |                            |   | 1,028,853             |   |  |   | 65,951  |  | 6.41 |  
|Construction                               |  |                | 142,764   |   |                            |   | 7,568                 |      | 5.30 |                |  |   | 117,293                    |   |                       |   | 6,539   |                | 5.57 |   |                            |   | 85,149                |   |  |   | 6,536   |  | 7.68 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total real estate                          |  |                | 2,828,166 |   |                            |   | 152,713               |      | 5.40 |                |  |   | 2,644,118                  |   |                       |   | 144,606 |                | 5.47 |   |                            |   | 2,054,164             |   |  |   | 134,228 |  | 6.53 |  
|Consumer                                   |  |                | 247,847   |   |                            |   | 15,014                |      | 6.06 |                |  |   | 271,109                    |   |                       |   | 18,909  |                | 6.97 |   |                            |   | 308,230               |   |  |   | 23,522  |  | 7.63 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total loans                                |  |                | 3,900,942 |   |                            |   | 210,432               |      | 5.39 |                |  |   | 3,624,859                  |   |                       |   | 200,553 |                | 5.53 |   |                            |   | 3,017,968             |   |  |   | 195,431 |  | 6.48 |  
|                                           |  |                |           |   |                            |   |                       |      |     
|Investments:                               |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Taxable                                    |  |                | 1,475,016 |   |                            |   | 60,361                |      | 4.09 |                |  |   | 1,660,119                  |   |                       |   | 71,552  |                | 4.31 |   |                            |   | 1,232,543             |   |  |   | 64,238  |  | 5.21 |  
|Tax-favored equity securities              |  |                | 3,973     |   |                            |   | 164                   |      | 4.13 |                |  |   | 9,569                      |   |                       |   | 231     |                | 2.42 |   |                            |   | 22,065                |   |  |   | 694     |  | 3.15 |  
|Interest-bearing deposits in banks         |  |                | 150       |   |                            |   | 2                     |      | 1.21 |                |  |   | 182                        |   |                       |   | 3       |                | 1.91 |   |                            |   | 225                   |   |  |   | 7       |  | 3.06 |  
|Federal funds sold                         |  |                | 13,007    |   |                            |   | 181                   |      | 1.39 |                |  |   | 27,112                     |   |                       |   | 291     |                | 1.07 |   |                            |   | 9,323                 |   |  |   | 162     |  | 1.74 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-earning assets              |  |                | 5,393,088 |   |                            |   | 271,140               |      | 5.03 |                |  |   | 5,321,841                  |   |                       |   | 272,630 |                | 5.12 |   |                            |   | 4,282,124             |   |  |   | 260,532 |  | 6.08 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Noninterest-earning assets                 |  |                | 560,855   |   |                            |   |                       |      |      |                |  |   | 512,233                    |   |                       |   |         |                |      |   |                            |   | 318,293               |   |  |   |         |  |      |  
|Allowance for loan losses                  |  |                | (58,223   | ) |                            |   |                       |      |      |                |  |   | (56,536                    | ) |                       |   |         |                |      |   |                            |   | (48,538               | ) |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total assets                               |  | $              | 5,895,720 |   |                            |   |                       |      |      |                |  | $ | 5,777,538                  |   |                       |   |         |                |      |   |                            | $ | 4,551,879             |   |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Interest-bearing liabilities:              |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Savings                                    |  | $              | 528,480   |   |                            |   | 1,654                 |      | 0.31 |                |  |   | 517,003                    |   |                       |   | 2,121   |                | 0.41 |   |                            | $ | 387,080               |   |  |   | 4,125   |  | 1.07 |  
|NOWs                                       |  |                | 887,801   |   |                            |   | 2,465                 |      | 0.28 |                |  |   | 825,947                    |   |                       |   | 3,121   |                | 0.38 |   |                            |   | 518,492               |   |  |   | 1,994   |  | 0.38 |  
|CMA / Money Market                         |  |                | 1,550,528 |   |                            |   | 11,498                |      | 0.74 |                |  |   | 1,551,136                  |   |                       |   | 13,333  |                | 0.86 |   |                            |   | 1,467,230             |   |  |   | 23,758  |  | 1.62 |  
|CDs under $100,000                         |  |                | 769,222   |   |                            |   | 14,554                |      | 1.89 |                |  |   | 814,089                    |   |                       |   | 17,798  |                | 2.19 |   |                            |   | 676,350               |   |  |   | 22,684  |  | 3.35 |  
|CDs $100,000 and over                      |  |                | 338,011   |   |                            |   | 6,268                 |      | 1.85 |                |  |   | 256,336                    |   |                       |   | 4,799   |                | 1.87 |   |                            |   | 223,511               |   |  |   | 6,034   |  | 2.69 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-bearing deposits            |  |                | 4,074,042 |   |                            |   | 36,439                |      | 0.89 |                |  |   | 3,964,511                  |   |                       |   | 41,172  |                | 1.04 |   |                            |   | 3,272,663             |   |  |   | 58,595  |  | 1.79 |  
|Repurchase agreements                      |  |                | 73,860    |   |                            |   | 618                   |      | 0.84 |                |  |   | 97,508                     |   |                       |   | 1,383   |                | 1.42 |   |                            |   | 24,714                |   |  |   | 218     |  | 0.88 |  
|Borrowings                                 |  |                | 219,723   |   |                            |   | 7,212                 |      | 3.28 |                |  |   | 315,831                    |   |                       |   | 10,824  |                | 3.43 |   |                            |   | 92,349                |   |  |   | 7,591   |  | 8.22 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total interest-bearing liabilities         |  |                | 4,367,625 |   |                            |   | 44,269                |      | 1.01 |                |  |   | 4,377,850                  |   |                       |   | 53,379  |                | 1.22 |   |                            |   | 3,466,781             |   |  |   | 66,404  |  | 1.92 |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Noninterest-bearing liabilities:           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Demands                                    |  |                | 882,408   |   |                            |   |                       |      |      |                |  |   | 793,877                    |   |                       |   |         |                |      |   |                            |   | 624,305               |   |  |   |         |  |      |  
|Other liabilities                          |  |                | 53,994    |   |                            |   |                       |      |      |                |  |   | 67,594                     |   |                       |   |         |                |      |   |                            |   | 66,053                |   |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total liabilities                          |  |                | 5,304,027 |   |                            |   |                       |      |      |                |  |   | 5,239,321                  |   |                       |   |         |                |      |   |                            |   | 4,157,139             |   |  |   |         |  |      |  
|Stockholders equity                       |  |                | 591,693   |   |                            |   |                       |      |      |                |  |   | 538,217                    |   |                       |   |         |                |      |   |                            |   | 394,740               |   |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Total liabilities and stockholders equity |  | $              | 5,895,720 |   |                            |   |                       |      |      |                |  | $ | 5,777,538                  |   |                       |   |         |                |      |   |                            | $ | 4,551,879             |   |  |   |         |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Net interest income                        |  |                |           |   |                            | $ | 226,871               |      |      |                |  |   |                            |   |                       | $ | 219,251 |                |      |   |                            |   |                       |   |  | $ | 194,128 |  |      |  
|                                           |  |                |           |   |                            |   |                       |      |      |                |  |   |                            |   |                       |   |         |                |      |   |                            |   |                       |   |  |   |         |  |      |  
|Interest rate spread (2)                   |  |                |           |   |                            |   |                       |      | 4.02 | %              |  |   |                            |   |                       |   |         |                | 3.90 | % |                            |   |                       |   |  |   |         |  | 4.16 | %
|Net yield on earning assets (3)            |  |                |           |   |                            |   |                       |      | 4.21 | %              |  |   |                            |   |                       |   |         |                | 4.12 | % |                            |   |                       |   |  |   |         |  | 4.53 | %

---

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

|(4) | Residential real estate includes 1-4 family, multi-family and home equity loans.
|--- | --------------------------------------------------------------------------------



35



---

##### Table of Contents

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.



|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|----------------------------- |  | ------------------------------------------------------- | - |  | ------------------------ | ------ | - | -------------------------------------------------------- | ----------- | ------- | ------------------------ | -------------- | -- | ------- | - |  | - | ------- | - |  | - | ------ | -
|                              |  | 2004 Compared With 2003                                 |   |  | 2003 Compared With 2002  |       
|                              |  | Increase (Decrease)Due to Change in NetInterest Income: |   |  | Total Increase(Decrease) |        |   | Increase (Decrease) Due to Change in NetInterest Income: |             |         | Total Increase(Decrease) |               
|                              |  | AverageRate                                             |   |  | AverageBalance           |        |   |                                                          | AverageRate |         |                          | AverageBalance |    |        
|                              |  | (in thousands)                                          |  
|Interest income:              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Loans                         |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Commercial                    |  | ($293                                                   | ) |  | $                        | 5,827  |   |                                                          | $           | 5,534   |                          |                |    | ($2,897 | ) |  | $ | 3,000   |   |  | $ | 103    |  
|Municipals                    |  | (126                                                    | ) |  |                          | 259    |   |                                                          |             | 133     |                          |                |    | (731    | ) |  |   | (15     | ) |  |   | (746   | )
|Real estate:                  |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Residential                   |  | (468                                                    | ) |  |                          | (2,282 | ) |                                                          |             | (2,750  | )                        |                |    | (3,857  | ) |  |   | 7,097   |   |  |   | 3,240  |  
|Commercial                    |  | (1,242                                                  | ) |  |                          | 11,070 |   |                                                          |             | 9,828   |                          |                |    | (8,495  | ) |  |   | 15,630  |   |  |   | 7,135  |  
|Construction                  |  | (321                                                    | ) |  |                          | 1,350  |   |                                                          |             | 1,029   |                          |                |    | 10,281  |   |  |   | (10,278 | ) |  |   | 3      |  
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Total real estate             |  | (2,031                                                  | ) |  |                          | 10,138 |   |                                                          |             | 8,107   |                          |                |    | (2,071  | ) |  |   | 12,449  |   |  |   | 10,378 |  
|Consumer                      |  | (2,486                                                  | ) |  |                          | (1,409 | ) |                                                          |             | (3,895  | )                        |                |    | (2,021  | ) |  |   | (2,592  | ) |  |   | (4,613 | )
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Total loans                   |  | (4,936                                                  | ) |  |                          | 14,815 |   |                                                          |             | 9,879   |                          |                |    | (7,720  | ) |  |   | 12,842  |   |  |   | 5,122  |  
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Investments:                  |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Taxable                       |  | (3,618                                                  | ) |  |                          | (7,573 | ) |                                                          |             | (11,191 | )                        |                |    | (11,216 | ) |  |   | 18,530  |   |  |   | 7,314  |  
|Tax-favored debt securities   |  | 164                                                     |   |  |                          | (231   | ) |                                                          |             | (67     | )                        |                |    | (161    | ) |  |   | (302    | ) |  |   | (463   | )
|Interest-bearing deposits     |  | (1                                                      | ) |  |                          |       |   |                                                          |             | (1      | )                        |                |    | (4      | ) |  |   |        |   |  |   | (4     | )
|Federal funds sold            |  | 86                                                      |   |  |                          | (196   | ) |                                                          |             | (110    | )                        |                |    | (62     | ) |  |   | 191     |   |  |   | 129    |  
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Total interest income         |  | (8,305                                                  | ) |  |                          | 6,815  |   |                                                          |             | (1,490  | )                        |                |    | (19,163 | ) |  |   | 31,261  |   |  |   | 12,098 |  
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Interest expense:             |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Savings                       |  | 503                                                     |   |  |                          | (36    | ) |                                                          |             | 467     |                          |                |    | 2,537   |   |  |   | (533    | ) |  |   | 2,004  |  
|NOW                           |  | 828                                                     |   |  |                          | (172   | ) |                                                          |             | 656     |                          |                |    | 35      |   |  |   | (1,162  | ) |  |   | (1,127 | )
|CMA / Money market            |  | 1,830                                                   |   |  |                          | 5      |   |                                                          |             | 1,835   |                          |                |    | 11,146  |   |  |   | (721    | ) |  |   | 10,425 |  
|CDs under $100,000            |  | 2,395                                                   |   |  |                          | 849    |   |                                                          |             | 3,244   |                          |                |    | 7,897   |   |  |   | (3,011  | ) |  |   | 4,886  |  
|CDs of $100,000 and over      |  | 46                                                      |   |  |                          | (1,515 | ) |                                                          |             | (1,469  | )                        |                |    | 1,850   |   |  |   | (615    | ) |  |   | 1,235  |  
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Total deposits                |  | 5,602                                                   |   |  |                          | (869   | ) |                                                          |             | 4,733   |                          |                |    | 23,465  |   |  |   | (6,042  | ) |  |   | 17,923 |  
|Repurchase agreements         |  | 567                                                     |   |  |                          | 198    |   |                                                          |             | 765     |                          |                |    | (1,033  | ) |  |   | (132    | ) |  |   | (1,165 | )
|Borrowings                    |  | 457                                                     |   |  |                          | 3,155  |   |                                                          |             | 3,612   |                          |                |    | (7,656  | ) |  |   | 4,423   |   |  |   | (3,233 | )
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Total interest expense        |  | 6,626                                                   |   |  |                          | 2,484  |   |                                                          |             | 9,110   |                          |                |    | 14,776  |   |  |   | (1,751  | ) |  |   | 13,025 |  
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  
|Change in net interest income |  | ($1,679                                                 | ) |  | $                        | 9,299  |   |                                                          | $           | 7,620   |                          |                | ($ | 4,387   | ) |  | $ | 29,510  |   |  | $ | 25,123 |  
|                              |  |                                                         |   |  |                          |        |   |                                                          |             |         |                          |                |    |         |   |  |   |         |   |  |   |        |  



Noninterest Income and Noninterest
Expense



Noninterest income for the year ended December
31, 2004, was $73.4 million, a decline of $23.6 million from the prior year. Lower levels of gains on sales of securities and mortgage loans, net of lower losses on prepayments of borrowings, accounted for the majority of the variance. Excluding
these items, noninterest income was $1.6 million higher in 2004 than in 2003, driven primarily by higher levels of investment management income, which offset lower levels of retail investment income. Also included in the 2004 other income amount was
$1.3 million in gains on sales of two branches.



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In 2004, noninterest expenses were $15 million lower than in 2003, primarily driven by $6.7 million in
reduced conversion and restructuring charges. An additional $4.8 million was due to reduced salary expenses, driven by lower staffing and reduced levels of incentive compensation. Lower levels of data processing expenses also accounted for $3.2
million of the decline. Increased employee benefits costs, driven by higher medical and dental benefits of $699,000, were offset by reduced levels of occupancy expenses of $587,000 and other noninterest expenses of $1.4 million.



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



|                                 |  |                |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       
|-------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - | ---- | - | ------ |  | - | ------
|                                 |  | 2004           |        |   | 2003 |   |        | 2002 |  |   | 2001   |   | 2000
|                                 |  | (in thousands)
|Legal and professional           |  | $              | 949    |   |      | $ | 1,569  |      |  | $ | 854    |   |      | $ | 1,320  |  | $ | 1,522 
|Marketing                        |  |                | 3,466  |   |      |   | 3,282  |      |  |   | 2,942  |   |      |   | 2,746  |  |   | 2,749 
|Software and supplies            |  |                | 7,845  |   |      |   | 7,288  |      |  |   | 4,924  |   |      |   | 4,884  |  |   | 4,722 
|Net OREO and collection expenses |  |                | (617   | ) |      |   | (129   | )    |  |   | (293   | ) |      |   | 86     |  |   | 48    
|Telephone                        |  |                | 2,829  |   |      |   | 3,210  |      |  |   | 3,071  |   |      |   | 2,799  |  |   | 3,118 
|Postage                          |  |                | 2,865  |   |      |   | 3,009  |      |  |   | 2,561  |   |      |   | 2,338  |  |   | 2,553 
|Other                            |  |                | 18,258 |   |      |   | 18,776 |      |  |   | 17,131 |   |      |   | 14,599 |  |   | 15,171
|                                 |  |                |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       
|                                 |  | $              | 35,595 |   |      | $ | 37,005 |      |  | $ | 31,190 |   |      | $ | 28,772 |  | $ | 29,883
|                                 |  |                |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       



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, 2004 and 2003, Federal and state income
tax provisions amounted to $43.0 million and $41.7 million, respectively. The effective tax rates for the respective periods were 36.4% and 35.8%. 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 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, 2003 and 2002



Net Interest Income



For 2003, net interest income was $218.1 million, compared with $192.6
million for 2002. On a fully taxable 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 levels of average earning assets were primarily due to the acquisition of Granite Bank in the first quarter of 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.



