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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2003

or

Securities Exchange Act of 1934

for the transition period from             to            

Commission File Number 0-7974

CHITTENDEN CORPORATION

(Exact name of Registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES x NO ¨

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant, computed by reference to the last reported sale price on the NYSE on June 30, 2003 was $973,721,920

At February 29, 2004 there were 36,722,381 shares of the Registrant’s common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

FORWARD-LOOKING STATEMENTS

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

Readers are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed in this document, including the documents incorporated by reference in this document. Control of the risks inherent in our business is essential for financial performance and creating long-term value. These risks include changes in general, national or regional economic conditions, changes in loan default and charge-off rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in interest rates, changes in levels of income and expense in noninterest income and expense related activities and other risk factors identified from time to time in Chittenden’s periodic filings with the Securities and Exchange Commission. Chittenden has a system of processes to aid in the identification and assessment of the above risks, to establish necessary controls, and to monitor compliance with levels deemed acceptable by the Company. This management system includes a series of committees to provide oversight.

The factors referred to above include many, but not all, of the factors that could impact the Company’s ability to achieve the results described in any forward-looking statements. You should not place undue reliance on forward-looking statements. You should be aware that the occurrence of the events described above and elsewhere in this document, including the documents incorporated by reference, could harm the Company’s business, operating results or financial condition. Chittenden does not undertake any obligation to update any forward-looking statements as a result of future events or developments.

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PART I

ITEM 1 BUSINESS

Chittenden Corporation (the “Company” or “CC”), a Vermont corporation organized in 1971, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2003, the Company had total consolidated assets of approximately $5.9 billion. The Company is the holding company parent and owns 100% of the outstanding common stock of Chittenden Trust Company (“CTC”), Flagship Bank and Trust Company (“FBT”), The Bank of Western Massachusetts (“BWM”), Maine Bank & Trust (“MBT”), Ocean National Bank (“ONB”), Granite Bank (“GB”) (collectively “The Banks”).

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

The Company engages in one line of business, that of providing financial services through its banking subsidiaries. Through its subsidiaries, the Company offers a variety of lending services, with loans totaling approximately $3.7 billion at December 31, 2003. The largest loan categories are commercial loans and residential real estate loans. Commercial loans include those secured by commercial real estate, and others made to a variety of businesses and municipalities. Commercial loans amounted to approximately 60% of the total loans outstanding at December 31, 2003.

Loans secured by residential properties, including home equity loans, comprised 31% of total loans outstanding at December 31, 2003. The Company underwrites its residential mortgages based upon secondary market standards and sells substantially all of its fixed-rate residential mortgage loans on a servicing-retained basis. Variable or adjustable rate mortgage loans are typically held in portfolio.

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Consumer loans at December 31, 2003 were 7% of total loans outstanding. The majority of these loans were indirect installment loans while the remaining loans consisted of direct installment and revolving credit. The Company’s lending activities are conducted primarily in Vermont, Massachusetts, New Hampshire and Maine, with additional activity related to nearby market areas in New York and Connecticut. In addition to the portfolio diversification described above, the loans are diversified by borrowers and industry groups. In making commercial loans, the Company occasionally solicits the participation of other banks. The Company also occasionally participates in loans originated by other banks. Certain of the Company’s commercial loans are made under programs administered by the U.S. Small Business Administration, U.S. Farmers Home Administration or other local government agencies within the Company’s markets. Loan terms generally include repayment guarantees by the agency involved in varying amounts up to 90% of the original loan.

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

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

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

CHITTENDEN TRUST COMPANY

CTC was chartered by the Vermont Legislature as a commercial bank in 1904. It is the largest bank headquartered in Vermont, based on total assets of approximately $3.0 billion, total loans of approximately $1.8 million and total deposits of approximately $2.6 billion. CTC’s principal offices are in Burlington, Vermont and it has fifty-two additional locations in Vermont. The trade name “Chittenden Bank” is used at all locations. The Company operates its mortgage banking and servicing operations under the “Mortgage Service Center” trade name.

