DBRS Confirms Ratings of Chittenden Corporation at A (low) and Changes All Trends to Positive

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Chittenden Corporation (“Chittenden” or the “Company”) and its banking subsidiaries, Chittenden Trust Company, The Bank of Western Massachusetts, Flagship Bank & Trust Company, Maine Bank & Trust Company, and Ocean National Bank as indicated above. DBRS has also assigned a new rating to the Trust Preferred Securities of the Company. At the same time, DBRS changed the trend for all ratings to Positive from Stable.

The Positive trend reflects the expectation that Chittenden will be able to continue strengthening its core profitability as well as sustaining its solid earnings growth, strong funding profile, and rising net interest margin. Additionally, DBRS expects the Company to maintain its high credit quality, plentiful liquidity, positive operating leverage, and adequate capitalization. While Chittenden’s progress in several of these categories would be best characterized as an incremental improvement, the Positive trend is also a reflection of the Company’s comparatively stronger performance relative to its similarly rated peers.

In 2005, Chittenden’s revenues grew modestly on annual loan growth of 10%. At the same time, the Company’s expenses were well-controlled and provisions minimal. This resulted in improved operating leverage, higher earnings, and strengthened profitability. Operating efficiency improved year over year from 60.2% to 57.3% while return on assets and return on equity increased to 1.34% and 13.11%, respectively. Revenues have increased 43% since 2000 from acquisitions and organic growth, and profitability has continued its three-year ascent.

The Company’s current ratings reflect a four-state New England commercial and consumer banking franchise with rising profitability from a very stable core deposit base that provides below-peer funding costs and ample liquidity. DBRS characterizes Chittenden’s deposit franchise as defensible based upon robust deposit and branch shares across the 129 cities that it serves. These cities are generally located in less dense non-metropolitan areas. Rising earnings are 78% spread-based with more than 70% of the loan portfolio based in secured asset classes.

Credit quality continues to perform well with credit costs consistently below those of similarly rated peers despite strong loan growth and a 40% commercial real estate (CRE) component. Chittenden’s exposure to CRE excluding owner-occupied properties accounts for only 1.5 times tangible common equity and therefore does not amount to a material risk concentration in addition to being broadly diversified by location and property type. Commercial lending (including real estate and municipal loans) represents a leading 71% of the loan portfolio and DBRS notes that the loan portfolio is both granular and largely secured by real estate.

The Company has a conservative operating philosophy, with adequate capitalization for its risk profile and a naturally hedged interest rate risk position. The bank and holding company’s healthy liquidity are underpinned by core deposits that funded 113% of net loans at year-end 2005 and a moderately-sized portfolio of high-quality and short-duration securities. Double leverage is moderate at 111% and has been in decline for the past three years.

Chittenden Corporation, the largest bank holding company with headquarters in Vermont and the fourth largest headquartered in New England, is a financial services company operating through five individually branded commercial banking subsidiaries in Vermont, Massachusetts, New Hampshire, and Maine. The Company had $6.5 billion in assets, 132 branches, 152 ATMs, and 1,909 employees as of March 31, 2006.

Note:
The Trust Preferred Securities of Chittenden Corporation contain certain unique covenants that give them some equity-like characteristics.