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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

or

Commission File Number 0-7974

CHITTENDEN CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number: 802-658-4000

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

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

NONE

Indicate by check mark whether the registrant: (1) has filed all reports 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 28, 2002 was $916,925,954

At January 31, 2003 there were 31,967,741 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:

FORWARD-LOOKING STATEMENTS

This report contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. You can identify these statements by forward-looking words such as “may,” “could”, “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. Chittenden intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 and are 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 relevant 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. Investors 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 differences may be the result of various factors, including 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.

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, prospects, 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

Chittenden Corporation (the “Company” or “CC”), a Vermont corporation organized in 1971, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2002, the Company had total consolidated assets of approximately $4.9 billion. The Company is the holding company parent and owns 100% of the outstanding common stock of Chittenden Trust Company (“CTC”), Flagship Bank and Trust Company (“FBT”), The Bank of Western Massachusetts (“BWM”), Maine Bank & Trust (“MBT”), Ocean National Bank (“ONB”) (collectively “The Banks”) and Chittenden Connecticut Corporation (“CCC”), a non-bank mortgage company.

On February 28, 2002, the Company completed its acquisition of Ocean National Corporation, headquartered in Kennebunk, Maine and its subsidiary Ocean National Bank, for $53.25 million in cash. On April 30, 2001, the Company completed its acquisition of Maine Bank Corp., headquartered in Portland, Maine and its subsidiary, Maine Bank & Trust for $49.25 million in cash. These acquisitions have been accounted for as purchases and accordingly, the operations of ONB and MBT are included in these financial statements from their dates of acquisition.

On May 28, 1999, Chittenden Corporation completed its acquisition of Vermont Financial Services Corp. (“VFSC”) in a stock-for-stock merger. The acquisition was accounted for as a pooling of interests and accordingly, all financial data was restated to reflect the combined financial condition and results of operations as if the acquisition was in effect for all periods presented. Based on the closing price of Chittenden stock as of May 28, 1999, the market value of the shares exchanged totaled $387.2 million. Acquired in the VFSC acquisition were its subsidiary banks: Vermont National Bank (VNB) and United Bank. United Bank merged into The Bank of Western Massachusetts in the third quarter of 1999. Vermont National Bank merged into Chittenden Trust Company in the first quarter of 2000.

The Company engages in substantially one line of business, that of providing financial services through its banking subsidiaries. Through its subsidiaries, the Company offers a variety of lending services, with loans totaling approximately $3.0 billion at December 31, 2002. The largest loan categories are commercial loans and residential real estate loans. Commercial loans include those secured by commercial real estate and others made to a variety of businesses, including retail concerns, small manufacturing businesses, larger corporations and political subdivisions in the U.S. Commercial loans amounted to 59% of the total loans outstanding at December 31, 2002.

Loans secured by residential properties, including closed-ended home equity loans comprised 22% of total loans outstanding at December 31, 2002. The Company underwrites substantially all of 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. Revolving home equity loans amounted to 7% of loans at December 31, 2002. These loans are generally underwritten based upon the same standards as first mortgages. The remaining real estate loans, which are 3% of total loans outstanding at December 31, 2002, are construction loans secured by residential and commercial land under development. Consumer loans outstanding at December 31, 2002 were 9% of total loans. Indirect installment loans and auto leases comprise 8%, while the remaining loans consist 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 Banks 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 Vermont Industrial Development Authority, the U.S. Small Business

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Administration, the U.S. Farmers Home Administration or other local government agencies within the Company’s markets. Loan terms include repayment guarantees by the agency involved in varying amounts up to 90% of the original loan.

The Banks offer a wide range of banking services, including the acceptance of demand, savings, and time deposits. As of December 31, 2002, total interest-bearing deposits and noninterest-bearing demand deposits amounted to approximately $3.4 billion and $684 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 $5.9 billion at December 31, 2002, which included $1.7 billion under full discretionary management.

The Company also offers specialized business services including payroll processing, merchant credit card processing, business credit cards 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 $3.0 billion and total deposits of approximately $2.6 billion. CTC’s principal offices are in Burlington, Vermont and it has fifty-two additional locations in Vermont, along with one office located in West Lebanon, New Hampshire. There are fourteen freestanding automated teller machines (“ATM’s”) at other locations. (See Item 2, “Properties”). The trade name “Chittenden Bank” is used at all locations. The Company operates its mortgage banking and servicing operations under the “Mortgage Service Center” trade name.

