Exhibit 10.3

MERCHANTS BANCSHARES, INC.

AND SUBSIDIARIES

AMENDED AND RESTATED

1996 COMPENSATION PLAN

FOR

NON-EMPLOYEE DIRECTORS

TABLE OF CONTENTS

ARTICLE 1 - Purpose

1

 

Section 1.1. Purpose

1

 

 

ARTICLE 2 - Administration

1

 

Section 2.1. Management Committee

1

 

 

ARTICLE 3 - Participation

1

 

Section 3.1. Participants

1

 

 

ARTICLE 4 - Deferred Compensation

2

 

Section 4.1. Maximum Number of Shares

2

 

Section 4.2. Adjustment to Number of Shares

2

 

 

ARTICLE 5 - Compensation

2

 

Section 5.1. Amount of Compensation

2

 

Section 5.2. Compensation Election

2

 

Section 5.3. Plan Year

2

 

 

ARTICLE 6 - Stock Election

2

 

Section 6.1. Deferred Common Stock

2

 

 

ARTICLE 7 - General Provisions

5

 

Section 7.1. Issuance of Common Stock

5

 

Section 7.2. Unfunded Obligation

5

 

Section 7.3. Beneficiary; Family Transfer

6

 

Section 7.4. Permanent Disability

6

 

Section 7.5. Nonassignment

6

 

Section 7.6. Termination and Amendment

6

 

Section 7.7. Applicable Law

7

 

Section 7.8. Effective Date and Term of the Plan

7

 

Section 7.9. Compliance With Rule 16b-3 of the Exchange Act

7

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MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

AMENDED AND RESTATED

1996 COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS

ARTICLE 1

Purpose

Section 1.1. Purpose. The name of this Plan is the Merchants Bancshares, Inc.
and Subsidiaries Amended and Restated 1996 Compensation Plan for Non-Employee
Directors (the “Plan”). The purpose of the Plan is to provide a compensation
program for non-employee directors (“Participating Directors”) of Merchants
Bancshares, Inc. and Subsidiaries (the “Company”) that will attract and retain
highly qualified individuals to serve as members of the Company's board of
directors (the “Board”). The Plan Participating Directors are to receive their
Compensation for service on the Board in the form of cash, shares of Company
common stock, par value $0.01 per share, subject to restrictions as described
below, (“Common Stock”) or any combination of the foregoing. For purposes of the
Plan, the term “Compensation” shall mean any and all fees earned by a
Participating Director for each regular or special meeting and for any committee
meetings attended. This Plan is hereby amended and restated as of January 1,
2005 to satisfy the requirements of Code Section 409A and Internal Revenue
Service and U.S. Treasury Department guidance thereunder.

ARTICLE 2

Administration

Section 2.1. Management Committee. Subject to Section 7.7, the Plan shall be
administered by a management committee (the “Committee”) consisting of the Chief
Executive Officer of the Company and such other senior officers as the Chief
Executive Officer shall designate. The Committee shall interpret the Plan, shall
prescribe, amend and rescind rules relating to it from time to time as it deems
proper and in the best interests of the Company, and shall take any other action
necessary for the administration of the Plan. Any decision or interpretation
adopted by the Committee shall be final and conclusive and shall be binding upon
all Directors.

ARTICLE 3

Participation

Section 3.1. Participants. Each person who is a non-employee Director of the
Company, or of its subsidiary The Merchants Bank (the “Bank”), on the Effective
Date (as defined below) of the Plan shall become a Participating Director on the
Effective Date. Any other individual shall become a Participating Director
immediately upon becoming a Director of the Company or the Bank.

ARTICLE 4

Deferred Compensation

Section 4.1. Maximum Number of Shares. Subject to Section 4.2, the maximum
number of shares of Common Stock which may at any time be awarded under the Plan
is 100,000 shares of Common Stock. Awards may be made from shares held in the
Company's treasury or out of authorized but unissued shares of the Company, or
partly out of each, as shall be determined by the Committee.

