MERCHANTS BANCSHARES, INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(RULE 14a-101)

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ___)

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MERCHANTS BANCSHARES, INC.

275 Kennedy Drive

South Burlington, Vermont 05403

_____________________

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

_____________________

Notice is hereby given that the annual meeting of shareholders of Merchants Bancshares, Inc. (“Merchants”), a Delaware corporation, will be held in the Lakeside Hall of The ECHO Lake Aquarium and Science Center in Burlington, Vermont, on Tuesday, May 7, 2013, at 10 a.m. for the following purposes:

To elect five directors, each of whom will serve for a three-year term, and to elect one director who will serve for a two-year term, all as more fully described in the proxy statement for the meeting;

To consider a non-binding resolution to approve the compensation of Merchants’ named executive officers;

To ratify Crowe Horwath LLP as Merchants’ independent registered public accounting firm for 2013;

To transact any other business as may properly come before the meeting or at any adjournments of the meeting.

The close of business on March 8, 2013 has been fixed as the record date for determination of shareholders entitled to notice of, and to vote at, the annual meeting. You may vote if you were a shareholder of record as of the close of business on March 8, 2013.

Your vote is very important. If you do not plan to attend the meeting and vote your shares of common stock in person, we urge you to vote your shares as instructed in the proxy statement.

If your shares of common stock are held by a broker, bank or other nominee, please follow the instructions you receive from your broker, bank or other nominee to have your shares of common stock voted.

Any proxy may be revoked at any time prior to its exercise at the annual meeting.


	By order of the Board of Directors,


	Raymond C. Pecor, Jr. Chairman of the Board of Directors	Michael R. Tuttle President and Chief Executive Officer

South Burlington, Vermont

March 28, 2013

Important Notice Regarding the Availability of Proxy Materials

for the Shareholder Meeting to be Held on May 7, 2013

This proxy statement and our annual report to security holders are available at www.mbvt.com at the “Investor Relations” link under “Proxy Materials/Annual Reports.”

MERCHANTS BANCSHARES, INC.

275 Kennedy Drive

South Burlington, Vermont 05403

_____________________

PROXY STATEMENT

_____________________

for the Annual Meeting of Shareholders

to be held on May 7, 2013

This Proxy Statement is furnished by the Board of Directors of MERCHANTS BANCSHARES, INC. in connection with the solicitation of proxies to be used at the annual meeting of shareholders to be held on May 7, 2013, and at any adjournments of the meeting. Our Board of Directors has fixed March 8, 2013 as the record date for determining those shareholders entitled to receive notice of, and to vote at, the annual meeting. Only shareholders of record at the close of business on March 8, 2013 will be entitled to vote at the annual meeting. On or about March 28, 2013, we began mailing to many of our shareholders a Notice of Internet Availability of Proxy Materials (“Notice”) containing instructions on how to access this Proxy Statement and our annual report online, as well as instructions on how to vote. Also on or about March 28, 2013, we began mailing printed copies of these proxy materials to certain of our shareholders.

Proxies in the form enclosed are solicited by our Board of Directors. Any proxy, if received in time for voting and not revoked, will be voted at the annual meeting in accordance with the shareholder’s instructions on the proxy card. If no instructions are given on the proxy card, the proxy will be voted: FOR the election of directors; FOR the approval of the compensation of Merchants’ named executive officers; and FOR the ratification of Crowe Horwath LLP as our registered public accounting firm for 2013. At present, management knows of no additional matters to be presented at the annual meeting, but if other matters are presented, the persons named in the proxy card and acting under the proxy card will vote or refrain from voting in accordance with their best judgment pursuant to the discretionary authority conferred by the proxy.

Revocability of Proxies

A proxy may be revoked at any time prior to its exercise by:

submitting a written revocation to Lisa Razo, our Corporate Secretary, at our principal administrative office at 275 Kennedy Drive, South Burlington, Vermont 05403;

submitting a new proxy after the time and date of the previously submitted proxy; or

appearing in person at the annual meeting and voting by ballot.

Any shareholder entitled to vote at the annual meeting may attend the annual meeting and vote in person on any matter presented for a vote to our shareholders at the annual meeting, whether or not that shareholder has previously given a proxy. The presence of a shareholder at the annual meeting (without further action) will not constitute revocation of a previously given proxy.

Solicitation of Proxies

The cost of solicitation of proxies will be borne by Merchants. In an effort to have as large a representation at the annual meeting as possible, special solicitation of proxies may, in certain instances, be made personally or by mail, telephone, e-mail or facsimile transmission by our directors, officers and other employees. We also may reimburse brokers, custodians, nominees and other fiduciaries for postage and reasonable clerical expenses of forwarding the proxy material to their principals who are beneficial owners of shares of our common stock.

Householding of Meeting Materials

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of the Notice or these proxy materials may have been sent to multiple shareholders in each household. We will promptly deliver a separate copy of these proxy materials to any shareholder upon written or verbal request to our Corporate Secretary at our principal administrative offices, which are located at 275 Kennedy Drive, South Burlington, Vermont 05403, telephone: (802) 658-3400. Any shareholder who wants to receive separate copies of proxy materials in the future, or any shareholder who is receiving multiple copies and would like to receive only one copy per household, should contact that shareholder’s bank, broker, or other nominee record holder, or that shareholder may contact us at the above address and phone number.

Voting Securities

As of March 8, 2013, the record date for the annual meeting, there were 6,289,748 shares of common stock issued and outstanding, all of which are entitled to vote at the annual meeting. Fractional shares will not be entitled to vote. Our common stock is the only class of our capital stock that is issued and outstanding.

Vote Required

Each common shareholder is entitled to one vote on all matters properly brought before the annual meeting for each share held by that shareholder on March 8, 2013. The representation in person or by proxy of at least a majority of the shares of common stock entitled to vote at the annual meeting is necessary to establish a quorum for the transaction of business. Abstentions and “broker non-votes” (i.e. shares represented at the meeting held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote such shares, and with respect to one or more issues, the broker or nominee does not have discretionary voting power to vote such shares) will be counted for purposes of determining whether a quorum is present for the transaction of business at the annual meeting.

The affirmative vote of a plurality of the shares of our common stock present in person or represented by proxy at the annual meeting is necessary for the election of directors. With regard to the election of directors, abstentions and broker non-votes will be excluded from the vote and have no effect on its outcome. The affirmative vote of the majority of shares present in person or represented by proxy at the annual meeting and entitled to vote on those matters is required for approval of the other proposals described in this proxy statement. With regard to these proposals, abstentions will have the same effect as a vote against the proposal, and broker non-votes will have no effect on its outcome.

ELECTION OF DIRECTORS

(Proposal Number 1)

Our Board of Directors currently consists of thirteen directors and is divided into three classes. Our charter and bylaws provide that the size of our Board of Directors shall be determined by the Board or shareholders at the annual meeting, but in no event shall be less than nine or more than twenty. Our Board of Directors has nominated Raymond C. Pecor, Jr., Patrick S. Robins, Jeffrey L. Davis, Bruce M. Lisman and Karen J. Danaher, for election to serve as Class II directors, each to serve for a three-year term until the annual meeting of shareholders to be held in 2016 and until his or her successor is duly elected and qualified. Messrs. Pecor, Jr., Robins, Davis, Lisman, and Ms. Danaher are Class II directors whose terms expire at this year’s annual meeting.

In addition, in order to prepare for the anticipated retirement of certain directors from the Board, our Board proposes to increase the size of the Board from thirteen to fourteen and to nominate Ms. Janette K. Bombardier for election to serve as a Class I director for a two-year term until the annual meeting of shareholders to be held in 2015 and until her successor is duly elected and qualified. Ms. Bombardier, who was first recommended for nomination by a non-management director of our Board, is a director of our primary subsidiary, Merchants Bank.

Based on its review of the relationships between its existing directors (including the director nominees) and our company and our subsidiaries, our Board of Directors has affirmatively determined that if these nominees are elected, a majority of our directors will be independent under the Nasdaq Listing Rules and in accordance with the Principles of Governance adopted by our Board of Directors.

Nominees for Directors of Merchants

The following table sets forth the names of the six nominees for election to our Board of Directors, their principal occupations, ages, independence status, as determined in accordance with the Nasdaq Listing Rules, and periods of service on our Board of Directors. Except as noted below, all of the nominees have been employed in their principal occupations for the last five years. Information regarding their ownership of shares of Merchants’ common stock as of March 8, 2013 may be found at “Security Ownership of Certain Beneficial Owners and Management” on page 33.

Class

Name

Age

Principal
Occupation

Independence
Status

Director
Since

Term of
Office to
Expire

Raymond C. Pecor, Jr.

Chairman, Lake Champlain
Transportation Company

1983

2016

Patrick S. Robins

Executive Chairman, Symquest
Group, Inc.

1984

2016

Jeffrey L. Davis

President, J. L. Davis, Inc.

1993

2016

Bruce M. Lisman

Private Investor

2004

2016

Karen J. Danaher

Partner, Danaher Attig & Plante PLC

2010

2016

Janette K. Bombardier

Director of Site Operations and
Senior Location Manager, IBM

—

2015

The biographical description below for each nominee includes the specific experience, qualifications, attributes and skills that led to the conclusion by the Board of Directors that such person should serve as a director of Merchants.

Raymond C. Pecor, Jr. has served as a member of our Board of Directors since 1983 and has served as Chairman of our Board of Directors since 1996. He is the Chairman of Lake Champlain Transportation Company, and has entrepreneurial interests in other companies and developments, including the Vermont Lake Monsters and Lehigh Valley IronPigs professional baseball teams. He is also an emeritus trustee of the University of Vermont in Burlington, Vermont. Mr. Pecor, Jr. is the father of Raymond C. Pecor III, who is also a director of Merchants. Mr. Pecor, Jr. brings business and management experience, industry knowledge, customer-based experience, crisis and risk management experience, knowledge of credit and leadership experience to the Board.

Patrick S. Robins has served as a member of our Board since 1984, and has served as a director of Merchants Bank since 1974. He is Executive Chairman of Symquest Group, Inc., a company specializing in technology services for networking solutions and document output. Mr. Robins brings a finance background, business and management experience, industry knowledge, customer-based experience, leadership experience and knowledge of credit to the Board.

Jeffrey L. Davis has served as a member of our Board and the board of Merchants Bank since 1993. He is President of J. L. Davis, Inc., a construction and development firm, and President of Taft Corners Associates, a development firm. He is also a trustee of the University of Vermont in Burlington, Vermont, President of The Champlain Valley Exposition and a former president of the Vermont Special Olympics. Mr. Davis brings business and management experience, industry knowledge, customer-based experience, knowledge of credit, crisis and risk management experience, leadership experience and strategic planning experience to the Board.

Bruce M. Lisman has served as a member of our Board and the board of Merchants Bank since 2004. He is a private investor, having retired as Chairman of JP Morgan Global Equity Division in February 2009. Mr. Lisman previously served as a Senior Managing Director of Bear Stearns Companies from 1984 to June 2008. In addition, he serves on the boards of the Shelburne Museum and National Life Group. He is an emeritus trustee of the University of Vermont, where he previously served as Chair. He has also served on the boards of Central Vermont Public Service, a public company; the Hewitt School, Pace University, HS Broadcasting, BRUT, Inc., the Vermont Symphony Orchestra and the Board of American Forests. Mr. Lisman brings accounting and finance experience, business management experience, industry knowledge, customer based experience, strategic planning experience, crisis and risk management experience and leadership experience to the Board.

Karen J. Danaher was elected to our Board of Directors in 2010 and has served as a director of Merchants Bank since 2008. She is a partner in Danaher Attig & Plante PLC, a public accounting firm located in South Burlington, Vermont. Ms. Danaher is a certified public accountant and brings accounting and finance experience, business management experience, industry knowledge, customer-based experience, crisis and risk management experience and leadership experience to the Board.

Janette K. Bombardier has served as a member of the board of Merchants Bank, our main operating subsidiary since February 2013. She is the Director of Site Operations and Senior Location Executive for the IBM Vermont facility. She is a licensed Professional Engineer in the State of Vermont. During her career with IBM she has held a variety of positions including construction management, manufacturing engineering, product development and quality, as well as positions in cost reduction and continuous improvement. Ms. Bombardier brings experience in business management, leadership, risk management and strategic planning to the Board.

If any nominee is unable to serve or should decline to serve at the time of the annual meeting, the discretionary authority provided in the proxies may be exercised to vote for a substitute, who would be designated by our Board of Directors, and would be elected to the same class as the nominee for whom he or she is substituted. Neither our bylaws nor any applicable law restricts the nomination of other individuals to serve as directors, and any shareholder present at the annual meeting may nominate another candidate. Unless authority to do so has been withheld or limited in the proxy, it is the intention of the persons named in the proxy to vote the shares represented by the proxy against any such other candidates not designated by our Board of Directors.

Vote Required

The affirmative vote of a plurality of the shares of our common stock represented in person or by proxy at the annual meeting is necessary for the election of the individuals named above. There is no cumulative voting in elections of directors. Unless otherwise specified, proxies will be voted in favor of the six nominees described above.

Recommendation

Our Board of Directors recommends that shareholders vote “FOR” the election of each of Raymond C. Pecor, Jr., Patrick S. Robins, Jeffrey L. Davis, Bruce M. Lisman, Karen J. Danaher and Janette Bombardier.

Continuing Directors

The following table sets forth certain information about those directors whose terms of office do not expire at the annual meeting and who consequently are not nominees for re-election at the annual meeting. Except where otherwise noted below the table, all of the directors listed have been officers of the organizations named below as their principal occupations for the last five years.