CTC has established a registered broker/dealer, Chittenden Securities, Inc., as a subsidiary. Chittenden Securities, Inc. is a full service broker-dealer registered with the Securities and Exchange Commission (SEC) and is a member of both the National Association of Securities Dealers, Inc. (NASD) and the Securities Investor Protection Corporation (SIPC).

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

The Bank of Western Massachusetts

BWM was chartered by the Commonwealth of Massachusetts as a commercial bank in 1986. At December 31, 2002, BWM had total assets of $519 million and total deposits of $451 million. BWM’s principal offices are 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, 2002, FBT had total assets of $495 million and total deposits of $451 million. FBT’s principal

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offices are 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, 2002, MBT had total assets of $281 million and total deposits of $238 million. MBT’s principal offices are in Portland, Maine and it has twelve additional locations in southern Maine.

Ocean National Bank

ONB is a federally chartered commercial bank founded in 1854. At December 31, 2002, ONB had total assets of $600 million and total deposits of $506 million. ONB’s principal offices are in Kennebunk, Maine and it has nineteen additional locations in southern Maine and southeastern New Hampshire. Ten locations that had previously operated as part of CTC under the trade name “First Savings of New Hampshire” were merged into ONB in April 2002.

Chittenden Connecticut Corporation

CCC was chartered by the State of Vermont as a mortgage company in 1996 and its principal offices are in Brattleboro, Vermont (See Item 2, “Properties”). CCC’s primary business is the origination of conforming residential real estate mortgage loans for resale to the secondary market. CCC originates these loans for resale through correspondent relationships with credit unions and through other mortgage brokers in the state of Connecticut who receive loan applications. These applications are underwritten by CTC in Vermont based upon secondary market standards and then sold.

Economy

The New England economy entered a recession in 2001 and remains slow at year-end. Retail sales sagged from a year ago, particularly during the holiday season. The residential real estate market was very active in 2002, particularly the refinancing market as a result of mortgage rates at recent lows throughout the last six months of 2002. New England unemployment levels have increased slightly from the levels seen the last few years, primarily due to cutbacks in the manufacturing and service sectors, but overall unemployment levels are still low to moderate in most areas. The ability and willingness of the Company’s borrowers to honor their repayment commitments are impacted by many factors, including the prevailing market interest rates and the level of overall economic activity within the borrowers’ geographic area.

Competition

There is vigorous competition in the Company’s marketplace for all aspects of banking and related financial service activities. In the retail financial services market, competitors include other banks, credit unions, finance companies, thrift institutions, brokerage firms, insurance companies, and mortgage loan companies. Money market deposit accounts and short-term flexible-maturity certificates of deposit offered by the Banks compete with investment account offerings of brokerage firms and with products offered by insurance companies. The Company also competes for personal and commercial trust business with investment advisory firms, mutual funds, and insurance companies.

Moreover, under the Gramm-Leach-Bliley Act of 1999 (the “Gramm-Leach-Bliley Act”), effective March 11, 2000, securities firms, insurance companies and other financial services providers that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which the Company and its subsidiaries conduct business. See “The Financial Services Modernization Legislation” below. The financial services industry is also

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likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.

Supervision and Regulation

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

Regulation of the Company

General.    As a corporation incorporated under Vermont law, the Company is subject to regulation by the Vermont Secretary of State and the rights of its stockholders are governed by Vermont corporate law. 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 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 issue cease and desist orders to terminate or prevent unsafe or unsound banking practices or violations of laws or regulations and to assess civil money penalties against bank holding companies and their non-bank subsidiaries, officers, directors and other institution-affiliated parties, and to remove officers, directors and other institution-affiliated parties.

Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act).    The Interstate Act permits adequately capitalized bank holding companies 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 such action is specifically authorized by the law of the host state.

Financial Services Modernization Legislation.    On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (“GLBA”) repeals provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve member banks with firms “engaged principally” in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. In addition, the Gramm-Leach-Bliley Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. 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 Bank Holding Company Act framework to permit a holding company system, 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 that bank holding companies, such as the Company, that have not elected financial holding company status.

