CHITTENDEN CORP /VT/ - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2004

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-13769

CHITTENDEN CORPORATION

(Exact Name of Registrant as Specified in its Charter)


VERMONT		03-0228404
(State of Incorporation)		(IRS Employer Identification No.)

TWO BURLINGTON SQUARE BURLINGTON, VERMONT		05401
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number: (802) 658-4000

NOT APPLICABLE

Former Name, Former Address and Formal Fiscal Year

If Changed Since Last Report

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

At October 29, 2004, there were 46,278,740 shares of the Corporation’s $1.00 par value common stock issued and outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Chittenden Corporation

Consolidated Balance Sheets

(Unaudited)


	September 30, 2004			December 31, 2003
	(in thousands)
Assets
Cash and cash equivalents	$	165,191		$	174,939
Securities available for sale		1,458,149			1,588,151
FRB and FHLB stock		19,243			20,753
Loans held for sale		35,723			25,262
Loans:
Commercial		770,933			658,615
Municipal		105,781			87,080
Real Estate:
Residential
1-4 family		685,714			700,671
Multi-family		181,622			176,478
Home equity		287,479			270,959
Commercial		1,558,221			1,430,945
Construction		143,871			140,801

Total Real Estate		2,856,907			2,719,854
Consumer		246,889			259,135

Total Loans		3,980,510			3,724,684
Less: Allowance for loan losses		(58,598	)		(57,464	)

Net loans		3,921,912			3,667,220
Accrued interest receivable		26,607			29,124
Other assets		58,574			68,587
Premises and equipment, net		82,409			75,179
Mortgage servicing rights		12,119			12,265
Identified intangibles		21,196			22,733
Goodwill		216,697			216,431

Total assets	$	6,017,820		$	5,900,644

Liabilities:
Deposits:
Demand	$	907,396		$	898,920
Savings		534,286			517,789
NOW		903,307			899,018
CMAs/ Money market		1,603,059			1,604,138
Certificates of deposit less than $100,000		755,494			789,066
Certificates of deposit $100,000 and over		388,935			260,960

Total deposits		5,092,477			4,969,891
Securities sold under agreements to repurchase		71,056			78,980
Borrowings		182,450			208,454
Accrued expenses and other liabilities		60,769			63,368

Total liabilities		5,406,752			5,320,693
Stockholders’ Equity:
Preferred stock - $100 par value authorized – 1,000,000 shares; issued and outstanding - none		—			—
Common stock - $1 par value; authorized – 60,000,000 shares; issued – 50,201,523 in 2004 and 50,177,861 in 2003		50,202			50,178
Surplus		248,828			246,938
Retained earnings		372,980			341,441
Treasury stock, at cost – 3,960,432 shares in 2004 and 4,514,421 shares in 2003		(71,017	)		(78,579	)
Accumulated other comprehensive income		5,377			15,595
Directors deferred compensation to be settled in stock		4,720			4,413
Unearned portion of employee restricted stock		(22	)		(35	)

Total stockholders’ equity		611,068			579,951

Total liabilities and stockholders’ equity	$	6,017,820		$	5,900,644

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

Chittenden Corporation

Consolidated Statements of Income

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2004			2003			2004			2003
	(in thousands, except per share amounts)
Interest income:
Interest on loans	$	53,090		$	49,434		$	152,805		$	149,558
Investment securities:
Taxable		14,807			17,648			45,144			54,375
Tax-favored		13			61			40			148
Short-term investments		59			88			119			223

Total interest income		67,969			67,231			198,108			204,304

Interest expense:
Deposits		9,411			9,605			26,139			32,665
Borrowings		1,889			2,965			5,664			9,930

Total interest expense		11,300			12,570			31,803			42,595

Net interest income		56,669			54,661			166,305			161,709
Provision for loan losses		1,025			2,050			2,553			6,150

Net interest income after provision for loan losses		55,644			52,611			163,752			155,559

Noninterest income:
Investment management and trust		4,813			3,983			13,735			11,634
Service charges on deposits		4,241			4,583			13,707			13,711
Mortgage servicing		(162	)		1,275			419			(311	)
Gains on sales of loans, net		2,261			6,959			7,057			17,494
Gains on sales of securities		186			3,305			2,228			14,349
Loss on prepayments of borrowings		—			(2,154	)		(1,194	)		(2,154	)
Credit card income, net		1,146			1,149			3,076			3,022
Insurance commissions, net		1,389			2,041			5,742			5,185
Retail investment services		715			1,287			2,565			3,497
Other		3,252			2,570			9,147			7,611

Total noninterest income		17,841			24,998			56,482			74,038

Noninterest expense:
Salaries		20,652			23,233			63,317			67,183
Employee benefits		5,027			5,419			16,677			15,421
Net occupancy expense		5,481			5,977			17,259			17,654
Data processing		994			2,319			5,271			6,980
Amortization of intangibles		776			755			2,303			1,993
Conversion and restructuring charges		505			—			1,975			6,800
Other		9,376			9,155			26,574			27,264

Total noninterest expense		42,811			46,858			133,376			143,295

Income before income taxes		30,674			30,751			86,858			86,302
Income tax expense		11,196			10,887			31,759			31,221

Net income	$	19,478		$	19,864		$	55,099		$	55,081

Basic earnings per share	$	0.42		$	0.43		$	1.20		$	1.24
Diluted earnings per share		0.42			0.43			1.18			1.23
Dividends per share		0.18			0.16			0.52			0.48

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

Chittenden Corporation

Consolidated Statements of CashFlows

(Unaudited)


	For the Nine Months Ended September 30,
	2004			2003
	(in thousands)
Cash flows from operating activities:
Net income	$	55,099		$	55,081
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,553			6,150
Depreciation		5,948			6,544
Amortization of intangible assets		2,302			1,993
Amortization of premiums, fees, and discounts, net		13,423			9,010
Recovery of provision for impairment of MSR asset		(2,113	)		(3,898	)
Investment securities gains		(2,228	)		(14,349	)
Deferred income taxes		(1,483	)		(14,024	)
Loans originated for sale		(375,741	)		(1,142,958	)
Proceeds from sales of loans		368,630			1,172,400
Gains on sales of loans, net		(7,057	)		(17,494	)
Changes in assets and liabilities, net of effect from purchase of acquired companies:
Accrued interest receivable		2,517			5,235
Other assets		13,313			1,545
Accrued expenses and other liabilities		5,972			(1,371	)

Net cash provided by operating activities		81,135			63,864

Cash flows from investing activities:
Cash paid, net of cash acquired in acquisition		(1,120	)		(90,468	)
Proceeds from sales of Federal Home Loan Bank stock		8,513			946
Purchase of Federal Reserve Bank stock		(7,003	)		—
Proceeds from sales of securities available for sale		211,900			583,600
Proceeds from maturing securities and principal payments on securities available for sale		218,910			503,568
Purchases of securities available for sale		(318,560	)		(846,200	)
Loans originated, net of principal repayments		(263,651	)		(96,868	)
Purchases of premises and equipment		(13,136	)		(11,770	)

Net cash provided by (used in) investing activities		(164,147	)		42,808

Cash flows from financing activities:
Net increase in deposits		122,586			109,375
Net decrease in borrowings		(33,928	)		(180,389	)
Proceeds from issuance of treasury and common stock		8,166			2,888
Dividends on common stock		(23,560	)		(20,991	)

Net cash provided by (used in) financing activities		73,264			(89,117	)

Net (increase) decrease in cash and cash equivalents		(9,748	)		17,555
Cash and cash equivalents at beginning of period		174,939			192,142

Cash and cash equivalents at end of period	$	165,191		$	209,697

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	32,427		$	41,318
Income taxes		19,582			48,065
Non-cash investing and financing activities:
Loans transferred to other real estate owned		1,001			267
Issuance of treasury and common stock		7,562			4,165
Assets acquired and liabilities assumed through acquisitions:
Fair value of assets acquired	$	854		$	1,122,089
Fair value of liabilities assumed		—			1,044,334
Equity issued		—			115,931
Cash paid		1,120			122,998
Goodwill	$	266		$	161,174

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

NOTE 1 – ACCOUNTING POLICIES

The financial information included herein is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results for interim periods are not necessarily indicative of the results of operations for the full year or any other interim period.

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in its 2003 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

On July 22, 2004, the Company declared a five-for-four stock split which was distributed on September 10, 2004 to stockholders of record August 27, 2004. This stock split has been reflected in the accompanying balance sheets as of September 30, 2004 and December 31, 2003; all share and per share amounts presented herein have been restated to reflect the split.

NOTE 2 – ACCOUNTING POLICIES ADOPTED

On March 9, 2004, the Securities and Exchange Commission (SEC) issued SEC Staff Accounting Bulletin (SAB) No. 105 – Application of Accounting Principles to Loan Commitments. SAB No. 105 summarizes the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. SAB No. 105 was issued to address divergence in practice regarding the timing of the recognition of a servicing asset, which some entities were recognizing upon the issuance of a commitment to the customer. Other entities were recording a servicing asset when a loan was funded for eventual sale on the secondary market, while others did not record a servicing asset until the sale of that loan on the secondary market. Specifically, the SAB states that at the date of origination, these loan commitments do not give rise to recognizable assets related to servicing rights or to selling the servicing rights, thus they may not be recorded. In effect, the SAB prohibits the recognition of an Originated Mortgage Servicing Right (OMSR) upon the issuance of a loan commitment that the entity intends to sell after it is funded. As described in footnote 1 of the Company’s 10-K/A for the year ended December 31, 2003, it is the Company’s accounting policy to recognize such OMSRs only upon the sale of the underlying loan.

In December 2003, the Financial Accounting Standards Board (FASB) issued a revision to FASB Interpretation No. 46, Consolidation of Variable Interest Entities, (or VIEs) which addresses consolidation by business enterprises of variable interest entities. FIN 46R expands upon existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Under previous guidance, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The Interpretation requires a variable interest entity to be consolidated by a company if that company is the “primary beneficiary” of that entity. The primary beneficiary is subject to a majority of the risk of loss from the VIE’s activities, or is entitled to receive a majority of the VIE’s residual returns, or both. The Company has evaluated all of the variable interest entities with which it is associated. Based upon that evaluation, no VIE’s meeting the definition of a primary beneficiary were identified. The adoption of FIN 46R did not have a material effect on the Company’s financial position or results of operations.

As part of the Company’s first quarter 2004 adoption of FIN 46R, the Company no longer consolidates the Chittenden Capital Trust I (“the Trust”), which issued $125 million of 8% trust preferred securities to the public, in its financial statements. However, the $125 million of junior subordinated debentures issued by the Company to the Trust continues to be classified as borrowings on the Company’s balance sheet, and the related interest expense continues to be so classified on the statements of income. Certain balances between the Company and the Trust, which were previously eliminated in consolidation, have been recognized in the Company’s financial statements.

NOTE 3 – ACQUISITIONS AND SALES

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

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


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

Total acquisition cost	$	238,929

Following is supplemental information reflecting selected pro forma results as if this acquisition had been consummated as of the beginning of the earliest period presented, January 1, 2003 (in thousands, except EPS):


	For the three months ended September 30,				For the nine months ended September 30,
	2004		2003		2004		2003
Total revenue	$	74,510	$	79,635	$	222,786	$	244,013
Income before income taxes		30,674		30,727		86,858		89,302
Net income	$	19,478	$	19,850	$	55,099	$	56,440
Diluted earnings per share (EPS)	$	0.42	$	0.43	$	1.18	$	1.23

Total revenue includes net interest income and noninterest income.

NOTE 4 – ACQUIRED INTANGIBLE ASSETS


	As of September 30, 2004
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets
Core deposit intangibles	$	28,541	$	12,148	$	16,393
Customer list intangibles		3,498		514		2,984
Acquired trust relationships		4,000		2,181		1,819

Total	$	36,039	$	14,843	$	21,196


Aggregate Amortization Expense:
For three months ended September 30, 2004	$	776
For nine months ended September 30, 2004	$	2,303
Estimated Amortization Expense:
For year ended 12/31/05	$	2,768
For year ended 12/31/06		2,659
For year ended 12/31/07		2,659
For year ended 12/31/08		2,659
For year ended 12/31/09		2,659

NOTE 5 – GOODWILL

The changes in the carrying amount of goodwill for the nine months ended September 30, 2004 are as follows:


	Commercial Banking Segment		Other Segment		Total
Balance as of December 31, 2003	$	211,379	$	5,052	$	216,431
Goodwill acquired during year		266		—		266
Impairment losses		—		—		—

Balance as of September 30, 2004	$	211,645	$	5,052	$	216,697

NOTE 6 – CAPITAL TRUST SECURITIES

On May 21, 2002, Chittenden Capital Trust I, issued $125 million of 8% trust preferred securities (“Securities”) to the public and invested the proceeds from this offering in an equivalent amount of junior subordinated debentures issued by Chittenden. These debentures are the sole asset of the trust. The proceeds from the offering, which was net of $4.4 million of issuance costs, were primarily used to fund the cash consideration paid in the Granite Bank transaction. The Securities pay interest quarterly, are mandatorily redeemable on July 1, 2032 and may be redeemed by the Trust at par any time on or after July 1, 2007. Chittenden has fully and unconditionally guaranteed the Securities issued by the Chittenden Capital Trust I.

Concurrent with the issuance of these securities, Chittenden entered into interest rate swap agreements with two counterparties, in which Chittenden will receive 8% fixed on the notional amount of $125 million, while paying the counterparties a variable rate based on the three month LIBOR (London Interbank Offered Rate), plus approximately 122 basis points.

NOTE 7 – COMPREHENSIVE INCOME

The Company’s comprehensive income for the three and nine months ended September 30, 2004 and 2003 is presented below (amounts in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2004			2003			2004			2003
Net Income	$	19,478		$	19,864		$	55,099		$	55,081
Unrealized gains/losses on investment securities:
Unrealized holding gains (losses) on securities available for sale, net of tax		10,042			(8,617	)		(7,413	)		6,364
Reclassification adjustments for (gains) losses arising during period, net of tax		(893	)		(2,148	)		(2,805	)		(9,327	)
Accrued minimum pension liability, net of tax		—			3,829			—			4,284

Total Comprehensive Income	$	28,627		$	12,928		$	44,881		$	56,402

NOTE 8 – EARNINGS PER SHARE

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
	(in thousands except per share information)
Net income	$	19,478	$	19,864	$	55,099	$	55,081

Weighted average common shares outstanding		46,188		45,637		46,043		44,380
Dilutive effect of common stock equivalents		675		434		604		376

Weighted average common and common equivalent shares		46,863		46,071		46,647		44,756

Basic earnings per share	$	0.42	$	0.43	$	1.20	$	1.24
Diluted earnings per share		0.42		0.43		1.18		1.23

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

Three Months Ending

September 30,

Nine Months Ending
September 30,

2004

2003

2004

2003

Anti-dilutive options

449,414

813,064

759,720

1,497,595

Weighted average exercise price

29.90

24.83

$28.61

23.89

NOTE 9 – STOCK PLANS

The Company has three stock option plans, which are described more fully in Note 10 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K/A for the period ended December 31, 2003. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock option-related compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock options granted in the respective periods.


	Three Months Ending September 30,				Nine Months Ending September 30,
	2004		2003		2004		2003
	(in thousands except per share information)
Net Income:
As reported	$	19,478	$	19,864	$	55,099	$	55,081
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		1,166		1,381		2,439		2,574

Pro forma	$	18,312	$	18,483	$	52,660	$	52,507

Earnings Per Share:
Basic:
As reported	$	0.42	$	0.43	$	1.20	$	1.24
Pro forma		0.40		0.41		1.14		1.18
Diluted:
As reported	$	0.42	$	0.43	$	1.18	$	1.23
Pro forma		0.39		0.40		1.13		1.17

The SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995. The resulting pro forma compensation cost may not be representative of that to be expected in future periods and is primarily affected by the number of stock options granted in a particular period.

NOTE 10 – EMPLOYEE BENEFITS

Pension Plan

As of January 1, 2004, the Company sponsored two qualified defined benefit pension plans that together covered substantially all of its employees. The Chittenden Pension Account Plan (“Chittenden Plan”) covers substantially all employees other than employees of Granite Bank and GSBI Insurance Group (“GSBI”) who meet minimum age and service requirements and provides benefits based on years of service and compensation earned during those years of service. The Retirement Plan of Granite State Bankshares, Inc. in RSI Retirement Trust (“Granite Plan”) covered substantially all employees of Granite Bank and GSBI who meet minimum age and service requirements and provides benefits based on years of service and final average compensation. Granite Bank and GSBI were acquired by the Company effective February 28, 2003.

Effective December 31, 2003, benefits earned under the Granite Plan were frozen. On September 30, 2004 the Company merged the Granite Plan into the Chittenden Plan, which the Company continues to sponsor, and which continues to cover substantially all of its employees. Effective January 1, 2004, eligible employees of Granite Bank and GSBI began to earn benefits under the Chittenden Plan.

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


	Nine Months Ended September 30, (in thousands)
	2004			2003
Service cost	$	2,570		$	1,758
Interest cost		2,772			2,261
Expected return on plan assets		(3,337	)		(2,422	)

Net Amortization:
Prior service cost		(442	)		(442	)
Net actuarial loss		351			—
Transition cost		(117	)		(96	)

Total amortization		(208	)		(538	)

Net periodic pension expense	$	1,797		$	1,059

As Chittenden previously disclosed in its financial statements for the year ended December 31, 2003, due to a prior contribution made in excess of the minimum required amounts, the Company does not anticipate a required contribution during 2004. The Company has made voluntary contributions totaling $5 million to the Pension Account Plan during 2004.

NOTE 11 – BUSINESS SEGMENTS

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

Immaterial operating segments of the Company’s operations, which do not have similar characteristics to the commercial banking operations and do not meet the quantitative thresholds requiring disclosure, are included in the Other category in the disclosure of business segments below. Revenue derived from these

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

The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies included in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K/A for the period ended December 31, 2003. The consolidation adjustments reflect certain eliminations of inter-segment revenue, cash and parent company investments in subsidiaries.


For the Three Months Ended September 30, 2004 (in thousands)	Commercial Banking		Other ⁽²⁾			Consolidation Adjustments			Consolidated
Net interest income ⁽¹⁾	$	57,789	$	(1,120	)	$	—		$	56,669
Noninterest income		16,340		1,501			—			17,841
Provision for loan losses		1,025		—			—			1,025
Noninterest expense		41,499		1,312			—			42,811

Net income (loss) before income taxes		31,605		(931	)		—			30,674
Income tax expense/(benefit)		11,449		(253	)		—			11,196

Net income (loss)	$	20,156	$	(678	)	$	—		$	19,478

End of Period Assets	$	6,076,619	$	768,837		$	(827,636	)	$	6,017,820

For the Three Months Ended September 30, 2003 (in thousands)	Commercial Banking		Other ⁽²⁾			Consolidation Adjustments			Consolidated
Net interest income ⁽¹⁾	$	55,275	$	(614	)	$	—		$	54,661
Noninterest income		22,907		2,091			—			24,998
Provision for loan losses		2,050		—			—			2,050
Noninterest expense		45,201		1,657			—			46,858

Net income (loss) before income taxes		30,931		(180	)		—			30,751
Income tax expense/(benefit)		10,929		(42	)		—			10,887

Net income (loss)	$	20,002	$	(138	)	$	—		$	19,864

End of Period Assets	$	6,022,229	$	856,959		$	(856,762	)	$	6,022,426


For the Nine Months Ended September 30, 2004 (in thousands)	Commercial Banking		Other ⁽²⁾			Consolidation Adjustments			Consolidated
Net interest income ⁽¹⁾	$	169,335	$	(3,030	)	$	—		$	166,305
Noninterest income		51,765		4,717			—			56,482
Provision for loan losses		2,553		—			—			2,553
Noninterest expense		129,942		(3,434	)		—			133,376

Net income (loss) before income taxes		88,605		(1,747	)		—			86,858
Income tax expense/(benefit)		32,270		(511	)		—			31,759

Net income (loss)	$	56,335	$	(1,236	)	$	—		$	55,099

End of Period Assets	$	6,076,619	$	768,837		$	(827,636	)	$	6,017,820

For the Nine Months Ended September 30, 2003 (in thousands)	Commercial Banking		Other ⁽²⁾			Consolidation Adjustments			Consolidated
Net interest income ⁽¹⁾	$	163,181	$	(1,472	)	$	—		$	161,709
Noninterest income		68,688		5,350			—			74,038
Provision for loan losses		6,150		—			—			6,150
Noninterest expense		138,759		4,536			—			143,295

Net income (loss) before income taxes		86,960		(658	)		—			86,302
Income tax expense/(benefit)		31,417		(196	)		—			31,221

Net income (loss)	$	55,543	$	(462	)	$	—		$	55,081

End of Period Assets	$	6,022,229	$	856,959		$	(856,762	)	$	6,022,426

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

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

NOTE 12 – STOCKHOLDERS’ EQUITY

On October 21, 2004, the Company declared dividends of $0.18 per share or approximately $8.3 million, to be paid on November 12, 2004 to shareholders of record on October 29, 2004. In addition, on September 10, 2004 Chittenden distributed the additional shares from the Company’s 5-for-4 common stock split.

NOTE 13 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments are expected to expire without being drawn upon. Therefore, the amounts presented below do not necessarily represent future cash requirements.

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

Financial instruments whose contractual amounts represent off-balance sheet risk at September 30, 2004 (in thousands):


Loans and Other Commitments
Commitments to originate loans	$	242,615
Unused home equity lines of credit		312,070
Other unused lines of credit		39,070
Unadvanced portions of construction loans		209,649
Equity investment commitments to limited partnerships		6,587
Standby Letters of Credit
Notional amount fully collateralized by cash		71,124
Notional amount of other standby letters of credit		29,606
Liability associated with letters of credit recorded on balance sheet		661

NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS

On December 12, 2003, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position 03-3: Accounting for Certain Loans of Debt Securities Acquired in a Transfer. The Statement of Position (SOP) addresses the accounting for acquired loans that show evidence of having deteriorated in terms of credit quality since their origination (i.e., impaired loans as defined in SFAS 114). Because of their deteriorated credit quality, the loans are generally acquired at a discount (i.e., below their par value). It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. SOP 03-3 does not apply to loans originated and held by the entity. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment.

SOP 03-3 would apply to the accounting for loans acquired as described above by the Company, after January 1, 2005. Other than recording the expected cash flows associated with the acquired loans on a net rather than a gross basis, it would not impact the day one accounting to record such a purchase. However, any differences between actual cash flows from the loans and those expected upon acquisition would be recognized in earnings after the acquisition.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. The Company 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 the Company 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 report. 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 the Company’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 report could harm the Company’s business, prospects, operating results or financial condition. The Company does not undertake any obligation to update any forward-looking statements as a result of future events or developments.

Application of Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Form 10-K/A for the year-ended December 31, 2003. The Company considers the following accounting policies and related estimates to be the most critical in their potential effect on its financial position or results of operations:

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

with respect to the assessment of the adequacy of the allowance for loan losses is more fully discussed in its Form 10-K/A for the period ended December 31, 2003.

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.

Mortgage Servicing Rights (MSRs). Servicing assets are recognized as separate assets when rights are acquired through purchase or 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 servicing rights relative to their book value. In the event that the fair value of these assets were to increase in the future, the Company can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact the Company’s financial condition and results of operations either positively or adversely.

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 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 September 30, 2004, there were no valuation allowances set aside against any deferred tax assets.

Conversion and 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.

Management Overview

During the second quarter of 2004, the Company completed the conversion of its core banking applications, for all of its banking subsidiaries, to the Jack Henry Silverlake System. At the same time, the former Granite Bank was merged into Ocean National Bank. In addition, Granite’s former insurance subsidiary was consolidated into Chittenden Insurance Group during the quarter. As a result of these activities, conversion and restructuring charges for the first nine months of $1.98 million (pre-tax), or approximately $0.03 per share (after-tax) were incurred.

Results of Operations

Chittenden posted third quarter 2004 net income of $0.42 per diluted share, compared to $0.43 per diluted share posted in the third quarter of last year. Net income for the third quarter of 2004 was $19.5 million, compared to $19.9 million recorded in the same quarter a year ago. Return on average equity (ROE) was 13.11% for the quarter ended September 30, 2004 compared with 14.19% for the same period in 2003. Return on average assets (ROA) was 1.31% for the third quarter of 2004 an increase of 5 basis points from the second quarter of 2004 and a decline of 1 basis point from the third quarter of last year.

Net interest income on a tax equivalent basis for the three months ended September 30, 2004 was $57.0 million, an increase from $55.0 million for the same period a year ago. The yield on earning assets was 4.20%, a slight increase from the second quarter of 2004 and up 22 basis points from the third quarter of 2003. In the third quarter of 2003 the Company recognized accelerated purchase accounting amortization of $1.7 million primarily due to heavy prepayments on Granite’s residential mortgages, which accounted for 13 basis points of the 22 basis points variance from the third quarter of last year.

On a year to date basis Chittenden posted net income of $1.18 per diluted share, compared to $1.23 per diluted share posted for the same period of last year. Net income for the first nine months of 2004 was $55.1 million, flat with the amount recorded for the first nine months of 2003. Return on average equity was 12.54% through September 30, 2004 compared with 13.98% for the same period in 2003. Return on average assets was 1.26% for the nine-month period ended September 30, 2004, down from 1.29% for the same period in 2003. Net interest income on a tax equivalent basis for the nine months ended September 30, 2004 was $167.2 million, up from $162.6 million for the same period a year ago. The yield on earning assets was 4.19%, an increase of 9 basis points from a year ago. The aforementioned accelerated purchase accounting amortization in 2003 led to 4 basis points of the year-over-year increase.

The following table presents an analysis of average rates and yields on a fully taxable equivalent basis for the three and nine months periods ended September 30, 2004 and 2003:


For the Three Months Ended September 30, 2004					For the Three Months Ended September 30, 2003								For the Nine Months Ended September 30, 2004							For the Nine Months Ended September 30, 2003
Average Balance	Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾		Average Balance			Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾		Description	Average Balance			Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾		Average Balance			Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾
												ASSETS
												Interest-Earning Assets:
												Loans:
$753,618	$	10,237	5.40	%	$	659,503		$	9,023	5.43	%	Commercial	$	705,931		$	28,371	5.37	%	$	622,770		$	25,921	5.56	%
102,206		799	3.13	%		100,712			759	3.01	%	Municipal		93,975			2,162	3.07	%		84,350			2,147	3.39	%
												Real Estate:
1,181,885		15,859	5.36	%		1,246,866			14,965	4.79	%	Residential		1,170,668			46,109	5.25	%		1,211,982			48,807	5.37	%
1,527,187		21,080	5.49	%		1,343,864			18,542	5.47	%	Commercial		1,491,623			60,460	5.41	%		1,278,785			54,240	5.67	%
135,682		1,844	5.41	%		120,487			1,613	5.31	%	Construction		136,280			5,180	5.08	%		106,181			4,546	5.72	%

2,844,754		38,783	5.43	%		2,711,217			35,120	5.15	%	Total Real Estate		2,798,571			111,749	5.33	%		2,596,948			107,593	5.53	%
250,197		3,636	5.78	%		280,316			4,835	6.84	%	Consumer		249,591			11,449	6.13	%		276,246			14,701	7.11	%

3,950,775		53,455	5.39	%		3,751,748			49,737	5.27	%	Total loans		3,848,068			153,731	5.33	%		3,580,314			150,362	5.61	%
												Investments:
1,439,643		14,807	4.11	%		1,691,276			17,648	4.17	%	Taxable		1,472,216			45,145	4.09	%		1,660,540			54,375	4.37	%
1,295		20	6.27	%		17,353			86	1.96	%	Tax-Favored Securities		1,295			61	6.31	%		12,357			210	2.27	%
150		0	1.09	%		150			1	2.64	%	Interest-Bearing Deposits		150			1	1.20	%		192			3	2.04	%
22,887		50	0.86	%		36,302			88	0.96	%	Federal Funds Sold		11,642			106	1.22	%		36,569			221	0.81	%

5,414,750		68,332	5.03	%		5,496,829			67,560	4.89	%	Total Interest-Earning Assets		5,333,371			199,044	4.98	%		5,289,972			205,171	5.18	%

573,866						535,877						Noninterest-Earning Assets		563,315							492,363
(58,344)						(58,154	)					Allowance for Loan Losses		(58,061	)						(55,515	)

$5,930,272					$	5,974,552						Total Assets	$	5,838,625						$	5,726,820

												LIABILITIES AND
												STOCKHOLDERS’ EQUITY
												Interest-Bearing Liabilities:
												Savings
538,913		411	0.30	%		526,894			432	0.33	%			527,918			1,223	0.31	%		515,046			1,690	0.44	%
892,358		628	0.28	%		901,126			713	0.31	%	NOW		884,226			1,771	0.27	%		805,036			2,517	0.42	%
1,570,431		3,019	0.76	%		1,565,010			2,830	0.72	%	CMA/money market		1,530,564			8,070	0.70	%		1,523,154			10,615	0.93	%
765,759		3,637	1.89	%		835,307			4,491	2.13	%	Certificates of deposit under $100,000		775,005			10,918	1.88	%		818,354			14,118	2.31	%
353,403		1,716	1.93	%		250,501			1,139	1.80	%	Certificates of deposit $100,000 and over		311,979			4,157	1.78	%		251,862			3,725	1.98	%

4,120,864		9,411	0.91	%		4,078,838			9,605	0.93	%	Total Interest-Bearing Deposits		4,029,692			26,139	0.87	%		3,913,452			32,665	1.12	%
192,738		1,739	3.59	%		316,968			2,720	3.41	%	Borrowings		225,738			5,199	3.08	%		350,980			8,704	3.31	%
74,585		150	0.80	%		92,653			245	1.05	%	Customer repurchase agreements		73,264			465	0.85	%		102,484			1,226	1.60	%

4,388,187		11,300	1.02	%		4,488,459			12,570	1.11	%	Total Interest-Bearing Liabilities		4,328,694			31,803	0.98	%		4,366,916			42,595	1.30	%

												NonInterest-Bearing Liabilities:
897,127						862,228						Demand Deposits		868,889							760,806
53,821						68,298						Other Liabilities		53,893							72,445

5,339,135						5,418,985						Total Liabilities		5,251,476							5,200,167
591,137						555,567						Stockholders’ Equity		587,149							526,653

$5,930,272					$	5,974,552						Total Liabilities and Stockholders’ Equity	$	5,838,625						$	5,726,820

	$	57,032						$	54,990			Net Interest Income				$	167,241						$	162,576

			4.01	%						3.78	%	Interest Rate Spread⁽²⁾						4.00	%						3.88	%
			4.20	%						3.98	%	Net Yield on Earning Assets⁽³⁾						4.19	%						4.10	%

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

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

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

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


	YTD 2004 Compared with YTD 2003
	Increase (Decrease) in Net Interest Income Due to:						Total Increase (Decrease)
	Average Rate			Average Balance			Total Increase (Decrease)
	(in thousands)
Interest income:
Loans:
Commercial	$	(915	)	$	3,365		$	2,450
Municipal		(204	)		219			15
Real estate
Residential		(1,071	)		(1,627	)		(2,698	)
Commercial		(2,399	)		8,619			6,220
Construction		(509	)		1,143			634

Total real estate		(3,979	)		8,135			4,156
Consumer		(2,020	)		(1,232	)		(3,252	)

Total loans		(7,118	)		10,487			3,369
Investments:
Taxable		(3,523	)		(5,707	)		(9,230	)
Tax-favored		373			(522	)		(149	)
Interest-bearing deposits in banks		(1	)		(1	)		(2	)
Federal funds sold		112			(227	)		(115	)

Total interest income		(10,157	)		4,030			(6,127	)

Interest expense:
Savings		492			(25	)		467
NOWs		898			(152	)		746
CMAs/ money market		2,553			(8	)		2,545
Certificates of deposit under $100,000		2,551			649			3,200
Certificates of deposit $100,000 and over		353			(785	)		(432	)
Repurchase agreements		574			187			761
Borrowings		604			2,901			3,505

Total interest expense		8,025			2,767			10,792

Change in net interest income	$	(2,132	)	$	6,797		$	4,665

Noninterest Income and Noninterest Expense

Noninterest income for the third quarter 2004 declined $2.8 million on a linked-quarter basis and $7.2 million from the same period a year ago. Lower mortgage banking revenues and insurance commissions were the primary factors in the declines. Gains on sales of loans declined from $7.0 million in the third quarter of 2003 to $2.3 million in the third quarter of 2004 due to lower originations of mortgage loans caused by higher market interest rates. Mortgage servicing income declined from both the third quarter in 2003 and the second quarter of 2004 due to lower impairment recoveries. Recoveries in the third quarter of 2003 were $3.3 million compared to $1.7 million in the second quarter of 2004 and an impairment of $15,000 in the third quarter of 2004. Insurance commissions declined from the third quarter of 2003 as a result of lower levels of performance-based income. Net gains on sales of securities were $186,000 in the third quarter of 2004, compared with $3.3 million in 2003. The prior quarter amount was substantially offset by $2.2 million in losses on the prepayment of borrowings. The current quarter amount reflects securities gains of $1.4 million, net of a $1.2 million impairment loss recognized on the Company’s only significant venture capital investment. Partially offsetting these declines were increases in investment management and trust income, due to stronger sales and improved equity markets, and other non interest income, from the $757,000 gain on the sale of a branch and the related deposits in the third quarter of 2004.

Noninterest income for the first nine months was $56.5 million in 2004 compared to $74.0 million for 2003. Mortgage-banking revenues declined $9.7 million primarily due to lower mortgage originations, which resulted from the increase in mortgage rates. Gains on sales of securities, net of losses on prepayment of borrowings, declined $11.2 million from 2003. The higher level of gains in the prior year were substantially offset by $6.8 million in non-recurring charges related to the Company’s decision to convert its core data processing systems. The remaining gains on sales of securities in 2003 were the result of rebalancing the investment portfolio due to heavy prepayments on mortgage backed securities and callable agencies. The declines in mortgage banking and gains on securities sales were partially offset by higher levels of investment management and trust income, which was $2.1 million higher than a year ago, and higher levels of other noninterest income driven by a $1.3 million gain on the sale of two branches.

Noninterest expenses were $42.8 million for the third quarter of 2004 compared to $46.9 million for the same period a year ago. The decline from the third quarter of 2003 is primarily attributable to lower salary and benefit expenses, as well as lower data processing expense. Salaries declined $2.6 million primarily due to lower sales based commissions of $1.6 million and incentive accruals of $856,000. Benefits expense declined due to lower medical and dental expenses of $342,000. Data processing expense declined $1.3 million from the same period a year ago due to the data processing system conversion in the second quarter of this year.

Noninterest expenses for the first nine months of 2004 were $133.4 million compared to $143.3 million for 2003. The decline from the same period a year ago is primarily attributable to lower salaries, data processing and conversion and restructuring expenses. Salaries declined $3.9 million from the first nine months of 2003 primarily due to lower incentive accruals. In addition, lower levels of sales based commissions for the nine months of 2004 were offset by higher salaries due to the inclusion of the former Granite Bank branches for the entire nine-month period in 2004 versus only seven months in 2003. Employee Benefits expenses were $1.3 million higher in 2004 due to an increase in medical and dental benefits expenses. Conversion and restructuring expense declined from 2003 due to the non-recurring charges accrued in the second quarter of 2003 related to the Company’s decision to convert its core data processing system.

Income Taxes

The Company and its subsidiaries are taxed on their income at the Federal level and by various states in which they do business. The State of Vermont levies franchise taxes on banks based upon average deposit levels in lieu of taxing income. Franchise taxes are included in income tax expense in the consolidated statements of income. Year-to-date income tax expense for 2004 was $31.8 million, up from $31.2 million for the same period a year ago. The Company’s effective income tax rate for the first nine months of 2004 was 36.5%, compared with 36.2% for the comparable period in 2003.

Financial Position

Total loans at September 30, 2004 increased $154.7 million from June 30, 2004 and $255.8 million from year-end. The increases were primarily driven by commercial, commercial real estate and municipal loans. The Company’s commercial and commercial real estate loan portfolios have continued to achieve steady growth throughout the year with an annualized growth rate of over 15%. Residential real estate loans increased approximately $21 million from June 30, 2004 driven by growth in the 1-4 family category and home equity lines of credit, which was partially offset by slightly lower balances in loans secured by multi-family residential properties. The increase in municipal loans reflects a seasonal trend, as June 30^th is historically the low point with respect to borrowing needs of municipalities, coinciding with their fiscal year-ends. The Company consumer loans declined from the prior year-end, primarily due to higher than normal prepayments in the indirect auto lease portfolio.

Total deposits at September 30, 2004 increased $122.6 million from year-end. The Company experienced solid deposit growth in CMA/money market accounts and jumbo CDs. This increase was primarily associated with

the Company’s municipal and commercial customers. At September 30, 2004 borrowings declined $33.9 million from the prior year-end. This decline was associated with lower levels of overnight Fed Funds purchased as a result of higher deposit levels.

Credit Quality

Net charge-off activity totaled $396,000 for the third quarter of 2004 compared to $470,000 for the same period in 2003. The allowance for loan losses was $58.6 million at September 30, 2004, an increase of $1.1 million from December 31, 2003. Nonperforming assets include nonaccrual loans and foreclosed real estate (Other Real Estate Owned). As of September 30, 2004, nonperforming assets (NPAs) were $21.6 million up slightly from the second quarter of 2004 and the comparable quarter of a year ago. As a percentage of total loans NPAs were 54 basis points, flat with the second quarter and up compared to 49 basis points in the third quarter of 2003. The level of nonperforming assets at December 31, 2003 was unusually low as compared with the Company’s historical experience, which has averaged approximately 50 basis points over the last six years.

A summary of credit quality follows:


	9/30/04			6/30/04			12/31/03			9/30/03
	(in thousands)
Loans on nonaccrual	$	20,578		$	20,578		$	14,331		$	17,749
Troubled debt restructurings		—			—			—			210
Other real estate owned (OREO)		987			47			100			52

Total nonperforming assets (NPAs)	$	21,565		$	20,625		$	14,431		$	18,011

Loans past due 90 days or more and still accruing interest	$	3,140		$	3,777		$	4,029		$	3,021
Allowance for loan losses		58,598			57,969			57,464			59,171
NPAs as % of loans plus OREO		0.54	%		0.54	%		0.39	%		0.49	%
Allowance as % of loans		1.47	%		1.52	%		1.54	%		1.61	%
Allowance as % of nonperforming loans		284.76	%		281.70	%		400.99	%		329.48	%

Provisions for and activity in the allowance for loan losses are summarized as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(in thousands)
Beginning balance	$	57,969		$	57,591		$	57,464		$	48,197
Provision for loan losses		1,025			2,050			2,553			6,150
Allowance acquired through acquisitions		—			—			—			7,937
Loans charged off		(1,654	)		(1,239	)		(4,338	)		(5,863	)
Loan recoveries		1,258			769			2,919			2,750

Ending balance	$	58,598		$	59,171		$	58,598		$	59,171

The allowance for loan losses is based on management’s estimate of the amount required to reflect the potential inherent losses in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. There are inherent uncertainties with respect to the collectibility of the Banks’ loans and it is reasonably possible that actual losses experienced in the near term may differ from the amounts reflected in this report.

Adequacy of the allowance is determined using a consistent, systematic methodology which analyzes the size and risk of the loan portfolio. In addition to evaluating the collectibility of specific loans when determining the adequacy of the allowance for loan losses, management also takes into consideration other factors such as changes in the mix and volume of the loan portfolio, historic loss experience, the amount of the 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. For a full discussion on the Company’s allowance for loan loss policies see “Allowance for Loan Losses” in the Company’s 2003 annual report on Form 10-K/A.

Mortgage Servicing Rights

The following table summarizes activity for mortgage servicing rights purchased and originated for the nine months ended September 30, 2004:


	Purchased			Originated			Total
	(in thousands)
Balance at December 31, 2003	$	573		$	11,692		$	12,265
Additions		—			3,706			3,706
Amortization		(449	)		(5,516	)		(5,965	)
Recovery of impairment		314			1,799			2,113

Balance at September 30, 2004	$	438		$	11,681		$	12,119

At September 30, 2004, a $620,000 impairment valuation allowance was necessary to recognize the excess of the mortgage-servicing rights’ book value over their current fair value. The current fair value of the MSR portfolio at September 30, 2004 was $17.5 million or 84 basis points on the loans serviced for others.

Capital

Stockholders’ equity totaled $611.1 million at September 30, 2004, compared to $580.0 million at December 31, 2003. “Tier One” capital, consisting of common equity and the Trust Preferred Securities, measured 10.16% of risk-weighted assets at September 30, 2004. Total capital, including the “Tier Two” allowance for loan losses, was 11.39% of risk-weighted assets and the leverage capital ratio was 8.39%. These ratios placed Chittenden in the “well-capitalized” category according to regulatory standards.

The trust subsidiary, which issued the Company’s trust preferred securities, is no longer consolidated into the Company’s financial statements upon the adoption of FIN 46R in the first quarter of 2004. However, the Company continues to reflect the amounts payable to the trust’s preferred shareholders as debt in its financial statements. On May 6, 2004 the Federal Reserve Board proposed a rule that would retain trust preferred securities in Tier One capital of bank holding companies, but with stricter quantitative limits and clearer standards. Under the proposal, after a three-year transition period, which would end on March 31, 2007, the aggregate amount of trust preferred securities would be limited to 25 percent of Tier One capital elements, net of goodwill.

The Company has evaluated the potential impact of such a change on its Tier One capital ratio and has concluded that it would remain well capitalized in the event the FRB were to change the regulatory capital treatment of these securities. The regulatory capital treatment of the TPS in the Company’s total capital ratio would be unchanged.

Liquidity

The Company’s liquidity and rate sensitivity are monitored by the asset and liability committee, based upon policies approved by the Board of Directors. The measure of an institution’s liquidity is its ability to meet its cash commitments at all times with available cash or by conversion of other assets to cash at a reasonable price. The Company’s commercial banking operations generate significant amounts of low cost funds through their deposit gathering operations. For the quarter ended September 30, 2004, the Company’s

ratio of average loans to average deposits was approximately 78.7%. At September 30, 2004, the Company maintained cash balances and short-term investments of approximately $165.2 million, compared with $174.9 million at December 31, 2003. Borrowings at September 30, 2004 were $253.5 million compared to $287.4 million on December 31, 2003.

The Company has available borrowing capacity under certain programs including Federal Home Loan Bank borrowings, Treasury Tax & Loan borrowings, repo lines with investment banks, and advised Fed Funds lines totaling more than $587 million. The Company also has an effective shelf registration statement under which an additional $225 million in debt securities, common stock, preferred stock, or warrants may be offered from time to time.

Aggregate Contractual Obligations


	Payments due by period
	(in thousands)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
FHLB borrowings	$	52,523	$	—	$	—	$	—	$	52,523
Trust preferred securities		125,000		—		—		—		125,000
Data processing contract		5,241		1,048		3,144		1,049		—
Equity investments commitments to limited partnerships		6,587		777		5,810		—		—
Operating leases		19,927		4,856		10,526		1,431		3,114

Total	$	209,278	$	6,681	$	19,480	$	2,480	$	180,637

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

Commitments to originate loans, unused lines of credit, and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments are expected to expire without being drawn upon. Therefore, the amounts presented below do not necessarily represent future cash requirements.

Financial instruments whose contractual amounts represent off-balance sheet risk at September 30, 2004 (in thousands):


Loans and Other Commitments
Commitments to originate loans	$	242,515
Unused home equity lines of credit		312,070
Other unused lines of credit		39,070
Unadvanced portions of construction loans		209,649
Equity investment commitments to limited partnerships		6,587

Standby Letters of Credit
Notional amount fully collateralized by cash		71,124
Notional amount of other standby letters of credit		29,606
Liability associated with letters of credit recorded on balance sheet		661

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

To measure the sensitivity of its income to changes in interest rates, the Company uses a variety of methods, including simulation, valuation techniques and gap analyses. Interest-rate risk is the sensitivity of income to variations in interest rates over both short-term and long-term horizons. The primary goal of interest-rate management is to control this risk within limits approved by the Board of Directors. These limits and guidelines reflect the Company’s tolerance for interest-rate risk. The Company attempts to control interest-rate risk by identifying exposures, quantifying them and taking appropriate actions. For a full discussion of interest-rate risk see “Liquidity and Rate Sensitivity” in the Company’s 2003 annual report on Form 10-K/A. The Company has completed the analysis for September 30, 2004 and believes that there has not been a material change from the prior year-end in its interest-rate exposure.

Item 4.

Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of September 30, 2004, the end of the quarter covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company’s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

PART II - OTHER INFORMATION

Item 6.

EXHIBITS

(a)

EXHIBITS



10.1		Chittenden Corporation Stock Incentive Plan Option Agreement

10.2		Chittenden Corporation Amended & Restated Directors’ Omnibus Long-Term Incentive Plan

31.1		Certification of Chairman, President and Chief Executive Officer, Paul A. Perrault pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Executive Vice President and Chief Financial Officer, Kirk W. Walters pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chairman, President, and Chief Executive Officer, Paul A. Perrault, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Executive Vice President and Chief Financial Officer, Kirk W. Walters, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

CHITTENDEN CORPORATION

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				CHITTENDEN CORPORATION Registrant

November 4, 2004				/S/ PAUL A. PERRAULT
Date				Paul A. Perrault, Chairman, President and Chief Executive Officer



November 4, 2004				/S/ KIRK W. WALTERS
Date				Kirk W. Walters Executive Vice President, Treasurer, and Chief Financial Officer