37



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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 and securities, improved mortgage servicing income and higher fee income due to the Granite Bank acquisition. Noninterest expense totaled $191.4 million in 2003, compared to $151.5 million
in 2002, an increase of $39.9 million. The primary factors in this increase in noninterest expense were the acquisition of Granite Bank, higher commissions and sales-based incentive expenses, and the conversion and restructuring charges.



Income Taxes



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% for 2003 and 34.9% for 2002. 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, 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 exchange rates, commodity prices, equity prices, and other market-driven
rates or prices. Since the Company has no trading operations, risks associated with foreign exchange rates, commodity prices, and equity prices are not significant. Interest rate risk, including mortgage prepayment risk, is the single most
significant non-credit risk to which the Company is exposed.



To measure the sensitivity of its income to changes in interest rates, the Company uses a variety of methods, including simulation, and gap analyses. Interest rate risk is the sensitivity of income to variations in interest rates over both
short-term and long-term horizons. The primary goal of interest-rate 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.



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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



As Of December 31, 2004

($ in thousands)



|                          |  |                    |   |  |           |   |        |                           |  |                    |   |  |           |  
|------------------------- |  | ------------------ | - |  | --------- | - | ------ | ------------------------- |  | ------------------ | - |  | --------- | -
|                          |  | Immediate          |   |  |           |   | Ramped |                          
|                          |  | Net InterestIncome |   |  | NetIncome |   |        |                           |  | Net InterestIncome |   |  | NetIncome |  
|Changes in interest rates |  |                    |   |  |           |   |        | Changes in interest rates |  |                    |   |  |           |  
|+ 200 bps                 |  | 2.74               | % |  | 4.76      | % |        | +50 bps                   |  | 0.83               | % |  | 1.42      | %
|+ 100 bps                 |  | 1.41               |   |  | 2.42      |   |        | +25 bps                   |  | 0.42               |   |  | 0.72      |  
|- 100 bps                 |  | (2.27              | ) |  | (4.25     | ) |        | -25 bps                   |  | (0.55              | ) |  | (0.96     | )
|- 200 bps                 |  | (8.93              | ) |  | (16.70    | ) |        | -50 bps                   |  | (2.62              | ) |  | (4.82     | )
|Policy Limit              |  | +/- 10.00          | % |  | +/- 20.00 | % |        | Policy Limit              |  |                   |   |  |          |  

---

|(1) | The 200 basis point shock down scenario has a 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. At December 31, 2004, the estimated exposure was 1.37% and the Company was asset-sensitive.



39



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##### Table of Contents

The following table shows the amounts of interest-earning assets and interest-bearing liabilities at
December 31, 2004 that reprice during the periods indicated:



|                                    |  |                      |           |   |                           |   |                             |  |                 |           |       |   |            |  |   |          
|----------------------------------- |  | -------------------- | --------- | - | ------------------------- | - | --------------------------- |  | --------------- | --------- | ----- | - | ---------- |  | - | ---------
|                                    |  | Repricing Date      
|                                    |  | One Day To SixMonths |           |   | Over SixMonths ToOne Year |   | Over One Year To Five Years |  | Over Five Years |           | Total
|                                    |  | (in thousands)      
|Interest-earning assets:            |  |                      |           |   |                           |   |                             |  |                 |           |       |   |            |  |   |          
|Loans (1)                           |  | $                    | 2,173,421 |   |                           | $ | 449,258                     |  | $               | 1,350,958 |       | $ | 137,091    |  | $ | 4,110,728
|Investment securities (2)           |  |                      | 166,325   |   |                           |   | 199,479                     |  |                 | 979,536   |       |   | 120,124    |  |   | 1,465,464
|Interest-bearing cash equivalents   |  |                      | 143       |   |                           |   | 250                         |  |                 | 631       |       |   |           |  |   | 1,024    
|                                    |  |                      |           |   |                           |   |                             |  |                 |           |       |   |            |  |   |          
|Total interest-earning assets       |  |                      | 2,339,889 |   |                           |   | 648,987                     |  |                 | 2,331,125 |       |   | 257,215    |  |   | 5,577,216
|                                    |  |                      |           |   |                           |   |                             |  |                 |           |       |   |            |  |   |          
|Interest-bearing liabilities:       |  |                      |           |   |                           |   |                             |  |                 |           |       |   |            |  |   |          
|Deposits                            |  |                      | 2,291,586 |   |                           |   | 310,090                     |  |                 | 541,144   |       |   | 1,005,349  |  |   | 4,148,169
|Borrowings                          |  |                      | 302,116   |   |                           |   | 1,681                       |  |                 | 486       |       |   | 52,188     |  |   | 356,471  
|                                    |  |                      |           |   |                           |   |                             |  |                 |           |       |   |            |  |   |          
|Total interest-bearing liabilities  |  |                      | 2,593,702 |   |                           |   | 311,771                     |  |                 | 541,630   |       |   | 1,057,537  |  |   | 4,504,640
|                                    |  |                      |           |   |                           |   |                             |  |                 |           |       |   |            |  |   |          
|Net interest rate sensitivity gap   |  |                      | ($253,813 | ) |                           | $ | 337,216                     |  | $               | 1,789,495 |       |   | ($800,322) |  | $ | 1,072,576
|                                    |  |                      |           |   |                           |   |                             |  |                 |           |       |   |            |  |   |          
|Cumulative gap at December 31, 2004 |  |                      | ($253,813 | ) |                           | $ | 83,403                      |  | $               | 1,872,898 |       | $ | 1,072,576  |  |   |          
|Cumulative gap at December 31, 2003 |  |                      | ($177,135 | ) |                           | $ | 67,912                      |  | $               | 1,717,807 |       | $ | 1,004,135  |  |   |          

---

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

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



The following table shows scheduled maturities of selected loans at December
31, 2004:



|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|--------------------------------------- |  | ----------------- | ------- | -------------------- | - | -------------- |  | ----- | ------- |  | - | ---------
|                                        |  | Less ThanOne Year |         | One YearTo FiveYears |   | Over FiveYears |  | Total
|                                        |  | (in thousands)   
|Predetermined rates:                    |  |                   |         |                      |   |                |  |       |         |  |   |          
|Commercial (1)                          |  | $                 | 150,350 |                      | $ | 100,204        |  | $     | 32,472  |  | $ | 283,026  
|Commercial real estate and construction |  |                   | 102,819 |                      |   | 379,870        |  |       | 150,948 |  |   | 633,637  
|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|Total                                   |  | $                 | 253,169 |                      | $ | 480,074        |  | $     | 183,420 |  | $ | 916,663  
|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|Comparative totals for 2003             |  | $                 | 173,529 |                      | $ | 405,002        |  | $     | 187,800 |  | $ | 766,331  
|                                        |  |                   |         |                     
|Floating or adjustable rates:           |  |                   |         |                      |   |                |  |       |         |  |   |          
|Commercial (1)                          |  | $                 | 263,381 |                      | $ | 262,081        |  | $     | 99,001  |  | $ | 624,463  
|Commercial real estate and construction |  |                   | 173,196 |                      |   | 604,025        |  |       | 536,423 |  |   | 1,313,644
|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|Total                                   |  | $                 | 436,577 |                      | $ | 866,106        |  | $     | 635,424 |  | $ | 1,938,107
|                                        |  |                   |         |                      |   |                |  |       |         |  |   |          
|Comparative totals for 2003             |  | $                 | 345,206 |                      | $ | 699,709        |  | $     | 506,195 |  | $ | 1,551,110

---

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



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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



CHITTENDEN CORPORATION



CONSOLIDATED BALANCE SHEETS



|                                                                                                                          |  |                |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                          |  | December 31,   |          
|                                                                                                                          |  | 2004           |           |   | 2003 |  
|                                                                                                                          |  | (in thousands) |          
|Assets                                                                                                                    |  |                |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                 |  | $              | 136,468   |   |      | $ | 174,939   |  
|Securities available for sale                                                                                             |  |                | 1,446,221 |   |      |   | 1,588,151 |  
|FRB and FHLB stock                                                                                                        |  |                | 19,243    |   |      |   | 20,753    |  
|Loans held for sale                                                                                                       |  |                | 33,535    |   |      |   | 25,262    |  
|Loans                                                                                                                     |  |                | 4,077,193 |   |      |   | 3,724,684 |  
|Less: Allowance for loan losses                                                                                           |  |                | (59,031   | ) |      |   | (57,464   | )
|                                                                                                                          |  |                |           |   |      |   |           |  
|Net loans                                                                                                                 |  |                | 4,018,162 |   |      |   | 3,667,220 |  
|                                                                                                                          |  |               
|Accrued interest receivable                                                                                               |  |                | 28,956    |   |      |   | 29,124    |  
|Other assets                                                                                                              |  |                | 64,970    |   |      |   | 71,636    |  
|Premises and equipment, net                                                                                               |  |                | 74,271    |   |      |   | 72,130    |  
|Mortgage servicing rights                                                                                                 |  |                | 11,826    |   |      |   | 12,265    |  
|Identified intangibles                                                                                                    |  |                | 20,422    |   |      |   | 22,733    |  
|Goodwill                                                                                                                  |  |                | 216,136   |   |      |   | 216,431   |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total assets                                                                                                              |  | $              | 6,070,210 |   |      | $ | 5,900,644 |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Liabilities and Stockholders Equity                                                                                      |  |                |           |   |      |   |           |  
|LIABILITIES:                                                                                                              |  |                |           |   |      |   |           |  
|Deposits:                                                                                                                 |  |                |           |   |      |   |           |  
|Demand                                                                                                                    |  | $              | 890,561   |   |      | $ | 898,920   |  
|Savings                                                                                                                   |  |                | 519,623   |   |      |   | 517,789   |  
|NOW                                                                                                                       |  |                | 890,701   |   |      |   | 899,018   |  
|Cash management / money market                                                                                            |  |                | 1,577,474 |   |      |   | 1,604,138 |  
|Certificates of deposit less than $100,000                                                                                |  |                | 752,828   |   |      |   | 789,066   |  
|Certificates of deposit $100,000 and over                                                                                 |  |                | 407,543   |   |      |   | 260,960   |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total deposits                                                                                                            |  |                | 5,038,730 |   |      |   | 4,969,891 |  
|                                                                                                                          |  |               
|Securities sold under agreements to repurchase                                                                            |  |                | 76,716    |   |      |   | 78,980    |  
|Other borrowings                                                                                                          |  |                | 279,755   |   |      |   | 208,454   |  
|Accrued expenses and other liabilities                                                                                    |  |                | 54,752    |   |      |   | 63,368    |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total liabilities                                                                                                         |  |                | 5,449,953 |   |      |   | 5,320,693 |  
|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: 50,203,529 in 2004 and 50,177,861 in
2003 |  |                | 50,204    |   |      |   | 50,178    |  
|Surplus                                                                                                                   |  |                | 249,036   |   |      |   | 246,938   |  
|Retained earnings                                                                                                         |  |                | 384,679   |   |      |   | 341,441   |  
|Treasury stock, at cost3,861,710 shares in 2004 and 4,382,174 shares in 2003                                             |  |                | (69,246   | ) |      |   | (78,579   | )
|Accumulated other comprehensive income                                                                                    |  |                | 672       |   |      |   | 15,595    |  
|Directors deferred compensation to be settled in stock                                                                   |  |                | 4,930     |   |      |   | 4,413     |  
|Unearned portion of employee restricted stock                                                                             |  |                | (18       | ) |      |   | (35       | )
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total stockholders equity                                                                                                |  |                | 620,257   |   |      |   | 579,951   |  
|                                                                                                                          |  |                |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                |  | $              | 6,070,210 |   |      | $ | 5,900,644 |  
|                                                                                                                          |  |                |           |   |      |   |           |  



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



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CHITTENDEN CORPORATION



CONSOLIDATED STATEMENTS OF INCOME



|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                 |  | Years Ended December 31,                |        
|                                                                 |  | 2004                                    |         |   | 2003 |   |         | 2002 | 
|                                                                 |  | (in thousands, except per shareamounts) |        
|INTEREST INCOME:                                                 |  |                                         |         |   |      |   |         |     
|Interest on loans                                                |  | $                                       | 209,107 |   |      | $ | 199,436 |      |  | $ | 194,121 |  
|Interest on investment securities:                               |  |                                         |         |   |      |   |         |      |  |   |         |  
|Taxable                                                          |  |                                         | 60,413  |   |      |   | 71,551  |      |  |   | 64,238  |  
|Tax-favored                                                      |  |                                         | 53      |   |      |   | 162     |      |  |   | 491     |  
|Short-term investments                                           |  |                                         | 194     |   |      |   | 293     |      |  |   | 169     |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total interest income                                            |  |                                         | 269,767 |   |      |   | 271,442 |      |  |   | 259,019 |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|INTEREST EXPENSE:                                                |  |                                         |         |   |      |   |         |      |  |   |         |  
|Deposits                                                         |  |                                         | 36,439  |   |      |   | 41,172  |      |  |   | 58,813  |  
|Borrowings                                                       |  |                                         | 7,830   |   |      |   | 12,207  |      |  |   | 7,591   |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total interest expense                                           |  |                                         | 44,269  |   |      |   | 53,379  |      |  |   | 66,404  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Net interest income                                              |  |                                         | 225,498 |   |      |   | 218,063 |      |  |   | 192,615 |  
|Provision for loan losses                                        |  |                                         | 4,377   |   |      |   | 7,175   |      |  |   | 8,331   |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Net interest income after provision for loan losses              |  |                                         | 221,121 |   |      |   | 210,888 |      |  |   | 184,284 |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|NONINTEREST INCOME:                                              |  |                                         |         |   |      |   |         |      |  |   |         |  
|Investment management and trust                                  |  |                                         | 18,383  |   |      |   | 15,956  |      |  |   | 15,601  |  
|Service charges on deposits                                      |  |                                         | 17,886  |   |      |   | 18,396  |      |  |   | 16,026  |  
|Mortgage servicing                                               |  |                                         | 159     |   |      |   | 281     |      |  |   | (6,442  | )
|Gains on sales of loans, net                                     |  |                                         | 9,661   |   |      |   | 21,765  |      |  |   | 10,068  |  
|Gains on sales of securities, net                                |  |                                         | 2,335   |   |      |   | 17,380  |      |  |   | 10,562  |  
|Loss on prepayments of borrowings                                |  |                                         | (1,194  | ) |      |   | (3,070  | )    |  |   |        |  
|Credit card income, net                                          |  |                                         | 4,150   |   |      |   | 4,079   |      |  |   | 3,656   |  
|Insurance commissions, net                                       |  |                                         | 6,966   |   |      |   | 6,686   |      |  |   | 3,733   |  
|Retail investment services                                       |  |                                         | 3,239   |   |      |   | 4,621   |      |  |   | 2,370   |  
|Other                                                            |  |                                         | 11,820  |   |      |   | 10,937  |      |  |   | 9,486   |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total noninterest income                                         |  |                                         | 73,405  |   |      |   | 97,031  |      |  |   | 65,060  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|NONINTEREST EXPENSE:                                             |  |                                         |         |   |      |   |         |      |  |   |         |  
|Salaries                                                         |  |                                         | 84,619  |   |      |   | 89,431  |      |  |   | 72,595  |  
|Employee benefits                                                |  |                                         | 21,958  |   |      |   | 20,578  |      |  |   | 15,478  |  
|Net occupancy expense                                            |  |                                         | 22,669  |   |      |   | 23,256  |      |  |   | 19,526  |  
|Data processing                                                  |  |                                         | 6,188   |   |      |   | 9,384   |      |  |   | 11,476  |  
|Amortization of intangibles                                      |  |                                         | 3,077   |   |      |   | 2,748   |      |  |   | 1,279   |  
|Conversion and restructuring charges                             |  |                                         | 2,266   |   |      |   | 8,969   |      |  |   |        |  
|Other                                                            |  |                                         | 35,595  |   |      |   | 37,005  |      |  |   | 31,190  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total noninterest expense                                        |  |                                         | 176,372 |   |      |   | 191,371 |      |  |   | 151,544 |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Income before income taxes                                       |  |                                         | 118,154 |   |      |   | 116,548 |      |  |   | 97,800  |  
|Income tax expense                                               |  |                                         | 43,027  |   |      |   | 41,749  |      |  |   | 34,155  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                       |  | $                                       | 75,127  |   |      | $ | 74,799  |      |  | $ | 63,645  |  
|                                                                 |  |                                         |         |   |      |   |         |      |  |   |         |  
|Basic earnings per share                                         |  | $                                       | 1.63    |   |      | $ | 1.67    |      |  | $ | 1.58    |  
|Diluted earnings per share                                       |  |                                         | 1.61    |   |      |   | 1.66    |      |  |   | 1.57    |  
|Dividends per share                                              |  |                                         | 0.70    |   |      |   | 0.64    |      |  |   | 0.63    |  
|Weighted average common shares outstanding                       |  |                                         | 46,106  |   |      |   | 44,720  |      |  |   | 40,132  |  
|Weighted average common and common equivalent shares outstanding |  |                                         | 46,731  |   |      |   | 45,150  |      |  |   | 40,619  |  