Section 4.2. Adjustment to Number of Shares. In the event of a recapitalization,
stock split, stock dividend, exchange of shares, merger, reorganization, change
in corporate structure or shares of the Company or similar event, the Board,
upon recommendation of the Committee, may make appropriate adjustments to the
number of shares (i) authorized for the Plan, and (ii) allocated under the Stock
Election (as defined in Section 6). The Committee shall clearly outline the
proposed mechanism for such adjustment, and such adjustment shall not result in
an increase or diminution in value in the Participant’s account.

ARTICLE 5

Compensation

Section 5.1. Amount of Compensation. Each Director’s compensation
(“Compensation”) shall be determined in accordance with the Company’s bylaws and
shall be paid, unless deferred pursuant to Section 6, according to the ordinary
practices of the Company (the “Payment Date”), unless otherwise determined by
the Committee.

Section 5.2. Compensation Election. Prior to each Plan Year (as defined below)
and subject to such deadlines as may be established by the Committee from time
to time, each Participating Director may elect to receive all or any portion of
his or her compensation for such Year in the form of shares of common stock
subject to the restrictions described in Section 6 below (a “Stock Election”),
provided that a Stock Election may not be made so as to apply to any fractional
share. If no election is received by the Company, the Participating Director
shall be deemed to have made an election to receive his or her Compensation in
immediate cash. An election under this Section 5.2 shall be irrevocable and
shall apply to the Compensation earned during the Plan Year (as defined below)
for which the election is effective.

Section 5.3. Plan Year. The term “Plan Year” shall mean the calendar year.

ARTICLE 6

Stock Election

Section 6.1. Deferred Common Stock.

(a)

Calculation of Pay-Out Shares. If a Participating Director makes a Stock
Election, then the day on which he or she would have received cash in the
absence of such election shall be a “Measurement Date.” On each Measurement
Date, the Committee or its delegate shall calculate the number of shares of
Common Stock (“Shares”) to be delivered with respect to such Stock Election
(“Pay-Out Shares”) by:

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(i)

dividing the amount of cash the Participating Director would have received on
such date by the “Per Share Price”, as defined below (the number of Pay-Out
Shares so determined being the “Basic Shares”), and

(ii)

multiplying the number of Basic Shares by the “Risk Premium”, as defined below,
rounding any fractional Share thus determined up to the nearest whole number
(the number of Pay-Out Shares in excess of the Basic Shares as determined
pursuant to this clause (ii) being the “Risk Premium Shares”). For purposes of
this Section 6, the term “Per Share Price” on any Measurement Date shall mean
the market price per Share at the close of trading on that day, and (ii) the
“Risk Premium” applicable during any Plan Year shall be a number, no less than
1.0 and no greater than 1.25, determined prior to the applicable Plan Year by
the Committee both to reflect the investment and other risks assumed by the
Participating Director in making the Stock Election and to provide a reasonable
inducement to the Participating Director for making such election.

(b)

Deferral Generally. Pay-Out Shares shall not be delivered to the Participating
Director until the applicable Delivery Date (defined below); however, at any
time on or after the Measurement Date and prior to the Delivery Date, the
Pay-Out Shares may be delivered or otherwise transferred to a trustee, via
ledger transfer or such other method as is determined by the Committee, or may
otherwise be set aside for deferred delivery to the Participating Director as
described herein. In any event, the Company's obligation to deliver Pay-Out
Shares to Participating Directors hereunder shall, until delivery of the same on
the Delivery Date, be an unfunded obligation of the Company. Without limiting
the foregoing, no Participating Director may sell, transfer or otherwise dispose
of any interest in any Pay-Out Shares, prior to the “Delivery Date” for such
Pay-Out Shares. Pay-Out Shares for which the Delivery Date has not yet arrived
are sometimes referred to herein as “Restricted Shares” or “Units.”

