DBRS Rates Chittenden Corporation at A (low)

Dominion Bond Rating Service (“DBRS”) has today initiated coverage on Chittenden Corporation (“Chittenden” or the “Company”) and has assigned ratings as indicated above. All trends are Stable.

The ratings are underpinned by a four-state commercial banking franchise with superior core funding, recurrent core earnings, a high net interest margin (NIM), and solid credit performance. Also embedded in the assigned ratings level are a concentration in commercial real estate (CRE) and large relationship exposures, modest fee income, and less robust than peer capitalization.

From its Burlington, Vermont, headquarters Chittenden manages a group of five New England traditional community banks that focus on a full-featured commercial banking business. The Company’s markets are generally characterized by less-dense non-major metropolitan areas where the bank can have a major local presence with a modest number of branches. Government and captive insurance specialty deposits fill out the rest of its healthy core deposit franchise. The Company’s spread-based earnings are driven by its low cost of deposits that delivers a superior NIM as well as dependable core earnings.

With close borrower relationships, a disciplined origination process, and strict underwriting guidelines, Chittenden’s credit losses have been minimal over an extended period of time despite strong loan growth. CRE is sizeable at 40% of loans or four times tangible common equity (TCE), but represents a more modest 1.4 times TCE when only considering investor properties. Mitigants to the CRE loan book include the lack of presence in boom or bust markets as well as being diversified by location and property type. Large borrower relationships constitute an additional lending concentration of which approximately half are CRE-related. While these concentrations reflect an element of higher risk, DBRS believes the Company has demonstrated a combination of lending expertise, customer knowledge, and conservative underwriting discipline to effectively manage its risk profile over the past decade. DBRS therefore expects stability in overall credit quality and costs; however, loan charge-offs will rise from the current unsustainable level of three basis points of average loans.

Rising regulatory capital levels more than qualify as “well-capitalized”, however, tangible equity levels are more modest and trail those of peers. In DBRS’s opinion, moderate but declining double leverage coupled with the modest tangible equity levels denote less financial flexibility, but this is somewhat alleviated by a solid core earnings capacity and management’s conservative operating philosophy. Liquidity at both the bank and parent company has been sound for the past number of years and compares favourably with peers.

Headquartered in Burlington, Vermont, Chittenden is a financial services company operating five individually-branded community banking subsidiaries in Vermont, Massachusetts, New Hampshire, and Maine. Chittenden was the largest publicly-held bank holding company in Vermont at March 31, 2005. The Chittenden franchise had approximately US$6.1 billion in assets, 120 banking offices, 152 ATMs, and approximately 2,000 employees as of March 31, 2005.