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In order to become a financial holding company and engage in the new activities, a bank holding company, such as the Company, must meet certain tests. Specifically, all of a bank holding company’s banks must be well-capitalized and well-managed, as measured by regulatory guidelines, and all of the bank holding company’s banks must have been rated “satisfactory” or better in the most recent Community Reinvestment Act evaluation of each bank. 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 significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, 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 an 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. Such borrowings and other covered transactions by an insured depository institution subsidiary (and its subsidiaries) with its non-depository institution affiliates are limited to the following amounts: (a) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and (b) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. For this purpose, “covered transactions” are defined by statute to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the Federal Reserve Board, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Covered transactions are also subject to certain collateral security requirements. Other types of transactions between a bank and a bank holding company must be on market terms and not otherwise unduly favorable to the holding company or an affiliate thereof. Further, 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. The Federal Reserve Board recently adopted a final rule, which will become effective April 1, 2003, to comprehensively implement these statutory provisions.

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”), an FDIC-insured depository institution, such as CTC, BWM, FBT or MBT can be held

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liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the “default” of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to any commonly controlled depository institution in “danger of default.” For these purposes, the term “default” is defined generally as the appointment of a conservator or receiver and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur without Federal regulatory assistance.

Regulation of The Banks

General.    As FDIC-insured state-chartered banks, The Banks are subject to 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, in the case of ONB the Officer of Comptroller of the Currency or “OCC”; the Maine Superintendent of the Bureau of Banking in the case of MBT; and the Commissioner of Banks of the Commonwealth of Massachusetts in the case of BWM and FBT (individually, a Commissioner and collectively, the “Commissioners”) and, for all the Banks except for ONB, by the FDIC. This supervision and regulation is for the protection of depositors, the BIF (as hereinafter defined), and consumers, and is not for the protection of the Company’s stockholders. The prior approval of the FDIC or OCC and the relevant Commissioner is required 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, 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 OCC as well as periodic reports to the Commissioners. The enforcement authority of the FDIC and 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. 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. Payment of dividends by MBT and ONB 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. Massachusetts banking laws require each of BWM and FBT to maintain a capital structure with a surplus account amounting to at least 50% of its capital stock and to transfer to its surplus account each year from net profits one-quarter of one percent of its deposit liabilities.

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

Affiliate Transactions.    As noted above, banks are subject to restrictions imposed by federal law on extensions of credit to, purchases of assets from, and certain other transactions with affiliates and on investments in stock or other securities issued by affiliates. Such restrictions prevent the banks from making loans to affiliates

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unless the loans are secured by collateral in specified amounts and have terms at least as favorable to the bank as the terms of comparable transactions between the bank and non-affiliates. Further, federal and applicable state laws significantly restrict extensions of credit by the banks to directors, executive officers and principal stockholders and related interests of such persons.

Deposit Insurance.    The Bank’s deposits are insured by the Bank Insurance Fund (“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% over a 15-year period commencing in 1991, and to maintain that ratio. Although the established framework of risk-based insurance assessments accomplished this increase in May 1995, and the FDIC has made a substantial reduction in the assessment rate schedule, the 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.    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 applicable to bank deposit account balances.

Consumer Protection Regulation.    Other aspects of the lending and deposit businesses of the banks that are subject to regulation by the FDIC, 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 record keeping, 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, require financial institutions, including the Bank, to implement additional or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity and currency transaction reporting and due diligence on customers. They 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 FRB (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 BHCA or the Bank Merger Act. Management believes that we are currently in compliance with all currently effective requirements prescribed by the USA Patriot Act and all applicable final implementing regulations.

CRA Regulations.    The Community Reinvestment Act of 1997 (“CRA”) requires lenders to identify the communities served by the institution’s offices and to identify the types of credit the institution is prepared to extend within such communities. The FDIC conducts examinations of insured institutions’ CRA compliance and rates such institutions as “Outstanding”, “Satisfactory”, “Needs to Improve” and “Substantial Noncompliance”. As of their last CRA examinations, CTC, MBT, BWM and FBT all received a rating of “Outstanding,” and ONB received a rating of “Satisfactory.” Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from undertaking certain activities, including engaging in activities newly permitted as a financial holding company under the Gramm-Leach-Bliley Act and acquisitions of other financial institutions, which require regulatory approval based, in part, on CRA compliance considerations. 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.