(c)

Vesting of Restricted Shares; Forfeiture of Risk Premium Shares. A Participating
Directors right to Pay-Out Shares shall “vest” on the fifth anniversary of the
applicable Measurement Date. Except as otherwise provided in this Section 6, in
no event shall any Pay-Out Shares be delivered to a Participating Director prior
to the vesting date for such Pay-Out Shares. Any Participating Director who:

(i)

resigns from the Board voluntarily without the consent of a majority of the
remaining members of the Board, or

(ii)

is forced to resign from the Board for “Cause” as provided in the Company’s
By-Laws,

prior to the vesting date for any Risk Premium Shares to which such
Participating Director would otherwise be entitled shall forfeit those unvested
Risk Premium Shares, as well as any Distributed Securities (defined below)
derived from any such forfeited Risk Premium Shares.

(d)

Delivery Commencement Date; Elections.

(i)

A Participating Director’s vested Pay-Out Shares shall be delivered in seven

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annual installments (the “Standard Form”) commencing on the “Delivery
Commencement Date” for such Participating Director, which shall be in January of
the first calendar year commencing after his or her sixty-fifth (65th) birthday
(the “Standard Commencement Date”). The Delivery Commencement Date and each
subsequent date on which Pay-Out Shares are delivered to a Participating
Director (or his or her Beneficiary) hereunder shall be a “Delivery Date.” Each
Delivery Date after the Delivery Commencement Date shall occur in the January
next following the previous Delivery Date. Installments under the Standard Form
shall be in as equal amounts as possible, as determined by the Committee in its
discretion.

(ii)

If a Participating Director desires to postpone the Delivery Commence Date, he
or she may do so only once and such change must comply with the restrictions of
Code Section 409A. More particularly:

(A)

The election to change cannot take effect until at least twelve (12) months
after the date on which the election is made.

(B)

The first payment as to which the new election is made must be deferred to a
date that is at least five (5) years from the date the payment would otherwise
have been made.

(C)

The election must be made not less than twelve (12) months prior to the date of
the first scheduled payment.

(iii)

Any Participating Director who is receiving payments hereunder shall no longer
be eligible to defer compensation under this Plan.

(d)

Committee Discretion to Accelerate. The Committee, in its discretion, may
accelerate the delivery of any Participating Director’s Restricted Shares upon
the Participating Director’s death or permanent Disability.

(e)

Illustration of Measurement and Vesting. For example, if a Participating
Director who is otherwise entitled to cash fees of $900 on September 1, 2000 has
made a Stock Election with respect to the entire amount of the fee, and if the
Per Share Price is then $18, and the Committee has declared a Risk Premium of
1.2 for that Plan Year, then the Participating Director shall receive 60
Restricted Shares (($900/18) x 1.2), which shall vest on September 1, 2005 and
which shall not be delivered to and cannot be sold or otherwise transferred by
the Participating Director until the applicable Delivery Date, determined as
described above.

(f)

Rights With Respect to Restricted Shares. Notwithstanding the delivery and
forfeiture conditions and transfer restrictions described in this Section 6
above, and to the extent permitted under the Company’s organizational documents
and applicable laws, to the extent that dividends or other distributions are
made with respect to the Company’s Common Stock, a Participant shall be credited
with the amount of such dividends or other distributions with respect to the
number of Pay-out Shares then credited to the Participating Director hereunder
(calculated as if such Participating Director had been entitled to actual
dividends or distributions as an actual shareholder); provided, however, that
any amount reflecting a Share or other security of the Company or of the Bank
which is issued or otherwise transferred as a dividend on or other distribution
with respect to a Restricted Share (a “Distributed Security”) shall itself be
subject to the same deferred delivery conditions and transfer restrictions that
are applicable to such Restricted Share.

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(g)

Acceleration upon Death. Notwithstanding the Standard Form or any election to
postpone the Delivery Commencement Date, the Committee shall accelerate the
delivery of any Participating Director’s Restricted Shares upon the
Participating Director’s death and shall deliver all amounts remaining to be
delivered hereunder to the Participating Director’s Beneficiary within 60 days
after such Participating Director’s death.