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

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

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THE BANK OF WESTERN MASSACHUSETTS

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

FLAGSHIP BANK AND TRUST COMPANY

FBT was chartered by the Commonwealth of Massachusetts as a commercial bank in 1986. At December 31, 2003, FBT had total assets of $500 million, total loans of $268 million and total deposits of $446 million. FBT’s principal offices are located in Worcester, Massachusetts and it has six additional locations in the greater Worcester, Massachusetts area.

MAINE BANK & TRUST

MBT was chartered by the State of Maine as a commercial bank in 1991. At December 31, 2003, MBT had total assets of $302 million, total loans of $229 million and total deposits of $254 million. MBT’s principal offices are located in Portland, Maine and it has eleven additional locations in southern Maine.

OCEAN NATIONAL BANK

ONB is a federally chartered commercial bank founded in 1854. At December 31, 2003, ONB had total assets of $578 million, total loans of $434 million and total deposits of $485 million. ONB’s principal offices are located in Kennebunk, Maine and it has twenty additional locations in southern Maine and southeastern New Hampshire.

GRANITE BANK

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

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

ECONOMY

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

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COMPETITION

There is vigorous competition in the Company’s marketplace for all aspects of banking and related financial service activities. The asset management and trust business which provides financial and estate advice is proving to be a necessity in today’s complex world. Money market deposit accounts, cash management accounts and short-term certificates of deposit offered by the Banks compete with investment account offerings of brokerage firms and with products offered by insurance companies. The Company also competes with other banks, credit unions, and finance companies for the commercial banking business in Northern New England. The Company’s operations are impacted by state and federal regulations which are applicable to the banking industry.

SUPERVISION AND REGULATION

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

Regulation of the Company

General. As a corporation incorporated under Vermont law, the Company is subject to regulation by the Vermont Secretary of State and Vermont corporate law governs the rights of its stockholders. As a bank holding company, the Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Under the BHC Act, bank holding companies generally may not acquire ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies (such as the Company) that are not also financial holding companies are generally prohibited under the BHC Act from engaging in non-banking activities, subject to certain exceptions. As a bank holding company that has not elected to become a financial holding company, the Company’s activities are limited generally to the business of banking and activities determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The Federal Reserve Board has authority to take a broad range of enforcement actions, including the issuance of cease and desist orders to terminate or prevent unsafe or unsound banking practices or violations of laws or regulations, the assessment of civil money penalties against bank holding companies and their non-bank subsidiaries, officers, directors and other institution-affiliated parties, and the removal of officers and directors.

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). The Interstate Act permits adequately capitalized and adequately managed bank holding companies, as determined by the Federal Reserve Board, to acquire banks in any state subject to certain concentration limits and other conditions. The Interstate Act also generally authorizes the interstate merger of banks. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis provided that the law of the host state specifically authorizes such action.

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

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

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

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

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

Holding Company Support of Subsidiary Banks. Under Federal Reserve Board policy, the Company is expected to act as a source of financial and managerial strength to its subsidiary banks and to commit resources

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to support such subsidiaries. This support of its subsidiary banks may be required at times when, absent such Federal Reserve Board policy, the Company might not otherwise be inclined to provide it. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

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

Regulation of The Banks

General. As FDIC-insured state-chartered banks, The Banks (with the exception of ONB) are subject to the supervision of and regulation by the Commissioner of Banking, Insurance, Securities and Health Care Administration of the State of Vermont, in the case of CTC; the Maine Superintendent of the Bureau of Banking in the case of MBT (the “Superintendent”); the Commissioner of Banks of the Commonwealth of Massachusetts in the case of BWM and FBT and the Commissioner of Banks of the State of New Hampshire in the case of GB (individually, a Commissioner and collectively, the “Commissioners”). ONB is a nationally chartered bank principally regulated by the Office of Comptroller of the Currency (the “OCC”). This supervision and regulation is for the protection of depositors, the Bank Insurance Fund (“BIF”), and consumers, and is not for the protection of the Company’s stockholders. The prior approval of the FDIC or the OCC and the relevant Commissioner is required, among other things, for The Banks to establish or relocate an additional branch office, assume deposits, or engage in any merger, consolidation, purchase or sale of all or substantially all of the assets of any of The Banks.