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As a result of certain amendments in 1996, current CRA regulations rely more than the former CRA regulations upon 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 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. The Federal Reserve Board has established substantially identical guidelines with respect to the maintenance of appropriate levels of capital, on a consolidated basis, by bank holding companies. If a banking organization’s capital levels fall below the minimum requirements established by such guidelines, a bank or bank holding company will be expected to develop and implement a plan acceptable to the FDIC or the Federal Reserve Board, respectively, to achieve adequate levels of capital within a reasonable period, and may be denied approval to acquire or establish additional banks or non-bank businesses, merge with other institutions or open branch facilities until such capital levels are achieved. Federal legislation requires federal bank regulators to take “prompt corrective action” with respect to insured depository institutions that fail to satisfy minimum capital requirements and imposes significant restrictions on such institutions. See “Prompt Corrective Action” below.

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

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

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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 provide explicitly for consideration of interest rate risk in the FDIC’s 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 the FDIC 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.

At December 31, 2002, the Company’s consolidated Total and Tier 1 Risk-Based Capital Ratios were 13.50% and 12.25%, respectively, and its Leverage Capital Ratio was 9.28%. Based on the above figures and accompanying discussion, CC exceeds all regulatory capital requirements and is considered well capitalized.

Prompt Corrective Action.    Among other things, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires the federal banking regulators to 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% for banks with the highest regulatory examination rating that are not experiencing or anticipating significant growth or expansion) or greater and does not meet the definition of a well capitalized bank is considered to be “adequately capitalized.” A bank that has a Total Risk-Based Capital Ratio of less than 8.0% or has a Tier 1 Risk-Based Capital Ratio that is less than 4.0%, except as noted above, a Leverage Capital Ratio of less than 4.0% is considered “undercapitalized.” A bank that has a Total Risk-Based Capital Ratio of less than 6.0%, or a Tier 1 Risk-Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0% is considered to be “significantly undercapitalized,” and a bank that has a ratio of tangible equity to total assets equal to or less than 2% is deemed to be “critically undercapitalized.” A bank may be deemed to be in a capital category lower than is indicated by its actual capital position if it is determined to be in an unsafe or unsound condition or receives an unsatisfactory examination rating. FDICIA generally prohibits a bank from making capital distributions (including payment of dividends) or paying management fees to controlling stockholders or their affiliates if, after such payment, the bank would be undercapitalized.

Under FDICIA and the applicable implementing regulations, an undercapitalized bank will be (i) subject to increased monitoring by the FDIC; (ii) required to submit to the FDIC 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 entry into new lines of business. In addition to the foregoing, the FDIC may issue a “prompt corrective action directive” to any undercapitalized institution. Such a directive may require sale or re-capitalization of the bank, impose additional restrictions on transactions between the bank and its affiliates, limit interest rates paid by the bank on deposits, limit asset growth and other activities, require divestiture of subsidiaries, require replacement of directors and officers, and restrict capital distributions by the bank’s parent holding company.

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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 the FDIC.

Not later than 90 days after an institution becomes critically undercapitalized, the appropriate federal banking agency 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 purposes 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.

Risk-Based Deposit Insurance and FICO Assessments.    The FDIC has adopted a rule establishing a risk-based system which assigns an institution to one of three capital categories consisting of (1) well capitalized, (2) adequately capitalized, or (3) undercapitalized, and one of three supervisory categories. An institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. Under this rule there are nine assessment risk classifications (i.e. combinations of capital categories and supervisory subgroups within each capital group). An institution’s deposit insurance assessment rate is determined by assigning the institution to a capital category and a supervisory subgroup to determine which one of the nine risk classification categories is applicable. 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 such action is taken by the FDIC, 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 2002 ranged from 0% of domestic deposits for an institution in the lowest risk category (i.e., well-capitalized and healthy from a supervisory standpoint) to 0.27% of domestic deposits for institutions in the highest risk category (i.e., undercapitalized and unhealthy from a supervisory standpoint). The Deposit Insurance Funds Act of 1996 eliminates the minimum assessment and authorizes the Financing Corporation (FICO) to levy assessments on BIF-assessable deposits. The actual assessment rates for FICO are adjusted on a quarterly basis to reflect changes in the assessment bases of the insurance funds. Based on the 1996 Act, the Banks paid assessments totaling $715,000 or 1.69 cents per $100 of deposits in 2002.

