Employee Benefit Plans

12 Months Ended

Dec. 31, 2011

Employee Benefit Plans [Abstract]

Employee Benefit Plans

NOTE 11: EMPLOYEE BENEFIT PLANS

Pension Plan

Prior to January 1995, we maintained a noncontributory defined benefit plan covering all eligible employees. Our Pension Plan (the "Plan") was a final average pay plan with benefits based on the average salary rates over the five consecutive plan years out of the last ten consecutive plan years that produce the highest average. It was our policy to fund the cost of benefits expected to accrue during the year plus amortization of any unfunded accrued liability that had accumulated prior to the valuation date based on IRS regulations for funding. During 1995, the Plan was curtailed. Accordingly, all accrued benefits were fully vested and no additional years of service or age will be accrued.

We recognize the overfunded or underfunded status of a single employer defined benefit post retirement plan as an asset or liability on the consolidated balance sheets and recognize changes in the funded status in comprehensive income in the year in which the change occurred.

The following tables provide a reconciliation of the changes in the plan's benefit obligations and fair value of assets over the two year period ending December 31, 2011, and a statement of the funded status as of December 31 of both years:

(In thousands)	2011			2010
Reconciliation of benefit obligation
Benefit obligation at beginning of year	$	9,109		$	8,586
Service cost including expenses		50			54
Interest cost		473			482
Actuarial (gain) loss		138			507
Benefits paid		(530	)		(520	)
Benefit obligation at year-end	$	9,240		$	9,109
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year	$	9,404		$	8,793
Actual return on plan assets		(83	)		1,127
Employer contributions		0			0
Benefits paid		(528	)		(516	)
Fair value of plan assets at year-end	$	8,793		$	9,404
Funded status at year end	$	(447	)	$	295

Amounts recognized in accumulated other comprehensive income include the unrecognized actuarial loss of $2.68 million at December 31, 2011 and $2.29 million at December 31, 2010, net of taxes.

The accumulated benefit obligation is equal to the projected benefit obligation and was $9.24 million and $9.11 million at December 31, 2011 and 2010, respectively.

The following tables summarize the components of net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31, 2011, 2010 and 2009, respectively:

(In thousands)	2011			2010			2009
Interest cost	$	473		$	482		$	492
Expected return on plan assets		(642	)		(600	)		(408	)
Service costs		50			54			45
Net loss amortization		252			242			410
Net periodic pension cost	$	133		$	178		$	539
(In thousands)		2011			2010			2009
Net loss (gain)	$	861		$	(23	)	$	(285	)
Net loss amortization		(252	)		(242	)		(410	)
Total recognized in other comprehensive income	$	609		$	(265	)	$	(695	)
Total recognized in net periodic pension cost and
other comprehensive income	$	742		$	(87	)	$	(156	)

The estimated net actuarial loss for the plan that will be amortized from accumulated other comprehensive income into net periodic pension cost for 2012 is $299 thousand.

The following table summarizes the assumptions used to determine the benefit obligations and net periodic benefit costs for the years ended December 31, 2011, 2010 and 2009:

	2011		2010		2009
Benefit obligations
Discount rate	5.24	%	5.26	%	5.80	%
Net periodic benefit cost
Discount rate	5.26	%	5.80	%	6.18	%
Expected long-term return on plan assets	7.00	%	7.00	%	7.00	%

The discount rate reflects the rates at which pension benefits could be effectively settled. We look to rates of return on high-quality fixed income investments currently available and expected to be available during the period of maturity of the pension benefits. Consideration was given to the rates that would be used to settle plan obligations as of December 31, 2011 and to the rates of other indices at year-end. Our actuary constructed a hypothetical high quality bond portfolio with cash flows that match the expected monthly benefit payments under the pension plan and calculated a discount rate based upon that portfolio. The expected long-term rate of return on plan assets reflects long-term earnings expectations on existing plan assets and those contributions expected to be received during the current plan year. In estimating that rate, appropriate consideration was given to historical returns earned by plan assets in the fund and the rates of return expected to be available for reinvestment. Rates of return were adjusted to reflect current capital market assumptions and changes in investment allocations, if any.

The Board of Directors has chosen our Trust division as the investment manager for the plan. The investment objectives of the plan are to provide both income and capital appreciation and to assist with current and future spending needs of the Plan while at the same time minimizing the risks of investing. The investment target of the Plan is to achieve a total annual rate of return in excess of the change in the Consumer Price Index for the aggregate investments of the Plan evaluated over a period of five years. A certain amount of risk must be assumed to achieve the Plan's investment target rate of return. The Plan uses a balanced portfolio which has a 5-15 year time horizon and is considered moderate risk. The portfolio strategy followed by the plan has a baseline allocation of 60% stock and 40% fixed income securities, but the investment manager may allocate funds within certain specified ranges. The range for equities is 35% to 75% and for fixed income securities the range is 25%

to 60%. The allocation among categories will vary from the baseline allocation when opportunities are identified to improve returns and/or reduce risk.