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



42



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##### Table of Contents

CHITTENDEN CORPORATION



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

AND COMPREHENSIVE INCOME

Years ended
December 31, 2004, 2003 and 2002

(In thousands)



|                                     |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|------------------------------------ |  | ---------------------- | ------- | - | ------------ | - | ------- |  | - | ----------------- | - |  | -------------- | ------- | - | ----------------------------------------- | - | ------- | ------------------------------- |  | - | --------------------------------------------- | - |  | ---------------------------- | ----- | - |  | - | --- | - |  | - | ------- | -
|                                     |  | Comp- rehensive Income |         |   | Common Stock |   | Surplus |  |   | Retained Earnings |   |  | Treasury Stock |         |   | Accum- ulated OtherComp- rehensive Income |   |         | Directors Deferred Comp. Stock |  |   | Unearned Portion of Employee Restricted Stock |   |  | Total Stock- holders Equity |      
|BALANCE AT DECEMBER 31, 2001         |  |                        |         |   |              | $ | 44,680  |  | $ | 136,750           |   |  | $              | 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 ($0.63 per share)     |  |                        |         |   |              |   |        |  |   |                  |   |  |                | (25,379 | ) |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |     |   |  |   | (25,379 | )
|Shares issued under stock plans, net |  |                        |         |   |              |   | 6       |  |   | (496              | ) |  |                |        |   |                                           |   | 4,255   |                                 |  |   |                                              |   |  |                              | (183  | ) |  |   |    |   |  |   | 3,582   |  
|Amortization of restricted stock     |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   | 37  |   |  |   | 37      |  
|Directors deferred compensation     |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              | 489   |   |  |   |    |   |  |   | 489     |  
|Purchase of treasury stock           |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   | (9,904  | )                               |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (9,904  | )
|                                     |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2002         |  |                        |         |   |              |   | 44,686  |  |   | 136,254           |   |  |                | 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 ($0.64 per share)     |  |                        |         |   |              |   |        |  |   |                  |   |  |                | (28,301 | ) |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (28,301 | )
|Shares issued under stock plans, net |  |                        |         |   |              |   | 9       |  |   | 241               |   |  |                |        |   |                                           |   | 6,803   |                                 |  |   |                                              |   |  |                              | (15   | ) |  |   |    |   |  |   | 7,038   |  
|Shares issued in Granite acquisition |  |                        |         |   |              |   | 5,483   |  |   | 110,443           |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 115,926 |  
|Amortization of restricted stock     |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   | 15  |   |  |   | 15      |  
|Directors deferred compensation     |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              | 376   |   |  |   |    |   |  |   | 376     |  
|                                     |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2003         |  |                        |         |   |              |   | 50,178  |  |   | 246,938           |   |  |                | 341,441 |   |                                           |   | (78,579 | )                               |  |   | 15,595                                        |   |  |                              | 4,413 |   |  |   | (35 | ) |  |   | 579,951 |  
|Comprehensive income:                |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Net income                           |  | $                      | 75,127  |   |              |   |        |  |   |                  |   |  |                | 75,127  |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | 75,127  |  
|Other comprehensive income (Note 9)  |  |                        | (14,923 | ) |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   | (14,923                                       | ) |  |                              |      |   |  |   |    |   |  |   | (14,923 | )
|                                     |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Total comprehensive income           |  | $                      | 60,204  |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|                                     |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|Cash dividends ($0.70 per share)     |  |                        |         |   |              |   |        |  |   |                  |   |  |                | (31,889 | ) |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   |    |   |  |   | (31,889 | )
|Shares issued under stock plans, net |  |                        |         |   |              |   | 26      |  |   | 2,098             |   |  |                |        |   |                                           |   | 9,333   |                                 |  |   |                                              |   |  |                              | (16   | ) |  |   | 2   |   |  |   | 11,443  |  
|Amortization of restricted stock     |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              |      |   |  |   | 15  |   |  |   | 15      |  
|Directors deferred compensation     |  |                        |         |   |              |   |        |  |   |                  |   |  |                |        |   |                                           |   |        |                                 |  |   |                                              |   |  |                              | 533   |   |  |   |    |   |  |   | 533     |  
|                                     |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2004         |  |                        |         |   |              | $ | 50,204  |  | $ | 249,036           |   |  | $              | 384,679 |   |                                           | $ | (69,246 | )                               |  | $ | 672                                           |   |  | $                            | 4,930 |   |  | $ | (18 | ) |  | $ | 620,257 |  
|                                     |  |                        |         |   |              |   |         |  |   |                   |   |  |                |         |   |                                           |   |         |                                 |  |   |                                               |   |  |                              |       |   |  |   |     |   |  |   |         |  





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



43



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##### Table of Contents

CHITTENDEN CORPORATION



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                          |  | Years Ended December 31, |         
|                                                                                          |  | 2004                     |          |   | 2003 |   |            | 2002 | 
|                                                                                          |  | (in thousands)           |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                          |          |   |      |   |            |      |  |   |            |  
|Net income                                                                                |  | $                        | 75,127   |   |      | $ | 74,799     |      |  | $ | 63,645     |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                          |          |   |      |   |            |      |  |   |            |  
|Provision for loan losses                                                                 |  |                          | 4,377    |   |      |   | 7,175      |      |  |   | 8,331      |  
|Depreciation                                                                              |  |                          | 7,977    |   |      |   | 8,362      |      |  |   | 7,428      |  
|Amortization of intangible assets                                                         |  |                          | 3,077    |   |      |   | 2,748      |      |  |   | 1,279      |  
|Amortization of premiums, fees, and discounts, net                                        |  |                          | 15,110   |   |      |   | 11,457     |      |  |   | 4,564      |  
|Provision for (recovery of) impairment of MSR asset                                       |  |                          | (1,691   | ) |      |   | (5,732     | )    |  |   | 8,464      |  
|Investment securities gains                                                               |  |                          | (2,335   | ) |      |   | (17,380    | )    |  |   | (10,562    | )
|Deferred (prepaid) income taxes                                                           |  |                          | 1,053    |   |      |   | (6,385     | )    |  |   | (9,990     | )
|Loans originated for sale                                                                 |  |                          | (499,350 | ) |      |   | (1,312,649 | )    |  |   | (764,259   | )
|Proceeds from sales of loans                                                              |  |                          | 495,648  |   |      |   | 1,416,877  |      |  |   | 729,661    |  
|Gains on sales of loans, net                                                              |  |                          | (9,661   | ) |      |   | (21,765    | )    |  |   | (10,068    | )
|Changes in assets and liabilities:                                                        |  |                          |          |   |      |   |            |      |  |   |            |  
|Accrued interest receivable                                                               |  |                          | 168      |   |      |   | 5,388      |      |  |   | (3,173     | )
|Other assets                                                                              |  |                          | 16,690   |   |      |   | (1,044     | )    |  |   | 11,211     |  
|Accrued expenses and other liabilities                                                    |  |                          | 1,492    |   |      |   | (3,927     | )    |  |   | 4,559      |  
|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities                                                 |  |                          | 107,682  |   |      |   | 157,924    |      |  |   | 41,090     |  
|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                          |          |   |      |   |            |      |  |   |            |  
|Cash paid, net of cash acquired in acquisitions                                           |  |                          | (1,120   | ) |      |   | (90,468    | )    |  |   | (41,481    | )
|Proceeds from sale (purchase) of FRB and FHLB stock                                       |  |                          | 1,510    |   |      |   | 4,545      |      |  |   | (2,211     | )
|Proceeds from sales of securities available for sale                                      |  |                          | 195,437  |   |      |   | 677,467    |      |  |   | 650,966    |  
|Proceeds from maturing securities and principal payments on securities available for sale |  |                          | 325,115  |   |      |   | 627,407    |      |  |   | 405,384    |  
|Purchases of securities available for sale                                                |  |                          | (409,963 | ) |      |   | (1,014,748 | )    |  |   | (1,647,249 | )
|Loans originated, net of principal repayments                                             |  |                          | (362,894 | ) |      |   | (146,798   | )    |  |   | 51,848     |  
|Purchases of premises and equipment                                                       |  |                          | (10,118  | ) |      |   | (13,143    | )    |  |   | (5,464     | )
|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) investing activities                                       |  |                          | (262,033 | ) |      |   | 44,262     |      |  |   | (588,207   | )
|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                          |          |   |      |   |            |      |  |   |            |  
|Net increase in deposits                                                                  |  |                          | 68,839   |   |      |   | 60,904     |      |  |   | 220,395    |  
|Net increase (decrease) in borrowings                                                     |  |                          | 69,037   |   |      |   | (258,322   | )    |  |   | 122,570    |  
|Proceeds from issuance of trust preferred securities, net                                 |  |                          |         |   |      |   |           |      |  |   | 120,321    |  
|Proceeds from issuance of treasury and common stock                                       |  |                          | 9,893    |   |      |   | 6,330      |      |  |   | 3,233      |  
|Dividends on common stock                                                                 |  |                          | (31,889  | ) |      |   | (28,301    | )    |  |   | (25,379    | )
|Repurchase of common stock                                                                |  |                          |         |   |      |   |           |      |  |   | (9,904     | )
|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) financing activities                                       |  |                          | 115,880  |   |      |   | (219,389   | )    |  |   | 431,236    |  
|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|Net decrease in cash and cash equivalents                                                 |  |                          | (38,471  | ) |      |   | (17,203    | )    |  |   | (115,881   | )
|Cash and cash equivalents at beginning of year                                            |  |                          | 174,939  |   |      |   | 192,142    |      |  |   | 308,023    |  
|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents at end of year                                                  |  | $                        | 136,468  |   |      | $ | 174,939    |      |  | $ | 192,142    |  
|                                                                                          |  |                          |          |   |      |   |            |      |  |   |            |  
|Supplemental disclosure of cash flow information:                                         |  |                          |          |   |      |   |            |      |  |   |            |  
|Cash paid during the year for:                                                            |  |                          |          |   |      |   |            |      |  |   |            |  
|Interest                                                                                  |  | $                        | 45,277   |   |      | $ | 51,755     |      |  | $ | 66,905     |  
|Income taxes                                                                              |  |                          | 27,529   |   |      |   | 61,228     |      |  |   | 27,712     |  
|Non-cash investing and financing activities:                                              |  |                          |          |   |      |   |            |      |  |   |            |  
|Loans transferred to other real estate owned                                              |  |                          | 1,021    |   |      |   | 380        |      |  |   | 1,104      |  
|Issuance of treasury and restricted stock                                                 |  |                          | 9,333    |   |      |   | 6,803      |      |  |   | 183        |  
|Assets acquired and liabilities assumed through acquisitions:                             |  |                          |          |   |      |   |            |      |  |   |            |  
|Fair value of assets acquired                                                             |  |                          | 854      |   |      |   | 1,122,089  |      |  |   | 267,310    |  
|Fair value of liabilities assumed                                                         |  |                          |         |   |      |   | 1,044,334  |      |  |   | 242,968    |  
|Equity issued                                                                             |  |                          |         |   |      |   | 115,931    |      |  |   |           |  
|Cash paid                                                                                 |  |                          | 1,120    |   |      |   | 122,998    |      |  |   | 53,250     |  
|Excess of cost over fair value of net assets acquired                                     |  |                          | 266      |   |      |   | 161,174    |      |  |   | 28,908     |  



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



44



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##### Table of Contents

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); and Chittenden Connecticut Corporation (CCC). (CTC, BWM, FBT, MBT, and ONB are collectively referred to as the Banks.) All material intercompany
accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year balances to conform to the current year presentation.



Nature of Operations



The Banks primary business is providing loans, deposits, and other banking services to commercial, individual, and public sector customers. CCC is a
mortgage banking operation with offices in Brattleboro, Vermont. CIG is an independent insurance agency with offices in Rutland and Burlington, Vermont, as well as Springfield, Massachusetts and Portsmouth 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.



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, goodwill impairment, income tax expense, mortgage-servicing
rights, 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 (SFAS 146), which contains specific guidance regarding the
types of, and circumstances under which, certain expenses related to restructuring activities can be accrued. In general, SFAS 146 requires that the Company have a detailed plan in place, which has been communicated to employees affected 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.



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



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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 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.



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



Credit quality of the commercial portfolios is quantified by a corporate credit rating system designed to parallel regulatory criteria and categories of loan risk. Individual loan officers monitor their loans to
ensure appropriate rating assignments are made on a timely basis. Risk ratings and quality of both commercial and 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. Consumer and residential real estate loan quality is evaluated on the basis of delinquency data and other credit data available due to the large number of such loans and the relatively small size
of individual credits.



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



Loan Origination and Commitment Fees



Loan
origination and commitment fees, and certain loan origination costs, are deferred and amortized over the contractual term of the related loans as yield adjustments using primarily the level-yield method. When loans are sold or paid off, the
unamortized net fees and costs are recognized in income. Net deferred loan fees amounted to $6,979,000 and $5,104,000 at December 31, 2004 and 2003, 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 regularly 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.



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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, CIG
and Granite Bank (GB) as well as core deposit intangibles (CDI) related to BWM, ONB, and GB, an acquired trust relationship at CTC and a customer list intangible related to the acquisition of GSBI Insurance Group. The core deposit intangibles are
amortized on a straight-line basis over 10 years. The straight-line basis is used because the Company has not experienced significant run off of core deposits in its past acquisitions. The customer list intangibles are amortized straight-line over
10 years. The Company periodically evaluates intangible assets for impairment on the basis of whether these assets are fully recoverable from projected, undiscounted net cash flows of the related acquired segment or customer base.



Income Taxes



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



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 $8.2 billion and $6.7 billion
at December 31, 2004 and 2003, 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.



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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 may receive
additional commissions based on achieving specific sales goals and loss experience targets.



Stock-Based Compensation



Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123),encourages and beginning July 1, 2005 will require in the future companies to record compensation cost for
stock-based employee compensation plans at fair value. (See Note 19, Recent Accounting Pronouncements.) 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.



Prior year per share amounts have been adjusted to reflect the Companys 5-for-4 common stock split, on August 27, 2004.