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

Dividends. The principal source of the Company’s revenue is dividends from The Banks. Payments of dividends by The Banks are subject to certain Vermont, Maine, Massachusetts and New Hampshire banking law restrictions. Payment of dividends by CTC is subject to Vermont banking law restrictions, which require that, CTC may not, without the Commissioner’s approval, authorize dividends that reduce capital below certain standards established by the Commissioner. New Hampshire statutes impose similar restrictions on the payment of dividends by GB. Payment of dividends by BWM and FBT is subject to Massachusetts banking law restrictions, which require that each bank’s capital not be impaired and limits the amount of dividends that may be paid during a calendar year to net profit for that year plus retained net profits from the prior two years. Payments of dividends by MBT are subject to Maine banking law restrictions, which require that, they may not,

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without the Superintendent’s approval, authorize dividends that reduce capital below certain standards established by the Superintendent. Payment of dividends by ONB is subject to certain limitations imposed by the OCC, which limit dividends that a national bank may declare during any calendar year to retained net income for that year plus retained net income for the preceeding two years. Massachusetts banking laws require each of BWM and FBT to maintain a capital structure with a surplus account amounting to at least 50% of its capital stock and to transfer to its surplus account each year from net profits one-quarter of one percent of its deposit liabilities.

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

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

Deposit Insurance. The Banks’ deposits are insured by the BIF of the FDIC to the legal maximum of $100,000 for each insured depositor. The FDI Act provides that the FDIC shall set deposit insurance assessment rates on a semi-annual basis at a level sufficient to increase the ratio of BIF reserves to BIF-insured deposits to at least 1.25%, and to maintain that ratio. Although current assessment levels are low, BIF insurance assessments may be increased in the future if necessary to maintain BIF reserves at the required level. See “Capital Requirements and FDICIA—Risk-Based Deposit Insurance and FICO Assessments” below.

Federal Reserve Board Policies and Reserve Requirements. The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. Federal Reserve Board policies affect the levels of bank earnings on loans and investments and the levels of interest paid on bank deposits through the Federal Reserve System’s open-market operations in United States government securities, regulation of the discount rate on bank borrowings from Federal Reserve Banks and regulation of non-earning reserve requirements. Regulation D promulgated by the Federal Reserve Board requires all depository institutions, including The Banks, to maintain reserves against their transaction accounts (generally, demand deposits, NOW accounts and certain other types of accounts that permit payments or transfer to third parties) or non-personal time deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain other types of time deposits), subject to certain exemptions. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at the Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the amount of the Bank’s interest-bearing assets. As of December 31, 2003, The Bank’s aggregate reserve requirement was approximately $10.6 million.

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

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

CRA Regulations. The Community Reinvestment Act of 1997 (“CRA”) requires lenders to identify the communities served by the institution’s offices and to identify the types of credit the institution is prepared to extend within such communities. The FDIC examines each of The Banks, except for ONB, which is examined by the OCC, and the agencies rate such institutions’ compliance with CRA as “Outstanding”, “Satisfactory”, “Needs to Improve” or “Substantial Noncompliance”. As of their last CRA examinations, CTC, MBT, BWM and FBT all received a rating of “Outstanding,” and ONB and GB received a rating of “Satisfactory.”

Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from undertaking certain activities, including engaging in activities newly permitted as a financial holding company under the GLBA and acquisitions of other financial institutions. The Federal Reserve Board must take into account the record of performance of banks in meeting the credit needs of the entire community served, including low-and moderate-income neighborhoods. Current CRA regulations primarily rely on objective criteria of the performance of institutions under three key assessment tests: a lending test, a service test and an investment test. The Banks are committed to meeting the existing or anticipated credit needs of their entire communities, including low and moderate-income neighborhoods, consistent with safe and sound banking operations.