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 the FDIC. 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 for deposits of certain employee benefit plans in banks that do not satisfy the requirements for acceptance of brokered deposits, 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

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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 has adopted implementing regulations, which establish supervisory limitations on Loan-to-Value (“LTV”) ratios in real estate loans by FDIC-insured banks. The regulations require FDIC-insured banks to establish LTV ratio limitations within or below the prescribed uniform range of supervisory limits.

Standards for Safety and Soundness.    FDICIA requires the federal bank regulatory agencies to prescribe, by regulation, standards 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 would 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 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 in an amount, that is not permissible for a national bank, unless such investments meet certain grandfather requirements.

The Gramm-Leach-Bliley Act includes a new 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 will permit 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 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 Gramm-Leach-Bliley Act. Maine and Massachusetts 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 Gramm-Leach-Bliley Act 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.

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Customer Information Security.    The FDIC and other bank regulatory agencies have adopted final guidelines for establishing 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 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.

EMPLOYEES

At December 31, 2002, the Company and its subsidiaries employed 1,930 persons, with a full-time equivalency of 1,779 employees. The Company enjoys good relations with its employees. A variety of employee benefits, including health, group life and disability income replacement insurance, a funded, non-contributory pension plan, and an incentive savings and profit sharing plan, are available to qualifying officers and employees.

COMPANY WEBSITE

The Company maintains a website on the World Wide Web at www.chittendencorp.com. The Company makes available, free of charge, on its website its annual report on the Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov.

The Company’s principal banking subsidiary, CTC, operates banking facilities in fifty-three locations in Vermont, along with one location in New Hampshire. The offices of the Company are located in an owned facility at Two Burlington Square in Burlington, Vermont. BWM’s principal offices are in Springfield, Massachusetts and it has eleven additional locations in the western Massachusetts area. FBT’s principal offices are in Worcester, Massachusetts and it has six additional locations in the greater Worcester, Massachusetts area. MBT’s principal offices are in Portland, Maine and it has twelve additional locations in southern Maine. ONB’s principal offices are in Kennebunk, Maine and it has nineteen 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.

A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2002. 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 consolidated financial statements.

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PART II

The $1 par value common stock of Chittenden Corporation has been publicly traded since November 14, 1974. As of January 31, 2003, there were 4,633 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:

For a discussion of dividend restrictions on the Company’s common stock, see “Dividends” under the caption “Business—Supervision and Regulation” on page 7 of this report.

The following table sets forth information regarding securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2002:

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ITEM 6    SELECTED FINANCIAL DATA

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For the Years Ended December 31, 2002, 2001, and 2000

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 incorporated by reference.

Application of Critical Accounting Policies

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

Allowance for Loan Losses.    The allowance for loan losses is established through a charge against current earnings to the provision for loan losses. The allowance for loan losses is based on management’s estimate of the amount required to reflect the probable inherent losses in the loan portfolio, based on circumstances and conditions known at each reporting date in accordance with Generally Accepted Accounting Principles (“GAAP”). There are three components of the allowance for loan losses: 1) specific reserves for loans considered to be impaired or for other loans for which management considers a specific reserve to be necessary; 2) allocated reserves based upon management’s formula-based process for assessing the adequacy of the allowance for loan losses; and 3) a non-specific environmentally-driven allowance considered necessary by management based on its assessment of other qualitative factors. The allowance for loan losses is a significant estimate and is regularly reviewed by the Company for adequacy using a consistent, systematic methodology which assesses such factors as changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency and charge-off rates; and current economic conditions that may affect a borrower’s ability to repay. Adverse changes in management’s assessment of these factors could lead to additional provisions for loan losses. The Company’s methodology with respect to the assessment of the adequacy of the allowance for loan losses is more fully discussed on pages 23-26 of Management’s Discussion and Analysis.

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 were to determine that its goodwill were 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.