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



|                                                                                                                                            |  |                                      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                            |  | 2004                                 |        |   | 2003 |   |        | 2002 | 
|                                                                                                                                            |  | (in thousands, except per sharedata) |       
|Net Income :                                                                                                                                |  |                                      |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | $                                    | 75,127 |   |      | $ | 74,799 |      |  | $ | 63,645 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                      | (2,447 | ) |      |   | (2,546 | )    |  |   | (2,043 | )
|                                                                                                                                            |  |                                      |        |   |      |   |        |      |  |   |        |  
|Pro forma                                                                                                                                   |  | $                                    | 72,680 |   |      | $ | 72,253 |      |  | $ | 61,602 |  
|                                                                                                                                            |  |                                      |        |   |      |   |        |      |  |   |        |  
|Earnings Per Share:                                                                                                                         |  |                                      |        |   |      |   |        |      |  |   |        |  
|Basic:                                                                                                                                      |  |                                      |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | $                                    | 1.63   |   |      | $ | 1.67   |      |  | $ | 1.58   |  
|Pro forma                                                                                                                                   |  |                                      | 1.58   |   |      |   | 1.61   |      |  |   | 1.53   |  
|Diluted:                                                                                                                                    |  |                                      |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | $                                    | 1.61   |   |      | $ | 1.66   |      |  | $ | 1.57   |  
|Pro forma                                                                                                                                   |  |                                      | 1.56   |   |      |   | 1.60   |      |  |   | 1.52   |  



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 results of future years.



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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 2004, 2003 and 2002:



|                      |  |      |       |   |      |   |      |      |  |   |      |  
|--------------------- |  | ---- | ----- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                      |  | 2004 |       |   | 2003 |   |      | 2002 | 
|Expected life (years) |  |      | 4.67  |   |      |   | 5.13 |      |  |   | 4.94 |  
|Volatility            |  |      | 22.45 |   |      |   | 23.9 |      |  |   | 23.7 |  
|Interest rate         |  |      | 3.25  | % |      |   | 3.11 | %    |  |   | 4.14 | %
|Dividend yield        |  |      | 2.63  | % |      |   | 2.96 | %    |  |   | 2.64 | %
|Fair value per share  |  | $    | 5.55  |   |      | $ | 5.05 |      |  | $ | 6.00 |  



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



None



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



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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  |  
|                                       |  |   |          |  



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   |  
|                                       |  |   |          |  



The following is
unaudited supplemental information, reflecting selected pro forma results as if each of these acquisitions had been consummated as of January 1, 2002 (in thousands, except EPS):



|                                 |  |                                  |         |      |   |         |  |   |        
|-------------------------------- |  | -------------------------------- | ------- | ---- | - | ------- |  | - | -------
|                                 |  | For the years ended December 31,
|                                 |  | 2004                             |         | 2003 |   | 2002   
|Total revenue                    |  | $                                | 300,695 |      | $ | 323,716 |  | $ | 292,550
|Income before income taxes       |  |                                  | 119,946 |      |   | 119,849 |  |   | 113,599
|Net income                       |  |                                  | 76,229  |      |   | 76,322  |  |   | 72,791 
|Diluted earnings per share (EPS) |  |                                  | 1.63    |      |   | 1.66    |  |   | 1.58   



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Total revenue includes net interest income and noninterest income.



Note 3 INTANGIBLE ASSETS AND
GOODWILL



Identified Intangible Assets



|                             |  |                                        |        |                         |   |                    |  |   |       
|---------------------------- |  | -------------------------------------- | ------ | ----------------------- | - | ------------------ |  | - | ------
|                             |  | As of December 31, 2004 (in thousands)
|                             |  | Gross CarryingAmount                   |        | AccumulatedAmortization |   | Net CarryingAmount
|Amortized intangible assets:
|Core deposit intangibles     |  | $                                      | 28,541 |                         | $ | 12,758             |  | $ | 15,783
|Customer list intangibles    |  |                                        | 3,498  |                         |   | 609                |  |   | 2,889 
|Acquired trust relationships |  |                                        | 4,000  |                         |   | 2,250              |  |   | 1,750 
|                             |  |                                        |        |                         |   |                    |  |   |       
|Total                        |  | $                                      | 36,039 |                         | $ | 15,617             |  | $ | 20,422
|                             |  |                                        |        |                         |   |                    |  |   |       



|                                 |  |                |      
|-------------------------------- |  | -------------- | -----
|                                 |  | (in thousands)
|Aggregate Amortization Expense:  |  |                |      
|For year ended December 31, 2004 |  | $              | 3,077
|                                 | 
|Estimated Amortization Expense:  |  |                |      
|For year ended December 31, 2005 |  | $              | 2,768
|For year ended December 31, 2006 |  |                | 2,659
|For year ended December 31, 2007 |  |                | 2,659
|For year ended December 31, 2008 |  |                | 2,659
|For year ended December 31, 2009 |  |                | 2,659



Goodwill



The changes in the carrying amount of goodwill for the year ended December
31, 2004 are as follows (in thousands):



|                                       |  |                           |         |   |              |   |       |  |   |         |  
|-------------------------------------- |  | ------------------------- | ------- | - | ------------ | - | ----- |  | - | ------- | -
|                                       |  | Commercial BankingSegment |         |   | OtherSegment |   | Total | 
|Balance as of December 31, 2003        |  | $                         | 211,379 |   |              | $ | 5,052 |  | $ | 216,431 |  
|Goodwill acquired during year          |  |                           | 266     |   |              |   |      |  |   | 266     |  
|Deferred tax adjustment to GB goodwill |  |                           | (561    | ) |              |   |      |  |   | (561    | )
|Impairment losses                      |  |                           |        |   |              |   |      |  |   |        |  
|                                       |  |                           |         |   |              |   |       |  |   |         |  
|Balance as of December 31, 2004        |  | $                         | 211,084 |   |              | $ | 5,052 |  | $ | 216,136 |  
|                                       |  |                           |         |   |              |   |       |  |   |         |  



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 4 INVESTMENTS



Investment securities at December 31, 2004 and 2003 are as follows:



|                                                 |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|------------------------------------------------ |  | -------------- | --------- | ---------------- | - | ----------------- |  | - | ---------- | - |  | - | ---------
|                                                 |  | Amortized Cost |           | Unrealized Gains |   | Unrealized Losses |  |   | Fair Value
|                                                 |  | (in thousands)
|2004                                             |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|SECURITIES AVAILABLE FOR SALE:                   |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|U.S. Treasury securities                         |  | $              | 6,612     |                  | $ | 31                |  | $ | (49        | ) |  | $ | 6,594    
|U.S. government agency obligations               |  |                | 452,150   |                  |   | 1,191             |  |   | (4,259     | ) |  |   | 449,082  
|Obligations of states and political subdivisions |  |                | 1,294     |                  |   | 23                |  |   |           |   |  |   | 1,317    
|Mortgage-backed securities                       |  |                | 499,891   |                  |   | 3,754             |  |   | (5,334     | ) |  |   | 498,311  
|Corporate bonds and notes                        |  |                | 484,309   |                  |   | 7,011             |  |   | (1,237     | ) |  |   | 490,083  
|Other debt securities                            |  |                | 834       |                  |   |                  |  |   |           |   |  |   | 834      
|                                                 |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|Total securities available for sale              |  | $              | 1,445,090 |                  | $ | 12,010            |  | $ | (10,879    | ) |  | $ | 1,446,221
|                                                 |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|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                            |  |                | 2,140     |                  |   | 57                |  |   |           |   |  |   | 2,197    
|                                                 |  |                |           |                  |   |                   |  |   |            |   |  |   |          
|Total securities available for sale              |  | $              | 1,564,433 |                  | $ | 32,230            |  | $ | (8,512     | ) |  | $ | 1,588,151
|                                                 |  |                |           |                  |   |                   |  |   |            |   |  |   |          



The following table
presents information related to sales of debt securities in each of the last three-year periods ended December 31:



|                |  |                |         |      |   |         |  |   |        
|--------------- |  | -------------- | ------- | ---- | - | ------- |  | - | -------
|                |  | 2004           |         | 2003 |   | 2002   
|                |  | (in thousands)
|Proceeds        |  | $              | 195,437 |      | $ | 677,467 |  | $ | 650,966
|Realized losses |  |                | 2,448   |      |   | 1,895   |  |   |       
|Realized gains  |  |                | 4,783   |      |   | 19,275  |  |   | 10,562 



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 $312,915,000 and $314,391,000 at December 31, 2004 and 2003, respectively.



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table shows the maturity distribution of the amortized cost of the Companys
investment securities at December 31, 2004, with comparative totals for 2003. 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 FiveButWithinTen Years |  | AfterTenYears |         | Total
|                                                 |  | (in thousands)
|Investment securities:                           |  |                |         |                               |   |                              |  |               |         |       |   |       |  |   |          
|U.S. Treasury securities                         |  | $              | 1,273   |                               | $ | 5,339                        |  | $             |        |       | $ |      |  | $ | 6,612    
|U.S. government agency obligations               |  |                | 42,406  |                               |   | 395,229                      |  |               | 14,515  |       |   |      |  |   | 452,150  
|Obligations of states and political subdivisions |  |                | 683     |                               |   | 495                          |  |               | 60      |       |   | 56    |  |   | 1,294    
|Mortgage-backed securities (1)                   |  |                | 115,121 |                               |   | 278,643                      |  |               | 102,497 |       |   | 3,630 |  |   | 499,891  
|Corporate bonds and notes                        |  |                | 94,956  |                               |   | 379,418                      |  |               | 9,935   |       |   |      |  |   | 484,309  
|Other debt securities                            |  |                | 200     |                               |   | 631                          |  |               |        |       |   | 3     |  |   | 834      
|                                                 |  |                |         |                               |   |                              |  |               |         |       |   |       |  |   |          
|Total investment securities                      |  | $              | 254,639 |                               | $ | 1,059,755                    |  | $             | 127,007 |       | $ | 3,689 |  | $ | 1,445,090
|                                                 |  |                |         |                               |   |                              |  |               |         |       |   |       |  |   |          
|Comparative totals for 2003                      |  | $              | 210,229 |                               | $ | 1,153,909                    |  | $             | 194,267 |       | $ | 6,028 |  | $ | 1,564,433

---

|(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, 2004, with comparative totals for 2003. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations:



|                                                 |  |                |         |                               |   |                               |  |                |         |       |   |       |  |   |          
|------------------------------------------------ |  | -------------- | ------- | ----------------------------- | - | ----------------------------- |  | -------------- | ------- | ----- | - | ----- |  | - | ---------
|                                                 |  | WithinOne Year |         | After OneBut WithinFive Years |   | After FiveBut WithinTen Years |  | After TenYears |         | Total
|                                                 |  | (in thousands)
|INVESTMENT SECURITIES:                           |  |                |         |                               |   |                               |  |                |         |       |   |       |  |   |          
|U.S. Treasury securities                         |  | $              | 1,267   |                               | $ | 5,327                         |  | $              |        |       | $ |      |  | $ | 6,594    
|U.S. government agency obligations               |  |                | 42,353  |                               |   | 392,177                       |  |                | 14,552  |       |   |      |  |   | 449,082  
|Obligations of states and political subdivisions |  |                | 692     |                               |   | 509                           |  |                | 60      |       |   | 56    |  |   | 1,317    
|Mortgage-backed securities (1)                   |  |                | 114,757 |                               |   | 277,762                       |  |                | 102,173 |       |   | 3,619 |  |   | 498,311  
|Corporate bonds and notes                        |  |                | 96,319  |                               |   | 383,878                       |  |                | 9,886   |       |   |      |  |   | 490,083  
|Other debt securities                            |  |                | 200     |                               |   | 631                           |  |                |        |       |   | 3     |  |   | 834      
|                                                 |  |                |         |                               |   |                               |  |                |         |       |   |       |  |   |          
|Total investment securities                      |  | $              | 255,588 |                               | $ | 1,060,284                     |  | $              | 126,671 |       | $ | 3,678 |  | $ | 1,446,221
|                                                 |  |                |         |                               |   |                               |  |                |         |       |   |       |  |   |          
|Comparative totals for 2003                      |  | $              | 211,536 |                               | $ | 1,175,760                     |  | $              | 194,819 |       | $ | 6,036 |  | $ | 1,588,151

---

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



54



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##### Table of Contents

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              |  | $                   | 3,071   |                  | $                   | (21    | )          |       | $                | 2,254   |  | $          | (28    | )                |  | $ | 5,325   |  | $ | (49     | )
|U.S. government agency obligations    |  |                     | 205,025 |                  |                     | (1,377 | )          |       |                  | 132,786 |  |            | (2,882 | )                |  |   | 337,811 |  |   | (4,259  | )
|Mortgage-backed securities            |  |                     | 80,122  |                  |                     | (420   | )          |       |                  | 286,540 |  |            | (4,914 | )                |  |   | 366,662 |  |   | (5,334  | )
|Corporate bonds and notes             |  |                     | 132,580 |                  |                     | (840   | )          |       |                  | 41,469  |  |            | (397   | )                |  |   | 174,049 |  |   | (1,237  | )
|                                      |  |                     |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  
|Total temporarily impaired securities |  | $                   | 420,798 |                  | $                   | (2,658 | )          |       | $                | 463,049 |  | $          | (8,221 | )                |  | $ | 883,847 |  | $ | (10,879 | )
|                                      |  |                     |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  



U.S. Treasury
Securities and U.S. government agency obligations. The unrealized losses on the Companys investments in U.S. Treasury securities and direct obligations of U.S. government agencies were caused by interest rate increases. Because the Company
has the ability and intent to hold these investments until a recovery of their amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004.



Mortgage-backed securities. The unrealized losses on the
Companys investment in federal agency mortgage-backed securities were caused by interest rate increases. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the
ability and intent to hold these investments until a recovery of their amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004.



Corporate bonds and notes. The Companys unrealized loss on
investment in corporate bonds and notes was caused by an overall interest rate increase after the purchase of the investments. Included are 22 issuers with a carrying value of $174.0 million and a fair value of $172.8 million. These bonds have at
least an S&P rating of A or better and a Moodys rating of A2 or better. The Companys review of the credit ratings determined that there were no downgrades during the year and no other information raised a concern as to the
collectibility of the bonds. Because the Company has the ability and intent to hold these investments until a recovery of their amortized cost, which may be at maturity, it does not consider any to be other-than-temporarily impaired at December 31,
2004.



Note 5 LOANS



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, and a
variety of consumer loans and municipal loans. In addition, the Banks make loans for the construction of residential homes, multi-family and commercial properties, and for land development.



55



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Major classifications of loans at December 31, 2004 and 2003 are as follows:



|                          |  |                |           |   |      |   |           |  
|------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                          |  | 2004           |           |   | 2003 |  
|                          |  | (in thousands) |          
|Commercial                |  | $              | 801,369   |   |      | $ | 658,615   |  
|Municipal                 |  |                | 106,120   |   |      |   | 87,080    |  
|Real estate:              |  |                |           |   |      |   |           |  
|Residential               |  |                |           |   |      |   |           |  
|1-4 family                |  |                | 688,017   |   |      |   | 700,671   |  
|Multi-family              |  |                | 182,541   |   |      |   | 176,478   |  
|Home equity               |  |                | 294,656   |   |      |   | 270,959   |  
|Commercial                |  |                | 1,590,457 |   |      |   | 1,430,945 |  
|Construction              |  |                | 174,283   |   |      |   | 140,801   |  
|                          |  |                |           |   |      |   |           |  
|Total real estate         |  |                | 2,929,954 |   |      |   | 2,719,854 |  
|Consumer                  |  |                | 239,750   |   |      |   | 259,135   |  
|                          |  |                |           |   |      |   |           |  
|Total gross loans         |  |                | 4,077,193 |   |      |   | 3,724,684 |  
|Allowance for loan losses |  |                | (59,031   | ) |      |   | (57,464   | )
|                          |  |                |           |   |      |   |           |  
|Net loans                 |  | $              | 4,018,162 |   |      | $ | 3,667,220 |  
|                          |  |                |           |   |      |   |           |  
|Loans held for sale       |  | $              | 33,535    |   |      | $ | 25,262    |  
|                          |  |                |           |   |      |   |           |  



Consumer loans include
lease financing receivables of $4,612,000 for 2004 and $20,153,000 in 2003, which includes the estimated residual value of leased vehicles of approximately $3,630,626 and $15,128,576 at December 31, 2004 and 2003, respectively, and is net of
unearned interest income of approximately $301,000 and $1,654,000 at those dates.



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



|                                        |  |                |        |   |      |   |         |      |  |   |         |  
|--------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                        |  | 2004           |        |   | 2003 |   |         | 2002 | 
|                                        |  | (in thousands) |       
|Balance at beginning of year            |  | $              | 57,464 |   |      | $ | 48,197  |      |  | $ | 45,268  |  
|Allowance acquired through acquisitions |  |                |       |   |      |   | 7,936   |      |  |   | 2,972   |  
|Provision for loan losses               |  |                | 4,377  |   |      |   | 7,175   |      |  |   | 8,331   |  
|Loan recoveries                         |  |                | 4,340  |   |      |   | 4,194   |      |  |   | 3,193   |  
|Loans charged off                       |  |                | (7,150 | ) |      |   | (10,038 | )    |  |   | (11,567 | )
|                                        |  |                |        |   |      |   |         |      |  |   |         |  
|Balance at end of year                  |  | $              | 59,031 |   |      | $ | 57,464  |      |  | $ | 48,197  |  
|                                        |  |                |        |   |      |   |         |      |  |   |         |  



The principal amount
of loans on nonaccrual status was $19,915,000 and $14,331,000 at December 31, 2004 and 2003, respectively. At the end of 2004 and 2003, the Company had no loans whose terms had been substantially modified in troubled debt restructurings. At December
31, 2004, 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:



|                                                       |  |                |       |      |   |       |  |   |      
|------------------------------------------------------ |  | -------------- | ----- | ---- | - | ----- |  | - | -----
|                                                       |  | 2004           |       | 2003 |   | 2002 
|                                                       |  | (in thousands)
|Interest income in accordance with original loan terms |  | $              | 1,762 |      | $ | 1,937 |  | $ | 1,872
|Interest income recognized                             |  |                | 359   |      |   | 1,497 |  |   | 730  
|                                                       |  |                |       |      |   |       |  |   |      
|Reduction in interest income                           |  | $              | 1,403 |      | $ | 440   |  | $ | 1,142
|                                                       |  |                |       |      |   |       |  |   |      



56



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##### Table of Contents

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                         |  |                |        |      |   |        |  |   |      
|-------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | - | -----
|                                                         |  | December 31,  
|                                                         |  | 2004           |        | 2003 |   | 2002  
|                                                         |  | (in thousands)
|Investment in impaired loans                             |  | $              | 15,211 |      | $ | 9,863  |  | $ | 9,060
|Impaired loans with no specific reserve                  |  |                | 8,670  |      |   | 4,197  |  |   | 5,517
|Impaired loans with a specific reserve                   |  |                | 6,541  |      |   | 5,666  |  |   | 3,543
|Specific reserve for impaired loans                      |  |                | 2,040  |      |   | 1,725  |  |   | 2,290
|Average investment in impaired loans during the year     |  |                | 15,024 |      |   | 10,130 |  |   | 8,365
|Cash-basis interest income recognized during the year    |  |                | 2      |      |   | 2      |  |   | 27   
|Accrual-basis interest income recognized during the year |  |                |       |      |   | 14     |  |   | 56   



Residential mortgage
loans serviced for others, which are not reflected in the consolidated balance sheets, totaled approximately $2.142 billion and $2.285 billion at December 31, 2004 and 2003, respectively. No recourse provisions exist in connection with such
servicing.



The following table is a summary of activity for
mortgage servicing rights purchased and originated for the three years ended December 31, 2004:



|                                      |  |                |        |   |            |   |        |       |  |   |         |  
|------------------------------------- |  | -------------- | ------ | - | ---------- | - | ------ | ----- |  | - | ------- | -
|                                      |  | Purchased      |        |   | Originated |   |        | Total | 
|                                      |  | (in thousands) |       
|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 | )
|Recovery of impairment                |  |                | 870    |   |            |   | 4,862  |       |  |   | 5,732   |  
|                                      |  |                |        |   |            |   |        |       |  |   |         |  
|Balance at December 31, 2003          |  |                | 573    |   |            |   | 11,692 |       |  |   | 12,265  |  
|Additions                             |  |                |       |   |            |   | 5,090  |       |  |   | 5,090   |  
|Amortization                          |  |                | (551   | ) |            |   | (6,669 | )     |  |   | (7,220  | )
|Recovery of impairment                |  |                | 388    |   |            |   | 1,303  |       |  |   | 1,691   |  
|                                      |  |                |        |   |            |   |        |       |  |   |         |  
|Balance at December 31, 2004          |  | $              | 410    |   |            | $ | 11,416 |       |  | $ | 11,826  |  
|                                      |  |                |        |   |            |   |        |       |  |   |         |  



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, 2004 include discount rate (9%), weighted average prepayment speed (315 PSA/18.9 CPR), weighted average
servicing fee (25.60 basis points) and net cost to service loans ($17/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.



57



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2004 and 2003, the impairment valuation allowance was $1,041,000 and $2,732,000
respectively.



During 2004, the percentage of mortgages in the
serviced portfolio with coupon rates in excess of 7% declined from 16% to 7% at December 31, 2003 and 2004, respectively, while the percentage of mortgages with coupon rates between 5% and 6% increased from 42% to 52% during the same period. Based
upon this rate migration, the Company believes hypothetical future increases in prepayment speeds would be unlikely to result in impairment of greater than the $2.7 million estimated as of December 31, 2003. If impairment were to increase to this
level from the $1.0 million at December 31, 2004, the estimated valuation of the asset would be reduced from 55 basis points to 47 basis points.



Note 6 PREMISES AND EQUIPMENT



Premises and equipment at December 31, 2004 and 2003 are summarized as follows:



|                                          |  |                |         |   |      |   |         |                               |  |            
|----------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ----------------------------- |  | -----------
|                                          |  | 2004           |         |   | 2003 |   |         | EstimatedOriginalUseful Lives
|                                          |  | (in thousands)
|Land                                      |  | $              | 11,711  |   |      | $ | 11,667  |                               |  |           
|Buildings and improvements                |  |                | 55,773  |   |      |   | 55,565  |                               |  | 25-50 years
|Leasehold improvements                    |  |                | 12,434  |   |      |   | 9,713   |                               |  | 2-50 years 
|Furniture and equipment                   |  |                | 51,916  |   |      |   | 49,783  |                               |  | 3-15 years 
|Construction in progress                  |  |                | 10,848  |   |      |   | 9,381   |                               |  |           
|                                          |  |                |         |   |      |   |         |                               |  |            
|Premises and equipment, gross             |  |                | 142,682 |   |      |   | 136,109 |                               |  |            
|Accumulated depreciation and amortization |  |                | (68,411 | ) |      |   | (63,979 | )                             |  |            
|                                          |  |                |         |   |      |   |         |                               |  |            
|Premises and equipment, net               |  | $              | 74,271  |   |      | $ | 72,130  |                               |  |            
|                                          |  |                |         |   |      |   |         |                               |  |            



Total depreciation
expense amounted to approximately $7,977,000, $8,362,000 and $7,428,000 in 2004, 2003 and 2002.



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 $4,560,000, $4,480,000 and $4,056,000 in 2004, 2003, and 2002, 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, 2004 are as follows:



|                             |  |                  |       
|---------------------------- |  | ---------------- | ------
|Year                         |  | LeaseObligations
|                             |  | (in thousands)  
|2005                         |  | $                | 4,640 
|2006                         |  |                  | 3,593 
|2007                         |  |                  | 2,803 
|2008                         |  |                  | 1,560 
|2009                         |  |                  | 712   
|Thereafter                   |  |                  | 3,000 
|                             |  |                  |       
|Total minimum lease payments |  | $                | 16,308
|                             |  |                  |       



58



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 7 BORROWINGS



Borrowings at December 31, 2004 and 2003 consisted of the following:



|                                                                         |  |                |         |      |   |        
|------------------------------------------------------------------------ |  | -------------- | ------- | ---- | - | -------
|                                                                         |  | 2004           |         | 2003
|                                                                         |  | (in thousands)
|Federal funds purchased, rate at 12/31/04 of 2.25% and 12/31/03 of 0.94% |  | $              | 101,947 |      | $ | 4,652  
|Securities sold under agreements to repurchase                           |  |                | 76,716  |      |   | 78,980 
|Trust preferred securities                                               |  |                | 125,000 |      |   | 125,000
|Note Payable, 4.35% in 2004 and 4.12% in 2003, due January 1, 2015       |  |                | 273     |      |   | 261    
|FHLB Advances:                                                           |  |                |         |      |   |        
|Maturing December 27, 2010 @ 4.80%, (callable)                           |  |                | 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% (callable)                               |  |                | 10,031  |      |   | 10,036 
|Maturing April 19, 2011 @ 3.50%                                          |  |                | 1,463   |      |   | 1,507  
|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% (callable)                             |  |                | 19,996  |      |   | 19,910 
|Maturing December 29, 2023 @ 0.13%                                       |  |                | 485     |      |   | 500    
|                                                                         |  |                |         |      |   |        
|Total Borrowings                                                         |  | $              | 356,471 |      | $ | 287,434
|                                                                         |  |                |         |      |   |        



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
$86,090,000 and $85,043,000 respectively, at December 31, 2004, and $89,727,000 and $89,038,000, respectively, at December 31, 2003. 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:



|                                            |  |                |        |   |      |   |         |      |  |   |        |  
|------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                            |  | 2004           |        |   | 2003 |   |         | 2002 | 
|                                            |  | (in thousands) |       
|Average balance outstanding during the year |  | $              | 73,860 |   |      | $ | 97,508  |      |  | $ | 29,947 |  
|Average interest rate during the year       |  |                | 0.84   | % |      |   | 1.42    | %    |  |   | 3.95   | %
|Maximum amount outstanding at any month-end |  | $              | 79,365 |   |      | $ | 123,131 |      |  | $ | 54,238 |  



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



|                                            |  |                |     |      |   |      |      |  |   |      |  
|------------------------------------------- |  | -------------- | --- | ---- | - | ---- | ---- |  | - | ---- | -
|                                            |  | 2004           |     | 2003 |   |      | 2002 | 
|                                            |  | (in thousands) |    
|Average balance outstanding during the year |  | $              |    |      | $ | 435  |      |  | $ | 555  |  
|Average interest rate during the year       |  |                | N/A |      |   | 0.93 | %    |  |   | 1.40 | %
|Maximum amount outstanding at any month-end |  | $              |    |      | $ | 875  |      |  | $ | 915  |  



The following
information relates to FHLB borrowings:



|                                            |  |                |        |   |      |   |         |      |  |   |         |  
|------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                            |  | 2004           |        |   | 2003 |   |         | 2002 | 
|                                            |  | (in thousands) |       
|Average balance outstanding during the year |  | $              | 52,942 |   |      | $ | 177,494 |      |  | $ | 83,870  |  
|Average interest rate during the year       |  |                | 4.47   | % |      |   | 3.81    | %    |  |   | 4.21    | %
|Maximum amount outstanding at any month-end |  | $              | 52,535 |   |      | $ | 272,644 |      |  | $ | 121,057 |  



59



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##### Table of Contents

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



Concurrent with the issuance of these securities, the Company entered into interest rate swap agreements with two
counterparties, in which the Company 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 TPS borrowings:



|                                                                             |  |                |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                             |  | 2004           |         |   | 2003 |   |         | 2002 | 
|                                                                             |  | (in thousands) |        
|Average balance outstanding during the year                                  |  | $              | 125,000 |   |      | $ | 125,000 |      |  | $ | 77,055  |  
|Average effective interest rate during the year (net of interest rate swaps) |  |                | 2.73    | % |      |   | 2.48    | %    |  |   | 3.11    | %
|Maximum amount outstanding at any month-end                                  |  | $              | 125,000 |   |      | $ | 125,000 |      |  | $ | 125,000 |  



Note 8 INCOME
TAXES



Income tax expense consists of the
following:



|                   |  |                |        |   |      |   |        |      |  |   |        |  
|------------------ |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                   |  | 2004           |        |   | 2003 |   |        | 2002 | 
|                   |  | (in thousands) |       
|Current payable    |  |                |        |   |      |   |        |      |  |   |        |  
|Federal            |  | $              | 35,070 |   |      | $ | 41,260 |      |  | $ | 40,369 |  
|State              |  |                | 6,904  |   |      |   | 6,874  |      |  |   | 3,776  |  
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|                   |  |                | 41,974 |   |      |   | 48,134 |      |  |   | 44,145 |  
|Deferred (prepaid) |  |                |        |   |      |   |        |      |  |   |        |  
|Federal            |  |                | 1,407  |   |      |   | (5,471 | )    |  |   | (9,811 | )
|State              |  |                | (354   | ) |      |   | (914   | )    |  |   | (179   | )
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|                   |  |                | 1,053  |   |      |   | (6,385 | )    |  |   | (9,990 | )
|                   |  |                |        |   |      |   |        |      |  |   |        |  
|Income tax expense |  | $              | 43,027 |   |      | $ | 41,749 |      |  | $ | 34,155 |  
|                   |  |                |        |   |      |   |        |      |  |   |        |  



Current income taxes
receivable, included in other assets, were $3,262,265 and $2,958,563 at December 31, 2004 and 2003, 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 $2,977,000, $2,757,000, and $2,694,000 in 2004, 2003, and 2002, 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.



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | 2004           |        |   | 2003 |   |        | 2002 | 
|                                              |  | (in thousands) |       
|Computed tax at statutory Federal rate of 35% |  | $              | 41,354 |   |      | $ | 40,792 |      |  | $ | 34,230 |  
|Increase (decrease) in taxes from:            |  |                |        |   |      |   |        |      |  |   |        |  
|Amortization of intangible assets             |  |                | 98     |   |      |   | 98     |      |  |   | 98     |  
|Tax-exempt interest, net                      |  |                | (954   | ) |      |   | (825   | )    |  |   | (970   | )
|Dividends received deduction                  |  |                | (13    | ) |      |   | (25    | )    |  |   | (86    | )
|State taxes, net of Federal tax benefit       |  |                | 4,341  |   |      |   | 3,874  |      |  |   | 2,338  |  
|Tax credits                                   |  |                | (2,169 | ) |      |   | (1,562 | )    |  |   | (1,555 | )
|Other, net                                    |  |                | 370    |   |      |   | (603   | )    |  |   | 100    |  
|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|Total                                         |  | $              | 43,027 |   |      | $ | 41,749 |      |  | $ | 34,155 |  
|                                              |  |                |        |   |      |   |        |      |  |   |        |  
|Effective income tax rate                     |  |                | 36.4   | % |      |   | 35.8   | %    |  |   | 34.9   | %



The components of the
net deferred tax liability at December 31, 2004 and 2003 are as follows:



|                                                        |  |                |        |   |      |   |         |  
|------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | -
|                                                        |  | 2004           |        |   | 2003 |  
|                                                        |  | (in thousands) |       
|Allowance for loan losses                               |  | $              | 22,118 |   |      | $ | 22,829  |  
|Deferred compensation and pension                       |  |                | 2,409  |   |      |   | 6,653   |  
|Depreciation                                            |  |                | (262   | ) |      |   | (392    | )
|Accrued liabilities                                     |  |                | (2,892 | ) |      |   | 565     |  
|Unrealized (gain) loss on securities available for sale |  |                | (551   | ) |      |   | (10,298 | )
|Basis differences, purchase accounting                  |  |                | (3,398 | ) |      |   | (4,268  | )
|Core deposit intangible                                 |  |                | (5,427 | ) |      |   | (6,392  | )
|Lease financing                                         |  |                | (1,763 | ) |      |   | (6,408  | )
|Mortgage servicing                                      |  |                | (4,054 | ) |      |   | (3,434  | )
|Other                                                   |  |                | (1,959 | ) |      |   | (3,328  | )
|                                                        |  |                |        |   |      |   |         |  
|                                                        |  | $              | 4,221  |   |      | $ | (4,473  | )
|                                                        |  |                |        |   |      |   |         |  



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, and 414,750 shares at a cost of $9.9 million during 2002. Over the four-year period
the program was outstanding, the Company repurchased 5,153,500 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 $31.9 million, $28.3 million and $25.4 million during 2004, 2003, and 2002, respectively. These amounts represented $0.70, $0.64, and $0.63 per share.



61



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##### Table of Contents

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Surplus



The payment of dividends by BWM and FBT to the Company are subject to Massachusetts banking law restrictions, which require 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.



Earnings Per Share



Prior year numbers have been adjusted to reflect the Companys 5-for-4 common stock split. The record date of the stock
split was as of the close of business on August 27, 2004.



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



|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------- |  | ------------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                 |  | 2004                                       |        |   | 2003 |   |        | 2002 | 
|                                                                 |  | (in thousands except per shareinformation) |       
|Net income                                                       |  | $                                          | 75,127 |   |      | $ | 74,799 |      |  | $ | 63,645 |  
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|Weighted average common shares outstanding                       |  |                                            | 46,106 |   |      |   | 44,720 |      |  |   | 40,132 |  
|Dilutive effect of common stock equivalents                      |  |                                            | 625    |   |      |   | 430    |      |  |   | 487    |  
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|Weighted average common and common equivalent shares outstanding |  |                                            | 46,731 |   |      |   | 45,150 |      |  |   | 40,619 |  
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|Basic earnings per share                                         |  | $                                          | 1.63   |   |      | $ | 1.67   |      |  | $ | 1.58   |  
|Dilutive effect of common stock equivalents                      |  |                                            | (0.02  | ) |      |   | (0.01  | )    |  |   | (0.01  | )
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  
|Diluted earnings per share                                       |  | $                                          | 1.61   |   |      | $ | 1.66   |      |  | $ | 1.57   |  
|                                                                 |  |                                            |        |   |      |   |        |      |  |   |        |  



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:



|                                |  |      |         |      |   |         |  |   |        
|------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                |  | 2004 |         | 2003 |   | 2002   
|Anti-dilutive options           |  |      | 449,414 |      |   | 768,329 |  |   | 869,314
|Weighted average exercise price |  | $    | 29.90   |      | $ | 24.91   |  | $ | 24.40  



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,:



|                                                                                          |  |                |         |   |      |   |         |      |  |   |        |  
|----------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                          |  | 2004           |         |   | 2003 |   |         | 2002 | 
|                                                                                          |  | (in thousands) |        
|Unrealized gains (losses) on securities available for sale, net of tax                    |  | $              | (13,405 | ) |      | $ | (1,681  | )    |  | $ | 26,818 |  
|Reclassification adjustment for realized (gains) losses arising during period, net of tax |  |                | (1,518  | ) |      |   | (11,297 | )    |  |   | (6,865 | )
|Accrued minimum pension liability, net of tax                                             |  |                |        |   |      |   | 4,284   |      |  |   | (4,284 | )
|                                                                                          |  |                |         |   |      |   |         |      |  |   |        |  
|Total other comprehensive income                                                          |  | $              | (14,923 | ) |      | $ | (8,694  | )    |  | $ | 15,669 |  
|                                                                                          |  |                |         |   |      |   |         |      |  |   |        |  



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##### Table of Contents

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 10 STOCK PLANS



The Company has two stock option plans: The 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 but not limited, to 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 time; unrestricted stock awards; performance awards; and non-employee directors stock options to purchase stock
at predetermined fixed prices. There were a total of 5,688,624 shares at December 31, 2004 and 2003, available to be issued under the plans and 5,151,393 and 4,380,167 had been issued.



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



|                  |  |                                         |       |         |           |  
|----------------- |  | --------------------------------------- | ----- | ------- | --------- | -
|                  |  | WeightedAverage ExercisePrice Per Share |       | Options |          
|December 31, 2001 |  | $                                       | 18.26 |         | 2,050,519 |  
|Granted           |  |                                         | 23.26 |         | 656,875   |  
|Exercised         |  |                                         | 13.53 |         | (234,425  | )
|Expired           |  |                                         | 24.54 |         | (23,830   | )
|                  |  |                                         |       |         |           |  
|December 31, 2002 |  |                                         | 19.98 |         | 2,449,139 |  
|Granted           |  |                                         | 21.74 |         | 1,024,687 |  
|Exercised         |  |                                         | 15.98 |         | (368,214  | )
|Expired           |  |                                         |      |         |          |  
|                  |  |                                         |       |         |           |  
|December 31, 2003 |  |                                         | 21.09 |         | 3,105,612 |  
|Granted           |  |                                         | 27.71 |         | 771,226   |  
|Exercised         |  |                                         | 18.35 |         | (529,292  | )
|Expired           |  |                                         | 28.83 |         | (313      | )
|                  |  |                                         |       |         |           |  
|December 31, 2004 |  | $                                       | 23.07 |         | 3,347,233 |  
|                  |  |                                         |       |         |           |  



OPTIONS
OUTSTANDING AND EXERCISABLE



December 31, 2004



|                        |  |                     |  |                                           |  |                               |  |                    |  |                              
|----------------------- |  | ------------------- |  | ----------------------------------------- |  | ----------------------------- |  | ------------------ |  | -----------------------------
|                        |  | Options Outstanding |  | Options Exercisable                      
|Range of ExercisePrices |  | OptionsOutstanding  |  | WeightedAverageRemaining Contractual Life |  | WeightedAverageExercise Price |  | OptionsOutstanding |  | WeightedAverageExercise Price
|$  6.53 - $19.97        |  | 768,237             |  | 6.03                                      |  | $18.43                        |  | 768,237            |  | $18.43                       
|$20.15 - $22.32         |  | 683,531             |  | 6.41                                      |  | 21.21                         |  | 683,531            |  | 21.21                        
|$22.89 - $23.23         |  | 837,085             |  | 7.52                                      |  | 23.03                         |  | 837,085            |  | 23.03                        
|$23.76 - $29.46         |  | 994,338             |  | 8.43                                      |  | 27.32                         |  | 994,338            |  | 27.32                        
|$29.77 - $36.02         |  | 64,042              |  | 3.78                                      |  | 32.92                         |  | 64,042             |  | 32.92                        
|                        |  |                     |  |                                           |  |                               |  |                    |  |                              
|$  6.53 - $36.02        |  | 3,347,233           |  | 7.15                                      |  | $23.07                        |  | 3,347,233          |  | $23.07                       
|                        |  |                     |  |                                           |  |                               |  |                    |  |                              



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##### Table of Contents

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 11 EMPLOYEE BENEFITS



Pension Plan



As of January 1, 2004, the Company sponsored two qualified defined benefit pension plans that together covered substantially
all of its employees. The Chittenden Pension Account Plan (Chittenden Plan) covered substantially all employees other than employees of Granite Bank and GSBI Insurance Group (GSBI) who met 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) covered substantially all employees of
Granite Bank and GSBI who met 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. Effective January 1, 2004, eligible employees of Granite Bank and GSBI began to earn benefits under the Chittenden Plan. On September 30, 2004, the Company merged the Granite Plan into the Chittenden Plan, which the Company continues to
sponsor, and which continues to cover substantially all of its employees.



The changes in the benefit obligation for the years ended December 31, 2004 and 2003 are as follows:



|                                                  |  |                |        |   |      |   |        |  
|------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                  |  | 2004           |        |   | 2003 |  
|                                                  |  | (in thousands) |       
|Projected benefit obligation at beginning of year |  | $              | 59,913 |   |      | $ | 45,847 |  
|Service cost                                      |  |                | 3,419  |   |      |   | 2,817  |  
|Interest cost                                     |  |                | 3,697  |   |      |   | 3,376  |  
|Plan amendments                                   |  |                | 845    |   |      |   | (800   | )
|Actuarial loss                                    |  |                | 5,412  |   |      |   | 3,392  |  
|Disbursements                                     |  |                | (1,908 | ) |      |   | (1,675 | )
|Granite Acquisition                               |  |                |       |   |      |   | 6,956  |  
|                                                  |  |                |        |   |      |   |        |  
|Projected benefit obligation at end of year       |  | $              | 71,378 |   |      | $ | 59,913 |  
|                                                  |  |                |        |   |      |   |        |  



The accumulated
benefit obligations for the U.S. pension plans at the end of 2004 and 2003 were $62,128,975 and $52,676,050, respectively.



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



|                              |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | -
|                              |  | 2004 |   |  | 2003 |  
|Discount rate                 |  | 5.75 | % |  | 6.00 | %
|Rate of compensation increase |  | 4.50 | % |  | 4.50 | %



The changes in the
plan assets for the years ended December 31, 2004 and 2003 are as follows:



|                                          |  |                |        |   |      |   |        |  
|----------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                          |  | 2004           |        |   | 2003 |  
|                                          |  | (in thousands) |       
|Fair value of assets at beginning of year |  | $              | 57,146 |   |      | $ | 34,287 |  
|Actual return on plan assets              |  |                | 4,212  |   |      |   | 6,237  |  
|Company contributions                     |  |                | 5,000  |   |      |   | 13,277 |  
|Disbursements                             |  |                | (1,908 | ) |      |   | (1,675 | )
|Granite Acquisition                       |  |                |       |   |      |   | 5,020  |  
|                                          |  |                |        |   |      |   |        |  
|Fair value of assets at end of year       |  | $              | 64,450 |   |      | $ | 57,146 |  
|                                          |  |                |        |   |      |   |        |  



64



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##### Table of Contents

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The asset allocation for the Companys pension plans at December 31, 2003 and 2004, and the
target asset allocation for 2005, by asset category are as follows:



|                  |  |      |   |  |                             |   |  |       |  
|----------------- |  | ---- | - |  | --------------------------- | - |  | ----- | -
|                  |  |      |   |  | Target AssetAllocation 2005 |  
|Asset Category    |  | 2003 |   |  | 2004                        |   | 
|Equity securities |  | 52   | % |  | 63                          | % |  | 40-75 | %
|Debt securities   |  | 25   | % |  | 22                          | % |  | 20-55 | %
|Cash              |  | 23   | % |  | 15                          | % |  | 0-20  | %
|                  |  |      |   |  |                             |   |  |       |  
|Total             |  | 100  | % |  | 100                         | % |  |       |  



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 20-55% of plan assets be invested in corporate bonds and other fixed income securities and 40-75% of plan assets be invested in equity securities.



The funded status of the plans for at year-end, reconciled to the amount on
the statement of financial position, follows:



|                                                                       |  |                |         |   |      |   |         |  
|---------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                       |  | 2004           |         |   | 2003 |  
|                                                                       |  | (in thousands) |        
|Fair value of plan assets                                              |  | $              | 64,450  |   |      | $ | 57,146  |  
|Benefit obligation                                                     |  |                | (71,378 | ) |      |   | (59,913 | )
|                                                                       |  |                |         |   |      |   |         |  
|Funded status                                                          |  |                | (6,928  | ) |      |   | (2,767  | )
|Prior service cost not yet recognized in net periodic pension cost     |  |                | (1,911  | ) |      |   | (3,396  | )
|Unrecognized net transition asset amortized over participants service |  |                |        |   |      |   | (110    | )
|Unrecognized net loss from actual experience versus assumptions        |  |                | 21,595  |   |      |   | 16,255  |  
|                                                                       |  |                |         |   |      |   |         |  
|Prepaid pension benefit included in other assets                       |  | $              | 12,756  |   |      | $ | 9,982   |  
|                                                                       |  |                |         |   |      |   |         |  



|                      |  |                |        |      |   |        |  
|--------------------- |  | -------------- | ------ | ---- | - | ------ | -
|                      |  | 2004           |        | 2003 |  
|                      |  | (in thousands) |       
|Prepaid benefit cost  |  | $              | 12,756 |      | $ | 12,159 |  
|Accrued benefit cost  |  |                |       |      |   | (2,177 | )
|                      |  |                |        |      |   |        |  
|Net amount recognized |  | $              | 12,756 |      | $ | 9,982  |  
|                      |  |                |        |      |   |        |  



65



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##### Table of Contents

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At the end of 2004 and 2003 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:



|                               |  |                                                                  |        |                                                                    |   |        |  |      |  |   |      
|------------------------------ |  | ---------------------------------------------------------------- | ------ | ------------------------------------------------------------------ | - | ------ |  | ---- |  | - | -----
|                               |  | Projected BenefitObligation exceeds theFair Value of Plan Assets |        | Accumulated BenefitObligation exceeds theFair Value of Plan Assets
|                               |  | 2004                                                             |        | 2003                                                               |   | 2004   |  | 2003
|Projected benefit obligation   |  | $                                                                | 71,378 |                                                                    | $ | 59,913 |  |     |  | $ | 7,000
|Accumulated benefit obligation |  |                                                                  | 62,129 |                                                                    |   | 52,676 |  |     |  |   | 7,000
|Fair value of plan assets      |  |                                                                  | 64,450 |                                                                    |   | 57,146 |  |     |  |   | 5,731



Employer
contributions for the years ended December 31, 2003 and 2004, and expected contributions for 2005 are as follows:



|                      |  |      |        |      |   |                |  |   |    
|--------------------- |  | ---- | ------ | ---- | - | -------------- |  | - | ---
|                      |  | 2003 |        | 2004 |   | Projected 2005
|Employer contribution |  | $    | 13,277 |      | $ | 5,000          |  | $ |   
|Benefit disbursements |  |      | 1,675  |      |   | 1,908          |  |   | N/A



Due to recent
contributions made in excess of the minimum required amounts, the Company does not anticipate a required contribution during 2005. However, it is possible that the Company, if appropriate to its tax and cash position, will make a voluntary
contribution during 2005 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,   |       
|                               |  | 2004           |        |   | 2003 |   |        | 2002 | 
|                               |  | (in thousands) |       
|Service cost                   |  | $              | 3,419  |   |      | $ | 2,817  |      |  | $ | 1,926  |  
|Interest cost                  |  |                | 3,697  |   |      |   | 3,376  |      |  |   | 2,903  |  
|Expected return on plan assets |  |                | (4,451 | ) |      |   | (3,544 | )    |  |   | (3,970 | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Net amortization:              |  |                |        |   |      |   |        |      |  |   |        |  
|Prior service cost             |  |                | (640   | ) |      |   | (590   | )    |  |   | (618   | )
|Net actuarial loss/(gain)      |  |                | 468    |   |      |   |       |      |  |   |       |  
|Transition amount              |  |                | (112   | ) |      |   | (129   | )    |  |   | (129   | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Total amortization             |  |                | (284   | ) |      |   | (719   | )    |  |   | (747   | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Net pension (income) expense   |  | $              | 2,381  |   |      | $ | 1,930  |      |  | $ | 112    |  
|                               |  |                |        |   |      |   |        |      |  |   |        |  



Weighted-average
assumptions used to determine net cost:



|                                         |  |      |   |  |      |  
|---------------------------------------- |  | ---- | - |  | ---- | -
|                                         |  | 2004 |   |  | 2003 |  
|Discount rate                            |  | 6.00 | % |  | 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



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 $1,433,000 and $1,677,000 at December 31, 2004 and 2003, respectively.



The Company has established a supplemental executive retirement plan (SERP) for members of the executive management group. This unfunded plan is intended to cover only those benefits excluded from coverage under the
Companys qualified defined benefit pension plan as a result of IRS regulations. The design elements of this SERP mirror those of the Companys qualified plan. In addition to the SERP, the Company has a separate arrangement with its Chief
Executive Officer under which contributions are accrued based upon the Companys return on equity (ROE). A ROE of 10% is the minimum threshold at which any contribution will be made. Benefits are payable upon attaining the age of 55, except in
the event of death or disability. The liability related to the SERPs, included in accrued expenses and other liabilities was $4,530,000 and $3,771,000 at December 31, 2004 and 2003 respectively. Expenses related to this plan were $760,000, $614,000
and $577,000 in 2004, 2003 and 2002, 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.



During the three year period
ended December 31, 2004, the Company made incentive savings contributions in amounts equal to 35% of each employees basic contribution, which was charged to benefits expense.



|     |  |                       |          
|---- |  | --------------------- | ---------
|Year |  | 35%ContributionAmount
|2004 |  | $                     | 1,322,000
|2003 |  |                       | 1,184,000
|2002 |  |                       | 1,202,000



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



|     |  |                                 |        
|---- |  | ------------------------------- | -------
|Year |  | ProfitSharingContributionAmount
|2004 |  | $                               | 376,000
|2003 |  |                                 | 761,000
|2002 |  |                                 | 643,000



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|     |  |        
|---- |  | -------
|Year |  | Shares 
|2004 |  | 123,212
|2003 |  | 132,796
|2002 |  | 94,891 



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 $12,000, $29,000 and $29,000 in 2004, 2003 and 2002,
respectively.