Capital Requirements and FDICIA

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

Leverage Capital Ratio. The regulations of the FDIC and the OCC require FDIC-insured state banks and national banks, respectively, to maintain a minimum “Leverage Capital Ratio” or “Tier 1 Capital” (as defined in the Risk-Based Capital Guidelines discussed in the following paragraphs) to Total Assets of 3.0%. The regulations of the FDIC and the OCC state that only banks with the highest federal bank regulatory examination rating will be permitted to operate at or near such minimum level of capital. All other banks are expected to maintain an additional margin of capital, equal to at least 1% to 2% of Total Assets, above the minimum ratio.

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Any bank experiencing or anticipating significant growth is expected to maintain capital well above the minimum levels. The Federal Reserve Board’s guidelines impose substantially similar leverage capital requirements on bank holding companies on a consolidated basis.

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

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

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

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

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires, among other things, that the federal banking regulators take “prompt corrective action” with respect to, and imposes significant restrictions on, any bank that fails to satisfy its applicable minimum capital requirements. FDICIA establishes five capital categories consisting of “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under applicable regulations, a bank that has a Total Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based

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Capital Ratio of 6.0% or greater and a Leverage Capital Ratio of 5.0% or greater, and is not subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure is deemed to be “well capitalized.” A bank that has a Total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital Ratio of 4.0% or greater and a Leverage Capital Ratio of 4.0% (or 3% for banks with the highest regulatory examination rating that are not experiencing or anticipating significant growth or expansion) or greater and does not meet the definition of a well capitalized bank is considered to be “adequately capitalized.” A bank that has a Total Risk-Based Capital Ratio of less than 8.0% or has a Tier 1 Risk-Based Capital Ratio that is less than 4.0%, except as noted above, a Leverage Capital Ratio of less than 4.0% is considered “undercapitalized.” A bank that has a Total Risk-Based Capital Ratio of less than 6.0%, or a Tier 1 Risk-Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0% is considered to be “significantly undercapitalized,” and a bank that has a ratio of tangible equity to total assets equal to or less than 2% is deemed to be “critically undercapitalized.” A bank may be deemed to be in a capital category lower than is indicated by its actual capital position if it is determined to be in an unsafe or unsound condition or receives an unsatisfactory examination rating. FDICIA generally prohibits a bank from making capital distributions (including payment of dividends) or paying management fees to controlling stockholders or their affiliates if, after such payment, the bank would be undercapitalized.

Under FDICIA and the applicable implementing regulations, an undercapitalized bank will be (i) subject to increased monitoring by its primary federal banking regulator; (ii) required to submit to its primary federal banking regulator an acceptable capital restoration plan (guaranteed, subject to certain limits, by the bank’s holding company) within 45 days of being classified as undercapitalized; (iii) subject to strict asset growth limitations; and (iv) required to obtain prior regulatory approval for certain acquisitions, transactions not in the ordinary course of business, and entries into new lines of business. In addition to the foregoing, the primary federal banking regulator may issue a “prompt corrective action directive” to any undercapitalized institution. Such a directive may (i) require sale or re-capitalization of the bank, (ii) impose additional restrictions on transactions between the bank and its affiliates, (iii) limit interest rates paid by the bank on deposits, (iv) limit asset growth and other activities, (v) require divestiture of subsidiaries, (vi) require replacement of directors and officers, and (vii) restrict capital distributions by the bank’s parent holding company.

In addition to the foregoing, a significantly undercapitalized institution may not award bonuses or increases in compensation to its senior executive officers until it has submitted an acceptable capital restoration plan and received approval from its primary federal banking regulator.