Class

Name

Age

Principal
Occupation

Independence
Status

Director
Since

Term of
Office
Will
Expire

Michael R. Tuttle

President and CEO
Merchants and Merchants Bank

2007

2015

Peter A. Bouyea

Retired

1994

2015

Scott F. Boardman

President
Hickok & Boardman, Inc.

2008

2015

Raymond C. Pecor III

President
Lake Champlain Transportation

2012

2015

III

Michael G. Furlong

Attorney, Sheehey Furlong &
Behm P.C.

1991

2014

III

Robert A. Skiff

President Emeritus, Champlain College

1984

2014

III

Lorilee A. Lawton

Owner & President
Firetech Sprinkler Corp

2003

2014

III

John A. Kane

Business Consultant

2005

2014

The biographical descriptions below for each director who is not standing for election include the specific experience, qualifications, attributes and skills that the Board of Directors would expect to consider if it were making a conclusion currently as to whether such person should serve as a director. The Board of Directors did not currently evaluate whether these directors should serve as directors, as the terms for which they have been previously elected continue beyond the annual meeting.

Michael R. Tuttle is President, Chief Executive Officer (“CEO”) and Director of Merchants Bancshares, Inc. and Merchants Bank. He served as Merchants Bank’s Executive Vice President and Chief Operating Officer from 1997 until his appointment as President, CEO and Director of Merchants Bank, effective January 1, 2006. Mr. Tuttle was appointed President, CEO and Director of Merchants Bancshares, Inc., effective January 1, 2007. He is the only Director on the Board who is also an officer of Merchants. Mr. Tuttle also serves on the boards of the United Way of Chittenden County and the Flynn Center for the Performing Arts, where he is the Treasurer. He is a former director of Fairpoint Communications, Inc., a publicly traded company. Mr. Tuttle brings experience in business management, finance and accounting, industry knowledge, customer service, crisis response, leadership, strategic planning, as well as in-depth knowledge of credit and risk management to the Board.

Peter A. Bouyea has served as a member of our Board since 1994, and has served as a director of Merchants Bank since 1993. Mr. Bouyea is retired from his previous role as President of Bouyea-Fassetts, Inc., a wholly-owned indirect subsidiary of Phillip Morris, Inc. Mr. Bouyea brings experience in business management, industry knowledge, customer service, leadership and risk management to the Board.

Scott F. Boardman was elected to our Board in 2008. He has been a member of the Board of Directors of Merchants Bank since 2004. Mr. Boardman is the President of Hickok & Boardman, Inc., a retail insurance agency in Burlington, Vermont. He serves on the boards of A.N. Deringer, Inc., the Lake Mansfield Trout Club, and the Mater Christi School in Burlington, Vermont. Mr. Boardman is a former trustee of Trinity College in Burlington, Vermont, and is a former board member and past president of the Vermont Insurance Agents Association. He is also past president of the Vermont chapter of the Casualty & Property Insurance Underwriters Society. Mr. Boardman brings experience in business management, credit, risk management, customer service and leadership, as well as industry knowledge to the Board.

Raymond C. Pecor III was elected to our Board in 2012. He has served as a member of the board of directors of Merchants Bank since 2009. He is President of Lake Champlain Transportation Company in Burlington, Vermont, and serves on the board of the Champlain Valley Expo. Mr. Pecor III brings experience in business management, customer service, crisis response, leadership, credit and risk management to the Board.

Michael G. Furlong has served as a member of our Board and the board of Merchants Bank since 1991. Mr. Furlong has served as Chairman of Merchants Bank’s Board of Directors since 2001. He is a member of the Burlington, Vermont law firm of Sheehey Furlong & Behm P.C., and is a former President of the Chittenden County Bar Association. He is an emeritus director of Wake Robin Corporation and has served on the boards of several Vermont nonprofit organizations. Mr. Furlong is a graduate of Middlebury College and Cornell Law School. Mr. Furlong brings experience in business management, customer service, crisis response, leadership, credit and risk management to the Board.

Robert A. Skiff has served as a member of our Board and the board of Merchants Bank since 1984. Dr. Skiff is a Trustee of the Shelburne Museum. In 2008 he retired from his role as Headmaster of the Vermont Commons School in Burlington, Vermont. Prior to becoming Headmaster in July 1997, Dr. Skiff served as President of Champlain College for 15 years. Dr. Skiff brings experience in business management, customer service, leadership and risk management; as well as industry knowledge to the Board.

Lorilee A. Lawton has been a member of our Board since 2003 and has served as a director of Merchants Bank since 1995. Ms. Lawton is the owner and President of Firetech Sprinkler Corporation, a contractor specializing in the design, fabrication and installation of fire sprinkler systems, located in Colchester, Vermont. She also serves as a director of Vermont Public Television. Ms. Lawton brings experience in business management, finance and accounting, customer service, crisis response, leadership, strategic planning and risk management to the Board.

John A. Kane has served as a member of our Board and the board of Merchants Bank since 2005. He previously served as Senior Vice President of Finance and Administration, and Chief Financial Officer and Treasurer of IDX Systems Corporation, where he was responsible for financial strategy, mergers and acquisitions activity, public company obligations, Wall Street relations, information systems and real estate facilities related operations. IDX was acquired by General Electric early in 2006 and Mr. Kane transitioned out of GE in December 2006. Mr. Kane currently functions as a business consultant working with various private equity companies and their portfolios. He also serves as a director of several privately held health care companies. Mr. Kane is a director and audit committee chairman of athenahealth, Inc., a public company. Mr. Kane brings experience in accounting and finance, business management, customer service, crisis response, leadership, strategic planning, as well as industry knowledge and knowledge of the fundamentals of credit and risk management to the Board.

Board Leadership Structure

Raymond C. Pecor, Jr. has served as a member of our Board of Directors since 1983 and as Chairman of the Board since 1996. Mr. Tuttle has served as a member of our Board of Directors and as President and CEO of Merchants since January 1, 2007. As reflected in the Principles of Governance adopted by our Board of Directors, our Board encourages the separation of the oversight and supervisory function from the executive function. Thus, our Board believes that the Chairman should be an independent director and that the roles of Chairman and CEO should be separated.

The independent Chairman’s role is to lead the Board, including working with the CEO, to determine Board agenda items and foster contributions of other directors during the Board’s deliberations. Our Board of Directors encourages strong communication among all of our independent directors and the independent Chairman. Our Board of Directors also believes that it is able to effectively provide independent oversight of Merchants’ business and affairs, including risks facing Merchants, through the composition of our Board of Directors, the independent Chairman, the strong leadership of the independent directors and the independent committees of our Board of Directors, and other corporate governance structures and processes in place. Twelve of the thirteen members of our Board of Directors are non-management directors, and all of these non-management directors are independent under the independence standards set forth in the Nasdaq Listing Rules. All of our directors are free to suggest the inclusion of items on the agenda for meetings of our Board of Directors or raise subjects that are not on the agenda for that meeting. In addition, our Board of Directors and each committee has complete and open access to any member of management and the authority to retain independent legal, financial and other advisors as they deem appropriate without consulting or obtaining the approval of any member of management. Our Board of Directors holds executive sessions of non-management directors in order to promote discussion among the non-management directors and assure independent oversight of management. Moreover, our Audit Committee, our Nominating and Governance Committee, and our Compensation Committee, each of which are comprised entirely of independent directors, also perform oversight functions independent of management.

Risk Oversight

The Board of Directors plays an important role in our risk oversight, but the Board recognizes that it is not possible to identify all risks that may affect us and our subsidiaries or to develop processes and controls to eliminate or mitigate fully their occurrence or effects. The Board of Directors is involved in risk oversight through direct decision-making authority with respect to significant matters and the oversight of management by the Board of Directors and its committees. The Board of Directors and its committees are also each directly responsible for consideration and oversight of risks relating to decisions within their respective areas of focus.

In particular, the Board of Directors administers its risk oversight function through: (1) the review and discussion of regular periodic reports to the Board of Directors and its committees on topics relating to the risks that we face, including, among others, market risk, interest rate risk, credit risk, regulatory risk and various other matters relating to our business; (2) the required approval by the Board of Directors (or a committee thereof) of significant transactions and other decisions, including, among others, extensions of credit above a certain size, material contracts with vendors, investment decisions above a certain size and new hires and promotions to our executive officer positions; (3) the direct oversight of specific areas of our business by the Audit Committee, the Nominating and Governance Committee, the Compensation Committee, and the Shareholder Value Committee; and (4) regular reports from our internal and external auditors and other outside consultants regarding various areas of potential risk, including, among others, those relating to our internal controls and financial reporting. The Board of Directors also relies on management to bring significant matters impacting us to the Board’s attention.

Pursuant to the Audit Committee’s charter, the Audit Committee is specifically responsible for reviewing and discussing with management and our external and internal auditors matters and activities relating to our financial reporting and internal controls, audit and loan review, regulatory compliance and risk management plans.

Other Information about the Board and its Committees

Attendance of Directors

During 2012, our Board of Directors met six times. During 2012, our Audit Committee met five times; our Compensation Committee met five times; and our Nominating and Governance Committee met four times. Our Shareholder Value Committee did not meet during 2012. All directors attended at least 75% of the total number of meetings of the Board and the committees of our Board of Directors on which they serve. Additional information about these committees is set forth below.

The following eight directors attended the annual meeting held on May 1, 2012: Scott F. Boardman, Karen J. Danaher, Jeffrey L. Davis, Lorilee A. Lawton, Raymond C. Pecor, Jr., Raymond C. Pecor III, Patrick S. Robins and Robert A. Skiff. Our directors are encouraged, but not required, to attend annual meetings.

Director Independence

Our Board of Directors has affirmatively determined that all of the following directors and director nominees are independent under the Nasdaq Listing Rules and in accordance with the Principles of Governance adopted by our Board of Directors: Raymond C. Pecor, Jr., Jeffrey L. Davis, Bruce M. Lisman, Karen J. Danaher, Michael G. Furlong, Robert A. Skiff, Lorilee A. Lawton, John A. Kane, Patrick S. Robins, Peter A. Bouyea, Scott F. Boardman and Raymond C. Pecor III and Janette K. Bombardier.

Committees of the Boards of Directors

Our Board of Directors has designated the following committees: an Audit Committee, a Nominating and Governance Committee, a Shareholder Value Committee, and a Compensation Committee. The composition and objectives of each committee are described below. Our Board of Directors continues to review its committees and the independence and qualifications of its current committee members in light of rules and regulations of the Securities and Exchange Commission (the “SEC”) and The Nasdaq Stock Market.

Audit Committee

The Audit Committee held five meetings in 2012. As described in the Audit Committee’s charter, a copy of which is available on our website at www.mbvt.com under “Investor Relations,” the primary function of the Audit Committee is to promote quality and reliable financial reporting and adequate and effective internal controls for our company and its subsidiaries. It promotes the adequacy, independence and objectivity of the internal and external audit and loan review functions and the effective identification and management of risks throughout the organization. The Audit Committee assists our Board of Directors in overseeing the integrity of our financial statements, our compliance with legal and regulatory requirements, the external auditor’s performance, qualifications and independence; and the performance of our internal audit function. In doing so, it is the goal of the Audit Committee to maintain free and open communication among the Audit Committee, external auditors and our management.

The Audit Committee currently consists of five members: John A. Kane (Chair), Peter A. Bouyea, Karen J. Danaher, Jeffrey L. Davis, and Lorilee A. Lawton. Each member of the Audit Committee is independent under the Nasdaq Listing Rules. No member of the Audit Committee is an employee of our company or any of its subsidiaries. We have not relied on exemptions for Audit Committee independence requirements contained in Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The members of the Audit Committee are required to have extensive business and financial experience. They are also required to have a good understanding of financial statements, including our balance sheet, income statement, cash flow statement and quarterly and annual reports on Forms 10-Q and 10-K and related financial statements and disclosures. Our Board of Directors has determined that Mr. Kane qualifies as an “audit committee financial expert” as defined in the SEC rules.

The Audit Committee meets with our external and internal auditors and principal financial personnel to review quarterly financial results and the results of the annual audit (in both regular and executive sessions). The Audit Committee reviews and approves annual external auditor engagement plans, scopes and fees. The Audit Committee approves all fees and terms related to the annual independent audit as well as all permissible non-audit engagements of the external auditors. The Audit Committee pre-approves all audit and permissible non-audit services to be performed by the external auditors, giving effect to the “de minimis” exception for non-audit services set forth in Section 10A(i)(1)(B) of the Exchange Act.

Compensation Committee

The Compensation Committee held five meetings during 2012. As described in the Compensation Committee’s charter, a copy of which is available on our website at www.mbvt.com under “Investor Relations,” the Compensation Committee oversees the administration and performance of executive compensation plans and reviews director compensation plans. The Compensation Committee is also responsible for reviewing and making recommendations to the Board of Directors regarding the compensation of our executive officers, including salaries, incentives, bonuses, benefit plans, commissions, the grant of restricted stock and other forms of, or matters relating to, executive compensation, and regarding incentive plans and benefit programs for our employees. This process includes review of an incentive compensation risk assessment performed by a multi-disciplinary team composed of representatives from our human resources, risk management and senior management teams. The risk assessment process includes development of a framework to examine incentive plans and practices, assessment of current incentive plans and identification of any needed refinements and communication of the results. The Compensation Committee reviews the Compensation Discussion and Analysis (“CD&A”) each year, discusses it with management and recommends to the Board of Directors that the CD&A be included in the Company’s annual meeting proxy statement.

