EXHIBIT 10.16

                                  AGREEMENT
 
 
      This Agreement is between THE MERCHANTS BANK, a Vermont banking 
corporation with a principal place of business in Burlington, Vermont (the 
"Bank") and DUDLEY H. DAVIS, of Burlington, Vermont ("Davis") and is 
effective as of the date specified on the execution page of this Agreement 
(the "Effective Date"). 
 
                                 Background
                                 ----------

      1.  The Bank and Davis are parties to a Salary Continuation Agreement 
dated June 1, 1989 (the "Salary Continuation Agreement"). 

      2.  The Bank desires to amend the Salary Continuation Agreement and 
the benefits payable thereunder, and Davis is willing to agree to such 
amendments. 

      3.  Davis has or may have claims on account of the Bank's 
administration of its so-called 401(k) Plan, particularly with respect to 
the timing of distributions made by the Bank to Davis thereunder, and the 
Bank and Davis desire forever to resolve and settle any such claims.  
 
                        N O W ,  T H E R E F O R E ,

      In consideration of the premises and the mutual covenants and 
agreements herein set forth, the parties hereby agree as follows: 

      Section 1.  Bank to Establish Trust.  The Bank shall establish, on the 
Effective Date, and thereafter shall maintain in accordance with this 
Agreement:  (a) a so-called rabbi trust in the form attached hereto as 
Exhibit "A" (the "Variable Trust"); and (b) a second so-called rabbi trust 
in the form attached hereto as Exhibit "B" (the "Fixed Trust"); the Variable 
Trust and the Fixed Trust are collectively sometimes referred to in this 
Agreement as the "Trusts".  The Bank shall contribute to the Variable Trust, 
on the Effective Date, the sum of $700,000, and shall contribute to the 
Fixed Trust, on the Effective Date, the sum of $200,000. 

      Section 2.  Bookkeeping Account.  The Bank shall establish and 
maintain a bookkeeping account (the "Variable Account"), and not less 
frequently than the end of each calendar year shall credit (or debit) to 
such Variable Account, that amount which causes the balance in such Variable 
Account to equal precisely the balance in the Variable Trust established and 
maintained under and pursuant to this Agreement and referred to in Section 
1, above; provided, however, that to the extent the balance in the Variable 
Trust has been reduced as a result of any withdrawals from the Variable 
Trust for any purpose other than a payment to or for the benefit of Davis or 
his designated beneficiary, the amount credited to such Variable Account 
shall be adjusted to take into account both such withdrawal(s) and the 
earnings (or losses) that would have been credited to such bookkeeping 
account if such withdrawal(s) had not occurred; and provided, further, that 
to the extent the Bank makes payments of amounts due under this Agreement 
directly to Davis or his beneficiary, or causes them to be made, from 
sources other than the Variable Trust, corresponding adjustments also shall 
be made to the Variable Account. 

      Section 3.  Nature of Accounts. 

      (a)  Except as provided in the Trusts:  all amounts credited to or 
           held in the Trusts shall remain the sole property of the Bank 
           and shall be usable by it as a part of its general funds for any 
           legal purpose whatever; the bookkeeping account referred to 
           herein shall exist only for the purpose of facilitating the 
           computation of payments hereunder; nothing contained in this 
           Agreement and no action taken pursuant to the provisions of this 
           Agreement shall create or be construed to create a trust or 
           escrow of any kind, or a fiduciary relationship between the Bank 
           and Davis or his designated beneficiary or any other person; and 
           to the extent that any person acquires a right to receive 
           payments from the Bank under this Agreement, such right shall be 
           no greater than the right of any unsecured general creditor of 
           the Bank. 

      (b)  It is the intention of all parties that Davis' rights under this 
           Agreement be unfunded for purposes of the Internal Revenue Code 
           of 1986, as amended, and Title I of the Employee Retirement 
           Income Security Act of 1974, as amended. 