ARTICLE 7

General Provisions

Section 7.1. Issuance of Common Stock. The Company shall not be required to
issue any certificate for shares of Common Stock prior to:

(a)

obtaining any approval or ruling from the Securities and Exchange Commission,
the Internal Revenue Service or any other governmental agency which the Company,
in its sole discretion, deems necessary or advisable;

(b)

listing the shares on any stock exchange on which the Common Stock may then be
listed; or

(c)

completing any registration or other qualification of such shares under any
federal or state laws, rulings or regulations of any governmental body which the
Company, in its sole discretion, determines to be necessary or advisable.

All certificates for shares of Common Stock delivered under the Plan also shall
be subject to such stop transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange upon which Common Stock
is then listed and any applicable federal or state securities laws, and the
Committee may cause a legend or legends to be placed on any such certificates to
make appropriate reference to such restrictions. The foregoing provisions of
this paragraph shall not be effective if and to the extent that the shares of
Common Stock delivered under the Plan are covered by an effective and current
registration statement under the Securities Act of 1933, as amended, or if and
so long as the Committee determines that application of such provisions is no
longer required or desirable. In making such determination, the Committee may
rely upon an opinion of counsel for the Company.

Section 7.2. Unfunded Obligation. Any deferred amount to be paid to
Participating Directors pursuant to the Plan is an unfunded obligation of the
Company. The Company is not required to segregate any monies from its general
funds, to create any trusts, or to make any special deposits with respect to
this obligation. Beneficial ownership of any investments, including trust
investments that the Company may make to fulfill this obligation shall at all
times remain in the Company. Any investments and the creation or maintenance of
any trust or memorandum accounts shall not create or constitute a trust or a
fiduciary relationship between the Committee or the Company and a Participating
Director, or otherwise create any vested or beneficial interest in any
Participating Director or the Participating Director's Beneficiary or the
Participating Director's creditors in any assets of the Company whatsoever. The
Participating Directors shall have no claim against the Company for any changes
in the value of any assets that may be invested or reinvested by the Company
with respect to the Plan.

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Section 7.3. Beneficiary; Matters Relating to Marital Rights.

(a)

The term “Beneficiary” shall mean the person or persons to whom payments are to
be paid pursuant to the terms of the Plan in the event of the Participating
Director's death. The designation shall be on a form provided by the Committee,
executed by the Participating Director, and delivered to the Committee.

(b)

In connection with a divorce, decree of separate maintenance or other
arrangement involving an adjustment of marital rights, if a Participating
Director is required to transfer all or a portion of his Restricted Shares to
his spouse, the Company shall have the right to purchase from the Participating
Director all such Restricted Shares, unless the Participating Director files
with the Company a copy, executed by his or her spouse, of any Agreement as to
the Restricted Shares executed by the Participating Director, and an irrevocable
proxy of unlimited duration, signed by his or her spouse, giving the
Participating Director exclusive power to act on all matters concerning the
Restricted Shares and this Plan.

Section 7.4. Permanent Disability. A Participating Director shall be deemed to
suffer a permanent Disability for purposes of this Plan if he or she: (A) is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or can be expected to last for a continuous period of not less than twelve
(12) months or (ii) is, by reason of any medically determinable physical or
mental impairment which can be expected to result in death or can be expected to
last for a continuous period of not less than twelve (12) months, receiving
income replacement benefits for a period of not less than three (3) months under
an accident and health plan covering employees of the Company. This definition
of “Disability” shall be interpreted consistently with the rules under Code
Section 409A and any regulations or other guidance thereunder.

Section 7.5. Nonassignment. The right of a Participating Director or Beneficiary
to the payment of any amounts under the Plan may not be assigned, transferred,
pledged or encumbered, nor shall such right or other interests be subject to
attachment, garnishment, execution or other legal process.

Section 7.6. Termination and Amendment. The Board may from time to time amend,
suspend or terminate the Plan, in whole or in part, and if the Plan is suspended
or terminated, the Board may reinstate any or all of its provisions. No
amendment, suspension or termination may impair or accelerate the right of a
Participating Director or the Participating Director’s designated Beneficiary to
receive benefits accrued prior to the effective date of such amendment,
suspension or termination. The Committee may amend the Plan, without Board
approval, to ensure that the Company may obtain any regulatory approval or to
accomplish any other reasonable purpose, provided that the Committee may not
effect a change that would materially increase the cost of the Plan to the
Company. Notwithstanding the foregoing, the Board and the Committee may not
amend the Plan without the approval of the stockholders of the Company to: (i)
materially increase the number of shares of Common Stock that may be issued
under the Plan, (ii) materially modify the eligibility for participation in the
Plan, or (iii) otherwise materially increase the benefits accruing to the
Participating Directors under the Plan.

The Plan shall not be amended more than once every six months, other than to
comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act, or the rules thereunder.

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Section 7.7. Applicable Law. The Plan shall be construed and governed in
accordance with the laws of the State of Vermont.

Section 7.8. Effective Date and Term of the Plan. The Plan shall be effective as
of May 22, 1997 (the “Effective Date”), provided that the Plan is approved by
the Company's stockholders within the earlier of the date the Company's next
annual meeting of stockholders or twelve (12) months after the date the Plan is
adopted by the Board. To the extent required for compliance with Section 16(b)
of the Exchange Act and rules promulgated thereunder, shares of Common Stock
distributed to Participating Directors may not be sold until a date at least six
(6) months after the date such stockholder approval is obtained, or if earlier,
such other date allowed by Section 16(b) of the Exchange Act or rules
promulgated thereunder. The Plan shall terminate ten (10) years after the
approval of the Plan by the stockholders of the Company.

Section 7.9. Compliance With Rule 16b-3 of the Exchange Act. The Company's
intention is that, so long as any of the Company's equity securities are
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, with respect
to awards of Common Stock, the Plan shall comply in all respects with Rule
16b-­3 promulgated under Section 16(b) of the Exchange Act. If any Plan
provision is later found not to be in compliance with Rule 16b-3 of the Exchange
Act, that provision shall be deemed modified as necessary to meet the
requirements of Rule 16b-3.

Section 7.10.

Section 409A.

(a)    Anything herein to the contrary notwithstanding, if at the time of a
Participating Director’s separation from service within the meaning of Section
409A of the Internal Revenue Code of 1986, as amended (the ‘Code’), the Company
determines that such Participating Director is a “specified employee” within the
meaning of Section 409A(a)(2)(B)(i) of the Code, then to the extent any payment
that such Participating Director becomes entitled to under this Plan on account
of such Participating Director’s separation from service would be considered
deferred compensation subject to the 20 percent additional tax imposed pursuant
to Section 409A(a) of the Code as a result of the application of Section
409A(a)(2)(B)(i) of the Code, such payment shall not be payable until the date
that is the earlier of (A) six months and one day after such Participating
Director’s separation from service, or (B) such Participating Director’s death.
If any such delayed payment is otherwise payable on an installment basis, the
first payment shall include a catch-up payment covering amounts that would
otherwise have been paid during the six-month period but for the application of
this provision, and the balance of the installments shall be payable in
accordance with their original schedule.

(b)    The Plan will be administered in accordance with Section 409A of the
Code. To the extent that any provision of the Plan is ambiguous as to its
compliance with Section 409A of the Code, the provision shall be read in such a
manner so that all payments hereunder comply with Section 409A of the Code.

(c)    The Company makes no representation or warranty and shall have no
liability to any person if any provisions of this Plan do not satisfy an
exemption from, or the conditions of, Section 409A of the Code.

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IN WITNESS WHEREOF, Merchants Bancshares, Inc. does hereby execute this document
as of the 17th day of October, 2010.

IN PRESENCE OF:

 

MERCHANTS BANCSHARES, INC.

 

 

 

/s/ Lisa Razo

 

By:

/s/ Janet Spitler

Witness

 

 

Duly Authorized Agent

 

 

 

 

 

 

IN PRESENCE OF:

 

MERCHANTS BANK

 

 

 

/s/ Lisa Razo

 

By:

/s/ Janet Spitler

Witness

 

 

Duly Authorized Agent

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