The fair value of our pension plan assets at December 31, 2011 by asset category are as follows:

			Fair Value Measurements at Reporting Date Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(In thousands)
Description
Cash	$	13	$	13	$	0	$	0
Money Market Funds		258		258		0		0
Equity Securities:
Large Cap Equity Mutual Funds		2,425		2,425		0		0
Small Cap Equity Mutual Funds		80		80		0		0
Domestic Equities		223		223		0		0
Global Equity Mutual Funds		506		506		0		0
International Equity Mutual Funds		822		822		0		0
Absolute Return Funds		419		419		0		0
Fixed Income:
International Bond Mutual Funds		419		419		0		0
Taxable Bond Mutual Funds		3,641		3,641		0		0
Total	$	8,806	$	8,806	$	0	$	0

The fair value of our pension plan assets at December 31, 2010 by asset category are as follows:

			Fair Value Measurements at Reporting Date Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(In thousands)
Description
Cash	$	26	$	26	$	0	$	0
Money Market Funds		196		196		0		0
Equity Securities:
Large Cap Equity Mutual Funds		2,702		2,702		0		0
Small Cap Equity Mutual Funds		101		101		0		0
Domestic Equities		211		211		0		0
Global Equity Mutual Funds		590		590		0		0
International Equity Mutual Funds		681		681		0		0
Absolute Return Funds		439		439		0		0
Fixed Income:
International Bond Mutual Funds		878		878		0		0
Taxable Bond Mutual Funds		3,581		3,581		0		0
Total	$	9,405	$	9,405	$	0	$	0

Large Cap Equity Mutual Funds: Funds in this category have a diversified, actively managed multi-manager approach to investing in domestic stocks. There are multiple fund managers that are included in the portfolio with multiple categories of industries being invested in by the managers in mid-size, to large-size publicly traded firms with a majority of funds invested in large companies.

Small Cap Equity Mutual Funds: Funds in this category have a diversified, active fund manager approach to investing in small company domestic stocks.

Domestic equities: The pension plan holds 7,650 shares of Merchants Bancshares, Inc. stock with a cost basis of $64 thousand and a market value at December 31, 2011 of $223 thousand.

Global Equity Mutual Funds: Funds in this category are diversified, active global equity funds that have exposure to both large company domestic stocks as well as large company developed country international stocks.

International Equity Mutual Funds: Funds in this category have a diversified, actively managed multi-manager approach to investing in international developed country stocks with limited exposure to emerging market international stocks.

Absolute Return Funds: Funds in this category are invested in a diversified portfolio of stocks, preferred stocks, convertible bonds, and bonds. The portfolio manager's objective is to take advantage of inefficiencies in the stock and bond markets to capture a return on investment by using specialized trading strategies. The goal of these trading strategies is to provide investors with consistent, positive returns that are not necessarily correlated to the general equity markets.

International Bond Mutual Funds: Funds in this category have a diversified, actively managed multi-manager approach to investing in international bonds, with an average credit rating for the entire portfolio being investment grade.

Taxable Bond Mutual Funds: Funds in this category have a diversified, actively managed multi-manager approach to investing in domestic and international bonds. A majority of funds are invested in domestic bonds with an average credit rating for the entire portfolio being investment grade.

We have no minimum required contribution for 2012.

The following table summarizes the estimated future benefit payments expected to be paid under the Plan:

	Pension Benefits
(In thousands)
2012	$	478
2013		506
2014		535
2015		550
2016		572
Years 2017 to 2021	$	3,277

The estimated future benefit payments expected to be paid under the Plan are based on the same assumptions used to measure our benefit obligation at December 31, 2011. No future service estimates were included due to the frozen status of the Plan.

401(k) Employee Stock Ownership Plan

Under the terms of our 401(k) Employee Stock Ownership Plan ("401(k)") eligible employees are entitled to contribute up to 75% of their compensation, subject to IRS limitations, to the 401(k), and we contribute a percentage of the amounts contributed by the employees as authorized by Merchants' Bank's Board of Directors. In 2011 we introduced a Roth plan available to all employees as part of the 401K plan. We contributed approximately 49%, 49% and 54% of the amounts contributed by the employees in 2011, 2010 and 2009, respectively.

Summary of Expense

A summary of expense relating to our various employee benefit plans for each of the years in the three year period ended December 31, 2011 is as follows:

(In thousands)	2011		2010		2009
Pension plan	$	133	$	178	$	539
401(k)		622		554		562
Total	$	755	$	732	$	1,101