      Section 4.  Variable Trust Investments.  The Bank has provided to 
Davis a copy of a letter of instructions of even date that the Bank has 
given to the Trustee under the Variable Trust.  Pursuant to its sole 
authority to direct the manner in which the Variable Trust assets will be 
invested, the Bank has instructed that the assets be invested as provided in 
that letter.  The Bank agrees that it will not change the investment 
instructions without Davis' prior written approval, which Davis agrees not 
to unreasonably withhold. 

      Section 5.  Distribution of Shares of Merchants Bancshares, Inc.  On 
January 2, 1997 and on January 2, 1998, the Bank shall distribute or cause 
to be distributed to Davis:  (i) 7,079.5 shares of Merchants Bancshares, 
Inc. (an aggregate of 14,159 shares); plus (ii) all dividends, distributions 
or other consideration paid on, on account of, or in exchange for such 
shares prior to their distribution as herein provided, however, if Davis 
dies before he has received all of such payments and distributions, the Bank 
shall pay and distribute to Davis' designated beneficiary, not later than 90 
days after the date of his death, the entire amount remaining for payment 
and distribution pursuant to the foregoing subsections (i) and (ii).  
Notwithstanding the provisions of the immediately-preceding sentence:  (y) 
in the event of a merger, consolidation or reorganization of Merchants 
Bancshares, Inc., the Bank shall be obligated to distribute, in lieu of the 
shares of Merchants Bancshares, Inc. referred to above, such shares or other 
property as shall have been exchanged for said Merchants Bancshares, Inc. 
stock, or into which said Merchants Bancshares, Inc. shares shall have been 
converted pursuant to such merger, consolidation or reorganization; and (z) 
in the event of a Change of Control (as defined below), the Bank shall have 
the option, to be exercised (if at all) not earlier than sixty days prior to 
such Change of Control nor later than sixty days thereafter, and to be 
effective not earlier than the time when such Change of Control occurs nor 
later than one hundred eighty days thereafter, to provide that in lieu of 
any obligation thereafter to distribute shares of Merchants Bancshares, 
Inc., the Bank thereafter shall be required to pay or distribute to Davis, 
in cash or in securities, a variable amount that equals the value from time 
to time of the balance posted to the bookkeeping account maintained for 
Davis in the Fixed Trust referred to in Section 3, above, provided, however, 
that to the extent the balance posted to the credit of Davis in the Fixed 
Trust has been reduced as a result of any withdrawals from the Fixed Trust 
for any purpose other than a payment to or for the benefit of Davis or 
Davis' designated beneficiary (see Section 8, below), the amount to be paid 
or distributed to Davis shall be adjusted to take into account both such 
withdrawal(s) and the earnings (or losses) that would have been credited to 
Davis' account under the Fixed Trust if such withdrawal(s) had not occurred. 

      A "Change of Control" shall occur upon the earliest of the following: 

      (A)  any "person," as such term is used in Sections 3(a)(9) and 13(d) 
           of the Securities Exchange Act of 1934 (a "Person"), becomes a 
           "beneficial owner," as such term is used in Rule 13D-3 
           promulgated under such Act (an "Owner") of twenty-five percent 
           (25%) or more of the Voting Stock, as defined below, of 
           Merchants Bancshares, Inc.; or 

      (B)  the majority of the Board of Merchants Bancshares, Inc. consists 
           of individuals other than the Incumbent Directors; 

      (C)  Merchants Bancshares, Inc., or the Bank, adopts any plan of 
           liquidation providing for the distribution of all or 
           substantially all of its assets; 

      (D)  all or substantially all of the business of Merchants Bancshares, 
           Inc. is disposed of pursuant to a merger, consolidation, or 
           other transaction in which Merchants Bancshares, Inc. is not the 
           surviving corporation or is substantially or completely 
           liquidated (unless the shareholders of Merchants Bancshares, 
           Inc. immediately prior to such merger, consolidation, or other 
           transaction beneficially own, directly or indirectly, in 
           substantially the same proportion as they owned the Voting Stock 
           of Merchants Bancshares, Inc., all of the Voting Stock, or 
           correlative ownership interests, of the entity or entities, if 
           any, that succeed to the business of Merchants Bancshares, 
           Inc.); or 

      (E)  Merchants Bancshares, Inc. combines with another company and is 
           the surviving corporation but, immediately after the 
           combination, the shareholders of Merchants Bancshares, Inc. 
           immediately prior to the combination (other than shareholders 
           who, immediately prior to the combination, were "affiliates" of 
           such other company, as such term is defined in the rules of the 
           Securities and Exchange Commission) do not beneficially own, 
           directly or indirectly, fifty percent (50%) or more of the 
           Voting Stock of the combined company; or 

      (F)  Merchants Bancshares, Inc. transfers to any Person or Persons not 
           controlled by Merchants Bancshares, Inc.:  (1) fifty percent 
           (50%) of the Voting Stock of the Bank; or (2) forty percent 
           (40%) or more of the assets of the Bank. 

      Notwithstanding the occurrence of any of the events described in 
clauses (A), (D) or (E), above, no "Change of Control" shall be deemed to 
have occurred if: 

      (1)  immediately following such event, members of the Board or 
           employees of Merchants Bancshares, Inc. and its subsidiaries who 
           file or are required to file (or immediately prior to such 
           event, filed or were required to file) reports under Section 
           16(a) of the 1934 Act) are beneficial owners, directly or 
           indirectly, of twenty-five percent (25%) or more of the Voting 
           Stock of Merchants Bancshares, Inc. or its successor, as the 
           case may be; or 

      (2)  such Change of Control event occurs as a result of a proposal 
           initiated by the Board of Merchants Bancshares, Inc. (and not as 
           a result of prior actions taken by the Person or Persons 
           effecting the Change of Control), and if at the time of making 
           the proposal, the Board of Directors notifies the Fixed Growth 
           Plan Participants that any such Change of Control event 
           resulting from the proposal shall not constitute a Change of 
           Control.  For this purpose, a Change of Control event shall be 
           considered to result from a proposal if the event occurs because 
           of the acquisition of stock or assets of Merchants Bancshares, 
           Inc., directly or indirectly, by Persons, or a group of some of 
           whose members are Persons, identified in the written notice 
           described above. 

      "Incumbent Director(s)" shall mean the members of the Board of 
Merchants Bancshares, Inc. on the date of this Amended Plan, provided that 
any person becoming a director subsequent to the date of this Amended Plan 
whose election or nomination for election was approved by two-thirds (but in 
no event less than two) of the directors who at the time of such election or 
nomination comprise the Incumbent Directors shall be considered to be an 
Incumbent Director. 

      "Voting Stock" of any corporation shall mean the capital stock of any 
class or classes having general voting power under ordinary circumstances, 
in the absence of contingencies, to elect directors of such corporation.

      Section 6.  Distributions Relating to Variable Account. 

      (a)  On or promptly following January 2, 1999 and each January 2 
           thereafter through and including January 2, 2008, the Bank shall 
           distribute or cause to be distributed to Davis or his designated 
           beneficiary a fraction of the value of the Variable Account as 
           of the last business day of the immediately-preceding calendar 
           year, as such value is determined in good faith by the Bank, 
           where the fraction has (a) a numerator of 1; and (b) a 
           denominator equal to ten (10) minus the aggregate number of 
           distributions previously made to Davis or his designated 
           beneficiary pursuant to this subsection 6(a).  All such 
           valuations in each case shall include all credits (or debits) 
           required to be made pursuant to Section 2 of this Agreement.  
           Distributions may be made in cash or in the form of securities 
           held by the Trust (distributed securities shall be valued at 
           their fair market value as of the date of distribution as 
           reasonably determined by the Bank). 
 
      (b)  Notwithstanding the provisions of subsection 6(a), above, if 
           Davis dies before he has received all of the payments referred 
           to above, the Bank shall pay to Davis' designated beneficiary, 
           not later than ninety (90) days after the date of his death, a 
           lump sum in an amount equal to the value of the Account as of 
           the date of his death. 

      (c)  Notwithstanding the provisions of subsection 6(a) and 6(b), 
           above, Davis may request, and the Bank may approve, a 
           distribution due to hardship by submitting a written request to 
           the Board of Directors of the Bank, accompanied by evidence to 
           demonstrate that the circumstances being experienced qualify as 
           a hardship.  If a hardship is found by the Bank, the 
           distribution shall be limited to an amount sufficient to meet 
           the hardship. 
 
      (d)  For purposes of subsection 6(c), "hardship" means a severe 
           financial hardship to Davis resulting from a sudden and 
           unexpected illness or accident of Davis or a dependent of Davis, 
           loss of Davis' property due to casualty, or other similar 
           extraordinary and unforeseeable circumstances arising as a 
           result of events beyond the control of Davis. The circumstances 
           that will constitute a hardship will depend on the facts of each 
           case.

           However, in no event shall payment be made if such purported 
           hardship is or may be relieved: 

           (i)    through reimbursement or compensation by insurance or 
                  otherwise; or 
 
           (ii)   by liquidation of Davis' assets, to the extent that such 
                  liquidation would not itself cause severe financial 
                  hardship. 
 
           In no case shall the need to send a child to college or the 
           desire to purchase a home be considered a hardship. 

      Section 7.  No Reductions.  The amounts to be paid to Davis hereunder, 
and the dates on which such payments shall be due, shall under no 
circumstances and in no event be subject to reduction, curtailment or 
deferral. 

      Section 8.  Beneficiary Designation.  Davis may designate one or more 
beneficiaries to receive, in the event of his death, all amounts which are 
then and thereafter payable under this Agreement.  Such designation and any 
subsequent changes thereto shall be made in writing and filed with the 
Treasurer of the Bank.  In the event of Davis' death prior to receipt of the 
total amount due to him hereunder and without a then-effective beneficiary 
designation, the balance shall be paid to Davis' spouse, if then living, and 
otherwise to his estate. 

      Section 9.  Nontransferability.  No right to payment under this 
Agreement shall be subject to anticipation, alienation, sale, assignment, 
pledge, encumbrance or charge, and any attempt to anticipate, alienate, 
sell, assign, pledge, encumber or charge the same shall be void.  No right 
to payment shall, in any manner, be liable for or subject to the debts, 
contracts, liabilities or torts of the person entitled thereto.  If, at the 
time when payments are to be made hereunder, Davis or any beneficiary is 
indebted to the Bank, then any payments remaining to be made hereunder may, 
at the discretion of the Bank, be reduced by the amount of such 
indebtedness.  An election by the Bank not to reduce such payments shall not 
constitute a waiver of its claim for such indebtedness. 

      Section 10.  Full Release.  The provisions of this Agreement are in 
full and final satisfaction of any and all claims which Davis has or may 
have against the Bank under or on account of the Salary Continuation 
Agreement and/or under on account of any act or omission of the Bank or any 
of its affiliates or their respective officers, directors or employees to 
the date of this Agreement with respect to its so-called 401(k) Plan and the 
untimely payment of amounts due to Davis thereunder. 

      Section 11.  Successors and Assigns.  This Plan shall be binding upon 
and inure to the benefit of the Bank, its successors and assigns, and Davis 
and his heirs, executors, administrators and legal representatives. 

      Section 12.  Governing Law.  This Plan shall be governed by and 
construed in accordance with the laws of the State of Vermont, without 
giving effect to such jurisdiction's principles of conflict of laws. 

      IN WITNESS WHEREOF, the Bank and Davis have executed this Agreement as 
of the 20th day of December, 1995. 

                                       THE MERCHANTS BANK 
 
/s/ Dudley H. Davis                    By: /s/ Joseph L. Boutin
------------------------------         -------------------------------
Dudley H. Davis                            Its President and
                                           Chief Executive Officer