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

Deposit Insurance Assessments. The FDIC uses a risk-based system which assigns each of The Banks to one of three capital categories (1) well capitalized, (2) adequately capitalized, or (3) undercapitalized, and to one of three subgroups within a capital category on the basis of supervisory evaluations by the applicable Bank’s primary federal regulator and, if applicable, other information relevant to the Bank’s financial condition and the risk posed to the BIF. An institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC is authorized to raise the assessment rates in certain circumstances. If the FDIC determines to increase the assessment rates for all institutions, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and may raise BIF insurance premiums again in the future. If the FDIC takes such action, it could have an adverse effect on the earnings of The Banks, the extent of which is not currently quantifiable. The risk classification to which an institution is assigned by the FDIC is confidential and may not be disclosed.

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Assessment rates in 2003 ranged from 0% of domestic deposits for an institution in the lowest risk category (i.e., well capitalized and healthy from a supervisory standpoint) to 0.27% of domestic deposits for institutions in the highest risk category (i.e., undercapitalized and unhealthy from a supervisory standpoint). The Deposit Insurance Funds Act of 1996 eliminates the minimum assessment and authorizes the Financing Corporation (FICO) to levy assessments on BIF-assessable deposits. The actual assessment rates for FICO are adjusted on a quarterly basis to reflect changes in the assessment bases of the insurance funds. Based on the 1996 Act, the Banks paid assessments totaling $838,302 or 0.0167 cents per $100 of deposits in 2003.

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

Conservatorship and Receivership Amendments. FDICIA authorizes the FDIC to appoint itself conservator or receiver for a state-chartered bank under certain circumstances and expands the grounds for appointment of a conservator or receiver for an insured depository institution to include (i) consent to such action by the board of directors of the institution; (ii) cessation of the institution’s status as an insured depository institution; (iii) the institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, or fails to become adequately capitalized when required to do so, or fails to timely submit an acceptable capital plan, or materially fails to implement an acceptable capital plan; and (iv) the institution is critically undercapitalized or otherwise has substantially insufficient capital. FDICIA provides that an institution’s directors shall not be liable to its stockholders or creditors for acquiescing in or consenting to the appointment of the FDIC as receiver or conservator for, or as a supervisor in the acquisition of, the institution.

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

Standards for Safety and Soundness. Pursuant to FDICIA the federal bank regulatory agencies have prescribed, by regulation, standards and guidelines for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The compensation standards prohibit employment contracts, compensation or benefit arrangements, stock option plans, fee arrangements or other compensatory arrangements that would provide “excessive” compensation, fees or benefits, or that could lead to material financial loss. In addition, the federal bank regulatory agencies are required by FDICIA to prescribe standards specifying; (i) maximum classified assets to capital ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; and (iii) to the extent feasible, a minimum ratio of market value to book value for publicly-traded shares of depository institutions and depository institution holding companies.

Activities and Investments of Insured State Banks. FDICIA provides that FDIC-insured state banks such as CTC, MBT, BWM, FBT and GB may not engage as a principal, directly or through a subsidiary, in any activity that is not permissible for a national bank, such as ONB, unless the FDIC determines that the activity does not

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pose a significant risk to the BIF, and the bank is in compliance with its applicable capital standards. In addition, an insured state bank may not acquire or retain, directly or through a subsidiary, any equity investment of a type, or in an amount, that is not permissible for a national bank, unless such investments meet certain grandfather requirements.

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

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

Customer Information Security. The FDIC, the OCC and other bank regulatory agencies have established standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the “Guidelines”). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

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

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

The Sarbanes-Oxley Act

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

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

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

EMPLOYEES

At December 31, 2003, the Company and its subsidiaries employed 2,223 persons, with a full-time equivalency of 2,058 employees. The Company enjoys good relations with its employees. A variety of employee benefits, including health, group life and disability income replacement insurance, a funded, non-contributory pension plan, and an incentive savings and profit sharing plan, are available to qualifying officers and employees.