The Compensation Committee currently consists of five directors: Lorilee A. Lawton (Chair), Peter A. Bouyea, Michael G. Furlong, Bruce M. Lisman and Robert A. Skiff, each of whom is independent under the Nasdaq Rules. No member of the committee is an employee of our company or any of its subsidiaries.

The Compensation Committee has the authority to hire, dismiss or otherwise seek the services of consulting and advisory firms as it deems appropriate. These advisors serve as independent counsel and report directly to the committee. As a matter of general policy, the Compensation Committee does not prohibit its advisors from providing services to management, but any such engagements must be requested or approved by the Compensation Committee.

In 2012, the Compensation Committee selected and retained an independent outside consulting firm, Pearl Meyer & Partners (“PM&P”), which specializes in executive and board compensation. PM&P reports directly to the Compensation Committee and carries out its responsibilities to the Compensation Committee in coordination with both the President and CEO and the Human Resources Manager as requested by the Compensation Committee. The Compensation Committee reviewed all services provided by the compensation consultant in 2012, and determined that the consultant did not provide services to management in 2012 and is independent with respect to SEC standards as well as our policy.

Nominating and Governance Committee

The Nominating and Governance Committee met four times in 2012. As described in the Nominating and Governance Committee’s charter, a copy of which is available on our website at www.mbvt.com under “Investor Relations,” the Nominating and Governance Committee is responsible for nominating directors for membership on committees and ensuring effective recruiting of directors as well as establishing and monitoring corporate governance guidelines. The Nominating and Governance Committee reports to our Board of Directors.

The Nominating and Governance Committee will consider director candidates recommended by our shareholders. Any submissions for director candidates may be submitted to the Chairperson of the Nominating and Governance Committee and sent to our Corporate Secretary, Lisa Razo, at 275 Kennedy Drive, South Burlington, VT 05403. These submissions will be considered on the basis of the same considerations applied to internally-nominated candidates.

The Nominating and Governance Committee’s goal is to nominate directors who bring diverse perspectives and skills derived from business and professional experience to our company. Our Principles of Governance provide that our Board will identify the desired diversity of backgrounds, mix of skills, experience and other qualifications of members required in order for the Board to function competently and efficiently. Each director should also have the other necessary qualifications, professional background and core competencies to discharge his or her duties. Additionally, each director should be able to contribute sufficient time to his or her duties, and each should possess certain core competencies, including a combination of several of the following:

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Accounting or finance background;

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Business or management experience;

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Industry knowledge;

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Customer-based experience or perspective;

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Crisis response experience;

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Leadership skills;

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Strategic planning experience;

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Knowledge of the fundamentals of credit;

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Risk management experience; and

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Decision-making skills and expertise that may not otherwise be available to Merchants.

The Nominating and Governance Committee keeps an active list of potential director candidates, which is reviewed and updated periodically. Our Board of Directors seeks to time the election of new directors to create a period of concurrent membership for new and retiring directors. This allows new directors to become fully oriented to their duties prior to the departure of retiring directors.

The Nominating and Governance Committee has the authority to hire, dismiss or otherwise seek the services of consulting and advisory firms as it deems appropriate. These advisors serve as independent counsel and report directly to the Nominating and Governance Committee. As a matter of general policy, the Nominating and Governance Committee does not prohibit its advisors from providing services to management, but any such engagements must be requested or approved by the Nominating and Governance Committee.

The Nominating and Governance Committee currently consists of five directors: Lorilee A. Lawton, Chair, Peter A. Bouyea, Michael G. Furlong, Bruce M. Lisman and Robert A. Skiff, each of whom is independent under Nasdaq Listing Rules. No member of the Nominating and Governance Committee is an employee of our company or any of its subsidiaries.

Shareholder Value Committee

The function of the Shareholder Value Committee is to consider and make recommendations to our Board of Directors on proposals that affect the value of shareholders’ investment in common stock. The Shareholder Value Committee consists of the following individuals: Raymond C. Pecor, Jr., Chair, Peter A. Bouyea, Michael G. Furlong and Michael R. Tuttle. The Shareholder Value Committee did not meet during 2012.

Executive Sessions

All directors, except Mr. Tuttle, met in executive session without our management once during 2012.

Communications with Directors

Our Board of Directors provides a means for our shareholders to send communications to our Board of Directors, which can be found on our website at www.mbvt.com under “Investor Relations – Corporate Information – Officers & Directors.”

Compensation of Directors

Only non-employee members of our Board of Directors received fees with respect to their services on our Board of Directors in 2012. The following table reflects the fee schedule for our Board of Directors for 2012:


	Chairperson Retainer	Member Retainer	Fee per Meeting (in person)	Fee per Meeting (via telephone)

Board of Directors	$10,000	$5,000	$500	$250
Audit Committee	$4,000	—	$600	$250
Compensation Committee	$3,000	—	$500	$250
Nominating and Governance Committee	$2,000	—	$400	$250
Other Committees	$1,000	—	$250	$250
Committee meeting on the same day as a Board meeting	—	—	$125	$125

The following table reflects the fee schedule for Merchants Bank’s board of directors for 2012:


	Chairperson Retainer	Member Retainer	Fee per Meeting (in person)	Fee per Meeting (via telephone)

Board of Directors	$15,000	$10,000	$800	$250
Audit Committee	—	—	—	—
Compensation Committee	—	—	—	—
Nominating and Governance Committee	—	—	—	—
Other Committees	$250	—	$250	$250
Committee meeting on the same day as a Board meeting	—	—	$125	$125

Although our Audit Committee, Nominating and Governance Committee, and Compensation Committee also act as Bank-level committees, the committee chairperson and members are paid at the holding company level only. All retainers and chairperson fees are paid in quarterly installments.

In 2008, our Board of Directors and shareholders voted to adopt the 2008 Compensation Plan for Non-Employee Directors and Trustees. This plan permits non-employee directors to defer receipt of their annual retainer and meeting fees by receiving those fees at a later date in the form of our common stock. If a participating director elects to have all or a specified percentage of his or her compensation for a given year deferred, that director is credited with a number of shares of our common stock equal in value to the amount deferred.

The following table sets forth information about fees earned by our directors for their service during 2012. The table includes compensation paid to directors who serve on our Board of Directors, as well as compensation paid for service on the board of our subsidiary, Merchants Bank.

DIRECTOR COMPENSATION


Name	Fees Earned or Paid in Cash (1)	Stock Awards	Option Awards	Non-Equity Incentive Plan Compensation	Change in Pension Value and Nonqualified Deferred Compensation Earnings	All Other Compensation	Total

Michael R. Tuttle	$ —	—	—	—	—	—	$ —
Scott F. Boardman	$32,050	—	—	—	—	—	$32,050
Peter A. Bouyea	$36,025	—	—	—	—	—	$36,025
Karen J. Danaher	$30,800	—	—	—	—	—	$30,800
Jeffrey L. Davis	$37,475	—	—	—	—	—	$37,475
Michael G. Furlong	$40,500	—	—	—	—	—	$40,500
John A. Kane	$34,275	—	—	—	—	—	$34,275
Lorilee A. Lawton	$40,025	—	—	—	—	—	$40,025
Bruce M. Lisman	$26,800	—	—	—	—	—	$26,800
Raymond C. Pecor, Jr.	$30,950	—	—	—	—	—	$30,950
Raymond C. Pecor III	$28,800	—	—	—	—	—	$28,800
Patrick S. Robins	$29,875	—	—	—	—	—	$29,875
Robert A. Skiff	$32,525	—	—	—	—	—	$32,525

_____________________

(1)

Includes all fees earned, whether paid in cash, or deferred under the 2008 Compensation Plan for Non-Employee Directors and Trustees. Also includes rounding for fractional shares.

Shareownership Guidelines

Our directors are required to own and hold 4,000 shares of our stock within five years of being nominated to the Board. All directors other than Mr. Kane (due solely to inadvertent oversight) are in compliance with these guidelines. Mr. Kane will come into compliance with the guidelines as soon as possible under our insider trading policy.

The 4,000 share ownership level is equal to approximately three times the average annual compensation for our directors. The Board reserves the discretion to change this requirement as appropriate.

Corporate Governance Guidelines

Our Board of Directors has adopted Principles of Governance. These principles serve as guidelines for the conduct of our Board of Directors. They reflect our Board’s commitment to ensuring adherence to good corporate governance principles. The corporate governance guidelines address a number of topics, including, among other things, director qualifications and responsibilities, the functioning of the Board of Directors, the responsibilities and composition of the Board committees, director compensation and annual Board review and self-evaluations. These guidelines are available on our website at www.mbvt.com, under “Investor Relations.” You may obtain a printed copy of these guidelines free of charge by submitting a request to our Corporate Secretary at our principal administrative office, which is located at 275 Kennedy Drive, South Burlington, Vermont 05403, telephone: (802) 658-3400.

Codes of Ethics

In addition to the Code of Ethics we have adopted for all employees and directors, we have adopted comprehensive Codes of Ethics for senior officers and senior financial officers. These Codes are available in the Investor Relations tab of our website at www.mbvt.com, under “Investor Relations.” We have a confidential telephone and Internet hotline system for anonymous reporting of complaints and concerns regarding financial reporting. This system may be accessed by telephone at 1-866-850-1442 or via the Internet at www.ethicspoint.com.

Executive Officers

The names and ages of our executive officers and each executive officer’s position are listed below.


Name	Age	Positions

Michael R. Tuttle	58	President and CEO, Merchants and Merchants Bank
Janet P. Spitler	53	Executive Vice President, Treasurer and CFO, Merchants and Merchants Bank
Geoffrey R. Hesslink	48	Executive Vice President, Senior Lender, Merchants Bank
Zoe P. Erdman	56	Senior Vice President, Senior Operations Officer, Merchants Bank
Molly Dillon	64	Senior Vice President, Community Banking and Trust, Merchants Bank

Mr. Tuttle, our President and CEO, and President and CEO of Merchants Bank, served as Merchants Bank’s Executive Vice President and Chief Operating Officer from 1997 until his appointment as President and Chief Executive Officer of Merchants Bank, effective January 1, 2006. Mr. Tuttle was appointed as our President and Chief Executive Officer effective January 1, 2007.

Ms. Spitler has served as our Treasurer and as Treasurer of Merchants Bank since 1995, and has served as our Chief Financial Officer (“CFO”) and as CFO of Merchants Bank since 1997. Ms. Spitler was also appointed as Senior Vice President of Merchants Bank in 2006, and as our Senior Vice President in January of 2009. She was appointed as Executive Vice President of Merchants and Merchants Bank in 2012.

Mr. Hesslink has served as Executive Vice President and Senior Lending Officer of Merchants Bank since May 2010. Prior to that time he served as Senior Vice President and Senior Lending Officer since January 2006. From 1996 through 2005, Mr. Hesslink served as Vice President and Corporate Banking Officer of Merchants Bank.

Ms. Erdman has served as Senior Vice President and Senior Operations Officer of Merchants Bank since December 2012. She previously served as Senior Vice President and Senior Credit Officer of Merchants Bank from April 2011 until her most recent appointment. Prior to that time she functioned as Senior Vice President and Corporate Banking Officer from November 2007 until February of 2010. Ms. Erdman also served as Senior Vice President and Senior Credit Manager of the Bank from 1998 until November 2007.

Ms. Dillon has served as our Senior Vice President for Community Banking and President of Merchants Trust Company, a division of Merchants Bank, since January 1, 2012. She previously served as the Bank’s Senior Vice President and President of Merchants Trust Company since April of 2008.

Compensation Discussion and Analysis

The Compensation Committee of our Board of Directors, which is comprised entirely of independent directors, oversees our executive compensation program and recommends all compensation for our Executive Officers for approval by our Board. The term “Named Executive Officers” (“NEOs”) refers to those individuals who served as our CEO, our CFO and our next three highest paid executive officers in 2012.

This Compensation Discussion and Analysis describes our executive compensation program for 2012, and certain elements for the 2013 program. In particular, this section explains how the Compensation Committee made decisions related to compensation for our executives, including our NEOs, during 2012.

Executive Summary

Performance Summary

Our results for 2012 were very strong. Highlights include:

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The second most profitable year in our history;

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Return on Average Equity (“ROAE”) over 13% for the last 16 years;

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Exceptional organic growth in loans and deposits with new record levels achieved in both;

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Continued strong capital position;

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Pristine asset quality;

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Strong growth in trust fees;

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Continued commitment to drive value for our shareholders – we declared our 65th consecutive dividend in January 2013, our five-year total return was over 50% and our one-year total return was 9%.

These accomplishments are significant given the slow economic recovery, sustained very low interest rate environment, the threat of continued volatility in the U.S. and the global economy, including a sustained higher level of unemployment, weak consumer confidence, and continued instability in the housing market.

We place a high value on building shareholder value. The book value of your stock has increased, on average, over 8% per year for the last five years. Dividends paid per share during each of the past six years totaled $1.12 per share, and we have maintained a quarterly cash dividend since 1997. Additionally, as shown in the chart on page 20 of our Annual Report on Form 10-K for the year ended December 31, 2012, a $100 investment in our stock on December 31, 2007 would have been worth $143.83 on December 31, 2012. That same $100 invested in the Russell 2000 would have been worth $119.09 on December 31, 2012 and, if invested in the NASDAQ Bank Index, would have been worth $79.64 at December 31, 2012.

