NOTE 15: STOCK-BASED COMPENSATION PLANS

Merchants has established stock based compensation plans for directors and for certain employees. The Amended and Restated Merchants Bancshares, Inc. 2008 Stock Incentive Plan (the “Plan”) allows us to grant stock options and restricted stock grants to certain employees. The Plan allows for the issuance of up to 600,000 shares of stock. As of December 31, 2016, 442,789 shares remain available for future grants under the Plan.

The Merchants Bancshares, Inc. and Subsidiaries Amended and Restated 2008 Compensation Plan for Non-Employee Directors and Trustees (“Deferred Compensation Plan”) allows for the issuance of up to 150,000 shares of stock. As of December 31, 2016, 66,583 shares were issued with 83,417 shares available for future issuance under the Deferred Compensation Plan. Additionally, as of December 31, 2016, 222,217 shares were issued under previous non-employee directors and trustees compensation plans that are now expired.

The fair value of stock option and restricted stock awards, measured at the grant date are amortized to compensation expense on a straight-line basis over the vesting period. The total compensation cost related to stock option awards and restricted stock awards was $374 thousand, $36 thousand and $119 thousand for 2016, 2015 and 2014, respectively. Compensation cost related to stock option and restricted stock awards is included in salary expense in the accompanying consolidated statements of income. There is no remaining compensation expense relating to stock option grants. Remaining compensation expense related to current outstanding restricted stock awards is $132 thousand, which will be recognized as of the date of the pending merger.

Deferred Compensation Plan for Non-Employee Directors and Trustees

Under the terms of the Deferred Compensation Plan participating directors can elect to have all, or a specified percentage, of their director’s fees for a given year paid in the form of cash or deferred in the form of restricted shares of Merchants’ common stock. These shares are held in a rabbi trust and are considered outstanding for purposes of computing earnings per share. Directors who elect to have their compensation deferred are credited with a number of shares of Merchants’ common stock equal in value to the amount of fees deferred. The participating director may not sell, transfer or otherwise dispose of these shares prior to distribution. With respect to shares of common stock issued or otherwise transferred to a participating director, the participating director will have the right to receive dividends or other distributions thereon. Deferred director’s fees are recognized as an expense in the year incurred.

Restricted Stock

Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. During the service period, all shares are considered outstanding and dividends are paid on the restricted stock. We made a grant of 9,106, 3,521 and 7,120 restricted shares in 2016, 2015 and 2014, respectively. The shares typically vest three years after the grant date. Due to the pending merger, Merchants accelerated the vesting date for the 2014, 2015 and 2016 grant years for select individuals. The grant date fair value of restricted stock granted during 2016, 2015 and 2014 was $30.73, $29.85 per share and $28.60 per share, respectively. A summary of Merchants’ restricted stock awards is as follows:


		Weighted Average Grant
	Shares	Date Fair Value
Non-Vested Shares at January 1, 2016	8,648	$	29.19
Granted	9,106		30.73
Vested	(7,964)		30.19
Forfeited	(2,433)		29.31
Non-Vested Shares at December 31, 2016	7,357	$	30.08

The total fair value of shares vested during the year ending December 31, 2016, 2015, and 2014 was $402 thousand, $111 thousand, and $282 thousand, respectively.

Stock Options

Stock options were granted at 100% of fair market value and vest over three years. The last option granted was in May 2010. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model that requires Merchants to develop estimates for assumptions used in the model. The Black-Scholes valuation model uses the following assumptions: expected volatility, expected term of option, risk-free interest rate and dividend yield. Expected volatility estimates are developed based on historical volatility of our stock. We use historical data to estimate the expected term of the options. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield in effect at the grant date. The dividend yield represents the expected dividends on our stock.

A summary of Merchants’ stock option plan as of December 31, 2016, 2015 and 2014 and changes during the years then ended are as follows, with numbers of shares in thousands:


	2016			2015			2014
		Weighted			Weighted			Weighted
		Average			Average			Average
	Number	Exercise		Number	Exercise		Number	Exercise
	of	Price		of	Price		of	Price
	Shares	Per Share		Shares	Per Share		Shares	Per Share
Options outstanding, beginning of year	39	$	22.43	82	$	23.00	88	$	22.95
Granted	—		—	—		—	—		—
Exercised	13		22.30	43		23.52	6		22.07
Forfeited	—		—	—		—	—		—
Expired	—		—	—		—	—		—
Options outstanding, end of year	26	$	22.50	39	$	22.43	82	$	23.00
Options exercisable	26	$	22.50	39	$	22.43	82	$	23.00

As of December 31, 2016, there were options outstanding within the following ranges: 26 thousand at an exercise price within the range of $22.07 to $22.93.

The total intrinsic value of options exercised was $144 thousand, $328 thousand and $41 thousand for the three years ended December 31, 2016, 2015 and 2014, respectively. We generally use shares held in treasury for option exercises. Options exercisable at December 31, 2016 had an intrinsic value of $841 thousand and expire upon the closing date of the merger with Community. All options outstanding at December 31, 2016 were exercised during February 2017. The total cash received from employees, net of withholding taxes, as a result of employee stock option exercises was $10 thousand, $0 and $0 for the years ended December 31, 2016, 2015 and 2014, respectively. The tax benefit realized as a result of the stock option exercises was approximately $50 thousand, $115 thousand and $14 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.