Income Taxes.    The Company must estimate income tax expense in each of the jurisdictions in which it operates for each period for which a statement of operations is presented. 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, 2002, there were no valuation allowances set aside against any deferred tax assets.

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Mortgage Servicing Rights (MSR or MSRs).    Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and original loan terms (primarily 15 and 30 year.) Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. 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. When the book value of an individual stratum exceeds its fair value, an impairment reserve must be recognized. 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.

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 a adverse impact on interest income recognized in future periods.

Results of Operations

On February 28, 2002, the Company acquired Ocean National Corp., headquartered in Kennebunk, Maine and its subsidiary, Ocean National Bank for $53.25 million in cash. On April 30, 2001, the Company acquired Maine Bank Corp., headquartered in Portland, Maine and its subsidiary, Maine Bank & Trust for $49.25 million in cash. These acquisitions have been accounted for as purchases and, accordingly, the operations of MBT and ONB are included in these financial statements from their dates of acquisition.

On May 28, 1999, the Company completed the acquisition of Vermont Financial Services Corp. in a stock-for-stock transaction accounted for as a pooling of interests. Accordingly, the consolidated financial statements of the Company were restated to reflect the acquisition as of the beginning of the earliest period presented. The Company recognized $57.4 million of after-tax special charges in 1999 (and an additional $792,000 in 2000) related to the acquisition of VFSC which included gains and losses on branch sales mandated as part of the acquisition, impaired goodwill of VFSC relating to CHZ market areas which was written off upon consummation of the merger, other merger costs including severance payments, legal fees, etc., and the related tax effects of taxable income or deductible expense. The results excluding these special charges are referred to in the following discussion as operating. Management considers these non-GAAP operating measures to be appropriate for comparison to operational performance of other fiscal periods in which these unique revenues and expenses did not occur.

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A reconciliation of the Company’s net income (loss) to its operating net income for the years ended December 31, 2000 and 1999 is presented below:

Performance Summary

Net income for 2002 was $63.6 million, an increase of $5.1 million, or 9% from the $58.5 million recorded in 2001. Net income of $58.5 million in 2001 was flat with the $58.7 million recorded for 2000. Diluted earnings per share for 2002 were $1.96 compared to $1.80 for 2001 and $1.72 for 2000.

Return on average assets (ROA) and return on average equity (ROE) are two industry measures on which the financial performance of a banking institution is generally measured. During 2002, the Company’s ROA was 1.40% compared to 1.51% in 2001 and 1.56% in 2000. The decline in ROA was primarily due to the acquisitions of MBT and ONB. During 2002, the Company’s ROE was 16.12% compared to 16.55% and 17.44% in 2001 and 2000, respectively. The decrease in return on equity from 2001 to 2002 was primarily attributable to significantly higher levels of unrealized gains in the investment portfolio, due to lower overall market interest rates, which increased stockholders’ equity. Excluding the unrealized gains in the investment portfolio, the return on average equity would have been 16.82% for 2002 and 16.92% a year ago.

Chittenden’s net interest income increased $22.3 million in 2002 compared to 2001. The increase was attributed primarily to the acquisitions of ONB and MBT, growth in deposits, and the Trust Preferred Securities (TPS) issuance. The provision for loan losses was $290,000 higher in 2002 due primarily to the acquisition of ONB. Noninterest income increased $1.3 million in 2002 primarily due to increases in service charges on deposits, insurance commissions, and other income. The increase of $1.7 million in service charges on deposits was attributed to the strong deposit flows throughout 2002 as well as high cash management fees. Gains on sales of loans declined $1.1 million as a result of the sale of the Company’s retail credit card portfolio in 2001, which generated a $4.6 million gain. Gains on sales of mortgage loans were $3.5 million higher in 2002 than in 2001 as a result of strong refinancing activity throughout 2002. Mortgage servicing income was approximately $10 million lower in 2002 as a result of the recognition of $8.5 million in MSR impairment reserves and an additional $1.3 million of MSR amortization. Gains on sales of securities of $10.6 million were realized in 2002 as a result of the rebalancing of the Company’s available for sale securities portfolio caused by lower interest rates, which accelerated paydowns on mortgage-backed securities. Noninterest expenses were $151.5 million in 2002 compared with $135.8 million in 2001. Salaries and employee benefits increased $13.2 million from the 2001 level. The inclusion of ONB (for ten months) and MBT (for the full year vs. eight months in 2001) represented $6.8 million of the increase. Also, incentive accruals were $1.5 million higher in 2002 than 2001. Net occupancy expense increased $1.8 million from 2001 primarily as a result of the ONB and MBT acquisition. Amortization of intangibles decreased $1.7 million in 2002 due to the adoption of FAS 142.