More details regarding our 2012 performance and executive compensation can be found below. We encourage you to read this section of the proxy statement in conjunction with the advisory (nonbinding) vote that we are conducting on the compensation of our NEOs.

Effect of 2012 Advisory Vote on NEO Compensation

We provide our shareholders with the opportunity to cast an annual advisory vote on executive compensation (a “say-on-pay proposal”). At our 2012 Annual Meeting of Shareholders, a substantial majority (87%) of the votes cast on the say-on-pay proposal at that meeting were voted in favor of the proposal. The Compensation Committee believes this affirms shareholders’ support of our approach to executive compensation, and therefore did not significantly change its approach in 2012. The Compensation Committee will continue to consider the outcome of our say-on-pay vote, regulatory changes and emerging best practices when making future recommendations regarding compensation for the NEOs.

2012 Compensation Actions

The following highlights the Compensation Committee’s key compensation recommendations made to the Board in 2012, as reported in the Summary Compensation table on page 28. These recommendations were made with advice from the Compensation Committee’s independent compensation consultant, PM&P, and are discussed in greater detail elsewhere in this Compensation Discussion and Analysis.

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In November 2011, the Compensation Committee hired PM&P to conduct a competitive review and to provide recommended salary ranges for 2012 salaries. Based upon the results of the study, the Compensation Committee awarded 2012 base salary increases to our NEOs ranging from 0% to 15% in order to align salaries with market and recognize each executive’s experience, performance, and contribution. The 2012 salary increases moved the NEOs closer to the Compensation Committee’s goal of 50^th percentile of the peer group with respect to base salary for each NEO’s position. 2012 PM&P survey results indicated that the majority of respondents anticipated executive base salaries would increase between 2% - 6% for 2013. Base salary increases for 2013 for the NEOs range from 2.6% to 16%. The Senior Operations Officer received the highest merit increase to recognize her new responsibilities.

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For 2012, our NEOs earned cash incentives ranging between 21.76% and 30.47% of base salary based upon strong corporate and division/individual performance. These payouts reflect incentives earned ranging between 87% and 112% of the target opportunity, varying by executive.

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In May 2012, the Compensation Committee recommended restricted stock grants for key executives for approval by the Board with a values ranging from to 9.11% to 20.25%, and, in the case of our CEO, 37.5%, of their December 31, 2011 base salary. These awards were granted in light of strong performance relative to our strategic and financial objectives. Executives are required to hold 40% or, in the case of the CEO, 60% of the after-tax value of the restricted stock until, at least, the date that the executive’s employment with us terminates.

Our Executive Compensation Program

The Compensation Committee continues to refine our executive compensation program to reflect evolving executive compensation best practices while ensuring it attracts, motivates and retains the talent that will help us achieve our objectives. Ultimately, our compensation programs are designed to (1) ensure sound risk management, (2) motivate and reward performance, and (3) deliver long-term value to our shareholders. The Compensation Committee has:

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Designed our Executive Annual Incentive Plan in light of emerging best practice:

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Plan activation is tied to achievement of established net income target and acceptable ratings on internal and regulatory agency audits.

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Target incentive opportunities for executives are aligned with market.

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Various risk mitigation features are used, including balanced financial performance metrics and appropriate maximum caps on incentive earnings.

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A comparable index of banks (commercial banks located in the Northeast with assets ranging between approximately $750 million to $3.0 billion) has been established that will be used to measure our relative performance to peers in regards to ROAE.

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Included a balanced and risk appropriate view of performance across our short and long-term incentive plans.

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Provided a significant portion of executive compensation in performance based pay.

The Compensation Committee has worked to develop a long-term incentive plan strategy and equity grant allocation guidelines for key executives based upon their role and our desired total compensation philosophy. The objectives of our long-term incentive plan are to:

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create strong alignment with shareholder interests;

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enable us to retain and motivate key executive officers who will contribute to our long-term growth and profitability;

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ensure awards are properly focused on long-term performance and do not encourage inappropriate risk taking; and

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enhance equity retention and ownership throughout the executive team (through holding requirements for CEO and key executives).

Compensation Philosophy

Our compensation program and philosophy for executive officers was developed by the Compensation Committee and approved by our Board of Directors. The objectives of our executive compensation program are to:

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attract, motivate and retain highly qualified and dedicated executive officers with competitive levels of compensation aligned with banks of similar size and complexity in our region;

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reward above-average corporate performance and recognize individual initiative and achievements;

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integrate pay with our strategic annual and long-term performance goals;

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align executive officers’ incentive with the promotion of shareholder value; and

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provide a balanced approach that helps mitigate the influence of any one element of compensation which might be considered to drive excessive risk taking.

To meet our executive compensation objectives, our program is designed to provide the following:

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competitive base salaries that are targeted at the market median, while allowing the flexibility to recognize each executive’s individual role, responsibilities, experience and performance;

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a short-term cash incentive program which focuses our executives on critical annual goals and objectives aligned with our strategic plan. Target incentive opportunities (as a percent of base salary) are structured to be competitive with the market median with the ability to pay above market for superior performance;

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long-term incentives, delivered in stock, that align our executives’ interests with those of shareholders, reward stock price appreciation and provide a means for retaining our top performers; and

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benefits that are, by design, conservatively competitive. While they do not comprise a major part of our total compensation program, they allow us to attract and retain key executives.

Executive Compensation Mix

In summary, we strive to provide a total compensation program that is competitive, performance-oriented, shareholder aligned, balanced, and reflects sound risk management practices. We set specific performance goals that align with our strategy and support our annual plans, but also recognize the need to be responsive and flexible in today’s challenging environment. We believe this approach also helps to ensure our program does not motivate our executives to take undue risks.

Our Principles of Governance, which were approved by our Board of Directors, require compensation for the CEO to be linked to the achievement of our strategic goals that improve our long-term performance. Accordingly, a meaningful portion of the CEO’s compensation depends upon our performance.

The Compensation Committee will continue to review, evaluate, and revise the compensation philosophy as appropriate to meet its desired objectives and adhere to emerging regulations.

The pie charts below summarize our 2013 target total direct compensation mix for the CEO and the other NEOs as a group. The pie chart illustrates the mix of pay expressed as a percentage of total direct compensation (base pay + annual cash incentives + long-term incentives).

2013 Total Compensation Mix At Target

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Role of the Compensation Consultant

The Compensation Committee has the sole authority to retain and terminate a compensation consultant and to approve the consultant’s fees and all other terms of the engagement. The Compensation Committee has direct access to outside advisors and consultants throughout the year as they relate to executive compensation. The Compensation Committee has direct access to and meets periodically with the compensation consultant independently of management.

During 2012, the Compensation Committee retained the services of PM&P, an independent outside consulting firm specializing in executive and board compensation, to assist the Committee. PM&P reports directly to the Compensation Committee and carries out its responsibilities to the Compensation Committee in coordination with both the CEO and the Human Resources Manager. Services include conducting benchmarking studies, establishing compensation guidelines, designing incentive programs, assisting with proxy disclosure and providing insight on emerging regulations and best practices.

The Compensation Committee regularly reviews the services provided by its outside consultants and believes that PM&P is independent in providing executive compensation consulting services. The Committee conducted a specific review of its relationship with PM&P in 2012, and determined that PM&P’s work for the Committee did not raise any conflicts of interest. In making this determination, the Compensation Committee noted that during 2012:

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PM&P did not provide any services to us or our management other than services to the Compensation Committee, and its services were limited to executive compensation consulting;

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Fees paid by us were less than 1% of PM&P’s total revenue for FY 2012;

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PM&P maintains a Conflicts Policy which details specific policies and procedures designed to ensure independence;

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None of the PM&P consultants had any business or personal relationship with Committee members;

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None of the PM&P consultants had any business or personal relationship with executive officers of the Company; and

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None of the PM&P consultants directly own our stock.

The Compensation Committee continues to monitor the independence of PM&P and its other compensation advisers on a periodic basis.

Role of Management

Although the Compensation Committee makes independent recommendations to the Board of Directors on all matters related to compensation of the named executive officers, certain members of management are requested to attend and provide input to the Compensation Committee throughout the year. Input may be sought from the CEO, CFO, Human Resources Manager, Risk Management Director and others as needed to ensure the Compensation Committee has the information and perspective it needs to carry out its duties.

The Compensation Committee meets with the CEO to discuss his performance and compensation package, but ultimately decisions regarding his package are made solely based upon the Compensation Committee’s deliberations, as recommended and reported to the Board, as well as input from the compensation consultant, as requested. The Compensation Committee considers recommendations from the CEO, as well as input from the compensation consultant as requested, to make recommendations to the Board regarding other executives.

Inputs to Committee Decision Making

Performance Evaluation

The Compensation Committee evaluates the performance of the CEO annually in the following four categories:

Development of specific strategic plan objectives;

Operational impact on company morale, customer satisfaction, our public image, company efficiency and flexibility, and research and development of leading edge products, services and technologies;

Management style and effectiveness in relation to our customers, shareholders, employees, executive officers, board and committee members, and the media and community; and

Effectiveness of leadership in:

developing appropriate strategies and gaining support from our Board of Directors and its committees to achieve these strategies;

setting the “tone at the top” for our ethics, customer relations, reputation and ensuing results; fostering an environment for leadership development at all levels within our company; and

working collaboratively with our Board of Directors and committees and communicating information in a timely manner to ensure full and informed consent regarding matters of governance.

The CEO evaluates the performance of our other executive officers annually. Each executive officer’s annual performance review serves as the basis for adjustments to his or her base salary. Individual performance evaluations are tied closely to achievement of short-term and long-term goals and objectives, individual initiative, team-building skills, level of responsibility and above average corporate performance.

The CEO makes annual recommendations to the Compensation Committee for changes to executive officer salaries (other than his own) for the following year. These recommendations are based on individual performance within their respective areas of expertise, the CEO’s assessment of their contributions to our earnings and growth during the year, as well as their management style and effectiveness in relation to our customers, shareholders, employees, fellow executive officers, board and committee members and the community. The Compensation Committee reviews these recommendations and makes its final recommendations to our Board of Directors. Decisions regarding compensation for executive officers, including that of the CEO, are approved by our Board of Directors based on the recommendations from the Compensation Committee.

Benchmarking

A primary data source used in setting market-competitive guidelines for the executive officers is the information publicly disclosed by a peer group of other publicly traded banks and thrifts. This peer group was developed by PM&P using objective parameters that reflect banks of similar asset size and region. When developing the peer group, PM&P included financial institutions ranging from approximately one half to two times our asset size that are located in the New England and New York region of the United States (excluding Boston and the New York City metro area, as well as banks with unique business models). The peer group was also designed to position us at approximately the 50^th percentile in regards to assets. Overall, the goal is to have 20-25 comparative banks that provide a market perspective for executive total compensation.

The following peer group was approved by the Compensation Committee in 2011 and was used in making decisions related to executive compensation for 2012:

Alliance Financial Corporation

Financial Institutions, Inc.

Arrow Financial Corporation

First Bancorp, Inc.

Bar Harbor Bankshares

First Connecticut Bancorp

Beacon Federal Bancorp

Hingham Institution for Savings

Berkshire Hills Bancorp, Inc.

New Hampshire Thrift Bancshares

Brookline Bancorp, Inc.

Rockville Financial, Inc.

Camden National Corporation

SI Financial Group, Inc.

Canandaigua National Corporation

United Financial Bancorp, Inc.

Century Bancorp, Inc.

Washington Trust Bancorp, Inc.

Chemung Financial Corporation

Westfield Financial, Inc.

Enterprise Bancorp Inc.

In addition to the peer group data, PM&P used several other sources of data including PM&P’s Northeast Banking Compensation Survey Report and Towers Watson’s Financial Institutions Benchmarking Survey. The data reflected banks similar to us in asset size and region.

Information from the competitive analysis was used by the consultant to provide market-competitive guidelines that support our total compensation philosophy. Guidelines for base salary, short and long-term incentive targets and estimated total direct compensation are provided with ranges for performance. This allows the Compensation Committee to see the potential pay, and range of pay, for each executive role. These guidelines provided a framework for consideration by the Compensation Committee in setting pay levels.

Risk Oversight of Compensation Programs

We believe that the compensation program is not structured to be reasonably likely to present a material adverse risk to us based on the following factors:

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As a community bank regulated by the Federal Deposit Insurance Corporation and the Commissioner of the Vermont Department of Banking, Insurance, Securities and Health Care Administration, among others, our main operating subsidiary, Merchants Bank, adheres to defined risk guidelines, practices and controls to ensure the safety and soundness of the organization.

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Our management and Board of Directors conduct regular reviews of our business to ensure we remain within appropriate regulatory guidelines and practices that are monitored and supplemented by our internal audit function, as well as our external auditors.

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Our incentive plan provides a maximum cap on payment and does not have highly leveraged payout curves and steep payout cliffs at specific performance levels that could encourage short-term actions to meet payout thresholds.

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Our restricted stock grants are subject to clawbacks in the event of accounting restatement due to fraud or misconduct or in the event of material violations of our code of ethics.

Components of Executive Compensation and 2012 Decisions

Our compensation program for all executive officers, including the CEO, consists of four key components, which are reviewed regularly by the Committee:

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Base Salary;

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Annual Incentive;

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Long-Term Incentive/Equity; and

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Employment Contracts/Other Benefits.

We offer no perquisites of any kind to any of our executive officers. Executive officers are not entitled to any severance or change-in-control payments beyond those described in the “Employment Agreements” section below.

The following section summarizes the role of each component, how decisions are made and the resulting 2012 decision process as it relates to the executive officers.