The Company also has an Executive Management
Incentive Compensation Plan. Executives at defined levels of responsibility are eligible to participate in the plan. Incentive award payments are determined on the basis of corporate and group profitability, relative performance within a defined
peer group and individual performance. Awards may range from zero to 100% of annual compensation. Expenses for this plan totaled $715,000, $2,169,000 and $2,155,000 in 2004, 2003, and 2002, 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 $1,189,000, $879,000, and $713,000 for 2004, 2003, and 2002, respectively. Based on these elections,
shares that could be issued under the plan totaled 423,800 at December 31, 2004.



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



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, 2004 and 2003 are as follows:



|                                                                          |  |                |         |      |   |        
|------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                                          |  | 2004           |         | 2003
|                                                                          |  | (in thousands)
|Loans and Other Commitments                                               |  |                |         |      |   |        
|Commitments to originate loans                                            |  | $              | 204,193 |      | $ | 131,610
|Unused home equity lines of credit                                        |  |                | 313,526 |      |   | 292,823
|Unused portions of credit card lines                                      |  |                | 39,921  |      |   | 37,554 
|Unadvanced portions of construction loans                                 |  |                | 173,878 |      |   | 192,826
|Equity investment commitments to limited partnerships                     |  |                | 4,785   |      |   | 8,769  
|                                                                          |  |               
|Standby Letters of Credit                                                 |  |                |         |      |   |        
|Notional amount of standby letters of credit fully collateralized by cash |  |                | 71,880  |      |   | 65,051 
|Notional amount of other standby letters of credit                        |  |                | 29,938  |      |   | 40,812 
|Liability associated with letters of credit recorded on balance sheet     |  |                | 510     |      |   | 290    



Note 13 COMMITMENTS
AND CONTINGENCIES



The
Federal Reserve System requires nonmember banks to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement, included in cash and cash equivalents, was
$26,097,000 and $10,592,000 at December 31, 2004 and 2003, respectively.



The Company has entered into severance agreements with the Chief Executive Officer and several members of senior management. These agreements are triggered by a change of control under certain circumstances. Payments
are equal to 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, 2004.
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:



|                                 |  |                |        |   |      |   |        |      |  |   |        |  
|-------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                 |  | 2004           |        |   | 2003 |   |        | 2002 | 
|                                 |  | (in thousands) |       
|Legal and professional           |  | $              | 949    |   |      | $ | 1,569  |      |  | $ | 854    |  
|Marketing                        |  |                | 3,466  |   |      |   | 3,282  |      |  |   | 2,942  |  
|Software and supplies            |  |                | 7,845  |   |      |   | 7,288  |      |  |   | 4,924  |  
|Net OREO and collection expenses |  |                | (617   | ) |      |   | (129   | )    |  |   | (293   | )
|Telephone                        |  |                | 2,829  |   |      |   | 3,210  |      |  |   | 3,071  |  
|Postage                          |  |                | 2,865  |   |      |   | 3,009  |      |  |   | 2,561  |  
|Other                            |  |                | 18,258 |   |      |   | 18,776 |      |  |   | 17,131 |  
|                                 |  |                |        |   |      |   |        |      |  |   |        |  
|                                 |  | $              | 35,595 |   |      | $ | 37,005 |      |  | $ | 31,190 |  
|                                 |  |                |        |   |      |   |        |      |  |   |        |  



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 and Federal Reserve Bank stock (FRB), is based on quoted market prices. The carrying value of FHLB and FRB stock represents its redemption value.



Loans



Fair values are estimated for portfolios of loans with similar financial and credit characteristics. The loan portfolio was
evaluated in the following segments: 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 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



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



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



|                                             |  |                |           |            |   |                |  |            |           |  |   |          
|-------------------------------------------- |  | -------------- | --------- | ---------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                                             |  | December 31,  
|                                             |  | 2004           |           | 2003      
|                                             |  | CarryingAmount |           | Fair Value |   | CarryingAmount |  | Fair Value
|                                             |  | (in thousands)
|Financial assets:                            |  |                |           |            |   |                |  |            |           |  |   |          
|Cash and cash equivalents                    |  | $              | 136,468   |            | $ | 136,468        |  | $          | 174,939   |  | $ | 174,939  
|Securities available for sale                |  |                | 1,446,221 |            |   | 1,446,221      |  |            | 1,588,151 |  |   | 1,588,151
|FRB and FHLB stock                           |  |                | 19,243    |            |   | 19,243         |  |            | 20,753    |  |   | 20,753   
|Loans, net                                   |  |                | 4,018,162 |            |   | 4,029,935      |  |            | 3,667,220 |  |   | 3,682,159
|Loans held for sale                          |  |                | 33,535    |            |   | 33,535         |  |            | 25,262    |  |   | 25,262   
|Mortgage servicing rights                    |  |                | 11,826    |            |   | 17,198         |  |            | 12,265    |  |   | 18,015   
|Financial liabilities:                       |  |                |           |            |   |                |  |            |           |  |   |          
|Deposits:                                    |  |                |           |            |   |                |  |            |           |  |   |          
|Demand                                       |  |                | 890,561   |            |   | 890,561        |  |            | 898,920   |  |   | 898,920  
|Savings                                      |  |                | 519,623   |            |   | 519,623        |  |            | 517,789   |  |   | 517,789  
|NOW                                          |  |                | 890,701   |            |   | 890,701        |  |            | 899,018   |  |   | 899,018  
|CMA / money market                           |  |                | 1,577,474 |            |   | 1,577,474      |  |            | 1,604,138 |  |   | 1,604,138
|Certificates of deposit less than $100,000   |  |                | 752,828   |            |   | 755,337        |  |            | 789,066   |  |   | 797,365  
|Certificates of deposit of $100,000 and over |  |                | 407,543   |            |   | 406,539        |  |            | 260,960   |  |   | 262,454  
|Borrowings                                   |  |                | 356,471   |            |   | 356,214        |  |            | 162,434   |  |   | 163,940  
|Commitments                                  |  |                | 510       |            |   | 682            |  |            | 290       |  |   | 827      



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 16 PARENT COMPANY FINANCIAL STATEMENTS



Chittenden Corporation (Parent Company Only)



BALANCE SHEETS



|                                           |  |                |         |      |   |        
|------------------------------------------ |  | -------------- | ------- | ---- | - | -------
|                                           |  | December 31,  
|                                           |  | 2004           |         | 2003
|                                           |  | (in thousands)
|Assets                                     |  |                |         |      |   |        
|Cash and cash equivalents                  |  | $              | 66,723  |      | $ | 34,342 
|Investment in subsidiaries                 |  |                | 695,017 |      |   | 682,694
|Other assets                               |  |                | 14,868  |      |   | 17,483 
|                                           |  |                |         |      |   |        
|Total assets                               |  | $              | 776,608 |      | $ | 734,519
|                                           |  |                |         |      |   |        
|Liabilities and stockholders equity       |  |                |         |      |   |        
|Liabilities:                               |  |                |         |      |   |        
|Accrued expenses and other liabilities     |  |                | 31,351  |      |   | 29,568 
|Other Borrowins                            |  |                | 125,000 |      |   | 125,000
|                                           |  |                |         |      |   |        
|Total liabilities                          |  |                | 156,351 |      |   | 154,568
|                                           |  |                |         |      |   |        
|Total stockholders equity                 |  |                | 620,257 |      |   | 579,951
|                                           |  |                |         |      |   |        
|Total liabilities and stockholders equity |  | $              | 776,608 |      | $ | 734,519
|                                           |  |                |         |      |   |        



STATEMENTS
OF INCOME



|                                                                                |  |                          |        |      |   |        |  |   |       
|------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                                                                                |  | Years Ended December 31,
|                                                                                |  | 2004                     |        | 2003 |   | 2002  
|                                                                                |  | (in thousands)          
|Operating income:                                                               |  |                          |        |      |   |        |  |   |       
|Dividends from bank subsidiaries                                                |  | $                        | 49,525 |      | $ | 78,350 |  | $ | 53,700
|Interest income                                                                 |  |                          |       |      |   | 607    |  |   | 597   
|                                                                                |  |                          |        |      |   |        |  |   |       
|Total operating income                                                          |  | $                        | 49,525 |      |   | 78,957 |  |   | 54,297
|                                                                                |  |                          |        |      |   |        |  |   |       
|Operating expense:                                                              |  |                          |        |      |   |        |  |   |       
|Interest expense                                                                |  |                          | 4,284  |      |   | 2,795  |  |   | 2,203 
|Other operating expense                                                         |  |                          | 1,163  |      |   | 3,823  |  |   | 1,388 
|                                                                                |  |                          |        |      |   |        |  |   |       
|Total operating expense                                                         |  |                          | 5,447  |      |   | 6,618  |  |   | 3,591 
|                                                                                |  |                          |        |      |   |        |  |   |       
|Income before income taxes and equity in undistributed earnings of subsidiaries |  |                          | 44,078 |      |   | 72,339 |  |   | 50,706
|Income tax benefit                                                              |  |                          | 1,938  |      |   | 2,301  |  |   | 1,143 
|                                                                                |  |                          |        |      |   |        |  |   |       
|Income before equity in undistributed earnings of subsidiaries                  |  |                          | 46,016 |      |   | 74,640 |  |   | 51,849
|Equity in undistributed earnings of subsidiaries                                |  |                          | 29,111 |      |   | 159    |  |   | 11,796
|                                                                                |  |                          |        |      |   |        |  |   |       
|Net income                                                                      |  | $                        | 75,127 |      | $ | 74,799 |  | $ | 63,645
|                                                                                |  |                          |        |      |   |        |  |   |       



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



STATEMENTS OF CASH FLOWS



|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                  |  | Years Ended December 31, |        
|                                                                                  |  | 2004                     |         |   | 2003 |   |          | 2002 | 
|                                                                                  |  | (in thousands)           |        
|Cash flows from operating activities:                                             |  |                          |         |   |      |   |          |      |  |   |         |  
|Net income                                                                        |  | $                        | 75,127  |   |      | $ | 74,799   |      |  | $ | 63,645  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |          |      |  |   |         |  
|Equity in undistributed earnings of bank subsidiaries                             |  |                          | (29,111 | ) |      |   | (159     | )    |  |   | (11,796 | )
|Decrease in other assets                                                          |  |                          | 2,615   |   |      |   | 2,438    |      |  |   | 2,647   |  
|Increase in accrued expenses and other liabilities                                |  |                          | 5,874   |   |      |   | 7,159    |      |  |   | 8,691   |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net cash provided by operating activities                                         |  |                          | 54,505  |   |      |   | 84,237   |      |  |   | 63,187  |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Cash flows from investing activities:                                             |  |                          |         |   |      |   |          |      |  |   |         |  
|Investments in and advanced to subsidiaries                                       |  |                          |        |   |      |   | (122,998 | )    |  |   | (69,249 | )
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net cash used in investing activities                                             |  |                          |        |   |      |   | (122,998 | )    |  |   | (69,249 | )
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Cash flows from financing activities:                                             |  |                          |         |   |      |   |          |      |  |   |         |  
|Proceeds from issuance of trust preferred securities                              |  |                          |        |   |      |   |         |      |  |   | 120,321 |  
|Proceeds from issuance of treasury and common stock                               |  |                          | 9,765   |   |      |   | 6,082    |      |  |   | 3,233   |  
|Dividends paid on common stock                                                    |  |                          | (31,889 | ) |      |   | (28,301  | )    |  |   | (25,379 | )
|Repurchase of common stock                                                        |  |                          |        |   |      |   |         |      |  |   | (9,904  | )
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net cash provided by (used in) financing activities                               |  |                          | (22,124 | ) |      |   | (22,219  | )    |  |   | 88,271  |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                          | 32,381  |   |      |   | (60,980  | )    |  |   | 82,209  |  
|Cash and cash equivalents at beginning of year                                    |  |                          | 34,342  |   |      |   | 95,322   |      |  |   | 13,113  |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents at end of year                                          |  | $                        | 66,723  |   |      | $ | 34,342   |      |  | $ | 95,322  |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  



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, 2004, that the Company and the Banks meet all capital adequacy requirements.



As of December 31, 2004, 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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



corrective action. To be categorized as adequately or well capitalized, the Company and the Banks must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the tables below.



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



|                                          |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|----------------------------------------- |  | ------ | ------- | ----- | --------------------------- | - | ------ | -------------------------------------------------------------- | ------- |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                                          |  | Actual |         |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions: |        
|                                          |  | Amount |         | Ratio |                             |   | Amount |                                                                | Ratio   |  |      | Amount |  | Ratio |        
|As of December 31, 2004                   |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Total Capital (to Risk Weighted Assets):  |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  | $      | 561,046 |       | 11.64                       | % |        | $                                                              | 385,499 |  | 8.00 | %      |  | $     | 481,874 |  | 10.00 | %
|Chittenden Trust Company                  |  |        | 262,528 |       | 10.70                       |   |        |                                                                | 196,252 |  | 8.00 |        |  |       | 245,315 |  | 10.00 |  
|Bank of Western Massachusetts             |  |        | 56,634  |       | 10.15                       |   |        |                                                                | 44,638  |  | 8.00 |        |  |       | 55,797  |  | 10.00 |  
|Flagship Bank and Trust                   |  |        | 41,038  |       | 10.82                       |   |        |                                                                | 30,345  |  | 8.00 |        |  |       | 37,931  |  | 10.00 |  
|Maine Bank & Trust                        |  |        | 30,870  |       | 10.52                       |   |        |                                                                | 23,482  |  | 8.00 |        |  |       | 29,352  |  | 10.00 |  
|Ocean National Bank                       |  |        | 125,588 |       | 10.96                       |   |        |                                                                | 91,660  |  | 8.00 |        |  |       | 114,576 |  | 10.00 |  
|Tier 1 Capital (to Risk Weighted Assets): |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  |        | 503,097 |       | 10.44                       |   |        |                                                                | 192,793 |  | 4.00 |        |  |       | 289,190 |  | 6.00  |  
|Chittenden Trust Company                  |  |        | 233,573 |       | 9.52                        |   |        |                                                                | 98,126  |  | 4.00 |        |  |       | 147,189 |  | 6.00  |  
|Bank of Western Massachusetts             |  |        | 49,647  |       | 8.90                        |   |        |                                                                | 22,359  |  | 4.00 |        |  |       | 33,538  |  | 6.00  |  
|Flagship Bank and Trust                   |  |        | 36,774  |       | 9.70                        |   |        |                                                                | 15,172  |  | 4.00 |        |  |       | 22,759  |  | 6.00  |  
|Maine Bank & Trust                        |  |        | 27,200  |       | 9.27                        |   |        |                                                                | 11,744  |  | 4.00 |        |  |       | 17,616  |  | 6.00  |  
|Ocean National Bank                       |  |        | 111,515 |       | 9.73                        |   |        |                                                                | 45,830  |  | 4.00 |        |  |       | 68,745  |  | 6.00  |  
|Tier 1 Capital (to Average Assets):       |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|Consolidated                              |  |        | 503,097 |       | 8.42                        |   |        |                                                                | 239,122 |  | 4.00 |        |  |       | 298,903 |  | 5.00  |  
|Chittenden Trust Company                  |  |        | 233,573 |       | 7.49                        |   |        |                                                                | 124,790 |  | 4.00 |        |  |       | 155,987 |  | 5.00  |  
|Bank of Western Massachusetts             |  |        | 49,647  |       | 8.31                        |   |        |                                                                | 23,889  |  | 4.00 |        |  |       | 29,861  |  | 5.00  |  
|Flagship Bank and Trust                   |  |        | 36,774  |       | 7.42                        |   |        |                                                                | 19,824  |  | 4.00 |        |  |       | 24,780  |  | 5.00  |  
|Maine Bank & Trust                        |  |        | 27,200  |       | 9.19                        |   |        |                                                                | 11,838  |  | 4.00 |        |  |       | 14,798  |  | 5.00  |  
|Ocean National Bank                       |  |        | 111,515 |       | 7.75                        |   |        |                                                                | 57,543  |  | 4.00 |        |  |       | 71,929  |  | 5.00  |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                          |  |        |         |       |                             |   |        |                                                                |         |  |      |        |  |       |         |  |       |  
|----------------------------------------- |  | ------ | ------- | ----- | --------------------------- | - | ------ | -------------------------------------------------------------- | ------- |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                                          |  | Actual |         |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions: |        
|                                          |  | Amount |         | Ratio |                             |   | Amount |                                                                | Ratio   |  |      | Amount |  | Ratio |        
|As of December 31, 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                       |  |        | 127,823 |       | 11.74                       |   |        |                                                                | 87,056  |  | 8.00 |        |  |       | 108,819 |  | 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                       |  |        | 114,214 |       | 10.49                       |   |        |                                                                | 43,528  |  | 4.00 |        |  |       | 65,292  |  | 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                       |  |        | 114,214 |       | 7.83                        |   |        |                                                                | 58,313  |  | 4.00 |        |  |       | 72,891  |  | 5.00  |  



|* | Prior year Granite numbers have been merged into ONB.
|- | -----------------------------------------------------



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 five 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



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CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



includes insurance commissions from insurance products and services, as well as other operations associated with the parent holding company.



The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant accounting policies. 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, 2004, 2003 and 2002:



|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|------------------------------------- |  | ----------------- | --------- | - | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                      |  | CommercialBanking |           |   | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated |  
|Year Ended December 31, 2004          |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net interest income (1)               |  | $                 | 229,782   |   |           | $ | (4,284  | )                         |  | $ |             |   |  | $ | 225,498   |  
|Non interest income:                  |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Investment management income          |  |                   | 18,383    |   |           |   |        |                           |  |   |             |   |  |   | 18,383    |  
|Service charges on deposits           |  |                   | 17,886    |   |           |   |        |                           |  |   |             |   |  |   | 17,886    |  
|Mortgage servicing                    |  |                   | 159       |   |           |   |        |                           |  |   |             |   |  |   | 159       |  
|Gains on sales of loans, net          |  |                   | 9,661     |   |           |   |        |                           |  |   |             |   |  |   | 9,661     |  
|Gains on sales of securities          |  |                   | 2,335     |   |           |   |        |                           |  |   |             |   |  |   | 2,335     |  
|Loss on prepayment of borrowings      |  |                   | (1,194    | ) |           |   |        |                           |  |   |             |   |  |   | (1,194    | )
|Credit card income, net               |  |                   | 4,150     |   |           |   |        |                           |  |   |             |   |  |   | 4,150     |  
|Insurance commissions, net            |  |                   |          |   |           |   | 6,966   |                           |  |   |             |   |  |   | 6,966     |  
|Retail investment services            |  |                   | 3,239     |   |           |   |        |                           |  |   |             |   |  |   | 3,239     |  
|Other non-interest income             |  |                   | 11,725    |   |           |   | 95      |                           |  |   |             |   |  |   | 11,820    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest income             |  |                   | 66,344    |   |           |   | 7,061   |                           |  |   |             |   |  |   | 73,405    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total income                          |  |                   | 296,126   |   |           |   | 2,777   |                           |  |   |             |   |  |   | 298,903   |  
|Provision for loan losses             |  |                   | 4,377     |   |           |   |        |                           |  |   |             |   |  |   | 4,377     |  
|Depreciation and amortization expense |  |                   | 10,748    |   |           |   | 306     |                           |  |   |             |   |  |   | 11,054    |  
|Salaries and employee benefits        |  |                   | 93,145    |   |           |   | 13,432  |                           |  |   |             |   |  |   | 106,577   |  
|Other non-interest expense            |  |                   | 67,253    |   |           |   | (8,512  | )                         |  |   |             |   |  |   | 58,741    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest expense            |  |                   | 171,146   |   |           |   | 5,226   |                           |  |   |             |   |  |   | 176,372   |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Income (loss) before income taxes     |  |                   | 120,603   |   |           |   | (2,449  | )                         |  |   |             |   |  |   | 118,154   |  
|Income tax expense (benefit)          |  |                   | 44,157    |   |           |   | (1,130  | )                         |  |   |             |   |  |   | 43,027    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net income (loss)                     |  | $                 | 76,446    |   |           | $ | (1,319  | )                         |  | $ |             |   |  | $ | 75,127    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|End of period assets                  |  | $                 | 6,166,544 |   |           | $ | 793,520 |                           |  | $ | (889,854     | ) |  | $ | 6,070,210 |  
|End of period loans, net              |  |                   | 4,018,162 |   |           |   |        |                           |  |   |             |   |  |   | 4,018,162 |  
|End of period deposits                |  |                   | 5,101,453 |   |           |   |        |                           |  |   | (62,723      | ) |  |   | 5,038,730 |  
|Expenditures for long-lived assets    |  |                   | 9,945     |   |           |   | 173     |                           |  |   |             |   |  |   | 10,118    |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|------------------------------------- |  | ----------------- | --------- | - | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                      |  | CommercialBanking |           |   | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated |  
|Year Ended December 31, 2003          |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net interest Income (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 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    |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|------------------------------------- |  | ----------------- | --------- | - | --------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                      |  | CommercialBanking |           |   | Other (2) |   |         | Consolidation Adjustments |  |   | Consolidated |  
|Year Ended December 31, 2002          |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net interest Income (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    |   |           |   | 2,124   |                           |  |   | (83          | ) |  |   | 54,765    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Total non-interest expense            |  |                   | 147,467   |   |           |   | 4,160   |                           |  |   | (83          | ) |  |   | 151,544   |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Income (loss) before income taxes     |  |                   | 99,685    |   |           |   | (1,885  | )                         |  |   |             |   |  |   | 97,800    |  
|Income tax expense (benefit)          |  |                   | 34,025    |   |           |   | 130     |                           |  |   |             |   |  |   | 34,155    |  
|                                      |  |                   |           |   |           |   |         |                           |  |   |              |   |  |   |           |  
|Net income (loss)                     |  | $                 | 65,660    |   |           | $ | (2,015  | )                         |  | $ |             |   |  | $ | 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     |  

---

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

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



Note 19 RECENT
ACCOUNTING PRONOUNCEMENTS



In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R (revised December 2004), Share-based Payment, which establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or services. This statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123. This
statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Statement 123-R allows the use of valuation models other than the
Black-Scholes model prescribed in Statement 123, specifically the Binomial Lattice method. Therefore the pro forma costs of stock option expense estimated in Note 1 using the Black-Scholes method may not be representative of the costs recognized by
the Company, upon adoption. The Company is still in the process of analyzing the cost of stock options under the revised Statement.



78



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##### Table of Contents

CHITTENDEN CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In December 2003, AcSEC issued SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired
in a Transfer. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. A transition provision applies for certain aspects of loans currently within the scope of Practice Bulletin 6, Amortization of Discounts
on Certain Acquired Loans. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer
if those differences are attributable, at least in part, to credit quality. It includes loans acquired in business combinations and applies to all nongovernmental entities, including not-for-profit organizations. The SOP does not apply to loans
originated by the entity.



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Report of Independent Registered Public Accounting Firm



TO THE BOARD OF
DIRECTORS AND SHAREHOLDERS OF CHITTENDEN CORPORATION:



We have completed an integrated audit of Chittenden Corporations 2004 consolidated financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.



Consolidated financial statements



In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial position of Chittenden Corporation (the Company) and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.



Internal control over financial reporting



Also, in our opinion, managements assessment,
included in Managements Annual Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established
in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment
and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



80



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##### Table of Contents

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.





LOGO

PricewaterhouseCoopers LLP

February 18, 2005

Montpelier, VT





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MANAGEMENTS STATEMENT OF
RESPONSIBILITY



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



Management maintains a system of internal controls to provide reasonable assurance that the Companys assets are safeguarded against loss and that
transactions are executed in accordance with managements authorization and recorded properly to permit the preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States of
America. These internal controls include the establishment and communication of policies and procedures, the selection and training of qualified personnel and an internal auditing program that evaluates the adequacy and effectiveness of such
internal controls, policies and procedures. Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the circumvention or overriding of controls, and that the
effectiveness of an internal control system can change with circumstances. However, management believes that the internal control system provides reasonable assurance that errors or irregularities that could be material to the consolidated financial
statements are prevented or would be detected on a timely basis and corrected through the normal course of business. As of December 31, 2004, management believes the internal controls were in place and operating effectively.



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



The independent accountants were engaged to
perform an independent audit of the consolidated financial statements. They have conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) as stated in their report which appears on page
80 and 81.



| |  |                                        |  |  |  |                              |  | 
| |  | -------------------------------------- |  |  |  | ---------------------------- |  | 
| |  |                                        |  | 
| |  | 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      |  | 



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QUARTERLY FINANCIAL DATA (Unaudited)



A summary of quarterly financial data for 2004 and 2003 is presented below:



|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|-------------------------- |  | ---------------------------------------- | ------ | ------- | - | -------- |  | ------- | ------ |  | - | ------
|                           |  | Three Months Ended                      
|                           |  | March 31                                 |        | June 30 |   | Sept. 30 |  | Dec. 31
|                           |  | (in thousands, except per share amounts)
|2004                       |  |                                          |        |         |   |          |  |         |        |  |   |       
|Total interest income      |  | $                                        | 64,854 |         | $ | 65,283   |  | $       | 67,969 |  | $ | 71,661
|Total interest expense     |  |                                          | 10,143 |         |   | 10,359   |  |         | 11,300 |  |   | 12,467
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net interest income        |  |                                          | 54,711 |         |   | 54,924   |  |         | 56,669 |  |   | 59,194
|Provision for loan losses  |  |                                          | 427    |         |   | 1,100    |  |         | 1,025  |  |   | 1,825 
|Noninterest income         |  |                                          | 18,003 |         |   | 20,638   |  |         | 17,841 |  |   | 16,923
|Noninterest expense        |  |                                          | 44,602 |         |   | 45,963   |  |         | 42,811 |  |   | 42,996
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Income before income taxes |  |                                          | 27,685 |         |   | 28,499   |  |         | 30,674 |  |   | 31,296
|Income tax expense         |  |                                          | 10,218 |         |   | 10,345   |  |         | 11,196 |  |   | 11,268
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Net income                 |  | $                                        | 17,467 |         | $ | 18,154   |  | $       | 19,478 |  | $ | 20,028
|                           |  |                                          |        |         |   |          |  |         |        |  |   |       
|Basic earnings per share   |  | $                                        | 0.38   |         | $ | 0.40     |  | $       | 0.42   |  | $ | 0.43  
|Diluted earnings per share |  |                                          | 0.37   |         |   | 0.39     |  |         | 0.42   |  |   | 0.43  
|Dividends paid per share   |  |                                          | 0.16   |         |   | 0.18     |  |         | 0.18   |  |   | 0.18  
|                           | 
|                           |  | 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   |  | $                                        | 0.40   |         | $ | 0.41     |  | $       | 0.43   |  | $ | 0.43  
|Diluted earnings per share |  |                                          | 0.39   |         |   | 0.41     |  |         | 0.43   |  |   | 0.43  
|Dividends paid per share   |  |                                          | 0.16   |         |   | 0.16     |  |         | 0.16   |  |   | 0.16  



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



None



ITEM 9A CONTROLS AND PROCEDURES



As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of December 31, 2004, 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. Also, based on managements evaluation, there was no change in the Companys internal control over
financial reporting that occurred during the fiscal quarter ended December 31, 2004 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.



MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



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



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



Chittendens management including the Companys CEO and CFO, assessed the effectiveness of the companys internal control over financial reporting as of December 31, 2004. In making this assessment, it
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management concluded that, as of December 31, 2004, the Companys
internal control over financial reporting was effective based on those criteria.



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



ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM



See Report of Independent Registered Public Accounting Firm on pages 80 and 81.



ITEM 9B OTHER INFORMATION



None



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##### Table of Contents

PART III



|ITEM 10 | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|------- | --------------------------------------------------



Information with respect to directors and executive officers of the Company required by Item 10 shall be included in the Proxy Statement and is
incorporated herein by reference.



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



|ITEM 11 | EXECUTIVE COMPENSATION
|------- | ----------------------



Information with respect to executive compensation required by Item 11 shall be included in the Proxy Statement and is incorporated herein by
reference.



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



Information with respect to security ownership of certain beneficial owners and management required by Item 12 shall be
included in the Proxy Statement and is incorporated herein by reference.



|ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|------- | ----------------------------------------------



Information with respect to certain relationships and related transactions required by Item 13 shall be included in the Proxy Statement and is
incorporated herein by reference.



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



Information with respect to principal accounting fees and services required by Item 14 shall be included in the Proxy Statement and is incorporated herein
by reference.



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PART IV



ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



(a)



(1) FINANCIAL STATEMENTS



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



(2)
FINANCIAL STATEMENT SCHEDULES



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



(3) EXHIBITS



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



|         |  |                                                                                                                                                                                                                                        
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3 (i).1  |  | Amended and restated Articles of Incorporation of the Company, incorporated herein by reference to the 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 is incorporated herein by reference to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003.
|         | 
|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.                    
|         | 
|10.7     |  | 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.                                                                              
|         | 
|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.                                                         



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|       |  |                                                                                                                                                                                                                                                                                                       
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|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.                                                                                                        
|       | 
|10.15  |  | Chittenden Corporation Stock Incentive Plan Option Agreement, incorporated herein by reference to the Companys quarterly report on Form 10-Q for the quarter ended September 30,
2004.                                                                                                               
|       | 
|10.16  |  | Chittenden Corporation Amended and Restated Directors Omnibus Long-Term Incentive Plan-Non-Employee Director Stock Option Agreement, incorporated herein by reference to the
Companys quarterly report on Form 10-Q for the quarter ended September 30, 2004.                                       
|       | 
|*10.17 |  | Employment Agreement of Paul A. Perrault                                                                                                                                                                                                                                                              
|       | 
|*10.18 |  | Employment Agreement of Kirk W. Walters                                                                                                                                                                                                                                                               
|       | 
|*10.19 |  | Employment Agreement of John P. Barnes                                                                                                                                                                                                                                                                
|       | 
|*10.20 |  | Employment Agreement of John W. Kelly                                                                                                                                                                                                                                                                 
|       | 
|*10.21 |  | Employment Agreement of F. Sheldon Prentice                                                                                                                                                                                                                                                           
|       | 
|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.                                                                                                                                                      

---

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



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EXHIBITS



(c)



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, New Hampshire and Maine



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



88



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SIGNATURES



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



|                        |  |  |  |                        |  |     |  |                                                                                           
|----------------------- |  |  |  | ---------------------- |  | --- |  | ------------------------------------------------------------------------------------------
|Date: February 18, 2005 |  |  |  | CHITTENDEN CORPORATION
|                        |  |  |  |                       
|                        |  |  |  |                        |  | By: |  | /s/    PAUL A. PERRAULT                                                                   
|                        |  |  |  |                        |  |     |  | Paul A. Perrault President, Chief Executive Officer and Chairman of the Board of Directors





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SIGNATURES



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



|                             |  |                                                                                                              |  |        
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | -------
|NAME                         |  | TITLE                                                                                                        |  | DATE   
|                             |  |                                                                                                             
|/S/    PAUL A.
PERRAULT      |  | President, Chief Executive Officer and Chairman of the Board of Directors                                    |  | 2/16/05
|                             |  |                                                                                                             
|/S/    KIRK W.
WALTERS       |  | Executive Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer) |  | 2/16/05
|                             |  |                                                                                                             
|/S/    SALLY W.
CRAWFORD     |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|PHILIP M. DRUMHELLER         |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|JOHN K. DWIGHT               |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|/S/    LYN
HUTTON            |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|/S/    JAMES C.
PIZZAGALLI   |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|/S/    ERNEST A.
POMERLEAU   |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|/S/    MARK W.
RICHARDS      |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|/S/    CHARLES W. SMITH,
JR. |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|/S/    PALL D.
SPERA         |  | Director                                                                                                     |  | 2/16/05
|                             |  |                                                                                                             
|/S/    OWEN W.
WELLS         |  | Director                                                                                                     |  | 2/16/05





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CHITTENDEN CORPORATION



SKU #0667-TK-04