COMPANY WEBSITE

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

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ITEM 2 PROPERTIES

The offices of the Company are located in an owned facility at Two Burlington Square in Burlington, Vermont. CTC’s principal offices are in Burlington, Vermont and it has fifty-two additional locations in Vermont. BWM’s principal offices are in Springfield, Massachusetts and it has twelve additional locations in the western Massachusetts area. FBT’s principal offices are in Worcester, Massachusetts and it has six additional locations in the greater Worcester, Massachusetts area. MBT’s principal offices are in Portland, Maine and it has eleven additional locations in southern Maine. ONB’s principal offices are in Kennebunk, Maine and it has twenty additional locations in southern Maine and New Hampshire. GB’s principal offices are in Keene, New Hampshire and it has seventeen additional locations in southern New Hampshire. The offices of all subsidiaries are in good physical condition with modern equipment and facilities considered by management to be adequate to meet the banking needs of customers in the communities served.

ITEM 3 LEGAL PROCEEDINGS

A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2003. Management, after reviewing these claims with legal counsel, is of the opinion that these matters, when resolved, will not have a material effect on the Company’s consolidated financial statements.

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PART II

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

MATTERS

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

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

For a discussion of dividend restrictions on the Company’s common stock, see “Dividends” under the caption “Business—Supervision and Regulation” on page 8 of this report.

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ITEM 6 SELECTED FINANCIAL DATA

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

RESULTS OF OPERATIONS

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

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

Application of Critical Accounting Policies

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

Allowance for Loan Losses. The allowance for loan losses is established through a charge against current earnings to the provision for loan losses. The allowance for loan losses is based on management’s estimate of the amount required to reflect the probable inherent losses in the loan portfolio, based on circumstances and conditions known at each reporting date in accordance with Generally Accepted Accounting Principles (“GAAP”). There are three components of the allowance for loan losses: 1) specific reserves for loans considered to be impaired or for other loans for which management considers a specific reserve to be necessary; 2) allocated reserves based upon management’s formula-based process for assessing the adequacy of the allowance for loan losses; and 3) a non-specific environmentally-driven allowance considered necessary by management based on its assessment of other qualitative factors. The allowance for loan losses is a significant estimate and is regularly reviewed by the Company for adequacy using a consistent, systematic methodology which assesses such factors as changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency and charge-off rates; and current economic conditions that may affect a borrower’s ability to repay. Adverse changes in management’s assessment of these factors could lead to additional provisions for loan losses. The Company’s methodology with respect to the assessment of the adequacy of the allowance for loan losses is more fully discussed on pages 24-27 of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

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

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

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

Interest Income Recognition. Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on loans 90 days or more past due unless they are adequately secured and in the process of collection or on other loans when management believes collection is doubtful. All loans considered impaired are nonaccruing. Interest on nonaccruing loans is recognized as payments are received when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on nonaccrual status, all interest previously accrued is reversed against current-period interest income; therefore an increase in loans on nonaccrual status could have an adverse impact on interest income recognized in future periods.

Income Taxes. The Company estimates its income taxes for each of the jurisdictions in which it operates to determine an appropriate expense against current earnings. This involves estimating the Company’s actual current tax exposure as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of December 31, 2003, there were no valuation allowances set aside against any deferred tax assets.

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

Executive Overview

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

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

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

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

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

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

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

Financial Condition

Loans

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

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

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

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

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

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

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

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

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

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Mortgage Banking Operations

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

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

Nonperforming Assets

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

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

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The following table shows the composition of nonperforming assets and loans past due 90 days or more and still accruing interest as of the end of each of the five years ended December 31, 2003:

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

Allowance for loan losses

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

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

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

Credit Review personnel conduct ongoing portfolio trend analyses and individual credit reviews to evaluate loan risk and compliance with corporate lending policies. The level of allowance allocable to each group of

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risk-rated loans is then determined by applying a loss factor that estimates the amount of probable loss in each category. The assigned loss factor for each risk rating is based upon management’s assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions and past experience.

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

The other method used to allocate the allowance for loan losses entails the assignment of reserve amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Company will not collect all of the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based on internal risk ratings or non-accrual status. A specific reserve amount is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. At December 31, 2003, impaired loans with specific reserves totaled $5,666,000 (all of these loans were on nonaccrual status) and the amount of such reserves were $1,725,000.

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

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

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

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

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

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