Base Salary

We believe the purpose of base salary is to provide competitive and fair base compensation that recognizes the executives’ role, responsibilities, experience and performance. Base salary represents fixed compensation that is targeted to be competitive with our peer group.

Typically, the Compensation Committee reviews and sets base pay for each executive in December of each year following the performance evaluation process. Competitive markets for similar roles are considered, as well as each individual’s experience, performance and contributions.

On July 23, 2012, Thomas S. Leavitt, our former Senior Operations Officer, who also had oversight of our marketing function, announced his resignation from Merchants Bank effective August 3, 2012, having accepted a position as President and CEO of another financial institution. As a result of that announcement we realigned responsibilities for two of our NEOs. Zoe P. Erdman, formerly our Senior Credit Officer, has assumed the responsibilities of Senior Operations Officer and Molly Dillon has added oversight of our marketing function to her duties as head of Community Banking and Trust.

The Compensation Committee approved the following 2013 base salary adjustments for NEOs for 2013 that were intended to recognize each executive’s contribution and performance, as well as the changes discussed in the preceding paragraph, and if needed, bring salaries more in line with market:


		January 2011 Base Salary	January 2012 Base Salary	Percent Increase in January 2012	January 2013 Base Salary	Percent Increase in January 2013

Michael R. Tuttle	President & CEO	$275,000	$315,000	15%	$325,000	3.2%
Janet P. Spitler	EVP, CFO and Treasurer	$175,000	$195,000	11%	$200,000	2.6%
Geoffrey R. Hesslink	EVP, Senior Lender	$190,000	$210,000	10%	$220,000	4.7%
Zoe P. Erdman	SVP, Senior Operations Officer	$107,515	$125,000	16%	$145,000	16.0%
Molly Dillon	SVP, Senior Community Banking and Trust Officer	$155,000	$170,000	10%	$180,000	5.8%

The Compensation Committee recognizes, as stated previously, that the CEO’s salary is slightly below the 25^th percentile for the market. This does not reflect performance, but rather a historical practice that reflected a more conservative and “team” oriented approach to managing compensation levels. The Committee has recommended that the CEO’s salary be increased to be closer to the market over the past several years. Currently the CEO base compensation is 1.43 times the base compensation of the next highest paid executive officer.

Annual Incentive

The objective of our Executive Annual Incentive Plan is to motivate and reward key members of management, including the CEO, for achieving specific company performance goals and/or division/individual goals that support the strategic plan. Rewards under this Plan represent compensation that must be earned (and re-earned each year) based upon company and division/individual performance.

Our proposed performance goals for the incentive plan are based on budget projections and typically presented by the CEO to the Compensation Committee during the first quarter of the year. Once the Compensation Committee finalizes and approves the performance goals, the goals are presented to the full Board for final approval. The following details the framework of the 2012 Executive Annual Incentive Plan (the “2012 Plan”):

Incentive Opportunity: Each participant has a target award (expressed as a percentage of earned base salary during the fiscal year) and range that defines the incentive opportunity. The CEO’s target is 35% of base salary and the other executive officers’ target is 25% of base salary. Actual awards vary based on performance and range from 0% of target (not achieving minimal performance for a goal) to 150% of target for exceptional performance.

Performance Measures: The 2012 performance measures are aligned with our strategy and business plan. The 2012 Plan was approved by the Compensation Committee on February 15, 2012. In order for the 2012 Plan to activate, we needed to achieve a net income target of $14.59 million in 2012 and maintain acceptable ratings on internal and regulatory agency audits. The awards of Mr. Tuttle, Ms. Spitler and Ms. Erdman were based upon achieving targets with respect to our return on assets, return on equity relative to a peer group index, efficiency ratio, net interest income on a fully taxable equivalent basis, or “FTE”⁽¹⁾and Tier 1 Leverage Ratio. The awards of Mr. Hesslink and Ms. Dillon were based upon one to three company goals as well as one or more division and/or individual performance goals. Minimum (threshold) and maximum (stretch) levels of performance were defined for the 2012 Plan and are summarized in the table below. No awards are paid for performance below threshold (minimum) for a particular performance measure. Actual payouts for each goal are based upon final performance between threshold and stretch levels. Actual payouts for each performance goal are pro-rated for any level of performance between threshold and stretch using interpolation to reward incremental improvement. The Compensation Committee has the discretion to adjust any payouts to reflect the business environment and market conditions.

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(1)

Net interest income on a fully taxable equivalent basis includes the tax benefit from certain tax exempt loans. Please see pages 3 and 24 of our Annual Report on Form 10-K for the years ended December 31, 2012 for more details.

The 2012 performance measures for Mr. Tuttle, Ms. Spitler and Ms. Erdman were as follows:


Performance Measure	Weighting	Threshold (Minimum) Goal Funds 40% of target award	Target Goal Funds 100% of target award	Stretch (Maximum) Goal Funds 150% of target award

ROAA	20%	0.90%	0.96%	1.01%
ROAE – Relative to Peer Group Performance	25%	70th percentile	80th percentile	90th percentile
Efficiency Ratio	15%	63.12%	62.19%	61.05%
Tier 1 Leverage Ratio	20%	8.07%	8.12%	8.17%
Net Interest Income (FTE, dollars in thousands)	20%	$51,547	$52,897	$54,097

The 2012 performance measures for Ms. Dillon were as follows:


Performance Measure	Weighting	Threshold (Minimum) Goal Funds 40% of target award	Target Goal Funds 100% of target award	Stretch (Maximum) Goal Funds 150% of target award

ROAA	20%	0.90%	0.96%	1.01%
ROAE – Relative to Peer Group Performance	20%	70th percentile	80th percentile	90th percentile
Gross Trust Income	20%	$2,645,000	$2,675,000	$2,710,000
Total Personal Rewards Checking Average Balances for 12/31/2012	20%	$40 million	$42 million	$44 million
Total Business Rewards Checking Average Balances for 12/31/2012	20%	$120 million	$124 million	$128 million

The 2012 performance measures for Mr. Hesslink were as follows:


Performance Measure	Weighting	Threshold (Minimum) Goal Funds 40% of target award	Target Goal Funds 100% of target award	Stretch (Maximum) Goal Funds 150% of target award

ROAA	15%	0.90%	0.96%	1.01%
ROAE – Relative to Peer Group Performance	25%	70th percentile	80^th percentile	90th percentile
Efficiency Ratio	10%	63.12%	62.19%	61.05%
Total Gross Loans at Year-End	25%	$1.07 billion	$1.09 billion	$1.12 billion
Nonperforming Asset Balances (NPAs) as % of Total Loans	25%	0.90%	0.75%	0.50%

At the end of the calendar year, the Compensation Committee assesses our performance relative to each of the performance measures and determines the awards based upon the attainment of each goal. The Compensation Committee retains the discretion to recommend to the Board modification of executives’ incentive payouts based on significant individual performance or company performance shortfalls. Our Board of Directors has the discretion to determine the amount and manner of executive incentive payments and to make adjustments.

2012 Decisions

The following table summarizes the 2012 performance results and the associated payouts (as a percent of target opportunity for each predefined performance measure) for Mr. Tuttle, Ms. Spitler and Ms. Erdman:


Performance Measure	2012 Threshold - Stretch Goal	2012 Result	Payout Allocation (0-150% of target opportunity)

ROAA	0.90% – 1.01%	0.92%	60%
ROAE – Relative to Peer Group Performance	70th-90th Percentile	86th Percentile	132%
Efficiency Ratio	63.12% – 61.05%	60.63%	150%
Tier 1 Leverage Ratio	8.07% – 8.17%	8.08%	52%
Net Interest Income (FTE, dollars	$51,547 – $54,097	$51,989	46%
in thousands)		TOTAL	87% of Target Incentive Opportunity

The following table summarizes the 2012 performance results and the associated payouts (as a percent of target opportunity) for each predefined performance measure for Ms. Dillon:


Performance Measure	2012 Threshold - Stretch Goal	2012 Result	Payout Allocation (0-150% of target opportunity)

ROAA	0.90% – 1.01%	0.92%	60%
ROAE – Relative to Peer Group Performance	70th-90th Percentile	86th Percentile	132%
Gross Trust Income	$2.65 million – $2.71 million	$2.69 million	80%
Total Cash Rewards Checking at 12/31/2012	$40 million – $44 million	$26.01 million	0%
Total Business Rewards Checking at 12/31/2012	$120 million – $128 million	$194.67 million	150%
		TOTAL	92% of Target Incentive Opportunity

The following table summarizes the 2012 performance results and the associated payouts (as a percent of target opportunity) for each predefined performance measure for Mr. Hesslink:


Performance Measure	2012 Threshold - Stretch Goal	2012 Result	Payout Allocation (0-150% of target opportunity)

ROAA	0.90% – 1.01%	0.92%	60%
ROAE – Relative to Peer Group Performance	70th-90th Percentile	86th Percentile	132%
Efficiency Ratio	63.12% – 61.05%	60.63%	150%
Gross Loans	$1.07 billion – $1.12 billion	$1.08 billion	71%
NPL as % of Total Loans	0.90% – 0.50%	0.27%	150%
		TOTAL	112% of Target Incentive Opportunity

Based upon the actual performance results summarized previously, the table below summarizes the actual incentive payouts (as dollar amount and percent of base salary) for each of the NEOs.


		2012 Annual Incentive Target Opportunity		2012 Annual Incentive Actual Awards
Executive	Title	Amount	% of Base Salary	Amount	% of Base Salary

Michael R. Tuttle	President & CEO	$110,251	35%	$95,981	30.47%
Janet P. Spitler	CFO and Treasurer	$ 48,751	25%	$42,433	21.76%
Geoffrey R. Hesslink	EVP, Senior Lender	$ 52,500	25%	$58,968	28.08%
Molly Dillon	Senior Community Banking and Trust Officer	$ 42,500	25%	$39,253	23.09%
Zoe P. Erdman	Senior Operations Officer	$ 31,251	25%	$27,562	21.76%

2013 Plan Design

On February 20, 2013, the Board approved the 2013 Executive Annual Incentive Plan (the “2013 Plan”) and designated target awards for fiscal year 2013 (calculated as a percentage of base salary) for our executive officers, including our NEOs as set forth in this proxy statement. The target award percentages are 35% for Mr. Tuttle, and 25% for Ms. Spitler, Mr. Hesslink, Ms. Dillon, and Ms. Erdman. The possible payouts under the 2013 Plan range from 0% to 150% of these target awards based upon the company’s and, in the case of Mr. Hesslink and Ms. Dillon, division or individual performance. In order for the 2013 Plan to activate, we must achieve a net income target of $14.65 million in 2013 and maintain acceptable ratings on internal and regulatory agency audits. The awards of Mr. Tuttle, Ms. Spitler and Ms. Erdman will be based upon achieving targets with respect to our return on assets, return on equity relative to our peer group, efficiency ratio, net interest income (FTE) and Tier 1 Leverage Ratio. The awards of Mr. Hesslink and Ms. Dillon will be based upon one to three company goals depending upon their current role as well as one or more division and/or individual performance goals. The Compensation Committee has the discretion to adjust any payouts to reflect the business environment and market conditions.

Long-Term Compensation

We award long-term incentives in the form of restricted stock grants to our executive officers, although an annual stock grant is not guaranteed. These awards are consistent with our pay-for-performance principles and align the interests of our executive officers with the interests of our shareholders. The Compensation Committee reviews and recommends to our Board of Directors the amount of each award to be granted to each executive officer and our Board of Directors approves each award. In making these determinations, the Compensation Committee considers performance relative to our strategic and financial objectives, the previous year’s individual performance of each executive officer and the market pay level for the executive officer. This typically takes place in May of each year.

2012 Decisions

The annual long-term incentive program includes a restricted stock award. Under this program, executives are eligible to receive annual grants of time-vested restricted stock (full value shares) based upon the Compensation Committee’s holistic assessment of both company and individual performance for the prior year. The Compensation Committee chose to introduce restricted stock since this type of equity vehicle helps to create an ownership focus and alignment with shareholders while also serving as a powerful retention feature for our top executives. The CEO’s target opportunity is 25% of base salary and other key executives’ target opportunity is 15% of base salary. The grants will cliff vest (100%) at the end of three years. The Compensation Committee will review the program on an annual basis and will have the ability to change the mix of equity instruments (i.e. mix of restricted stock and stock options) as deemed necessary. These grants are subject to clawbacks in the event of accounting restatement due to fraud or misconduct or in the event of material violation of our code of ethics.

The Compensation Committee believes that Merchants’ executive officers should maintain a material personal financial stake in the company to promote a long-term perspective in managing the company and to align shareholder and executive interests. Therefore, executive officers are required to hold onto a percentage of their after tax full value shares until termination or retirement. The table below summarizes these holding requirements.


Role		Holding Requirement (after tax, full value shares)
CEO		60%
Key Executives		40%

If an executive experiences personal economic hardship, the Compensation Committee will have the authority to decide whether the holding requirements will be waived for that particular award or if the executive will be allowed to sell more shares than the holding requirements permit.

Employment Agreements

On March 17, 2011, each of our executive officers entered into employment agreements with us which became effective on January 1, 2011. These agreements contain standard terms and conditions customarily found in employment agreements for comparable executives. No severance is payable unless there is an involuntary termination after a change in control (“double-trigger”). If an executive officer is terminated without “cause” (as defined in such agreements) or the executive officer resigns for “good reason” (as defined in such agreements) we agreed to pay, over 24 months (36 months in the case of our CEO), that executive officer’s salary for two years (three years in the case of our CEO) from the date of termination. In return, each executive has agreed to be subject to restrictive covenants (non-competition and non-solicitation) during the severance period. There are no tax “gross up” provisions in the employment agreements. We believe it is appropriate to provide a higher level of severance in exchange for restrictive covenants which protect the company.