Overall, net income was flat in 2001 compared to 2000. Net interest income increased $3.2 million, primarily as a result of the acquisition of MBT. The provision for loan losses was $659,000 lower in 2001 due to lower levels of non-performing assets. Noninterest income increased $10.6 million in 2001 primarily due to

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increases of $8.4 million in gains on sales of loans and $2.2 million in investment management income. The increase in gains on sales of loans was primarily due to higher volumes of loans sold in mortgage banking activities as well as to the gain of $4.6 million on the sale of the Company’s retail credit card portfolio. Noninterest expenses were $135.8 million in 2001 compared with $124.8 million in 2000. Salaries and employee benefits increased $10.3 million from the 2000 level. The inclusion of MBT amounted to $4.9 million of the increase. Also, incentive accruals were $2.2 million higher in 2001 than 2000. In addition, a $1.3 million pension curtailment gain taken in the first quarter of 2000 upon the merger of the Vermont National and Chittenden Bank pension plans reduced expenses for the previous year. Net occupancy and amortization expenses increased  $1.5 million and $862,000, respectively as a result of the inclusion of MBT in the 2001 amounts.

Total assets increased from $4.154 billion at December 31, 2001 to $4.921 billion at December 31, 2002 primarily as a result of the acquisition of ONB, the TPS issuance and growth in deposits. Total assets increased from $3.770 billion in 2000 to $4.154 million in 2001, as a result of the acquisition of MBT.

Financial Condition

Loans

Chittenden’s loan portfolio at December 31, 2002 totaled $2.974 billion compared to $2.838 billion at year-end 2001. The classification of the Company’s loan portfolio is based on underlying collateral. Acquired in the ONB transaction were loans totaling $210 million, of which $19 million were commercial loans; $80 million were commercial real estate loans; $89 million were residential real estate loans; $9 million were home equity loans; and $7 million were consumer loans.

Commercial real estate loans, representing 37% of the portfolio, increased $200 million or 22% to  $1.1 billion at year-end 2002, compared to $904 million at December 31, 2001. This increase was caused by the acquisition of ONB, in which $80 million in commercial real estate loans were obtained, and by strong growth in these loans at the other affiliate banks.

The overall proportion of commercial-related loans continued to increase in 2002 due to the move in commercial real estate loans discussed above. At December 31, 2002, commercial loans secured by non-real estate business assets totaled $646 million or 22% of total loans. Included in the commercial portfolio are business credit cards, which amounted to $7.0 million in 2002 compared to $5.9 million in 2001.

Residential real estate loans including home equity loans held flat at $861 million in 2002 as a result of the ONB acquisition. Total paydowns of the residential real estate portfolio were $227 million in 2002 compared with $175 million in 2001. New originations added to the portfolio did not keep pace with paydowns because the preponderance of loans originated in 2002 were fixed rate loans sold on the secondary market. Approximately one quarter of the construction portfolio at December 31,2002 related to residential construction which amounted to $22 million at December 31, 2002, an increase of $6 million from $16 million the year before. The remaining three-fourths of the construction portfolio related to commercial real estate construction. The majority of both types of construction loans are to borrowers who will eventually occupy the properties.

Residential mortgages originated during 2002 totaled $860 million, compared to $562 million during 2001. This increase was due to continued high volumes of fixed rate residential loans caused by increasingly lower market rates throughout 2002. The Company underwrites substantially all of its residential mortgages to secondary market standards. The Company continues to follow its policy of selling substantially all of its fixed-rate residential mortgage production on a servicing-retained non-recourse basis. Secondary market sales of mortgage loans totaled $720 million in 2002, compared to $480 million in 2001.

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The portfolio of residential mortgages serviced for investors totaled $1.837 billion at December 31, 2002 compared to $1.961 billion at year-end 2001. These assets are owned by investors other than Chittenden and therefore are not included in the Company’s consolidated balance sheets. The Company originated approximately 90 percent of the serviced-loan portfolio and the balance consisted of loans whose mortgage-servicing rights were purchased in prior years.

In accordance with Statement of Financial Accounting Standards No. 140, the Company has recorded an originated mortgage servicing rights asset for all mortgages sold on a servicing retained basis since January 1, 1996. As noted under Application of Critical Accounting Policies, the Company evaluates the MSR asset for impairment on a quarterly basis. At December 31, 2002 the MSRs’ amortized cost of $17 million was reduced by an impairment reserve of $8.5 million, so that the carrying value of the MSR asset was equal to its fair value at that date.

Included in the real estate portfolio are outstanding balances under home equity credit lines, totaling $204 million at December 31, 2002 compared to $183 million the previous year. The unused portion of these lines totaled $220.2 million at December 31, 2002 compared to $202.7 million at year-end 2001.

Consumer loans decreased $77 million or 22% in 2002, ending the year at $276.7 million. This decrease reflects paydowns on the automotive finance portfolio, driven by lower market interest rates, which outpaced originations. The Company views these loans as a discretionary investment and will not add to its portfolio if it cannot obtain what it considers to be an appropriate yield. As a result of many manufacturers’ financing programs as low as 0%, the Company did not actively compete for this business in 2002. The Company underwrites all of its indirect automotive loans on substantially the same credit standards as for car loans directly originated in its branch offices. Indirect installment lending through auto dealers was down $48.4 million from year-end 2001 to $180.9 million at the end of 2002. Lease financing receivables outstanding at December 31, 2002 were $54.2 million, down from $98.4 million a year earlier, of which $40.1 million and $66.8 million represented the residual value of these leases. The large decline in lease financing receivables was a result of the Company’s decision to exit this market in late 2001. Therefore the existing portfolio will continue to run off over the next three years. The Company has insurance through outside insurance companies, which substantially eliminates the risk associated with the residual value of its leased vehicle portfolio. Direct installment balances at December 31, 2002 stood at $37.1 million compared with $27.5 million at the end of 2001. This increase was due primarily to the acquisition of ONB.

The Company’s lending activities are conducted in market areas focused in Vermont, western and central Massachusetts, southern Maine, and southeastern New Hampshire, with additional activity related to nearby trading areas in New York and Connecticut. In addition to the geographic portfolio diversification described above, the loans are widely diversified by borrowers and industry groups. The following table shows the composition of the loan portfolio for the five years ended December 31, 2002:

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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 loans 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 based upon management’s discretion 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. 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.

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, 2002:

Nonaccrual loans at December 31, 2002 consisted of approximately 169 loans, which were diversified across a range of industries, sectors and geography. Nonaccrual loans with payments less than 30 days past due are 67% of total loans on nonaccrual.

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 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. 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 size of the loan portfolio, historic loss experience, the amount of

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delinquencies and loans adversely classified, and economic trends. The adequacy of the allowance for loan losses is assessed by an allocation process whereby specific loss allocations are made against certain adversely classified loans, and general loss allocations are made against segments of the loan portfolio which have similar attributes. The Company’s historical loss experience, industry trends, and the impact of the local and regional economy on the Company’s borrowers, were considered by management in determining the adequacy of the allowance for loan losses.

The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. Management believes that the allowance for loan losses was adequate at December 31, 2002. While management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, or for other reasons. Any future additions to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Company’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to record additions to the allowance based on judgements different from those of management.

Credit quality of the commercial portfolios is quantified by a corporate credit rating system designed to parallel regulatory criteria and categories of loan risk. Individual loan officers monitor their loans to ensure appropriate rating assignments are made on a timely basis. Risk ratings and quality of both commercial and consumer credit portfolios are also assessed on a regular basis by an independent Credit Review Department, which reports to the Chief Banking Officer. 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 rating 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, 2002, impaired loans with a specific reserve totaled $3,543,000 (all of these loans were on nonaccrual status) and the amount of such reserve was $2,290,000.

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

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The following table summarizes the activity in the Company’s allowance for loan losses for the five years ended December 31, 2002: