Chittenden Corp /VT/ - Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Chittenden Corp	NYSE:CHZ	NYSE	Ordinary Share

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, 2007

¨	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. x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of a “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check One):

Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

At October 22, 2007, there were 46,719,345 shares of Chittenden 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, 2007			December 31, 2006
	(in thousands)
Assets:
Cash and cash equivalents	$	276,115		$	199,358
Securities available for sale		919,066			1,137,352
FRB and FHLB stock		9,138			13,403
Loans held for sale		17,891			17,354
Loans:
Commercial & Industrial (C&I)		937,034			853,839
Municipal		159,076			141,522
Multi-family		245,510			216,049
Commercial real estate		2,155,342			1,942,685
Construction		269,349			232,000
Residential real estate		859,048			751,450
Home equity credit lines		352,747			322,124
Consumer		258,279			237,541

Total Loans		5,236,385			4,697,210
Less: Allowance for loan losses		(67,494	)		(62,160	)

Net loans		5,168,891			4,635,050

Accrued interest receivable		34,080			33,123
Other assets		94,839			83,938
Premises and equipment, net		76,066			67,036
Mortgage servicing rights		16,121			14,155
Identified intangibles		20,137			14,996
Goodwill		282,448			216,038

Total assets	$	6,914,792		$	6,431,803

Liabilities:
Deposits:
Demand	$	996,924		$	966,758
Savings		488,833			468,294
NOW		869,028			861,435
CMAs/ Money market		1,697,271			1,655,349
Certificates of deposit less than $100,000		997,583			848,814
Certificates of deposit $100,000 and over		759,986			678,243

Total deposits		5,809,625			5,478,893

Securities sold under agreements to repurchase		118,015			73,611
Other borrowings		167,070			136,409
Accrued expenses and other liabilities		73,098			71,804

Total liabilities		6,167,808			5,760,717

Stockholders’ Equity:
Preferred stock - $100 par value; authorized – 1,000,000 shares; issued and outstanding - none		—			—
Common stock - $1 par value; authorized – 120,000,000 shares; issued and outstanding – 52,434,776 in 2007 and 50,234,661 in 2006		52,435			50,235
Surplus		343,774			276,034
Retained earnings		491,777			468,331
Treasury stock, at cost – 5,806,467 shares in 2007 and 4,874,536 shares in 2006		(135,931	)		(105,666	)
Accumulated other comprehensive income		(9,387	)		(24,008	)
Directors’ deferred compensation to be settled in stock		6,405			6,160
Unearned portion of employee restricted stock		(2,089	)		—

Total stockholders’ equity		746,984			671,086

Total liabilities and stockholders’ equity	$	6,914,792		$	6,431,803

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,
	2007		2006		2007			2006
	(in thousands, except per share amounts)
Interest income:
Loans	$	93,816	$	82,743	$	264,405		$	234,555
Investments		12,786		13,539		38,938			42,353

Total interest income		106,602		96,282		303,343			276,908

Interest expense:
Deposits		36,339		28,868		101,226			77,648
Borrowings		3,387		4,689		14,506			13,487

Total interest expense		39,726		33,557		115,732			91,135

Net interest income		66,876		62,725		187,611			185,773
Provision for credit losses		2,000		1,670		5,000			4,953

Net interest income after provision for credit losses		64,876		61,055		182,611			180,820

Noninterest income:
Investment management and trust		6,614		5,233		18,464			15,708
Service charges on deposits		4,458		4,277		13,022			12,564
Mortgage servicing		449		382		2,151			1,702
Gains on sales of loans, net		1,410		1,624		4,117			4,897
Losses on sales of securities		—		—		(14,137	)		—
Credit card, net		1,377		1,376		3,794			3,837
Insurance commissions, net		1,141		1,275		4,690			4,750
Other		5,910		1,970		12,113			8,794

Total noninterest income		21,359		16,137		44,214			52,252

Noninterest expense:
Salaries		27,188		23,200		74,431			69,906
Employee benefits		5,685		5,637		17,070			16,987
Net occupancy		6,119		5,705		18,453			17,635
Data processing		1,191		1,034		3,397			2,987
Amortization of intangibles		849		665		2,240			1,994
Merger costs		—		—		4,130			—
Other		10,977		9,777		32,126			30,545

Total noninterest expense		52,009		46,018		151,847			140,054

Income before income taxes		34,226		31,174		74,978			93,018
Income tax expense		10,205		9,449		21,893			30,086

Net income	$	24,021	$	21,725	$	53,085		$	62,932

Basic earnings per share	$	0.52	$	0.47	$	1.16		$	1.36
Diluted earnings per share		0.51		0.47		1.15			1.34
Dividends per share		0.22		0.20		0.64			0.58

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

Chittenden Corporation

Consolidated Statements of Cash Flows

(Unaudited)


	For the Nine Months Ended September 30,
	2007			2006
	(in thousands)
Cash flows from operating activities:
Net income	$	53,085		$	62,932
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		5,000			4,953
Depreciation		5,475			5,617
Amortization of intangible assets		2,240			1,994
Amortization of premiums, fees, and discounts, net		4,717			5,762
Share-based payment compensation		2,299			3,041
Recovery of MSR impairment		(400	)		(117	)
Investment securities losses		14,137			—
Prepaid (deferred) income taxes		2,684			(1,575	)
Loans originated for sale		(242,037	)		(225,063	)
Proceeds from sales of loans		243,393			224,866
Gains on sales of loans, net		(4,117	)		(4,897	)
Changes in assets and liabilities:
Accrued interest receivable		991			228
Other assets		(7,489	)		6,898
Accrued expenses and other liabilities		(6,639	)		4,081

Net cash provided by operating activities		73,339			88,720

Cash flows from investing activities:
Cash paid, net of cash acquired in acquisition of Merrill Merchants Bancshares, Inc.		(28,712	)		—
Purchase of FHLB stock		6,578			3,237
Proceeds from sales of securities available for sale		629,047			—
Proceeds from principal payments on securities available for sale		364,243			172,970
Purchases of securities available for sale		(702,277	)		(25,318	)
Loans originated, net of principal repayments		(189,308	)		(199,899	)
Purchases of premises and equipment		(9,788	)		(3,838	)

Net cash provided by (used in) investing activities		69,783			(52,848	)

Cash flows from financing activities:
Net decrease in deposits		(17,175	)		(15,204	)
Net increase in repurchase agreements		44,404			30,797
Net decrease in other borrowings		(32,106	)		(35,033	)
Issuance of subordinated debt		—			—
Common stock transactions – net		7,283			3,640
Dividends on common stock		(29,140	)		(26,992	)
Repurchase of common stock		(39,631	)		(28,394	)

Net cash used in financing activities		(66,365	)		(71,186	)

Net increase (decrease) in cash and cash equivalents		76,757			(35,314	)
Cash and cash equivalents at beginning of period		199,358			180,707

Cash and cash equivalents at end of period	$	276,115		$	145,393

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	115,057		$	92,434
Income taxes		25,114			32,017
Non-cash investing and financing activities:
Loans transferred to other real estate owned		244			424,
Issuance of treasury and restricted stock		1,102			2,995
Assets acquired and liabilities assumed through acquisitions:
Fair value of assets acquired, including core deposit intangibles		464,558			—
Fair value of liabilities assumed		419,670			—
Equity issued in common stock		66,913			—
Cash paid		44,384			—
Goodwill acquired		66,410			—

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 significant accounting policies of Chittenden Corporation (the “Company”) are described in Note 1 of the Notes to Consolidated Financial Statements included in its 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For interim reporting purposes, the Company follows the same accounting policies and considers each interim period as an integral part of an annual period. Certain amounts presented for the period have been reclassified to conform with the presentation used in the current period.

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely–than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 31, 2006 (See Note 9 for additional information).

NOTE 2 – ACQUISITIONS AND SALES

On May 31, 2007, Chittenden acquired Merrill Merchants Bancshares, Inc., headquartered in Bangor, Maine, and its subsidiary Merrill Merchants Bank for $111.3 million in cash and stock. Shareholders of the former Merrill Merchants Bancshares, Inc. who elected cash received all of their consideration in cash at the rate of $31.00 per share for each share of Merrill Merchants common stock. Shareholders who elected to receive Chittenden common stock received all of their consideration in the form of Chittenden common stock at the rate of 1.02 shares of Chittenden common stock for each share of Merrill Merchants common stock. The transaction has been accounted for as a purchase and, accordingly, the operations of Merrill Merchants 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	$	15,672
FRB & FHLB Stock		2,313
Securities available for sale		65,596
Net loans		357,080
Prepaid expenses and other assets		11,800
Premises and equipment		4,717
Identified Intangibles		7,380
Goodwill		66,410
Deposits		(347,907	)
Borrowings		(62,767	)
Accrued expenses and other liabilities		(8,996	)

Total acquisition cost	$	111,298

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, 2006 (in thousands, except EPS):


	For the three months ended September 30,				For the nine months ended September 30,
	2007		2006		2007		2006
Total revenue	$	88,093	$	84,303	$	241,289	$	253,861
Income before income taxes		33,837		33,211		82,369		94,400
Net income	$	23,632	$	22,927	$	57,927	$	41,549
Diluted earnings per share (EPS)	$	0.50	$	0.47	$	1.25	$	0.85

Total revenue includes net interest income and noninterest income.

NOTE 3 – ACQUIRED INTANGIBLE ASSETS


	As of September 30, 2007
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in thousands)
Amortized intangible assets
Core deposit intangibles	$	35,921	$	18,619	$	17,302
Customer list intangibles		3,498		1,645		1,853
Acquired trust relationships		4,000		3,018		982

Total	$	43,419	$	23,282	$	20,137


Aggregate Amortization Expense:
For the three months ended September 30, 2007	$	849
For the nine months ended September 30, 2007		2,240
Estimated Amortization Expense:
For year ended 12/31/08	$	3,397
For year ended 12/31/09		3,397
For year ended 12/31/10		3,280
For year ended 12/31/11		3,117
For year ended 12/31/12		1,921

NOTE 4 – GOODWILL

The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 are as follows:


	Commercial Banking Segment		Other Segment		Total
Balance as of December 31, 2006	$	210,986	$	5,052	$	216,038
Goodwill acquired during year		66,410		—		66,410
Impairment losses		—		—		—

Balance as of September 30, 2007	$	277,396	$	5,052	$	282,448

NOTE 5 – CREDIT QUALITY

The allowance for credit losses consists of two components: 1) the allowance for loan losses which is presented as a contra to total gross loans, and 2) the reserve for unfunded commitments included in other liabilities. 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. For a full discussion on the Company’s allowance for credit loss policies, see “Allowance for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2007

2006

2007

2006

(in thousands)

Beginning allowance for loan losses:

67,400

62,070

62,160

60,822

Provision for credit losses

2,000

1,670

5,000

4,953

Allowance acquired from acquisition of Merrill Merchants

—

4,054

—

Loans charged off

(2,635

)

(2,093

)

(5,915

)

(5,718

)

Loan recoveries

729

506

2,195

2,096

Ending allowance for loan losses:

67,494

62,153

67,494

62,153

Components of allowance for credit losses:

Allowance for loan losses

67,494

62,153

67,494

62,153

Reserve for unfunded commitments

1,172

1,200

1,172

1,200

68,666

63,353

68,666

63,353

NOTE 6 – INVESTMENT SECURITIES

In the second quarter of 2007 Chittenden announced that it was taking steps to reposition its balance sheet through a strategy which involved the sale of approximately $572 million or 52% of the investment securities held in the available-for-sale investment portfolio in accordance with Statement of Financial Accounting Standards No.115 Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). As a result of this strategy, Chittenden recorded a pretax loss on the sales of these securities of approximately $14.1 million. The available-for-sale investment securities, consisting primarily of lower yielding fixed rate agencies, mortgage backed securities and corporate notes, were replaced with shorter duration higher yielding securities. The Company executed the repositioning to reconfigure and shorten the cash flows of the investment portfolio to reflect the addition of Merrill Merchants, and to be consistent with its forecasts for future loan and deposit growth. The portfolio has expected cash flows of $103 million remaining in 2007 and $322 million in 2008 from maturities and expected principal payments on mortgage-backed securities.

NOTE 7 – CAPITAL TRUST SECURITIES

On May 21, 2002, Chittenden Capital Trust I (the “Trust”) issued $125 million of 8% trust preferred securities (“Trust Preferred Securities”) to the public and invested the proceeds from this offering in an equivalent amount of junior subordinated debentures issued by the Company (the “Junior Subordinated Notes”). These Junior Subordinated Notes 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.

Concurrent with the issuance of the Trust Preferred Securities, the Company entered into interest rate swap agreements with two counterparties, pursuant to which the Company received 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. Transaction costs associated with the issuance were amortized on an effective yield basis over five years to the call date. In August 2006, the Company terminated the interest rate swap agreements with both counterparties. On July 1, 2007, the Company redeemed the remaining outstanding ($125 million aggregate principal amount) 8.00% Junior Subordinated Notes due 2032. The redemption of the Junior Subordinated Notes caused the trustee of the Trust to redeem the outstanding ($125 million liquidation amount) Trust Preferred Securities.

NOTE 8 – SUBORDINATED DEBT SECURITIES

On February 14, 2007, the Company issued $125 million in subordinated notes due February 2017. The subordinated debt has a coupon of 5.80% for the first five years and converts to a variable rate in year six that is tied to the three month LIBOR plus 68.5 basis points. The Company utilized the proceeds from the issuance of the subordinated debt, which was net of the $1.4 million of issuance costs, to redeem the Company’s Trust Preferred Securities, which were called on July 1, 2007. The issuance costs will be amortized over the next seven years. Beginning February 14, 2012, the Company may choose to redeem some or all of the notes. The subordinated debt securities ratings are Moody’s A3, DBRS BBBH, Fitch BBB+, and S&P BBB. The subordinated notes are included in the Company’s total capital ratio, including Tier two, for regulatory standards.

NOTE 9 – INCOME TAXES

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely–than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company adopted the provisions of FIN 48 and there has been no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48. However, certain amounts have been reclassified in the statement of financial position in order to comply with the requirements of the statement.

As of January 1, 2007, the Company provided a liability for $2,948,000 of unrecognized tax benefits related to various federal and state income tax matters. Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, is $901,000. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred tax assets, and the federal tax benefit of state income tax items. The Company has provided an additional $118,000 to the reserve for unrecognized tax benefits through the quarter ended September 30, 2007. In the second quarter of 2007, the Company paid $221,000 to the state of New Hampshire related to the 2002 year. Therefore, the reserve has decreased by $103,000 through September 30, 2007. The Company is currently undergoing a state tax audit for the 2003 year with the state of New Hampshire. The Company expects to settle this audit over the next year but does not believe the tax liability, if any, will be material. In addition, the Company is currently under audit by the Internal Revenue Service for the year ending December 31, 2005. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

As of January 1, 2007, the Company has accrued $356,000 of interest related to uncertain tax positions. As of September 30, 2007, the total amount of accrued interest was $541,753. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.

NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income is the total of net income and all other non-owner changes in equity. The following table summarizes reclassification detail for other comprehensive income for each of the three and nine month periods ended September 30, 2007 and 2006 (amounts in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2007		2006		2007			2006
	(In Thousands)				(In Thousands)
Net Income	$	24,021	$	21,725	$	53,085		$	62,932
Unrealized gains (losses) on securities available for sale, net of tax		4,884		11,454		5,413			(506	)
Reclassification adjustments for losses arising during the period, net of tax		—		—		9,115			—
Amortization of actuarial loss		95		—		95			—
Foreign currency translation adjustments		3		—		(2	)		4

Total accumulated other comprehensive income	$	29,003	$	33,179	$	67,706		$	62,430

NOTE 11 – EARNINGS PER SHARE

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2007		2006		2007		2006
	(in thousands except per share information)
Net income	$	24,021	$	21,725	$	53,085	$	62,932
Weighted average common shares outstanding		46,559		45,982		45,622		46,400
Dilutive effect of common stock equivalents		862		522		687		532

Weighted average common and common equivalent shares outstanding		47,421		46,504		46,309		46,932

Basic earnings per share	$	0.52	$	0.47	$	1.16	$	1.36
Diluted earnings per share		0.51		0.47		1.15		1.34

The following table summarizes anti-dilutive stock options which were not included in the computation of common stock equivalents:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Anti-dilutive options		21,068		918,115		43,736		918,115
Weighted average exercise price	$	36.02	$	29.50	$	34.38	$	29.50

NOTE 12 – STOCK PLANS

Stock options are the primary type of share-based payment utilized by the Company. Stock options are awards which allow an employee to purchase shares of the Company’s stock at a fixed price. In accordance with the Company’s Stock Incentive Plan, stock options are granted at an exercise price equal to the Company’s stock price at the date of grant. For the 2007 grants the Company’s Board of Directors changed the option life from ten years to seven years.

The following tables summarize stock option activity during the first nine months of 2007:


	Options		Weighted-Average Exercise Price Per Share
Outstanding at December 31, 2006	3,521,182		$	24.27
Options granted	459,200			31.19
Options exercised	(290,358	)		24.04
Options forfeited	(500	)		31.20
Options expired	(1,978	)		22.89

Outstanding at September 30, 2007	3,687,546		$	25.15
Exercisable at September 30, 2007	3,573,248		$	24.96


Range of Exercise Prices	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Avg. Remaining Contractual Life	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price
$16.19 - $20.70	679,126	3.58	$	19.20	679,126	$	19.60
$20.86 - $22.89	680,654	4.20	$	22.07	680,654	$	22.07
$22.93 - $24.60	615,728	6.44	$	23.98	615,728	$	23.98
$25.11 - $29.11	930,446	6.82	$	27.54	930,446	$	27.54
$29.20 - $31.20	737,856	6.51	$	30.52	623,558	$	30.39
$32.74 - $36.02	43,736	1.09	$	34.38	43,736	$	34.38

$16.19 - $36.02	3,687,546	5.54	$	25.15	3,573,248	$	24.96

The Company estimates the fair value of stock option grants using the Black-Scholes valuation model. The Black-Scholes valuation model uses the following assumptions: expected volatility, expected term of option, risk-free interest rate and dividend yield. Expected volatility estimates are developed by the Company based on historical volatility of the Company’s stock. The Company uses historical data to estimate the expected term of the options. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield in effect at the grant date. The dividend yield represents the expected dividends on the Company stock. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are consistent with SFAS 123R. Estimates of fair value are not intended to predict the actual future value ultimately realized by employees who receive share-based awards, and subsequent events are not indicative of the reasonableness of original estimates of fair value made by the Company under SFAS 123R.

The following table presents the key input assumptions for the Black-Scholes valuation model:


	Nine Months Ended September 30,
	2007			2006
Expected term (years)		4.46			4.79
Volatility		22.45			24.67
Risk-free interest rate		4.47	%		4.71	%
Dividend yield		2.57	%		2.47	%
Fair value per share	$	6.09		$	6.55

The total intrinsic value (market value on date of exercise less grant price) of options exercised during the three months ended September 30, 2007 and 2006, was $1.6 million and $277,000, respectively. The total cash received from employees as a result of employee stock option exercises for the quarters ended September 30, 2007 and 2006 was approximately $4.1 million and $1.2 million, respectively. The tax benefit realized as a result of the stock option exercises was $476,500 in the third quarter of 2007 compared with $84,000 for the same period in 2006.

As of September 30, 2007, there was $692,000 of unearned compensation cost related to non-vested stock options granted in 2007 under the plan. The Company expects to recognize the expense over the next quarter. The total compensation cost related to options during the quarters ended September 30, 2007 and September 30, 2006 was $691,000 and $784,000, respectively. These amounts are included in salary expense in the accompanying consolidated Statements of Income.

NOTE 13 – PENSION PLAN

The Company sponsors a qualified defined benefit pension plan (“Pension Account Plan”). On December 31, 2005, benefits accrued under the Pension Account Plan were frozen based on participants’ current service and pay levels. Effective January 1, 2006, the Company’s annual contribution to its Incentive Savings and Profit Sharing Plan was enhanced for all eligible employees.

The components of net periodic pension expense, which is included in employee benefits expense in the consolidated statements of income, are presented below.


	Nine Months Ended September 30,
	2007			2006
	(in thousands)
Service cost	$	—		$	746
Interest cost		2,908			2,882
Expected return on plan assets		(4,008	)		(3,901	)
Net amortization:
Prior service cost		—			—
Net actuarial loss		95			99
Transition cost		—			—

Total amortization		95			99

Net periodic pension income	($	1,005	)	$	(174	)

As previously disclosed in the Company’s financial statements for the year ended December 31, 2006, due to prior contributions made in excess of the minimum required amounts, the Company does not anticipate a required contribution during 2007. The Company made voluntary contributions totaling $1.5 million to the Pension Account Plan during 2006.

NOTE 14 – 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 six Commercial Banking subsidiaries, Chittenden Trust Company, The Bank of Western Massachusetts, Flagship Bank and Trust Co., Ocean Bank, Maine Bank and Trust Co. and Merrill Merchants (the “Banks”), which provide similar products and services, and 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 deposits, business services, investment management and trust, 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 commissions from insurance related products and services, as well as other operations associated with the parent holding company. The consolidation adjustments reflect certain eliminations of inter-segment revenue, cash and parent company investments in subsidiaries


For the Three Months Ended September 30, 2007	Commercial Banking		Other			Consolidation Adjustments			Consolidated
	(in thousands)
Net interest income (1)	$	68,640	$	(1,764	)	$	—		$	66,876
Noninterest income		20,132		1,227			—			21,359
Provision for credit losses		2,000		—			—			2,000
Noninterest expense		49,325		2,684			—			52,009

Net income (loss) before income tax		37,447		(3,221	)		—			34,226
Income tax expense/(benefit)		11,741		(1,536	)		—			10,205

Net income (loss)	$	25,706	$	(1,685	)	$	—		$	24,021

End of Period Assets	$	7,088,228	$	939,954		$	(1,113,390	)	$	6,914,792


For the Three Months Ended September 30, 2006	Commercial Banking		Other			Consolidation Adjustments			Consolidated
	(in thousands)
Net interest income (1)	$	65,300	$	(2,575	)	$	—		$	62,725
Noninterest income		15,195		942			—			16,137
Provision for loan losses		1,670		—			—			1,670
Noninterest expense		44,621		1,397			—			46,018

Net income (loss) before income tax		34,204		(3,030	)		—			31,174
Income tax expense/(benefit)		10,664		(1,215	)		—			9,449

Net income (loss)	$	23,540	$	(1,815	)	$	—		$	21,725

End of Period Assets	$	6,622,770	$	877,316		$	(1,033,997	)	$	6,466,089

For the Nine Months Ended September 30, 2007	Commercial Banking		Other			Consolidation Adjustments			Consolidated
	(in thousands)
Net interest income (1)	$	195,386	$	(7,775	)	$	—		$	187,611
Noninterest income		39,198		5,016			—			44,214
Provision for credit losses		5,000		—			—			5,000
Noninterest expense		147,170		4,677			—			151,847

Net income (loss) before income tax		82,414		(7,436	)		—			74,978
Income tax expense/(benefit)		25,453		(3,560	)		—			21,893

Net income (loss)	$	56,961	$	(3,876	)	$	—		$	53,085

End of Period Assets	$	7,088,228	$	939,954		$	(1,113,390	)	$	6,914,792

For the Nine Months Ended September 30, 2006	Commercial Banking		Other			Consolidation Adjustments			Consolidated
	(in thousands)
Net interest income (1)	$	192,603	$	(6,830	)	$	—		$	185,773
Noninterest income		47,748		4,504			—			52,252
Provision for loan losses		4,953		—			—			4,953
Noninterest expense		135,526		4,528			—			140,054

Net income (loss) before income tax		99,872		(6,854	)		—			93,018
Income tax expense/(benefit)		32,753		(2,667	)		—			30,086

Net income (loss)	$	67,119	$	(4,187	)	$	—		$	62,932

End of Period Assets	$	6,622,770	$	877,316		$	(1,033,997	)	$	6,466,089

(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.

NOTE 15 – STOCKHOLDERS’ EQUITY

On October 17, 2007 the Company’s Board of Directors declared the quarterly dividend of $0.22 cents per share, which will be paid on November 9, 2007 to shareholders of record on October 26, 2007. Due to the Company’s anticipated acquisition by People’s United, there were no stock repurchases made in the third quarter of 2007, nor are any repurchases expected for the remainder of the year.

NOTE 16 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, to meet customers’ financing needs 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 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 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, plant and equipment, and real estate.

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

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

Other commitments refer to the Company’s equity investments in limited partnerships for CRA related low income housing projects.

Financial instruments whose contractual amounts represent off-balance sheet risk at September 30, 2007 (in thousands):


Loan Commitments
Commitments to originate loans	$	171,509
Unused home equity lines of credit		451,765
Unused portions of business credit card lines		47,323
Unadvanced portions of C&I loans		587,235
Unadvanced portions of commercial real estate and construction loans		255,306

Standby Letters of Credit
Notional amount collateralized by cash	$	46,704
Notional amount of other standby letters of credit		54,554
Liability associated with letters of credit recorded on balance sheet		1,011

Other Commitments
Equity investment commitments	$	8,702

NOTE 17 – PENDING MERGERS AND ACQUISITIONS

On June 27, 2007, the Company announced that it had signed a definitive merger agreement to be acquired by People’s United Financial, Inc. (“People’s United Financial”), in a stock and cash transaction valued at approximately $1.9 billion of which approximately 55% is in cash and 45% in People’s United Financial stock. The transaction, which is expected to close in the first quarter of 2008, remains subject to approvals by regulators and the Company’s shareholders. At closing, Chittenden shareholders will have the right, subject to proration, to elect to receive cash or People’s United Financial common stock, in either case having a value equal to $20.35 plus the product of .8775 times the average closing price of People’s United Financial shares for the five day period prior to the closing. People’s United Financial currently operates 160 branches, 75 of which offer seven-day banking in Super Stop & Shop locations across Connecticut. Chittenden currently has 133 branches in New England through six bank subsidiaries.

On June 4, 2007, the Company announced that it had signed a definitive merger agreement to acquire Community Bank & Trust Company (“Community Bank”), for approximately $124.1 million in cash and stock as of announcement date. The acquisition is expected to close in the fourth quarter of 2007; however completion of the acquisition remains subject to the approval of the shareholders of Community Bank, as well as various regulatory agencies. Under the terms of the merger agreement, October 24, 2007 has been set as the deadline for shareholders of Community Bank to elect to receive $33.37 per share in cash, with total cash consideration of approximately $33.4 million (assuming all stock options are cashed out at closing), or 1.1293 shares of Chittenden common stock for each share of Community Bank stock they own, with total stock consideration of approximately 3.1 million shares of Chittenden common stock. In addition, October 24, 2007 has been set as the shareholder meeting to approve the Chittenden and Community Bank merger. As a result of the transaction, Community Bank will merge into Ocean Bank.

NOTE 18 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities , which gives entities the option to measure eligible financial assets, and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement is effective as of the beginning of a company’s first fiscal year after November 15, 2007. The Company is in the process of analyzing the impact of SFAS 159.

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, among others: changes in general, national or regional economic conditions; changes in loan default and charge-off rates; reductions in deposit levels necessitating increased borrowings to fund loans and investments; changes in interest rates; changes in levels of income and expense in noninterest income and expense-related activities; changes in the methods or rates used by governments to assess taxes against the Company including income that is exempted from taxation or expenses that are not deductible for tax purposes; competition and its effect on pricing, spending, third-party relationships and revenues; failure of the parties to satisfy the closing conditions for the Chittenden/Community merger or the People’s United/Chittenden merger in a timely manner or at all; failure to obtain governmental approvals of either merger, or imposition of adverse regulatory conditions in connection with such approvals; failure of the Community shareholders to approve the Chittenden/Community merger or the Company’s shareholders to approve the People’s United/Chittenden merger; costs or difficulties related to the integration of the businesses following the completion of each merger; disruptions to the Company’s business as a result of the announcement and pendency of the People’s United/Chittenden merger; and other risk factors identified from time to time in the Company’s periodic filings with the Securities and Exchange Commission, including under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and in Item 1A of this report.

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 or non-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 Annual Report on Form 10-K for the year ended December 31, 2006. 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 Credit Losses (ACL) . The allowance for credit losses consists of two components: (1) the allowance for loan losses and (2) the reserve for unfunded commitments. The allowance for loan losses is established through a charge against current earnings to the provision for credit 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 U.S. 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 reserve for unfunded commitments is based on management’s estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit, merchant processing activity and unused loan credit commitments. Adequacy of the reserve is determined using a consistent, systematic methodology, similar to the one that analyzes the allowance for loan losses. Management must also estimate the likelihood that these commitments would be funded and become loans. This is done by evaluating the historical utilization of each type of unfunded commitment and estimating the likelihood that the current utilization rates on lines available at the balance sheet date could change in the future. The Company’s methodology with respect to the assessment of the adequacy of the allowance for credit losses is more fully discussed in its Annual Report on Form 10-K for the year ended December 31, 2006.

Income Taxes. On January 1, 2007, the Company adopted Financial Accounting Interpretation Number 48 (“FIN 48”) to account for uncertain tax positions. FIN 48 prescribes a recognition threshold of more-likely –than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.

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, 2007, there were no valuation allowances set aside against any deferred tax assets.

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

Management Overview

For the quarter ended September 30, 2007, the Company earned $24.0 million, or $0.51 per diluted share compared to $21.7 million or $0.47 per diluted share for the same period a year ago. For the first nine months of 2007, GAAP earnings were $53.1 million or $1.15 per diluted share. Core earnings (non-GAAP) for the first nine months of 2007 were $65.6 million or $1.42 per diluted share, compared to $62.9 million or $1.34 per diluted share for the same period of a year ago. A reconciliation table of GAAP to non-GAAP financial measures for the estimated impact on the Company’s year to date earnings per share is included below. Non-GAAP measures typically adjust GAAP performance measures to exclude the effects of significant gains, losses or expenses unusual in nature and not expected to recur. The Company’s management uses non-GAAP measures for operational and investment decisions and believes that these measures are among several useful measures for understanding its operating results, including in relation to its performance to prior periods, and financial condition. However, these measures should not be construed as a substitute for GAAP measures. Non-GAAP measures should be read and

used in conjunction with the Company’s reported GAAP operating results and financial information. The following table reconciles the year to date GAAP to non-GAAP measures referenced above (no adjustments were made to the quarter to date GAAP numbers):


	For the nine months ended 9/30/07
Net income (GAAP)	$	53,085
Losses on sales of securities (after tax)		9,676
Non recurring charge for Merrill Merchants (after tax)		2,859

Core net income (non-GAAP)	$	65,620

Fully diluted earnings per share (GAAP)	$	1.15
Fully diluted core earnings per share (non-GAAP)	$	1.42

Results of Operations

Net interest income on a tax equivalent basis for the three months ended September 30, 2007 was $68.1 million, which was up $4.9 million or 7.8% from the second quarter of 2007 and $4.6 million from the same period a year ago. The increase in net interest income was primarily attributable to the acquisition of Merrill Merchants. The net yield on earning assets was 4.33% for the third quarter of 2007, an increase of 19 basis points on a linked quarter basis and 10 basis points from the third quarter of 2006. The increases in the net interest margin from both periods were driven by the redemption of the TPS and the securities portfolio repositioning in the second quarter of 2007.

Net interest income on a tax equivalent basis for the nine months ended September 30, 2007 was $191.1 million compared with $188.0 million for the same period a year ago. The net interest margin was 4.18%, a decrease of 4 basis points, compared to 4.22% for the same period a year ago. The decline from a year ago was driven by an increase in funding costs, which was partially offset by an increase in the yield on interest earning assets and a higher average balance sheet.

For the third quarter of 2007 GAAP return on average equity (ROE) was 13.04% up slightly from the same period in 2006. GAAP return on average assets (ROA) was 1.39% for the third quarter of 2007 up from 1.33% for the third quarter of last year. The nine month GAAP ROE was 10.27% through September 30, 2007. The Company’s year to date Core ROE (non-GAAP) was 12.68%, compared with 12.65% for the same period in 2006. GAAP ROA was 1.07% for the nine-month period ended September 30, 2007. Core ROA (non-GAAP) of 1.32% was effectively up two basis points from the same period in 2006. The following table reconciles the GAAP to non-GAAP measures.


	For the nine months ended
	9/30/07			9/30/06
Net income (GAAP)	$	53,085		$	62,932
Losses on sales of securities (after tax)		9,676			—
Non recurring charge for Merrill Merchants (after tax)		2,859			—

Core net income (non-GAAP)	$	65,620		$	62,932

Average Equity (GAAP)	$	691,209		$	664,981
Non recurring charge for Merrill Merchants (after tax)		956			—

Core Average Equity (non-GAAP)	$	692,165		$	664,981

Average Assets (GAAP)

Return on Average Equity		10.27	%		12.65	%
Core Return on Average Equity		12.68	%		12.65	%
Return on Average Assets		1.07	%		1.30	%
Core Return on Average Assets		1.32	%		1.30	%

The following table presents an analysis of average rates and yields on a fully taxable equivalent basis for the three months and nine months ended September 30, 2007 and 2006:


For the Three Months Ended September 30, 2007					For the Three Months Ended September 30, 2006							Description	For the Nine Months Ended September 30, 2007							For the Nine Months Ended September 30, 2006
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:

$ 947,860	$	18,823	7.88	%	$	863,524		$	17,298	7.95	%	C&I	$	904,253		$	53,944	7.98	%	$	845,080		$	48,731	7.71	%
163,098		2,355	5.78			141,345			2,045	5.79		Municipal		154,613			6,757	5.83			158,602			6,055	5.09
247,621		4,526	7.15			207,717			3,706	6.98		Multifamily		240,661			12,901	7.07			200,973			10,485	6.88
2,120,653		38,585	7.22			1,915,610			33,704	6.98		Commercial real estate		2,026,798			108,633	7.17			1,858,681			95,417	6.86
252,148		4,829	7.49			215,894			4,165	7.55		Construction		236,180			13,429	7.50			214,217			11,833	7.28
875,629		14,182	6.48			771,780			12,334	6.39		Residential		816,000			39,510	6.52			759,203			34,986	6.20
349,634		7,008	7.95			322,452			6,524	8.03		Home equity		333,111			19,945	8.01			318,144			18,338	7.71
261,011		4,416	6.71			250,665			3,720	5.88		Consumer		245,502			11,882	6.47			252,735			10,938	5.77

5,217,654		94,724	7.20			4,688,987			83,496	7.07		Total loans		4,957,118			267,001	7.19			4,607,635			236,783	6.86
												Investments:
869,217		10,666	4.91			1,269,409			13,526	4.26		Taxable		983,324			33,201	4.50			1,330,632			42,256	4.23
58,844		998	6.73			498			8	6.52		Tax-favored securities		74,512			3,431	6.16			498			24	6.52
49,111		651	5.26			280			2	3.12		Interest-bearing deposits in banks		17,900			700	5.23			280			6	3.05
56,101		745	5.27			425			6	5.23		Federal funds sold		64,438			2,545	5.28			2,328			75	4.29

6,250,927		107,784	6.85			5,959,599			97,038	6.47		Total interest-earning assets		6,097,292			306,878	6.72			5,941,373			279,144	6.27

664,674						585,321						Noninterest-earning assets		606,319							577,460
(68,023)						(62,793	)					Allowance for loan losses		(65,205	)						(62,173	)

$6,847,578					$	6,482,127						Total assets	$	6,638,406						$	6,456,660


												Liabilities and stockholders’ equity
												Interest-bearing liabilities:
501,830		1,237	0.98			498,804			1,050	0.85		Savings		480,625			3,313	0.92	%		486,959			2,530	0.69
861,712		2,118	0.98			851,371			1,631	0.76		NOW		848,510			6,025	0.95			867,544			4,628	0.71
1,675,966		13,674	3.24			1,605,212			11,433	2.83		CMAs/money market		1,624,697			38,413	3.16			1,602,800			30,459	2.54
1,001,581		10,057	3.98			873,690			7,532	3.42		Certificates of deposit under $100,000		931,173			27,321	3.92			855,926			20,489	3.20
733,422		9,254	5.01			662,562			7,222	4.32		Certificates of deposit $100,000 and over		722,244			26,154	4.84			647,900			19,542	4.03

4,774,511		36,340	3.02			4,482,639			28,868	2.55		Total interest-bearing deposits		4,607,249			101,226	2.94			4,461,129			77,648	2.33
113,810		1,013	3.53			104,068			1,008	3.84		Repurchase agreements		99,268			2,671	3.60			88,642			2,259	3.41
166,899		2,373	5.64			208,362			3,681	7.01		Other borrowings		231,727			11,835	6.83			245,065			11,228	6.13

5,055,220		39,726	3.12			4,795,069			33,557	2.78		Total interest-bearing liabilities		4,938,244			115,732	3.13			4,794,836			91,135	2.54


												Noninterest-bearing liabilities:
990,404						960,255						Demand deposits		940,401							934,845
71,394						63,839						Other liabilities		68,552							61,998

6,117,018						5,819,163						Total liabilities		5,947,197							5,791,679

730,560						662,964						Stockholders’ equity		691,209							664,981

$6,847,578					$	6,482,127						Total liabilities and stockholders’ equity	$	6,638,406						$	6,456,660

	$	68,058						$	63,481			Net interest income				$	191,145						$	188,009


			3.73	%						3.69	%	Interest rate spread (2)						3.59	%						3.73	%
			4.33	%						4.23	%	Net yield on earning assets (3)						4.18	%						4.22	%

(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 tables attribute changes in the Company’s net interest income (on a fully taxable equivalent basis) to changes in either average balances or average rates for the three and nine months ended September 30, 2007. Changes due to both interest rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each.


QTD 2007 Compared with QTD 2006							Description	YTD 2007 Compared with YTD 2006
Increase (Decrease) in Net Interest Income Due to:				Total Increase (Decrease)				Increase (Decrease) in Net Interest Income Due to:						Total Increase (Decrease)
Average Rate	Average Balance							Average Rate			Average Balance
Average Rate	Average Balance							Average Rate			Average Balance
(in thousands)								(in thousands)
							Interest income:
							Loans:
$ (151)	$	1,676		$	1,525		C&I	$	1,683		$	3,530		$	5,213
(4)		314			310		Municipal		876			(174	)		702
91		729			820		Multifamily		288			2,128			2,416
1,150		3,731			4,881		Commercial real estate		4,205			9,011			13,216
(30)		694			664		Construction		347			1,249			1,596
167		1,681			1,848		Residential real estate		1,774			2,750			4,524
(61)		545			484		Home equity		711			896			1,607
526		170			696		Consumer		1,295			(351	)		944

1,688		9,540			11,228		Total loans		11,179			19,039			30,218

							Investments:
2,050		(4,910	)		(2,860	)	Taxable		2,672			(11,727	)		(9,055	)
0		990			990		Tax-favored		(1	)		3,408			3,407
2		647			649		Interest-bearing deposits		5			689			694
0		739			739		Federal funds sold		17			2,453			2,470

3,740		7,006			10,746		Total interest income		13,872			13,862			27,734

							Interest expense:
(157)		(30	)		(187	)	Savings		(827	)		44			(783	)
(462)		(25	)		(487	)	NOWs		(1,532	)		135			(1,397	)
(1,664)		(577	)		(2,241	)	CMAs/Money Market		(7,436	)		(518	)		(7,954	)
(1,241)		(1,284	)		(2,525	)	Certificates of deposit under $100,000		(4,624	)		(2,208	)		(6,832	)
(1,138)		(894	)		(2,032	)	Certificates of deposit $100,000 and over		(3,920	)		(2,692	)		(6,612	)
83		(88	)		(5	)	Repurchase agreements		(126	)		(286	)		(412	)
718		590			1,308		Other borrowings		(1,288	)		681			(607	)

(3,861)		(2,308	)		(6,169	)	Total interest expense		(19,753	)		(4,844	)		(24,597	)

$ (121)	$	4,698		$	4,577		Change in net interest income	$	(5,881	)	$	9,018		$	3,137

Noninterest Income

Noninterest income was $21.4 million for the third quarter of 2007 as compared to $16.1 million for the same period a year ago. The increase was driven by higher investment management and trust revenue, other noninterest income and $1.7 million from Merrill Merchants. The higher investment management and trust revenue was a result of increased assets under management and higher sales at Chittenden Securities, Inc. Other noninterest income increased $3.9 million due to a gain on the sale of MasterCard shares of $2.4 million and the recognition in 2006 of a $372,000 loss related to the early termination of the interest rate swaps on the Company’s TPS and the reduction of $275,000 in accrued interest on income tax refunds.

Gains on sales of loans declined $214,000 from the third quarter of 2006. The Company originated $124 million and sold $84 million in residential real estate loans during the third quarter of 2007, which was up from $113 million and $78 million, respectively, during the same period in 2006. For the first nine months of 2007, gains on sales of loans declined $780,000. The Company originated $335 million and sold $242 million in residential real estate loans during the first nine months of 2007, which was up from $316 million and $223 million, respectively, during the same period in 2006. Volatility in interest rates can significantly impact mortgage origination and sales volumes, gains on sales of loans, amortization of mortgage servicing assets and related impairment recoveries based on the fair value of those assets as measured based on current interest rates. During 2007, mortgage interest rates have moved steadily but gradually upward, leading to slower prepayment speeds and as a result lower amortization and higher impairment recoveries. During the first nine months of 2007, the Mortgage servicing rights, or MSR amortization was $2.2 million as compared to $2.4 million for the same period in 2006. The Company recorded an impairment recovery of $400,000 during 2007 as compared to $118,000 for the same period a year ago. The remaining impairment reserve for particular stratas in the MSR’s at September 30, 2007 was $206,000. The Company services approximately $2.2 billion in mortgages for others and has net capitalized mortgage-servicing rights of $16.1 million. As a result, the MSR asset as a percentage of loans serviced was approximately 72 basis points as of September 30, 2007.

Noninterest Expense

Noninterest expense was $52.0 million for the third quarter of 2007, an increase of $6.0 million from the same period a year ago and a decrease of $542,000 from the second quarter of 2007. The increase in noninterest expense from the third quarter of 2006 was primarily due to the operating costs of Merrill Merchants ($3.3 million) and higher levels of incentive compensation ($2.0 million). On a linked quarter basis the decline in noninterest expense was driven by lower legal expenses and non-recurring merger costs of $4.1 million, which was partially offset by operating costs at Merrill Merchants of $2.1 million and higher incentive accruals of $2.0 million.

For the first nine months of 2007, noninterest expenses were $151.8 million, compared to $140.0 million in 2006. Excluding Merrill Merchants’ operating expenses of $4.4 million and non-recurring merger costs of $4.1 million, noninterest expenses would have been $143.3 million. The increase of $3.3 million, excluding Merrill Merchants, was primarily attributable to higher salary, data processing and net occupancy costs, which were partially offset by lower benefit expenses. The increase in salary was due to higher incentive accruals of $1.3 million. Net occupancy expense increased from 2006 primarily due to higher rent and seasonal expenses.

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 effective income tax rate was 29.8% in the third quarter of 2007 and 29.2% for the first nine months of 2007 compared with 30.3% and 32.3% for the respective periods in 2006. The lower effective income tax rates were primarily attributable to higher low income housing credits as well as a first quarter 2007 change in the tax accounting method for a customer list intangible related to a prior acquisition.

As of January 1, 2007, the Company has provided a liability for $2,948,000 of unrecognized tax benefits related to various federal and state income tax matters. Of this liability, the amount that would impact the Company’s effective tax rate, if recognized, is $901,000. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred tax assets, and the federal tax benefit of state income tax items. The Company has provided an additional $118,000 to the reserve through the quarter ended September 30, 2007. In addition in the second quarter of 2007, the Company paid $221,000 to the state of New Hampshire related to the 2002 year. Therefore, the reserve has decreased by $103,000 through September 30, 2007. The Company is currently undergoing a state tax audit for the 2003 year with the state of New Hampshire. The Company expects to settle this audit over the next year but does not believe the tax liability, if any, will be material. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2004 through 2006. The Company and its subsidiaries state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2003 through 2006. As of January 1, 2007, the Company has accrued $356,000 of interest related to uncertain tax positions. As of September 30, 2007, the total amount of accrued interest was $541,753. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.

Financial Position

Total loans at September 30, 2007 increased $539 million from December 31, 2006 and $559 million from the same period a year ago. The increases were attributable to continued growth across the various commercial loan categories as well as the inclusion of Merrill Merchants, which contributed $366 million at September 30, 2007. The Company’s securities portfolio declined by 19% from $1.1 billion at December 31, 2006 to $919 billion at September 30, 2007. The decrease in the securities portfolio from December 31, 2006 was primarily utilized for the common stock repurchases and to fund loan growth, which was in excess of the Company’s deposit growth. (Further discussion on the repositioning is located in the “Liquidity” section below.) The commercial real estate portfolio excluding Merrill Merchants experienced growth of 2.4% on a linked quarter basis and 5.7% from the same period of

a year ago. The growth in the commercial real estate portfolio was throughout the franchise and was not specifically concentrated in any one industry. In addition, over 62% of the commercial real estate portfolio is owner occupied. The emphasis on the construction portfolio relates to the financing of projects for commercial customers, as well as individual consumer loans. Accordingly, this portfolio is comprised of approximately 28% in individual consumer construction loans, 26% in loans to residential developers, 23% in loans to commercial customers for owner occupied properties and 23% to commercial customers for investor properties.

Total deposits at September 30, 2007 increased $331 million from December 31, 2006 and $310 million from September 30, 2006. The increase in both periods was a result of the Merrill Merchants acquisition, which contributed $351 million at September 30, 2007. Approximately 41% of the Company’s deposit base is comprised of demand, savings and NOW accounts, which had an overall weighted average cost of 57 basis points in the third quarter of 2007. In addition, approximately 29% of the Company’s deposits are held in CMA/Money Market accounts with an average weighted cost for the second quarter of 2007 of 324 basis points. The overall cost of the Company’s deposits in the third quarter of 2007 was 250 basis points (including noninterest bearing deposits) and the Company’s all in cost of funds was 261 basis points.

Borrowings at September 30, 2007 were $285 million, an increase of $62 million from September 30, 2006, and a decline of $120 million from June 30, 2007. The increase from a year ago related to the acquisition of Merrill Merchants. The decline on a linked quarter basis was due to the July 1, 2007 redemption of the Company’s $125 million of 8.0% TPS. The redemption of the TPS reduced interest costs and increased the net interest margin approximately 7 basis points in the third quarter of 2007.

Credit Quality

The provision for credit losses was $2 million for the third quarter of 2007, up $330,000 from the third quarter of 2006. The increase is due to higher net charge-offs and commercial loan growth. As of September 30, 2007, nonperforming assets (“NPAs”) were $29.1 million, up $3 million from the same period in 2006. The increase from September 30, 2006 primarily related to $1.1 million of NPAs acquired from Merrill Merchants and one CRE relationship in Vermont. As a percentage of total loans, NPAs were 56 basis points, which was consistent with the third quarter of 2006. Net charge-off activity totaled $1.9 million for the third quarter of 2007, which was up $319,000 from the third quarter of 2006 primarily due to higher consumer loan charge-offs.

A summary of the Company’s credit quality follows:


	9/30/07			6/30/07			12/31/06			9/30/06
	(in thousands)
Nonaccrual loans	$	28,801		$	29,113		$	20,094		$	25,453
Other real estate owned (OREO)		285			426			264			636

Total NPAs	$	29,086		$	29,539		$	20,358		$	26,089


Loans past due 90 days or more and still accruing interest	$	3,810		$	4,141		$	3,352		$	3,196
NPAs as % of loans plus OREO		0.56	%		0.58	%		0.43	%		0.56	%
ACL as % of loans		1.31	%		1.34	%		1.35	%		1.35	%
ACL as % of loans (excluding municipal loans)		1.35	%		1.37	%		1.39	%		1.40	%
ACL as % of nonaccrual loans		238.41	%		235.72	%		315.32	%		248.90	%

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

Three Months

Ended

September 30,

Nine Months

Ended

September 30,

2007

2006

2007

2006

(in thousands)

Beginning allowance for loan losses:

67,400

62,070

62,160

60,822

Provision for credit losses

2,000

1,670

5,000

4,953

Allowance acquired from acquisition of Merrill Merchants

—

4,054

—

Loans charged off

(2,635

)

(2,093

)

(5,915

)

(5,718

)

Loan recoveries

729

506

2,195

2,096

Ending allowance for loan losses:

67,494

62,153

67,494

62,153

Components of allowance for credit losses:

Allowance for loan losses

67,494

62,153

67,494

62,153

Reserve for unfunded commitments

1,172

1,200

1,172

1,200

68,666

63,353

68,666

63,353

For a full discussion on the Company’s allowance for credit loss policies, see “Allowance for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Capital

Stockholders’ equity totaled $747 million at September 30, 2007, compared to $671 million at December 31, 2006. Net income of $53 million for the first nine months of 2007 and an after tax increase of $15 million in the fair market value of the Company’s securities portfolio increased stockholders’ equity, which was offset by common stock dividend payments of $29.1 million and the Company’s repurchase of $39.6 million in common stock. Tier one capital, consisting of common equity measured 8.20% of risk-weighted assets at September 30, 2007. Total capital, including the Tier two allowance for credit losses, and the subordinated debt, was 11.74% of risk-weighted assets and the leverage capital ratio was 6.84%. These ratios placed the Company in the “well-capitalized” category according to regulatory standards. As a result of the redemption of the Trust Preferred Securities, the regulatory capital ratios declined from the levels at June 30, 2007.

In June 2004, the central bank governors of the member countries of the Basel Committee approved a revised capital adequacy framework generally known as the “Basel II Framework.” The Basel II Framework is a three-pillar capital adequacy approach versus the flat 8% of risk-weighted assets (as defined) currently used. The Basel II Framework also permits qualifying bank institutions to use more advanced approaches for measuring operational risk and credit risk. In order to address competitive equity issues for community and regional banking organizations that could arise under the bifurcated regulatory capital framework following the implementation of the Basel II Framework, the United States bank regulatory agencies issued an advance notice of proposed rulemaking in October 2005, known as Basel IA, which would make some aspects of the Basel II Framework applicable in modified form to smaller banks. After receiving extensive comment, the agencies proposed a notice of proposed rulemaking in December 2006. It remains uncertain whether the rules will be adopted and, even if adopted, how closely the final Basel IA rules will resemble the rules described in the notice of proposed rulemaking and the effective date of such rules.

Liquidity

The Company’s liquidity is 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. For the quarter ended September 30, 2007, the Company’s ratio of average loans to average deposits was approximately 90.5%. At September 30, 2007, the Company maintained cash balances and short-term investments of $276 million, compared with $199 million at December 31, 2006.

Repurchase agreements and other borrowings at September 30, 2007 were $285 million compared to $210 million on December 31, 2006. The increase resulted from the addition of Merrill Merchants. The Company utilized the proceeds from the issuance of the subordinated debt securities to redeem its Trust Preferred Securities on July 1, 2007. The Company has available borrowing capacity under certain programs including the FHLB, U.S. Treasury, repurchase agreement lines, and advised Fed Funds lines totaling more than $1.4 billion. The Company also has an effective shelf registration statement under which an additional $100 million in debt securities, common stock, preferred stock, or warrants may be offered from time to time.


Contractual Obligations	Payments due by period
	(in thousands)
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
FHLB advances	$	19,198	$	4,231	$	9,166	$	2,760	$	3,041
Subordinated debt securities		125,000		—		—		—		125,000
Data processing contract		3,144		1,797		1,347		—		—
Equity investment commitments		8,702		5,519		3,183		—		—
Operating leases.		31,191		5,611		8,651		6,090		10,839

Total	$	187,235	$	17,158	$	22,347	$	8,850	$	138,880

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

Financial instruments whose contractual amounts represent off-balance sheet risk at September 30, 2007 (in thousands):


Loan Commitments
Commitments to originate loans	$	171,509
Unused home equity lines of credit		451,765
Unused portions of business credit card lines		47,323
Unadvanced portions of C&I loans		587,235
Unadvanced portions of commercial real estate and construction loans		255,306

Standby Letters of Credit
Notional amount collateralized by cash	$	46,704
Notional amount of other standby letters of credit		54,554
Liability associated with letters of credit recorded on balance sheet		1,011

Other Commitments
Equity investment commitments to limited partnerships	$	8,702

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 “Qualitative and Quantitative Disclosures about Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company has completed the analysis for September 30, 2007 and is slightly liability sensitive.

Item 4.

Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of September 30, 2007, 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. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2007 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 control 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 1.

Legal Proceedings

None

Item 1A.

Risk Factors

There have been no material changes to the risk factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as updated by the disclosure in Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table sets forth information with respect to any purchase made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of the Company’s common stock during the indicated periods.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased under the Plans or Programs (1)(2)
July 1 – 31, 2007	—	$	—	—	887,400
August 1- 31, 2007	—		—	—	887,400
September 1- 30, 2007	—		—	—	887,400

Total	—	$		—	887,400

(1)	On July 19, 2006, the Board of Directors authorized the repurchase of 1,000,000 shares of the Company’s common stock. The repurchase of the common stock may be done in negotiated transactions or open market purchases for two years from the date the repurchase plan was adopted.

(2)	On April 18, 2007, the Board of Directors authorized the repurchase of 1,000,000 shares of the Company’s common stock. The repurchase of the common stock may be done in negotiated transactions or open market purchases for two years from the date the repurchase plan was adopted.

(3)	Due to the pending acquisition by People’s United, the Company did not repurchase any common stock in the third quarter of 2007.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

None

ITEM 6.

EXHIBITS

(a) EXHIBITS


3.i.1		Amended and Restated Articles of Incorporation of the Company (Incorporated herein by reference to the Proxy Statement for the 1999 Annual Meeting of the Stockholders).

3.i.2		Articles of Amendment of the Amended and Restated Articles of Incorporation of the Company (Incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).

3.ii.1		Bylaws of the Company, as amended and restated as of October 18, 2006, (Incorporated herein by reference to Exhibit 3(ii) of the Company’s Current Report on Form 8-K filed on October 24, 2006).

* 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.

*	Filed herewith

**	Furnished herewith

SIGNATURES

Pursuant to the requirements 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

October 24, 2007		/S/ PAUL A. PERRAULT
Date		Paul A. Perrault,
		Chairman, President and Chief Executive Officer

October 24, 2007		/S/ KIRK W. WALTERS
Date		Kirk W. Walters
		Executive Vice President, Treasurer, and Chief Financial Officer

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CHZ Chittenden Corp