Other Benefits

Our executive officers are also eligible for other benefits available to all other employees on substantially the same terms, such as our 401(k) plan, and health, dental, and life insurance plans.

•

401(k) plan: We match individual plan contributions for participating employees, including the executive officers, on a dollar-for-dollar basis, up to 3% of annual salary, and on a $0.50 per dollar basis up to the next 3% of annual salary up to annual IRS maximums.

•

Medical and dental health insurance plans.

•

Life insurance plan (benefit equal to one time annual salary) and short and long-term disability insurance plans.

Impact of Accounting and Tax on the Form of Compensation

The Compensation Committee and management consider the accounting and tax (individual and corporate) consequences of the compensation plans prior to making changes to the plans.

Section 162(m) of the Internal Revenue Code limits deduction of compensation paid to NEOs to $1,000,000 unless the compensation is “performance-based.” Based on current compensation levels, we do not believe the section 162(m) cap on compensation will be triggered for our CEO or other executive officers, but may consider this in future years.

Compensation Committee Report

The Compensation Committee reviewed and discussed the above Compensation Discussion and Analysis with our management. Based on the review and discussion, the Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

Submitted by the Compensation Committee

Lorilee A. Lawton, Chair

Peter A. Bouyea

Michael G. Furlong

Bruce M. Lisman

Robert A. Skiff

Executive Compensation

Summary Compensation Table

The following table sets forth a summary of compensation paid to each of our NEOs during 2012, 2011, and 2010.

SUMMARY COMPENSATION TABLE


Name and Principal Position	Year	Salary	Bonus(1)	Option Awards	Equity Incentive Plan Compensation (2)	Non-Equity Incentive Plan Compensation (3)	Change in Pension Value and Non-Qualified Deferred Compensation Earnings (4)	All Other Compensation (5)	Total

Michael R. Tuttle	2012	$313,478	$ —	$ —	$55,688	$95,981	$8,951	$16,634	$490,732
President and CEO	2011	$274,056	$ —	$ —	$93,750	$78,249	$1,686	$13,019	$460,760
	2010	$248,862	$ —	$37,500	$ —	$94,556	$4,126	$11,025	$396,069

Janet P. Spitler, EVP	2012	$194,231	$10,000	$ —	$21,263	$42,433	$5,408	$12,434	$285,769
CFO and Treasurer	2011	$174,530	$ —	$ —	$36,563	$35,608	$ 799	$10,968	$258,468
	2010	$162,338	$ —	$24,375	$ —	$44,024	$2,232	$ 9,463	$242,432

Geoffrey R. Hesslink,	2012	$209,248	$ —	$ —	$36,480	$58,968	$ —	$19,790	$324,486
EVP Senior Lender	2011	$189,431	$ —	$ —	$39,375	$60,953	$ —	$17,853	$307,612
	2010	$174,511	$ —	$26,250	$ —	$47,410	$ —	$16,058	$264,229

Molly Dillon	2012	$169,422	$ —	$ —	$18,368	$39,253	$ —	$10,905	$237,948
SVP, Community
Banking and Trust

Zoe Erdman	2012	$125,586	$ —	$ —	$10,935	$27,562	$ —	$ 6,815	$170,898
SVP, Operations

_____________________

(1)

The amount shown in this column represents a $10,000 payment made to Ms. Spitler for assuming responsibility for Operations on an interim basis.

(2)

The amounts shown in this column represent the aggregate grant date fair value of the shares of restricted stock granted to the NEOs.

(3)

The amounts shown in this column represent cash awards made to the NEOs pursuant to our annual incentive plan.

(4)

The amounts shown in this column reflect the aggregate change in actuarial present value of the NEOs’ accumulated benefit under our frozen defined benefit pension plan from December 31, 2012 to December 31, 2010. Present values as of December 31, 2012 are based on commencement at normal retirement age with no mortality before commencement. Mr. Hesslink, Ms. Erdman and Ms Dillon joined Merchants after the plan was frozen and, accordingly, have no benefit under this pension plan.

(5)

The amounts shown in this column reflect contributions made by us on behalf of the NEOs to the Merchants Bank 401(k) Plan; dividends on unvested restricted stock in the amount of $5,384 for Mr. Tuttle, $2,091 for Ms. Spitler, $2,540 for Mr. Hesslink, $233 for Ms. Erdman, $1,903 for Ms. Dillon and a $6,000 annual car allowance for Mr. Hesslink.

Non-Equity Incentive Plan Awards

Non-Equity incentive awards and shares of restricted stock were awarded to NEOs during 2012 as detailed in the table below.

GRANTS OF PLAN-BASED AWARDS

Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards

Estimated Future Payouts
Under Equity Incentive
Plan Awards

All Other
Stock
Awards:
Number of
Shares of
Stock or

All Other
Option
Awards:
Number of
Securities
Underlying

Exercise
Price of
Option

Grant
Date Fair
Value of
Option

Name

Grant Date

Threshold

Target

Maximum

Threshold

Target

Maximum

Units

Options

Awards

Michael R. Tuttle

5/17/2012

$44,100

$110,251

$165,375

−

2,115

−

$55,688

Janet P. Spitler

5/17/2012

$19,500

$ 48,751

$ 73,145

−

808

−

$21,275

Geoffrey R. Hesslink

5/17/2012

$21,000

$ 52,500

$ 78,792

−

1,386

−

$36,493

Molly Dillion

5/17/2012

$17,000

$ 42,500

$ 63,750

−

698

−

$18,378

Zoe Erdman

5/17/2012

$12,666

$ 31,666

$ 47,512

−

416

−

$10,953

“Estimated Future Payouts Under Non-Equity Incentive Plan Awards” reflects the 2012 threshold, target and maximum awards available under the 2012 Executive Annual Incentive Plan, tied to achievement of a number of performance targets more fully described in the “Compensation Discussion and Analysis” section of this proxy. The actual bonus earned by each NEO is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. The amounts reflected in the above table are estimated amounts at the time of grant.

“All Other Stock Awards” reflects the number of shares of restricted stock granted by Merchants during 2012 pursuant to the Amended and Restated 2008 Stock Incentive Plan. The restricted stock grants made on May 17, 2012 to each of the five officers vest on the third anniversary date of the grant.

Equity Awards

The following table sets forth outstanding equity awards to our NEOs at December 31, 2012. In addition, this table includes the number of shares remaining unexercised underlying both “exercisable” (i.e. vested) and “unexercisable” (i.e. unvested) stock options as of December 31, 2012.

OUTSTANDING EQUITY AWARDS AT YEAR-END


	Option Awards					Stock Awards
Name	Number of Securities Underlying Unexercised Options Exercisable	Number of Securities Underlying Unexercised Options Unexercisable(1)	Equity Incentive Plan Awards Underlying Unexercised Unearned Options	Option Exercise Price	Option Expiration Date	Grant Date	Vesting Date	Number of Shares of Units of Stock That Have Not Vested(2)	Market Value of Shares or Units of Stock That Have Not Vested

Michael R. Tuttle	7,175	—	—	$22.93	6/9/2018	5/19/2011	5/19/2014	3,750	$100,388
	7,590	—	—	$22.75	5/21/2019	5/17/2012	5/17/2015	2,115	$ 56,619
	—	12,255	—	$22.07	5/20/2020	—	—	—	—
Janet P. Spitler	5,363	—	—	$22.93	6/9/2018	5/19/2011	5/19/2014	1,463	$ 39,165
	5,637	—	—	$22.75	5/21/2019	5/17/2012	5/17/2015	808	$ 21,630
	—	7,966	—	$22.07	5/20/2020	—	—	—	—
Geoffrey R. Hesslink	10,000	—	—	$26.63	8/16/2016	5/19/2011	5/19/2014	1,575	$ 42,163
	5,363	—	—	$22.93	6/9/2018	5/17/2012	5/17/2015	1,386	$ 37,103
	5,637	—	—	$22.75	5/21/2019	—	—	—	—
	—	8,578	—	$22.07	5/20/2020	—	—	—	—
Zoe P. Erdman	—	—	—	—	—	5/17/2012	5/17/2015	416	$ 11,136
Molly Dillon	4,232	—	—	$22.75	2/21/2019	5/19/2011	5/19/2014	1,350	$ 36,140
	—	7,794	—	$22.07	5/20/2020	5/17/2012	5/17/2015	698	$ 18,685

_____________________

(1)

The vesting date for for options expiring on May 20, 2020 is May 20, 2013.

None of our current NEOs exercised stock options during 2012.

Retirement Benefits

Prior to January 1995, we maintained a noncontributory defined benefit plan covering all eligible employees. During 1995, this plan was curtailed. Accordingly, all accrued benefits were fully vested and no additional years of service or increases in compensation will be taken into account in determining the benefit. The retirement benefits listed in the table below take into consideration the Social Security offset amount, which is based on the law in effect on January 1, 1994. The present value of accumulated benefit was determined using the same assumptions used for financial reporting purposes under generally accepted accounting principles for 2012.

PENSION BENEFITS


Name	Plan Name	Number of Service Years Credited	Present Value of Accumulated Benefit	Payments During Last Fiscal Year

Janet P. Spitler	The Merchants Bank Pension Plan	4	$20,140	—
Michael R. Tuttle	The Merchants Bank Pension Plan	4	$40,634	—

Due to the frozen status of the plan, no further years of service will accrue. The annual retirement benefits payable at age 65 for Mr. Tuttle and Ms. Spitler under the plan are approximately $4,000 and $2,000, respectively. Mr. Tuttle is the only NEO currently eligible for early retirement. Participants are eligible for early retirement upon obtaining age 55 and completing 10 years of vesting service.

Potential Payments Upon Termination or Change in Control

The following table summarizes payments and benefits that would be payable to each of the NEOs in the event of their termination of employment or upon the occurrence of a change in control combined with a termination of employment. For purposes of this table, the effective date of termination is assumed to be December 31, 2012. The closing market price of our common stock on December 31, 2012 was $26.77.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL


Form of Compensation	Discharge without cause or Resignation with Good Reason	Discharge With Cause	Death or Disability	No Discharge - Change in Control Related	Discharge without Cause or Resignation with Good Reason - Change in Control Related

Michael R. Tuttle
Cash Severance	$ 945,000	$ —	$ —	$ —	$ 945,000
Accelerated vesting of equity awards (1)	—	—	—	214,605	214,605
Total	$ 945,000	$ —	$ —	$ 214,605	$ 1,159,605

Janet P. Spitler
Cash Severance	$ 390,000	$ —	$ —	$ —	$ 390,000
Accelerated vesting of equity awards (1)	—	—	—	98,235	98,235
Total	$ 390,000	$ —	$ —	$ 98,235	$ 488,235

Geoffrey R. Hesslink
Cash Severance	$ 420,000	$ —	$ —	$ —	$ 420,000
Accelerated vesting of equity awards (1)	—	—	—	119,583	119,583
Total	$ 420,000	$ —	$ —	$ 119,583	$ 539,583

Zoe P. Erdman
Cash Severance	$ 250,000	$ —	$ —	$ —	$ 250,000
Accelerated vesting of equity awards (1)	—	—	—	11,136	11,136
Total	$ 250,000	$ —	$ —	$ 11,136	$ 261,136

Molly Dillon
Cash Severance	$ 340,000	$ —	$ —	$ —	$ 340,000
Accelerated vesting of equity awards (1)	—	—	—	91,457	91,457
Total	$ 340,000	$ —	$ —	$ 91,457	$ 431,457

_____________________

(1)

Options and restricted stock awards become fully vested upon a change in control.

“Good reason” means, among other things, a material diminution of responsibility or salary; a change in location of more than 50 miles from the executive’s current location; or the inability of Merchants to perform its obligations under the agreement. “Cause” means, among other things, illegal acts, gross misconduct or the executive’s failure to perform in any material respect their obligations under this agreement.

Related Party Transactions

Certain of our directors and executive officers, as well as members of their immediate families and the companies, organizations, trusts, and other entities with which they are associated, are, or during 2012 were, also customers of Merchants Bank in the ordinary course of business. As permitted by applicable law, these persons may have had loans outstanding during 2012, and it is anticipated that these persons and their associates will continue to be customers of and indebted to Merchants Bank in the future. All of these loans were made in the ordinary course of business, and did not involve more than normal risk of collectability or present other unfavorable features, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unaffiliated persons and, where required by law, received prior approval by Merchants Bank’s Board of Directors. At December 31, 2012, these loans totaled approximately $2.98 million (2.5% of total shareholders’ equity). None of these loans to directors, executive officers, or their associates are nonperforming.

We have established guidelines for review of third party contracted services, which are reviewed annually by the Audit Committee. Our officers are assigned responsibility for review of service levels of outsourced technology service providers and vendors that pose the highest risk exposure within the guidelines established by the Federal Financial Institutions Examination Council (“FFIEC”). New service relationships considered for engagement with our insiders of Merchants Bank (defined by the FFIEC as individuals, their direct family members and business associates who are executive officers or directors of us and/or Merchants Bank) must be bid by at least one other service provider. Merchants Bank’s board of directors may require a third party analysis or review to substantiate the results of a new service contract with an insider.

Renewals of existing contracts with insiders of Merchants or Merchants Bank do not require re-bidding or a third party analysis. However, the CEO or the board of directors of Merchants Bank may require either or both prior to reviewing a recommendation for a contract renewal.

We obtained legal services during 2012 from the firm of Sheehey Furlong & Behm P.C., of which Michael G. Furlong is a principal member. Mr. Furlong is a member of our Board of Directors and is the Chairman of Merchants Bank’s board of directors. We paid fees totaling approximately $62,000 to Mr. Furlong’s firm in 2012.

During 2012, we purchased copier equipment and supplies from SymQuest Group, Inc. totaling approximately $33,000. Patrick S. Robins, who is the Chairman of the Board of SymQuest Group, Inc., is a member of our Board of Directors and the board of directors of Merchants Bank.

We obtained insurance during 2012 through an insurance agency, of which Scott F. Boardman, a member of our board of Directors and the board of directors of Merchants Bank, is president. In 2012, commissions paid to this insurance agency totaled approximately $24,000.

These transactions were approved pursuant to the policies and procedures set forth above. In the opinion of our management, the terms of these transactions were no less favorable to us than those we could have obtained from an unrelated party providing comparable premises or services.

Compensation Committee Interlocks and Insider Participation

Lorilee A. Lawton, Peter A. Bouyea, Michael G. Furlong, Bruce M. Lisman and Robert A. Skiff served as members of the Compensation Committee during the year ended December 31, 2012. None of the members of the Compensation Committee has ever been an employee of the Company or any of its subsidiaries.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of March 8, 2013, certain information concerning the beneficial ownership of our common stock by (i) each person known by us to own beneficially five percent (5%) or more of the outstanding shares of our common stock; (ii) each of our directors, director nominees and the named executive officers; and (iii) all executive officers and directors as a group.

The number of shares beneficially owned by each 5% shareholder, director or executive officer is determined under SEC rules, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and also any shares which the individual or entity has the right to acquire within 60 days after
March 8, 2013 through the exercise of any stock option or other right. Unless otherwise indicated, each person or entity has sole investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares.


Name of Beneficial Owner (1)	Amount and Nature of Beneficial Ownership (3)(4)		Percentage of Common Stock Beneficially Owned (2)

5% Shareholders
Merchants Bank 401(k) Employee Stock Ownership Plan	332,477	(5)	5%
275 Kennedy Drive
South Burlington, Vermont

Charles A. Davis	421,354	(6)	7%
Stone Point Capital LLC
20 Horseneck Lane
Greenwich, Connecticut

BlackRock, Inc.	365,550	(7)	6%
40 East 52nd Street
New York, NY 10022

Ameriprise Financial, Inc.	323,937	(8)	5%
Columbia Management Investment Advisers, LLC
145 Ameriprise Financial Center
Minneapolis, MN 02110

Directors, Director Nominees and Executive Officers

Scott F. Boardman	13,020		*
Janette K. Bombardier	0		*
Peter A. Bouyea	89,227	(10)	1%
Karen J. Danaher	4,164		*
Jeffrey L. Davis	29,472	(11)	*
Molly Dillon	7,280		*
Zoe P. Erdman	5,612		*
Michael G. Furlong	7,154		*
Geoffrey R. Hesslink	44,518		*
John A. Kane	2,854	(12)	*
Lorilee A. Lawton	8,988		*
Bruce M. Lisman	6,030		*
Raymond C. Pecor, Jr.	262,155	(13)	4%
Raymond C. Pecor, III	11,008	(14)	*
Patrick S. Robins	83,430		1%
Robert A. Skiff	12,024	(15)	*
Janet P. Spitler	26,609		*
Michael R. Tuttle	70,978		1%

Directors and Executive Officers as a Group (eighteen persons)	684,523		11%

_____________________

Shareholdings represent less than 1.0% of class.

(footnotes continued on following page)

NOTES:

(1)

The address for all executive officers and directors is c/o Merchants Bancshares, Inc., 275 Kennedy Drive, South Burlington, Vermont 05403.

(2)

The total number of shares outstanding used in calculating this percentage assumes the exercise of all options to acquire shares of common stock that are exercisable on or within 60 days after March 8, 2013 held by the beneficial owner and that no options held by other beneficial owners are exercised. Shares outstanding as of March 8, 2013 include 305,232 deferred shares held in various trusts related to our former and current deferred compensation plans for directors and executive salary continuation plan. See Note 4. Merchants has the authority to vote these deferred shares.

(3)

Includes the following number of shares of common stock issuable upon the exercise of outstanding stock options which were exercisable within 60 days after March 8, 2013 as follows:


Directors and Executive Officers		Vested Options

Mr. Tuttle		14,765
Ms. Spitler		11,000
Mr. Hesslink		21,000
Ms. Dillon		4,232

Also includes unvested restricted stock awards of 13,561 shares made to each of the following executive officers under the Amended and Restated Merchants Bancshares, Inc. 2008 Stock Incentive Plan. Each recipient of a restricted share award has sole voting power, but no investment power, over the common stock covered by the award. The restricted stock will vest on the third anniversary of the date of the grant, with accelerated vesting upon death, disability, retirement or change in control.


Directors and Executive Officers	Restricted Stock (Unvested)

Mr. Tuttle		5,865
Ms. Spitler		2,271
Mr. Hesslink		2,961
Ms. Erdman		416
Ms. Dillon		2,048

(4)

Does not include the following number of shares of common stock which certain directors and executive officers have the right to receive on a deferred basis pursuant to our prior and current deferred compensation plans for directors and executive salary continuation plan:


Directors and Executive Officers		Deferred Shares

Mr. Boardman		11,996
Mr. Bouyea		41,668
Mr. J. Davis		43,903
Mr. Furlong		9,729
Mr. Kane		5,351
Ms. Lawton		23,548
Mr. Lisman		10,963
Mr. Pecor. Jr.		26,930
Mr. Pecor III		3,261
Mr. Robins		18,036
Dr. Skiff		24,968

The individuals named above do not have the power to vote or dispose of these deferred shares. Merchants has the authority to vote these deferred shares.

(5)

Information has been obtained from Schedule 13G/A, filed February 11, 2013 with the SEC by the Merchants Bank 401(k) Employee Stock Ownership Plan. While 401(k) Employee Stock Ownership Plan participants have the right to designate how shares allocated to their respective accounts are to be voted, the Plan’s trustee, Charles Schwab Trust Company, is authorized to vote the shares for which participants make no designation in connection therewith.

(6)

Until February 21, 2008, Mr. C. Davis was a member of our Board of Directors.

(7)

Information has been obtained from Schedule 13G/A, filed February 8, 2013 with the SEC by BlackRock, Inc. BlackRock Inc. has sole voting and dispositive power over 365,550 shares.

(8)

Information has been obtained from Schedule 13G/A, filed February 13, 2013 with the SEC by Ameriprise Financial, Inc. Ameriprise Financial, Inc. and Columbia Management Investment Advisors have shared voting power and shared dispositive power over 323,937 shares.

(9)

Includes 12,777 shares owned by Mr. Boardman’s spouse.

(10)

Includes 1,400 shares owned by Mr. Bouyea’s spouse, and 3,000 shares owned by Mr. Bouyea’s daughter for which Mr. Bouyea may be deemed to have investment and voting control; Mr. Bouyea disclaims beneficial ownership of these shares.

(11)

Includes 6,436 shares held in trust for Mr. J. Davis’ children, 633 shares held directly by Mr. J. Davis’ minor children and 1,260 shares held directly by Mr. J. Davis’ spouse. Also includes 595 shares held by a family trust, of which Mr. J. Davis is trustee. Mr. J. Davis disclaims beneficial ownership of these shares.

(12)

Includes 800 shares held in trust for Mr. Kane’s children for which Mr. Kane’s wife is trustee. Mr. Kane disclaims beneficial ownership of the shares held in these trusts.

(13)

Includes 15,000 shares held in the Pecor Family Foundation and 19,500 shares held by Mr. Pecor Jr.’s spouse.

(14)

Includes 4,693 shares held in trust for Mr. Pecor III’s niece and nephew, for which Mr. Pecor III is trustee. Mr. Pecor III disclaims beneficial ownership of shares held in these trusts.

(15)

Includes 1,750 shares held by Dr. Skiff’s wife.

______________________________

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Exchange Act requires our executive officers, directors, and 10% shareholders to file reports of ownership (Form 3) and changes of ownership (Forms 4 and 5) with respect to our common stock with the SEC. Executive officers, directors and 10% shareholders are required to furnish us with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such reports furnished to us with respect to 2012, all Section 16(a) filing requirements applicable to our executive officers and directors during 2012 were met.

NON-BINDING RESOLUTION TO APPROVE THE COMPENSATION OF MERCHANTS’ NAMED

EXECUTIVE OFFICERS

(Proposal Number 2)

As required by Section 14A of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Board of Directors is submitting for shareholder approval, on an advisory basis, the compensation paid to our NEOs as described in this Proxy Statement pursuant to Item 402 of Regulation S-K. As previously disclosed by us, the Board of Directors has determined that it will hold an advisory vote on executive compensation on an annual basis, and the next such shareholder advisory vote will occur at the 2014 Annual Meeting of Shareholders.

The resolution that is the subject of this proposal is a non-binding advisory resolution. Accordingly, the resolution will not have any binding legal effect regardless of whether or not it is approved and may not be construed as overruling a decision by Merchants or the Board of Directors or to create or imply any change to the fiduciary duties of the Board. Furthermore, because this non-binding advisory resolution primarily relates to compensation of our NEOs that has already been paid or contractually committed, there is generally no opportunity for us to revisit those decisions. However, the Compensation Committee intends to take the results of the vote on this proposal into account in its future decisions regarding the compensation of our NEOs.

Merchants’ compensation program is designed to attract, motivate and retain our NEOs, who are critical to our success, by offering a combination of base salary and annual and long-term incentives that are closely aligned to the annual and long-term performance objectives of Merchants. Please see “Compensation Discussion and Analysis” beginning on page 14 for additional information about our executive compensation programs.

We believe that the effectiveness of our compensation programs is demonstrated by the accomplishments of management over the last fiscal year. Merchants’ reported strong profits for 2012 and its returns were at the top of its peer group.

We are asking you to consider the following resolution:

RESOLVED, that the compensation of Merchants’ Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the compensation tables and narrative discussion, be approved.

Recommendation

Our Board of Directors recommends that shareholders vote “FOR” the non-binding resolution to approve the compensation of Merchants’ named executive officers.

RATIFICATION OF CROWE HORWATH LLP AS THE COMPANY’S INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM FOR 2013

(Proposal Number 3)

Our Board of Directors voted at their meeting on February 21, 2013 to approve Crowe Horwath LLP as Merchants’ independent registered public accounting firm for 2013.

Recommendation

The Board of Directors unanimously recommends that shareholders vote “FOR” the ratification of Crowe Horwath LLP as Merchants’ independent registered public accounting firm for 2013.

Relationship with Independent Registered Public Accounting firm

The Audit Committee has selected the firm of Crowe Horwath LLP as Merchants’ independent registered public accounting firm for 2013. We have been advised by Crowe Horwath LLP and by the directors themselves that neither it nor any of its members or associates has any relationship with us or our subsidiaries, other than as independent auditors.

On February 21, 2013, we notified KPMG LLP that it would be dismissed as our independent registered public accounting firm upon the completion of its audit of our consolidated financial statements as of and for the year ending December 31, 2012 and the effectiveness of internal control over financial reporting as of December 31, 2012, and the issuance of KPMG LLP’s reports thereon. The decision to dismiss KPMG LLP was approved by our Audit Committee. KPMG LLP served as our independent registered public accounting firm since the year ended December 31, 2002. The audit report of KPMG LLP on our consolidated financial statements for the years ended December 31, 2012 and December 31, 2011 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2012 and December 31, 2011 and the subsequent interim period through March 5, 2013, there were: (1) no disagreements between us and KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of KPMG LLP would have caused them to make reference thereto in their reports on our financial statements for such years, and (2) no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

During the years ended December 31, 2012 and December 31, 2011, and the subsequent interim period through March 5, 2013, we did not consult Crowe Horwath LLP regarding: (1) the application of accounting principles to a specified transaction, either completed or proposed; (2) the type of audit opinion that might be rendered on our financial statements, and Crowe Horwath LLP did not provide any written report or oral advice that Crowe Horwath LLP concluded was an important factor that we considered in reaching a decision as to any such accounting, auditing or financial reporting issue; or (3) any matter that was either the subject of a disagreement or a reportable event.

Representatives of Crowe Horwath LLP will be present at the annual meeting, will have an opportunity to make any statement that they may desire to make, and will be available to answer appropriate questions from shareholders. Representatives of KPMG LLP will not be present at the annual meeting.

Fees

The following table presents fees for professional audit services rendered by KPMG LLP for the audit of our annual consolidated financial statements for the fiscal years ended December 31, 2012 and 2011 and fees billed for other services provided by KPMG LLP during 2011 and 2012.


	2012	2011

Audit Fees (1)	$259,900	$243,000
Tax Fees (2)	36,500	51,625
Total Fees	$296,400	$294,625

_____________________

(1)

Audit Fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements and review of the interim consolidated financial statements included in the quarterly reports and services that are normally provided by KPMG LLP in connection with statutory and regulatory filings or engagements.

(2)

Tax fees consisted of fees for tax consultation and preparation compliance services.

KPMG LLP did not render any professional services to us in connection with the design or implementation of financial information systems during the year ended December 31, 2012.

The Audit Committee has considered whether, and has determined that, the provision of the services described above is compatible with maintaining KPMG LLP’s independence.

The Audit Committee has received the written disclosures and the letter from KPMG LLP by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence.

Report of the Audit Committee

The Audit Committee has reviewed and discussed our previous audited financial statements for the fiscal year ended December 31, 2012 with our management.

The Audit Committee has discussed with KPMG LLP, our previous independent registered public accounting firm, the matters required to be discussed by the statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

Based on the review and discussions with management and KPMG LLP described above, the Audit Committee recommended to our Board of Directors that the audited consolidated financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and for filing with the SEC.

Submitted by the Audit Committee

John A. Kane, Chair

Peter A. Bouyea

Jeffrey L. Davis

Karen J. Danaher

Lorilee A. Lawton

Other Matters

We know of no additional matters which are likely to be presented for action at the annual meeting other than the proposals specifically set forth in the notice and referred to in this proxy statement. If any other matter properly comes before the annual meeting for action, it is intended that the persons named in the accompanying proxy and acting under that proxy will vote or refrain from voting in accordance with their best judgment pursuant to the discretionary authority conferred by the proxy.

Submission of Shareholder Proposals for 2014 Annual Meeting

Shareholders who desire to submit proposals for the consideration of our shareholders at our 2014 annual meeting of shareholders will be required, pursuant to SEC rules, to deliver any proposal to be included in the proxy statement and form of proxy for the 2014 annual meeting to Merchants on or prior to November 28, 2013. Please forward any shareholder proposals to our corporate secretary at the address indicated below.

A shareholder of record who wishes to present a proposal at the next annual meeting, other than a proposal to be considered for inclusion in our proxy statement described above, must provide notice of such proposal on or before February 11, 2014.

Annual Report

A copy of our Annual Report on Form 10-K for the year ended December 31, 2012, which includes audited financial statements, has been made to all shareholders with this proxy statement and has been filed with the SEC. The Annual Report on Form 10-K is not to be regarded as proxy soliciting material. Additional copies of the Annual Report on Form 10-K may be obtained by shareholders without charge on written request to our corporate secretary, Lisa Razo, at Merchants Bank, 275 Kennedy Drive, South Burlington, Vermont 05403. The Annual Report on Form 10-K may also be obtained from our webpage at www.mbvt.com.


	By Order of the Board of Directors,



	Lisa Razo Corporate Secretary Merchants Bancshares, Inc. 275 Kennedy Drive South Burlington, VT 05403

ANNUAL MEETING OF SHAREHOLDERS OF

MERCHANTS BANCSHARES, INC.

May 7, 2013

10:00 a.m. E.T.

The ECHO Lake Aquarium and Science Center

Lakeside Hall

Burlington, VT 05401

NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIAL:

The Notice of Meeting, Proxy Statement and Proxy Card are available at www.mbvt.com. From there,

click on "Investor Relations," then “SEC Filings” and "Proxy Materials/Annual Reports."

Please sign, date and mail

your proxy card in the

envelope provided as soon

as possible.

[d900696_d14a006.jpg] Please detach and mail in the envelope provided. [d900696_d14a007.jpg]


n	20633000000000000000 3	050713

THE BOARD OF DIRECTORS RECOMMENDS A VOTE 1. “FOR” THE ELECTION OF DIRECTORS, 2. “FOR” THE NON-BINDING RESOLUTION TO
APPROVE THE COMPENSATION OF MERCHANTS’ NAMED EXECUTIVE OFFICERS, 3. “FOR” THE RATIFICATION OF CROWE HORWATH LLP AS
MERCHANTS’ REGISTERED PUBLIC ACCOUNTANTS FOR 2013.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]

To elect five directors, each of whom will serve for a three-year term, and one director who will serve for a two-year term:

^FOR

^AGAINST

^ABSTAIN

FOR ALL NOMINEES

NOMINEES:
O Raymond C. Pecor, Jr.
O Patrick S. Robins
O Jeffrey L. Davis

Three year term
Three year term
Three year term

To consider a non-binding resolution to approve the compensation of Merchants’ named executive officers.

WITHHOLD AUTHORITY

FOR ALL NOMINEES

O Bruce M. Lisman
O Karen J. Danaher
O Janette K. Bombardier

Three year term
Three year term
Two year term

To ratify Crowe Horwath LLP as Merchants’ registered public accounting firm for 2013.

FOR ALL EXCEPT
(See instructions below)

To transact any other business as may properly come before the meeting or at any adjournments of the meeting.

Mark box below at the left if there is an address change and write comments on the reverse side of this card.

INSTRUCTIONS:

To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT” and fill in the circle next to each nominee you wish to withhold, as shown here: [d900696_d14a008.jpg]

To change the address on your account, please check the box at right and indicate your new address in the address space above. Please note that changes to the registered name(s) on the account may not be submitted via this method.


Signature of Shareholder		Date:		Signature of Shareholder		Date:

Note:

This proxy must be signed exactly as the name(s) appear(s) hereon. When shares are held jointly, each holder must sign in order to have a valid proxy vote. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.

MERCHANTS BANCSHARES, INC.

Proxy Solicited by the Board of Directors for

Annual Meeting of Shareholders on May 7, 2013

The undersigned hereby appoints Andrew T. Kloeckner and Sarah A. Schmidt, and each of them, proxies, with full power of substitution, to represent and to vote all the shares of common stock of Merchants Bancshares, Inc. held of record by the undersigned at the close of business on March 8, 2013 at the Annual Meeting of Shareholders of MERCHANTS BANCSHARES, INC. to be held on May 7, 2013 (including any adjournments or postponements thereof), with all powers the undersigned would possess if personally present, as specified on the reverse side of this ballot, and in their discretion on any other business that may come before the meeting or any adjournments or postponements thereof, and revokes all proxies previously given by the undersigned with respect to shares covered hereby.

This proxy, when properly executed, will be voted in the manner directed herein by the shareholder. If no contrary specification is made, this proxy will be properly voted FOR the election of the nominees of the Board of Directors, FOR the non-binding resolution to approve the compensation of Merchants’ named executive officers, FOR the ratification of Crowe Horwath LLP as Merchants’ registered public accounting firm for 2013, and upon such other business as may come before the meeting in the appointed proxies’ discretion.

PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.

Please sign exactly as your name(s) appear(s) hereon and return in the enclosed envelope, whether or not you expect to attend the meeting. You may, nevertheless, vote in person if you do attend.

NOTE: When shares are held jointly, each holder must sign in order to have a valid proxy vote. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.

The undersigned hereby acknowledges receipt of a copy of the accompanying Notice of Annual Meeting of Shareholders and related Proxy Statement. This proxy may be revoked at any time.

COMMENTS:


n	14475 n

ANNUAL MEETING OF SHAREHOLDERS OF

MERCHANTS BANCSHARES, INC.

401-k

May 7, 2013

10:00 a.m. E.T.

The ECHO Lake Aquarium and Science Center

Lakeside Hall

Burlington, VT 05401

NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIAL:

The Notice of Meeting, Proxy Statement and Proxy Card are available at www.mbvt.com. From there,

click on "Investor Relations," then “SEC Filings” and "Proxy Materials/Annual Reports."

Please sign, date and mail

your proxy card in the

envelope provided as soon

as possible.

[d900696_d14a009.jpg] Please detach and mail in the envelope provided. [d900696_d14a010.jpg]


n	20633000000000000000 3	050713

To elect five directors, each of whom will serve for a three-year term, and one director who will serve for a two-year term:

^FOR

^AGAINST

^ABSTAIN

FOR ALL NOMINEES

NOMINEES:
O Raymond C. Pecor, Jr.
O Patrick S. Robins
O Jeffrey L. Davis

Three year term
Three year term
Three year term

To consider a non-binding resolution to approve the compensation of Merchants’ named executive officers.

WITHHOLD AUTHORITY

FOR ALL NOMINEES

O Bruce M. Lisman
O Karen J. Danaher
O Janette K. Bombardier

Three year term
Three year term
Two year term

To ratify Crowe Horwath LLP as Merchants’ registered public accounting firm for 2013.

FOR ALL EXCEPT
(See instructions below)

To transact any other business as may properly come before the meeting or at any adjournments of the meeting.

Mark box below at the left if there is an address change and write comments on the reverse side of this card.

INSTRUCTIONS:

To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT” and fill in the circle next to each nominee you wish to withhold, as shown here: [d900696_d14a011.jpg]


Signature of Shareholder		Date:		Signature of Shareholder		Date:

Note:

MERCHANTS BANCSHARES, INC.

Proxy Solicited by the Board of Directors for

Annual Meeting of Shareholders on May 7, 2013

PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.

Please sign exactly as your name(s) appear(s) hereon and return in the enclosed envelope, whether or not you expect to attend the meeting. You may, nevertheless, vote in person if you do attend.

The undersigned hereby acknowledges receipt of a copy of the accompanying Notice of Annual Meeting of Shareholders and related Proxy Statement. This proxy may be revoked at any time.

COMMENTS:


n	14475 n

ANNUAL MEETING OF SHAREHOLDERS OF

MERCHANTS BANCSHARES, INC.
May 7, 2013

10:00 a.m. E.T.

The ECHO Lake Aquarium and Science Center

Lakeside Hall

Burlington, VT 05401

[d900696_d14a012.jpg]


TELEPHONE - Call toll-free 1-800-PROXIES (1-800-776-9437) in the United States or 1-718-921-8500 from foreign countries from any touch-tone telephone and follow the instructions. Have your proxy card available when you call and use the Company Number and Account Number shown on your proxy card. Vote by phone until 11:59 PM EST the day before the meeting. MAIL - Sign, date and mail your proxy card in the envelope provided as soon as possible. IN PERSON - You may vote your shares in person by attending the Annual Meeting.
		COMPANY NUMBER
		ACCOUNT NUMBER


NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIAL: The Notice of Meeting, Proxy Statement and Proxy Card are available at www.mbvt.com. From there, click on "Investor Relations," then “SEC Filings” and "Proxy Materials/Annual Reports."
	Please detach along perforated line and mail in the envelope provided IF you are not voting via telephone.


n	20633000000000000000 3	050713

To elect five directors, each of whom will serve for a three-year term, and one director who will serve for a two-year term:

^FOR

^AGAINST

^ABSTAIN

FOR ALL NOMINEES

NOMINEES:
O Raymond C. Pecor, Jr.
O Patrick S. Robins
O Jeffrey L. Davis

Three year term
Three year term
Three year term

To consider a non-binding resolution to approve the compensation of Merchants’ named executive officers.

WITHHOLD AUTHORITY

FOR ALL NOMINEES

O Bruce M. Lisman
O Karen J. Danaher
O Janette K. Bombardier

Three year term
Three year term
Two year term

To ratify Crowe Horwath LLP as Merchants’ registered public accounting firm for 2013.

FOR ALL EXCEPT
(See instructions below)

To transact any other business as may properly come before the meeting or at any adjournments of the meeting.

Mark box below at the left if there is an address change and write comments on the reverse side of this card.

INSTRUCTIONS:

To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT” and fill in the circle next to each nominee you wish to withhold, as shown here: [d900696_d14a015.jpg]


Signature of Shareholder		Date:		Signature of Shareholder		Date:

Note:

Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.

ANNUAL MEETING OF SHAREHOLDERS OF

MERCHANTS BANCSHARES, INC.
401-k

May 7, 2013

10:00 a.m. E.T.

The ECHO Lake Aquarium and Science Center

Lakeside Hall

Burlington, VT 05401

[d900696_d14a016.jpg]


TELEPHONE - Call toll-free 1-800-PROXIES (1-800-776-9437) in the United States or 1-718-921-8500 from foreign countries from any touch-tone telephone and follow the instructions. Have your proxy card available when you call and use the Company Number and Account Number shown on your proxy card. Vote by phone until 11:59 PM EST the day before the meeting. MAIL - Sign, date and mail your proxy card in the envelope provided as soon as possible. IN PERSON - You may vote your shares in person by attending the Annual Meeting.
		COMPANY NUMBER
		ACCOUNT NUMBER


NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIAL: The Notice of Meeting, Proxy Statement and Proxy Card are available at www.mbvt.com. From there, click on "Investor Relations," then “SEC Filings” and "Proxy Materials/Annual Reports."
	Please detach along perforated line and mail in the envelope provided IF you are not voting via telephone.


n	20633000000000000000 3	050713

To elect five directors, each of whom will serve for a three-year term, and one director who will serve for a two-year term:

^FOR

^AGAINST

^ABSTAIN

FOR ALL NOMINEES

NOMINEES:
O Raymond C. Pecor, Jr.
O Patrick S. Robins
O Jeffrey L. Davis

Three year term
Three year term
Three year term

To consider a non-binding resolution to approve the compensation of Merchants’ named executive officers.

WITHHOLD AUTHORITY

FOR ALL NOMINEES

O Bruce M. Lisman
O Karen J. Danaher
O Janette K. Bombardier

Three year term
Three year term
Two year term

To ratify Crowe Horwath LLP as Merchants’ registered public accounting firm for 2013.

FOR ALL EXCEPT
(See instructions below)

To transact any other business as may properly come before the meeting or at any adjournments of the meeting.

Mark box below at the left if there is an address change and write comments on the reverse side of this card.

INSTRUCTIONS:

To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT” and fill in the circle next to each nominee you wish to withhold, as shown here: [d900696_d14a019.jpg]


Signature of Shareholder		Date:		Signature of Shareholder		Date:

Note: