Report of Independent Public Accountants    

                                                         
                                                                  
      To the Stockholders and Board of Directors of Merchants
Bancshares, Inc.:
                                                                  
 
                                                                  
      We have audited the accompanying consolidated balance
sheets of Merchants Bancshares, Inc. (a Delaware corporation) and
subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three        
years in the period ended December 31, 1995.  These consolidated
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.  
                              
                                                                  
      We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
                                                                 
                                                                  
      In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Merchants Bancshares, Inc. and subsidiaries
as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally
accepted accounting principles.                                   
                                                                  
       As explained in Note 2 to the consolidated financial
statements, the Company adopted, effective December 31, 1993,
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
                              
                                                                  
                                                        
                                                                  
    ARTHUR ANDERSEN LLP                                           
    Boston, Massachusetts                                         
    January 25, 1996                                              
            
<TABLE>

                  Merchants Bancshares, Inc.
                  Consolidated Balance Sheets
<CAPTION>
At December 31,                                                                1995             1994
--------------------------------------------------------------------------------------  ---------------
ASSETS:
<S>                                                                     <C>              <C>    
 Cash and Due from Banks (Note 2)                                       $    38,366,772  $    34,851,401
 Trading Securities (at market value) (Notes 2 and 3)                           500,000                0
 Securities Available for Sale (Notes 2 and 3):
   Debt Securities                                                           97,943,234       90,470,922
   Marketable Equity Securities                                                 309,508        1,195,897
 Debt Securities Held to Maturity (Market Value of $9,871,875 in 1994)                0       10,084,646
--------------------------------------------------------------------------------------  ---------------
      Total Investment Securities                                            98,252,742      101,751,465
--------------------------------------------------------------------------------------  ---------------
 Loans (Notes 2 and 4)                                                      379,930,413      414,752,749
 Segregated Assets (Notes 4 and 10)                                          69,793,604       95,802,303
   Reserve for Possible Loan Losses                                         (16,234,481)     (19,928,817)
--------------------------------------------------------------------------------------  ---------------
      Net Loans                                                             433,489,536      490,626,235
--------------------------------------------------------------------------------------  ---------------
 Federal Home Loan Bank Stock                                                 3,174,400        6,856,200
 Premises and Equipment, Net (Notes 2 and 5)                                 12,454,708       16,620,173
 Investments in Real Estate Limited Partnerships (Note 2)                     3,141,245        3,593,818
 Other Real Estate Owned, Net (Note 2)                                        7,772,067       13,230,807
 Other Assets (Note 7)                                                       17,896,993       27,306,440
--------------------------------------------------------------------------------------  ---------------
      Total Assets                                                      $   615,048,463  $   694,836,539
--------------------------------------------------------------------------============  ---============
LIABILITIES:
 Deposits:
   Demand                                                               $    85,417,465  $    94,467,122
   Savings, NOW and Money Market Accounts                                   278,241,601      293,655,696
   Time Deposits Over $100,000                                               20,473,321       23,280,762
   Other Time                                                               160,381,588      170,820,804
--------------------------------------------------------------------------------------  ---------------
      Total Deposits                                                        544,513,975      582,224,384
 Other Borrowed Funds (Note 8)                                                5,335,422       18,294,734
 Other Liabilities (Notes 6 and 7)                                            9,525,446        7,788,085
 Debt (Note 9)                                                               15,424,757       44,229,366
--------------------------------------------------------------------------------------  ---------------
      Total Liabilities                                                 $   574,799,600      652,536,569
--------------------------------------------------------------------------------------  ---------------

Commitments and Contingencies (Note 13)

STOCKHOLDERS' EQUITY (Note 11):
 Preferred Stock
   Class A:
     $.01 par value, non-voting
     Shares Authorized: 200,000
     Shares Outstanding: None                                                         0                0
   Class B:
     $.01 par value, voting
     Shares Authorized: 1,500,000
     Shares Outstanding: None                                                         0                0
 Common Stock, $.01 par value
     Shares Authorized: 4,700,000 in 1995 and 1994
     Shares Issued: 4,434,620 in 1995 and 4,242,927 in 1994                      44,346           42,429
 Capital in Excess of Par Value                                              33,154,407       30,647,120
 Retained Earnings                                                            8,620,881       12,462,820
 Treasury Stock (at Cost) 144,278 Shares in 1995 and 12,733 Shares in 1994   (2,037,927)        (178,730)
 Net Unrealized Appreciation (Depreciation) of Investment Securities
   Available for Sale, Net of Taxes                                             467,156         (673,669)
----------------------------------------------------------------------------------------   --------------
      Total Stockholders' Equity                                             40,248,863       42,299,970
---------------------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity                        $   615,048,463  $   694,836,539
--------------------------------------------------------------------------==============---==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<TABLE>

                        Merchants Bancshares, Inc.
                  Consolidated Statements of Operations

<CAPTION>
For the years ended December 31,                                  1995            1994             1993
-----------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
<S>                                                          <C>             <C>              <C> 
 Interest and Fees on Loans                                  $ 46,067,109    $ 48,938,668     $ 47,268,729
 Interest and Dividends on Investments:
   U.S. Treasury and Agency Obligations                         4,525,095       3,508,523        3,655,198
   Obligations of State and Political Subdivisions                      0               0           12,839
   Other                                                          722,539         872,267          537,054
-----------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income                             51,314,743      53,319,458       51,473,820
-----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
 Savings, NOW and Money Market Accounts                         9,077,337       8,419,716        8,476,489
 Time Deposits Over $100,000                                    1,432,520       1,335,775        1,394,307
 Other Time                                                     8,981,211       8,095,686        7,108,490
 Other Borrowed Funds                                             256,439         495,997          733,817
 Debt                                                           3,254,128       4,029,479        4,242,423
-----------------------------------------------------------------------------------------------------------
Total Interest Expense                                         23,001,635      22,376,653       21,955,526
-----------------------------------------------------------------------------------------------------------
Net Interest Income                                            28,313,108      30,942,805       29,518,294
 Provision for Possible Loan Losses (Note 4)                   12,100,000      10,000,000       23,822,000
-----------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Possible Loan Losses   16,213,108      20,942,805        5,696,294
-----------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
 Trust Department Income                                        1,796,138       1,729,376        1,686,561
 Service Charges on Deposits                                    3,183,525       3,451,507        3,571,376
 Merchant Discount Fees                                         1,861,313       2,123,526        1,741,209
 Gains on Sale of Investment Securities, net (Note 3)             351,771          72,884        1,898,945
 Gain on Curtailment of Pension Plan (Note 6)                   1,562,670               0                0
 FDIC Assistance Received-Loss Sharing (Note 10)                2,950,840       6,248,802        1,674,615
 Other                                                          1,059,660       1,411,587        1,555,721
-----------------------------------------------------------------------------------------------------------
Total Non-Interest Income                                      12,765,917      15,037,682       12,128,427
-----------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
 Salaries and Wages                                            10,728,741      10,664,411        9,590,775
 Employee Benefits (Note 6)                                     2,705,164       2,531,980        2,713,988
 Occupancy Expense                                              2,177,612       2,324,171        1,949,256
 Equipment Expense                                              2,068,991       2,004,352        1,879,764
 Losses on and Writedowns of Other Real Estate Owned            2,986,555       3,791,819        1,970,428
 Equity in Losses of Real Estate Limited Partnerships             645,600       1,588,914          967,138
 Trust Customers' Reimbursement, Net (Note 13)                          0       3,246,100                0
 Losses and Write-downs of Segregated Assets (Note 10)          2,950,840       6,248,802        1,674,615
 Reengineering Expenses and Related Consultants' Fees (Note 12  4,055,510               0                0
 Other                                                          8,286,836       9,312,413        7,270,812
-----------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses                                    36,605,849      41,712,962       28,016,776
-----------------------------------------------------------------------------------------------------------
Loss Before Benefit for Income Taxes                           (7,626,824)     (5,732,475)     (10,192,055)
Benefit for Income Taxes (Notes 2 and 7)                       (3,784,885)     (2,842,451)      (4,410,486)
-----------------------------------------------------------------------------------------------------------
NET LOSS                                                       (3,841,939)   $ (2,890,024)    $ (5,781,569)
--------------------------------------------------------------============----============-----============
LOSS PER SHARE, based upon weighted average common
shares outstanding of 4,269,231 in 1995, 4,230,194 in 1994,
and 4,216,355 in 1993 (Note 11):                                    (0.90)   $      (0.68)    $      (1.37)
--------------------------------------------------------------============----============-----============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<TABLE>

                                   Merchants Bancshares, Inc.
                        Consolidated Statements of Changes in Stockholders' Equity
                     For Each of the Three Years in the Period Ended December 31, 1995




<CAPTION>
                                                                               Net Unrealized
                                                                               Appreciation
                                                                               (Depreciation)
                                           Common    Capital in                of Investment
                                            Stock     Excess of    Retained     Securities   Treasury
                                          (Note 11)   Par Value    Earnings      (Note 2)      Stock         Total
---------------------------------------------------------------------------------------------------------------------
<S>                                     <C>        <C>          <C>          <C>          <C>           <C>           
Balance, December 31, 1992              $   42,429 $ 30,635,559 $ 21,949,050 $         0  $   (424,125) $ 52,202,913
 Net Loss                                    ---         ---      (5,781,569)     ---           ---       (5,781,569)
 Treasury Stock Transactions                 ---         11,561       33,948      ---          245,395       290,904
 Cash Dividends ($.20 per share)             ---         ---        (848,585)     ---           ---         (848,585)
 Effect of a Change in Accounting
   Principle (Note 2)                                                           (143,657)       ---         (143,657)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993              $   42,429 $ 30,647,120 $ 15,352,844 $  (143,657) $   (178,730) $ 45,720,006
 Net Loss                                    ---         ---      (2,890,024)     ---           ---       (2,890,024)
 Change in Net Unrealized Depreciation
   of Investment Securities
   Available for Sale, Net of Taxes          ---         ---          ---       (530,012)       ---         (530,012)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994              $   42,429 $ 30,647,120 $ 12,462,820 $  (673,669) $   (178,730) $ 42,299,970
 Net Loss                                    ---         ---      (3,841,939)     ---           ---       (3,841,939)
 Sale of Treasury Stock                      ---         ---          ---         ---          178,730       178,730
 Purchase of Treasury Stock                  ---        (44,598)      ---         ---       (2,037,927)   (2,082,525)
 Issuance of common stock                    1,917    2,551,885       ---         ---           ---        2,553,802
 Change in Net Unrealized Appreciation
    (Depreciation) of Investment Securities
   Available for Sale, Net of Taxes          ---         ---          ---      1,140,825        ---        1,140,825
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995              $   44,346 $ 33,154,407 $  8,620,881 $   467,156 $  (2,037,927)$  40,248,863
----------------------------------------=============================================================================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
                                         Merchants Bancshares, Inc.
                                    Consolidated Statements of Cash Flows
<CAPTION>
 For the Years Ended December 31,                                1995         1994          1993
 CASH FLOWS FROM OPERATING ACTIVITIES:                        -----------  -----------   -----------
<S>                                                         <C>             <C>            <C>
 Net Loss                                                   $  (3,841,939)  $ (2,890,024)  $ (5,781,569)
 Adjustments to Reconcile Net Loss to Net
  Cash Provided by Operating Activities:
   Provision for Possible Loan Losses                           12,100,000   10,000,000    23,822,000
   Provision for Possible Losses on Other Real Estate Owned      1,365,011    2,388,469       658,123
   Provision for Depreciation and Amortization                   4,357,768    6,685,094     4,762,037
   Prepaid Income Taxes                                           (692,726)  (1,890,304)      (25,360)
   Net Gains on Sales of Investment Securities                    (351,771)     (72,884)   (1,898,945)
   Net Gains on Sales of Loans and Leases                         (463,919)    (218,510)     (818,376)
   Net (Gains) Losses on Sales of Premises and Equipment          (222,895)           0             0
   Equity in Losses of Real Estate Limited Partnerships            645,600    1,588,916       967,138
  Changes in Assets and Liabilities net of Effects From
Acquisition of NFNBV in 1993 (Note 10):
   (Increase) Decrease in Interest Receivable                    1,099,212       40,651       (28,313)
   Increase in Interest Payable                                    170,331      347,000       587,598
   (Increase) Decrease in Other Assets                           8,810,236   (3,336,601)   (5,032,001)
   Increase (Decrease) in Other Liabilities                      1,567,069   (1,418,975)     (272,603)
                                                               -----------  -----------   -----------
   Net Cash Provided by Operating Activities                    24,541,977   11,222,832    16,939,729
                                                               -----------  -----------   -----------
 CASH FLOWS FROM INVESTING ACTIVITIES: 
   Proceeds from Sales of Investment Securities                 50,377,072      682,030   403,140,859
   Proceeds from Maturities of Investment Securities            59,000,000            0     1,000,000
   Proceeds from Sales of Loans and Leases                      35,573,702   48,911,562    98,332,905
   Proceeds from Sales of FHLB Stock                             3,681,800            0             0
   Proceeds from Sales of Premises and Equipment                   327,500       39,631             0
   Proceeds from Sales of Other Real Estate Owned                8,377,527    5,684,332     2,162,941
   Purchases of FHLB Stock                                               0   (1,282,500)   (2,652,400)
   Purchases of Available for Sale Investment Securities      (102,822,744) (10,014,063) (385,195,506)
   Purchases of Held to Maturity Investment Securities                   0  (10,098,437)            0
   Cash and Cash Equivalents Received - Acquisition (Note 10)            0            0    17,102,000
   Loans Originated, net of Principal Repayments                 4,075,622   (2,272,774)  (82,445,997)
   Investments in Real Estate Limited Partnerships                       0     (273,742)      281,821
   Purchases of Premises and Equipment                            (792,762)  (2,258,284)   (1,599,220)
   Decrease in Net Investment in Leveraged Leases                        0       41,731       587,438
                                                                ----------- -----------   -----------
     Net Cash Provided by Investing Activities                  57,797,717   29,159,486    50,714,841
                                                                ----------- -----------   -----------
 CASH FLOWS FROM FINANCING ACTIVITIES:
   Net Increase (Decrease) in Deposits                         (37,710,409) (37,085,500)  (87,773,966)
   Net Increase (Decrease) in Other Borrowed Funds             (12,959,312)   3,370,653     6,459,269
   Proceeds from Debt                                                    0            0    12,000,000
   Principal Payments on Debt                                  (28,804,609)  (2,404,056)  (14,403,713)
   Acquisition of Treasury Stock                                (2,082,525)           0      (132,058)
   Issuance of Common Stock                                      2,553,802            0             0
   Cash Dividends Paid                                                   0            0      (838,050)
   Sale of Treasury Stock                                          178,730            0       377,457
                                                                ----------- -----------   -----------
     Net Cash Used in Financing Activities                     (78,824,323) (36,118,903)  (84,311,061)
                                                                ----------- -----------   -----------
 Increase (Decrease) in Cash and Cash Equivalents                3,515,371    4,263,415   (16,656,491)
 Cash and Cash Equivalents at Beginning of Year                 34,851,401   30,587,986    47,244,477
                                                                ----------- -----------   -----------
 Cash and Cash Equivalents at End of Year                    $  38,366,772   34,851,401    30,587,986
                                                                =========== ===========   ===========
 Total Interest Payments                                     $  22,831,304   22,029,653    21,367,928
 Total Income Tax Payments                                   $           0       50,000     1,190,000
 Transfer of loans to Other Real Estate Owned                $   2,777,117    7,899,401     5,151,867

 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                       Merchants Bancshares, Inc.
               Notes to Consolidated Financial Statements
                            December 31, 1995

(1) CURRENT OPERATING ENVIRONMENT AND REGULATORY MATTERS

  Merchants Bancshares, Inc. (the Company), and its wholly owned
subsidiaries, including the Merchants Bank and subsidiaries (the
Bank), operate primarily in Vermont.  Beginning in the late
1980's, this region was severely affected by a deterioration in
the real estate market and an economic recession.  As a result,
the Bank experienced increased levels of nonperforming assets and
loan charge-offs, increased provisions for possible loan losses
and high costs associated with troubled assets and foregone
income on nonaccrual loans.  Although these adverse trends appear
to be abating, prospects as to the extent and timing of future
improvement in the economy remain uncertain.

  The reserve for possible loan losses as of December 31, 1995 is
deemed adequate based on management's estimate of the amount
required to absorb future losses in the loan portfolio based on
known current circumstances and real estate market conditions. 
However, if there is further deterioration in the real estate
markets, the Company could experience increases in nonperforming
assets and resultant operating losses attributable to a need for
further significant provisions for loan losses and increased
foregone interest income on nonaccrual loans.

  The Company and the Bank and its subsidiaries are subject to
various regulatory requirements administered by the regulators. 
Failure to meet minimum requirements, including capital
requirements, can initiate certain mandatory and possible
additional discretionary actions by the regulators.  The Bank and
its subsidiary, Merchants Trust Company (the Trust Company),
currently operate under separate Memoranda of Understanding
(MOUs) with the Federal Deposit Insurance Corporation (FDIC). 
The Company currently operates under a Regulatory Agreement with
the Federal Reserve Bank of Boston (the Federal Reserve).  The
specific terms of these agreements are described below.

  As of December 31, 1995, the most recent notification from the
FDIC categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action.  To be
categorized as adequately capitalized, the Bank must maintain
minimum Tier 1 Risk-Based, Total Risk-Based and Tier 1 Leverage
Capital ratios as set forth in the table below:


                                        Amount        Percent

Tier 1 Risk-Based Capital     
  Actual                                $37,627        8.19%
  Minimum required                      $18,386        4.00%

Total risk-based Capital           
  Actual                                $43,420        9.45%
  Minimum required                      $36,772        8.00%

Tier 1 Leverage Capital
  Actual                                $37,627        6.15%
  Minimum required                      $24,471        4.00%
  MOU Requirement                       $33,650         5.50%

  Failure to maintain the minimum leverage capital ratio of 5.5%
(see Note 11) included in the MOU, or in compliance with other
provisions of the the MOUs, or the agreement with the Federal
Reserve, could subject the Bank, Trust Company or the Company to
additional actions by the regulatory authorities.

Discussion of Regulatory Actions
  
In March, 1993, the FDIC and the State of Vermont Department of
Banking, Insurance and Securities (the Commissioner) conducted a
joint field examination of the Bank.  As a result of this
examination, the Bank entered into a Memorandum of Understanding
with the FDIC and the Commissioner on October 29, 1993.  Under
the terms of the MOU, the Bank is required to, among other
things, maintain a leverage capital ratio of at least 5.5% and
refrain from declaring dividends.  The dividend limitation
includes dividends paid by the Bank to the Company.  In April,
1995, the FDIC and the Commissioner completed the field work
related to their most recent examination of the Bank as of
December 31, 1994.  Based on this examination, the Bank is
required to continue its efforts to correct certain
administrative and legal violations and enhance certain operating
policies before the MOU will be removed.  Management has revised
the policies, made changes to enhance the credit review
procedures and corrected the technical exceptions and violations,
and believes the Bank is in substantial compliance with the
provisions of the MOU as of December 31, 1995.  

In February, 1994, the Company and the Federal Reserve entered
into an agreement.  Under this agreement, among other things, the
Company may not declare or pay a dividend or incur any debt
without the approval of the Federal Reserve.  On December 29,
1995, the Federal Reserve completed the field work related to
their most recent examination of the Company as of September 30,
1995.  No substantive issues were brought up as a result of the
examination.  However, it appears that the Written Agreement will
remain in place until at least the next examination.

In December, 1994, the FDIC and the Commissioner completed field
work related to their examination of the Merchants Trust Company
as of September 26, 1994.  On February 17, 1995 the Trust Company
entered into a Memorandum of Understanding (MOU) with the FDIC
and the Commissioner to affect corrective actions relating to
certain operating, technical and regulatory issues.  In December,
1995 the FDIC and the Commissioner completed the field work
related to their examination of the Merchants Trust Company as of
November 6, 1995.  It appears that the MOU will remain in place
until at least the next examination.  

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, the
Bank (including its wholly owned subsidiaries Merchants Trust
Company, Queneska Capital Corp. and certain trusts) and Merchants
Properties, Inc., after elimination of all material intercompany
accounts and transactions.

Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the
reported amounts of income and expenses during the reporting
periods.  Operating results in the future could vary from the
amounts derived from management's estimates and assumptions.

Investment Securities
In May 1993, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115).  This statement requires investments
in debt securities to be classified as held-to-maturity and
measured at amortized cost only if the Company has the positive
intent and ability to hold such securities to maturity. 
Investments in debt securities that are not classified as held-
to-maturity and equity securities that have readily determinable
fair values are classified as trading securities or available-
for-sale securities.  Trading securities are investments
purchased and held principally for the purpose of selling in the
near term; available-for-sale securities are investments not
classified as trading or held-to-maturity.  Unrealized holding
gains and losses for trading securities are included in earnings;
unrealized holding gains and losses for available-for-sale
securities are reported in a separate component of stockholders'
equity, net of applicable income taxes.  The Company elected to
apply the accounting principle to investment securities held as
of December 31, 1993.  All investment securities were classified
as available-for-sale at December 31, 1993 and the resulting
adjustment was included in the accompanying consolidated
statement of changes in stockholders' equity as the effect of a
change in accounting principle.

Prior to December 31, 1993, debt securities were designated at
the time of purchase as either held for sale or held for
investment, based on management's intentions in light of
investment policy, asset/liability management policy, liquidity
needs and economic factors.  Debt securities held for sale were
stated at the lower of amortized cost or market value while debt
securities held for investment, where management had the
intention and ability to hold such securities until maturity,
were stated at amortized cost.  Unrealized losses on debt
securities held for sale were recorded as a valuation allowance
against the related securities.  The provision for the valuation
allowance was recorded in the accompanying consolidated
statements of operations.

Marketable equity securities were stated at the lower of
aggregate cost or market value. Net unrealized losses, considered
temporary in nature, were shown as a reduction of stockholders'
equity.  Unrealized losses, considered other than temporary in
nature, were recognized in the accompanying consolidated
statements of operations.  The gain or loss recognized on the
sale of an investment security was based upon the adjusted cost
of the specific security.

Dividend and interest income, including amortization of premiums
and discounts, is recorded in earnings for all categories of
investment securities.  Discounts and premiums related to debt
securities are amortized using a method which approximates the
level-yield method.

Management reviews all reductions in value below book value to
determine if the impairment is other than temporary.  If the
impairment is determined to be other than temporary in nature,
the carrying value of the security is written down to the
appropriate level by a charge to earnings.

Loan Origination and Commitment Fees
Loan origination and commitment fees and certain direct loan
origination costs are deferred and amortized over the lives of
the related loans.  Net deferred origination fees were $956,333  
and $1,132,494 at December 31, 1995 and 1994, respectively.

Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided using straight-line and
accelerated methods at rates that amortize the original cost of
the premises and equipment over their estimated useful lives. 
Expenditures for maintenance, repairs and renewals of minor items
are generally charged to expense as incurred.


Gains and Losses on Sales of Loans
Gains and losses on sales of loans are recognized based upon the
difference between the selling price and the carrying amount of
loans sold. Gains and losses are adjusted for excess servicing
rights resulting from the sale of loans with servicing rights
retained.  Excess servicing rights are recorded at the net
present value of estimated future servicing revenue less expected
normal servicing costs.  Deferred excess servicing is amortized
over the period of estimated net servicing income.  Origination
fees collected, net of commitment fees paid in connection with
the sales of loans and net of the direct cost of loan
originations, are recognized at the time such loans are sold. 
The net gain on sales of loans is included in interest and fees
on loans and amounted to $463,920, $218,510 and $818,376 in 1995,
1994, and 1993, respectively.

Income Taxes
The Company provides for income taxes in accordance with SFAS No.
109.  This method recognizes the tax effects of all income and
expense transactions in each year's consolidated statement of
operations, regardless of the year in which the transactions are
reported for tax purposes.  Low income housing tax credits are
recognized in the year in which they are earned. 

Investments in Real Estate Limited Partnerships
The Bank has investments in various real estate limited
partnerships that acquire, develop, own and operate low and
moderate income housing.  The Bank's ownership interest in these
limited partnerships varies from 35% to 100% as of December 31,
1995.   The Bank consolidates the financial statements of the
limited partnership in which the Bank is actively involved in
management and has a controlling interest.  The Bank accounts for
its investments in limited partnerships where the Bank does not
actively participate or have a controlling interest under the
equity method of accounting. 

Management periodically reviews the results of operations of the
various real estate limited partnerships to determine if the
partnerships generate sufficient operating cash flow to fund
their current obligations.  In addition, management reviews the
current value of the underlying property compared to the
outstanding debt obligations.  If it is determined that the
investment suffers from a permanent impairment, the carrying
value is written down to the appropriate balance.  The Bank
recognized losses due to the impairment of an investment in a
real estate limited partnership of $546,000 in 1994.

Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due
from banks and federal funds sold in the accompanying
consolidated statements of cash flows.  At December 31, 1995 and
1994, cash and cash equivalents included $5,187,000 and
$8,508,000, respectively, held to satisfy the requirements of the
Federal Reserve Bank.

Other Real Estate Owned
Collateral acquired through foreclosure are recorded at the lower
of cost or fair value, less estimated costs to sell, at the time
of acquisition or designation as in-substance foreclosure.  A
valuation allowance is established for the estimated costs to
sell and is charged to expense.  Subsequent changes in the fair
value of other real estate owned are reflected in the valuation
allowance and charged or credited to expense.  Net operating
income or expense related to foreclosed property is included in
non-interest expense in the accompanying consolidated statements
of operations.  Because of the present market conditions, there
are inherent uncertainties in the assumptions with respect to the
estimated fair value of other real estate owned.  Because of
these inherent uncertainties, the amount ultimately realized on 
real estate owned may differ from the amounts reflected in the
consolidated financial statements.  The Bank recognized losses
due to additions to the valuation allowance of $1,361,000,
$2,392,000 and $599,000 during 1995, 1994 and 1993, respectively.

Mortgage Servicing Rights
In May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights."  This statement requires a banking
enterprise that sells or securitizes loans and retains the
mortgage servicing rights, to allocate the total cost of the
loans to the mortgage servicing rights and the loans based on
their relative fair value if it is practicable  to estimate those
fair values.  Mortgage servicing rights should be recognized as a
separate asset and amortized in proportion to, and over the
period of, estimated net servicing income.  In addition, these
servicing rights will be evaluated for impairment based on their
fair value.  The Bank is required to adopt the new standard
prospectively on January 1, 1996.  Management does not believe
that the adoption of this standard will have a significant impact
on the Bank's consolidated financial condition or future results
of operations.
                                     
Intangible Assets
Premiums paid for the purchase of core deposits are recorded as
other assets and amortized over the estimated period of time over
which value is realized.  Management reviews the value of the
intangible asset by comparing purchased deposit levels to the
current level of acquired deposits in the branches purchased.  If
any deposit runoff has occurred and is determined to be permanent
in nature, the asset is written down accordingly.  

Accounting for Impairment of Long-Lived Assets
In March 1995 the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of."  This statement requires a review for impairment of
long-lived assets and certain identifiable intangibles to be held
and used by an entity when events or changes in circumstances
indicate that the carrying amount of the assets may not be
recoverable.  An impairment loss would be recognized if the sum
of the future cash flows expected to result from the use and
eventual disposition of the asset is less than the carrying
amount of the asset.  The amount by which the carrying amount of
the asset exceeds the asset's fair value is the total impairment
loss to be recognized.  The statement also requires that for
certain long-lived assets to be disposed of, the amount by which
the carrying amount of the asset exceeds the fair value less
costs to sell, is an impairment loss to be recognized.  This
statement does not apply to financial instruments, core deposit
intangibles, mortgage and other servicing rights, or deferred tax
assets.  The Bank is required to adopt this new standard on
January 1, 1996.  Management does not believe that the adoption
of this standard will have a siginficant impact on the Bank's
consolidated financial condition or future results of operations.

Reclassification
Certain amounts in the prior year's consolidated financial
statements have been reclassified to be consistent with the 1995
presentation.


(3) INVESTMENT SECURITIES

Investments in debt securities are classified as trading, available for sale
or held to maturity as of December 31, 1995 and 1994.  The amortized cost
and fair values of the debt securities classified as available for sale as
of December 31, 1995 and 1994 are as follows:
     
                                        Gross       Gross       
                        Amortized    Unrealized   Unrealized       Fair
                          Cost          Gains       Losses        Value      

      1995
U.S. Treasury
    Obligations       $ 49,644,093   $ 219,355   $   11,835   $ 49,851,613  
Mortgage-backed
    Securities          47,561,580     592,975       62,934     48,091,621  
                      $ 97,205,673   $ 812,330   $   74,769   $ 97,943,234  


      1994
U.S. Treasury 
    Obligations       $ 91,935,993           0   $1,545,368   $ 90,390,625  
Other Debt Securities       90,297           0       10,000         80,297  
                      $ 92,026,290   $       0   $1,555,368   $ 90,470,922  


Marketable equity securities are classified as available for sale at
December 31, 1995 and 1994 and are stated at their fair value of $309,508
and $1,195,897 respectively.  Gross unrealized gains and losses related to
marketable equity securities were $654,658 and $120,000, respectively, at 
December 31, 1994.  Gross unrealized losses on equity securities were
$20,000 at December 31, 1995.  

The fair value of securities held for trading was $500,000 at December 31,
1995.  There were no unrealized gains or losses related to securities held
for trading at December 31, 1995.

In the fourth quarter of 1995, concurrent with the adoption of its
implementation guide on SFAS No. 115, "Accounting for Certain Debt and
Equity Securities," the FASB allowed a one-time reassessment of the SFAS No.
115 classifications of all securities currently held.  Any reclassifications
would be accounted for at fair value in accordance with SFAS No. 115 and any
reclassifications from the held for investment portfolio that resulted from
this one-time reassessment would not call into question the intent of the
Bank to hold other debt securities to maturity in the future.  The Bank used
the opportunity under this one-time reassessment to reclassify a $10 million
U.S. Treasury obligation from the held to maturity to the available-for-sale
category.  In connection with this reclassification an unrealized gain of
$70,000 was recorded in available-for-sale securities and in stockholders'
equity (on a net-of-tax basis).  The security was subsequently sold and the
Bank recognized a gain of a similar amount.  This security was classified as
held to maturity at December 31, 1994, having an amortized book value of
$10,084,646 and a fair value of $9,971,975.

The contractual maturities of all debt securities held at December 31, 1995
are as follows:
                                                         
                                        Amortized          Fair
                                          Cost             Value    
________________________________________________________________________

Due in one year or less                $30,076,814       $30,178,505
Due after one year through five years   19,547,278        19,673,361
Mortgage-backed securities              47,581,581        48,091,368
__________________________________________________________________________
                                       $97,205,673       $97,943,234


Proceeds from sales of available for sale debt securities were $49,383,072
and $682,030 during 1995 and 1994, respectively.  Gross gains of $659,994,
$91,780 and $2,120,838 and gross losses of $308,223,  $18,896, and $221,893
were realized from sales of debt and equity securities in 1995, 1994 and
1993, respectively.  


At December 31, 1995, securities with a face value of $30,195,000 were
pledged to secure federal funds lines, public deposits, securities sold
under agreements to repurchase, and for other purposes required by law.        


(4) LOANS

The composition of the loan portfolio at December 31, 1995 and 1994 is as
follows (including Segregated Assets - Note 10):
                                             1995           1994
-----------------------------------------------------------------
Commercial, Financial and Agricultural $ 76,925,602  $ 92,611,512 
Real Estate - Commercial                207,235,189   226,014,576
Real Estate - Residential               148,611,053   173,406,384
Installment Loans to Individuals         16,559,626    18,086,099
All Other Loans (including overdrafts)      392,547       436,481 
_________________________________________________________________
                                       $449,724,017  $510,555,052
=================================================================
As discussed in Note 10, Segregated Assets consist of loans subject to loss
sharing.  The composition of the Segregated Assets portfolio at December 31,
1995 and 1994 is as follows:
                                             1995           1994
-----------------------------------------------------------------
Commercial, Financial and Agricultural $ 11,793,297   $16,294,045 
Real Estate - Commercial                 28,625,693    41,909,959
Real Estate - Residential                29,352,150    37,534,294
Installment Loans to Individuals             22,464        64,005             
_________________________________________________________________
                                       $ 69,793,604  $ 95,802,303
=================================================================

There has been an insignificant effect on the Bank's noninterest expenses
for 1995 and 1994 as a result of expenses and charge-offs relating to the
Segregated Assets.  The Bank's share of the charge-offs was charged to the
allowance for losses on the Segregated Assets, which was established in
conjunction with the acquisition.  Management believes that the allowance
for losses on the Segregated Assets is adequate to cover possible losses
inherent in the Segregated Assets.  
    
Charge-offs, net of recoveries, and eligible expenses on Segregated Assets
aggregated $3,688,550 and $7,811,002 for 1995 and 1994, respectively.  The
Bank recognized recoveries of $2,950,840, $6,248,802 and $1,674,615 from the
FDIC for eligible charge-offs, net of recoveries and eligible expenses, 
related to 1995, 1994 and 1993, respectively, in accordance with the loss 
sharing arrangement.  Amounts due from the FDIC totaling $663,106 and  
$2,883,372 as of December 31, 1995 and 1994 are included in other assets in the
accompanying consolidated balance sheets. 

The Company originates primarily residential and commercial real estate
loans and a lesser amount of installment loans to customers throughout the
state of Vermont.  In order to minimize its interest rate and credit risk,
the Company sells certain residential loans to the secondary market and to
financial investors such as insurance companies and pension funds located in
other states.  Loans held for sale at December 31, 1995 totaled $7,985,000. 
Substantially all of the Company's loan portfolio is based in the state of
Vermont.  There are no known significant industry concentrations in the loan
portfolio.  Loans serviced for others on a non-recourse basis at December 31,
1995 and 1994 amounted to $322,292,294 and $391,517,792, respectively.

The reserve for possible loan losses is based on management's estimate of
the amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known or anticipated at each reporting date. 
There are inherent uncertainties with respect to the final outcome of
certain of the Bank's loans and nonperforming assets.  Because of these
inherent uncertainties, actual losses may differ from the amounts reflected
in these consolidated financial statements. Factors considered in evaluating
the adequacy of the reserve include previous loss experience, current
economic conditions and their effect on the borrowers, the performance of
individual loans in relation to contract terms and estimated fair values of
properties to be foreclosed.  Losses are charged against the reserve for
loan losses when management believes that the collectibility of principal is
doubtful.

Key elements of the above estimates, including those used in independent
appraisals, are dependent upon the economic conditions prevailing at the
time of the estimates.  Accordingly, uncertainty exists as to the final
outcome of certain of the valuation judgments as a result of the difficult
and unpredictable conditions in the region.  The inherent uncertainties in
the assumptions relative to the projected sales prices or rental rates may
result in the ultimate realization of amounts on certain loans that are
different from the amounts reflected in these consolidated financial
statements.

An analysis of the reserve for possible loan losses for the two years ended
December 31, 1995 and 1994 is as follows:

                                   1995           1994      

Balance, beginning of year       $19,928,817      $20,060,059     
Provision for possible
  loan losses                     12,100,000       10,000,000    
Reserve recorded in connection
 with acquisition of NFNBV            ---            -----      
Loans charged off                (18,360,790)    (12,649,842)   
Recoveries                         2,566,454       2,518,600     


Balance, end of year             $16,234,481      $19,928,817    
  
Loans charged off include $749,103 and $1,314,632 and recoveries include
$145,380 and $25,142 related to the Bank's portion of charge-offs and
recoveries on Segregated Assets for 1995 and 1994, respectively.

Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended.  Under the standard, the
allowance for possible loan losses related to loans that are identified as
impaired in accordance with SFAS No. 114 is based on discounted cash flows
using the loan's effective interest rate or the fair value of the collateral
for certain collateral dependent loans.  Prior to 1995, the allowance for
possible loan losses related to these loans was based on undiscounted cash
flows or the fair market value of the collateral for collateral dependent
loans.  A loan is considered to be impaired when it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement.  

The Company has determined that, after an analysis of the loan portfolio,
and a review of its credit quality monitoring policies and procedures, loans
recognized by the Company as nonaccrual and restructured troubled debt are
generally equivalent to "impaired loans" as defined by SFAS No. 114.  The
Company has also determined that the allowance for possible loan losses did
not require any additional provision as a result of the adoption of this
Statement.

Total impaired loans at December 31, 1995 with a related allowance were      
$29,629,572 and the specific allowance associated with such loans was
$2,724,371.   Interest payments on impaired loans are recorded as principal
reductions if the remaining loan balance is not expected to be paid in full. 
If full collection of the remaining loan balance is expected, payments are
recognized as interest income on a cash basis.  During 1995 the Company
recorded interest income on impaired loans of $949,002.  Average impaired
loans were $35,280,318 in 1995.

SFAS No. 114 also requires that, upon adoption, in-substance foreclosures be
reclassified as loans and the ISF valuation reserve be included in the
reserve for possible loan losses.  The effect at January 1, 1995 was an
increase in loans and a decrease in Other Real Estate Owned (OREO) of $4.43
million.  

Nonperforming assets at December 31, 1995 and 1994 were as follows:
                                  1995
                    -----------------------------------   
                               Segregated
                       Loans     Assets      Total     
                   ----------- ----------- ----------- 
Nonaccrual Loans   $19,580,747 $ 6,035,520 $25,616,267 

Restructured Loans   1,364,018      65,756   1,429,774 

Loans Past Due
 90 Days or More
 and Still Accruing    236,817          0      236,817 

Other Real Estate
 Owned, Net          7,224,395    547,672    7,772,067
                   ----------- ----------- ----------- 
     Total         $28,405,977 $6,648,948  $35,054,925 
                   =========== =========== =========== 
 
                                1994
                 -----------------------------------   
                               Segregated
                       Loans     Assets      Total     
                   ----------- ----------- ----------- 
Nonaccrual Loans   $24,251,987 $ 7,948,632 $32,200,619 

Restructured Loans   5,016,123      66,731   5,082,854 

Loans Past Due
 90 Days or More
 and Still Accruing    668,007           0     668,007 

Other Real Estate
 Owned, Net         10,791,262   2,439,545  13,230,807 
                   ----------- ----------- ----------- 
     Total         $40,727,379 $10,454,908 $51,182,287 
                   =========== =========== =========== 
     
Included in nonaccrual loans are $8,362,454 and $3,526,402 of loans whose
terms have been substantially modified in troubled restructurings at
December 31, 1995 and 1994, respectively.  Additionally, the Bank had
$1,429,774 and $1,316,827 of restructured loans that were performing in
accordance with the modified agreement at December 31, 1995 and 1994,
respectively.  Other Real Estate Owned is shown net of valuation reserves of
$2,430,301 and $2,991,065 at December 31, 1995 and 1994.

On June 25, 1995, an auction was held to sell properties held in the Other
Real Estate Owned portfolio.  Over forty properties were sold which
reduced the carrying value of the portfolio by $1.3 million and resulted in
a loss of approximately $300,000.

Additionally, in 1995 the Bank entered into an agreement to sell $6.3
million in non-performing loans resulting in additional losses of $1.3
million.      

The Bank's policy  is to discontinue the accrual of interest and reverse
uncollected interest receivable on loans when scheduled payments become
contractually past due in excess of 90 days or, in the judgment of
management, the ultimate collectibility of principal or interest becomes
doubtful. 

The amount of interest which was not earned but which would have been earned
had the nonaccrual and restructured loans performed in accordance with their
original terms and conditions was approximately $3,466,000, $1,859,000 and
$2,688,000 in 1995, 1994 and 1993, respectively.

An analysis of loans in excess of $60,000 to directors and executive
officers for the year ended December 31, 1995 is as follows:

     Balance, December 31, 1994         $14,984,944    
     Additions                            1,204,218  
     Repayments                          (3,614,503)
     Balance, December 31, 1995         $12,574,659   

It is the policy of the Bank to grant such loans on substantially the same
terms, including interest rates and collateral, as those prevailing for
comparable lending transactions with other persons.

(5) PREMISES AND EQUIPMENT         

The components of premises and equipment included in the
accompanying consolidated balance sheets are as follows:

                             1995           1994
---------------------------------------------------
Land and Buildings       $14,461,616    $18,020,230    
Leasehold Improvements       867,775        869,444    
Furniture and Equipment   11,373,256     11,292,724    
----------------------------------------------------
                          26,702,647     30,182,398    
Less: Accumulated
Depreciation and
Amortization              14,247,939     13,562,225    
----------------------------------------------------
                         $12,454,708    $16,620,173    
====================================================

Depreciation and amortization expense amounted to $1,932,074,
$1,786,213 and $1,595,914 in 1995, 1994 and 1993, respectively.

The Bank leases certain properties for branch purposes.  Rent
expense on these properties totaled $213,096, $214,891 and
$163,807 for the years ended December 31, 1995, 1994 and 1993,
respectively.  Minimum lease payments for these properties
subsequent to December 31, 1995 are:  1996 - $195,061; 1997 -
$172,680; 1998 - $142,717; 1999 - $100,876 and $300,623
thereafter.                                     
                             
(6) EMPLOYEE BENEFIT PLANS

Pension Plan

The Company maintained a noncontributory defined benefit plan covering
all eligible employees.  The plan was a final average pay plan with
benefits based on the average salary rates over the five consecutive
plan years out of the last ten consecutive plan years that produces
the highest average.  It was the Company's policy to fund the cost of
benefits expected to accrue during the year plus amortization of any
unfunded accrued liability that had accumulated prior to the valuation
date based on IRS regulations for funding. During 1994, the Company
made the decision to freeze the plan beginning on January 1, 1995. 
During 1995 the plan was curtailed.  Accordingly, all accrued benefits
were fully vested and no additional years of service or age will be
accrued.  As a result of the curtailment, the Bank recognized a gain
in the amount of $1.56 million in 1995.

The plan's funded status and amounts recognized in the accompanying
consolidated balance sheets and statements of operations as of
December 31, 1995 and 1994 are as follows:  
                                             1995           1994
-----------------------------------------------------------------
Actuarial Present Value of 
Benefit Obligation:  
Vested Benefit Obligation               $5,771,869     $4,797,489
Nonvested Benefits                               0              0
-----------------------------------------------------------------
Accumulated Benefit Obligation          $5,771,869     $4,797,489 
Effects of Projected 
Future Compensation Levels                       0              0
-----------------------------------------------------------------
Projected Benefit Obligation for 
Service Rendered to Date                $5,771,869     $4,797,489 
Plan Assets                              6,835,057      6,332,824
-----------------------------------------------------------------
Excess of Plan Assets Over
 Projected Benefit Obligation           $1,063,188     $1,535,335
Unrecognized Net Asset 
at January 1, 1987 Being Amortized
over 13.4 Years                           (132,513)      (171,602)
Unrecognized Net Loss                       34,114        190,446
Unrecognized Prior Service Cost                  0     (1,673,616)
-------------------------------------------------------------------
Accrued Pension Costs Included 
in Other Liabilities                    $   964,789    $ (119,437)
===================================================================


                                   1995           1994           1993
-----------------------------------------------------------------
Net Pension Expense (Income) Included 
  the Following Components:
Service Cost - Benefits Earned 
  During the Year                  $      0  $316,681  $257,232 
Interest Cost on Projected 
  Benefit Obligation                393,901   486,993   432,963 
Actual Return on
  Plan Assets                      (815,566)  100,004  (488,860)
Net Amortization and 
  Deferral                          172,099  (660,098)  (24,194)      
-----------------------------------------------------------------
Total                             $(249,566) $243,580  $177,141  
================================================================= 
The actuarial present value of the projected benefit obligation was
determined using a weighted average discount rate of 7.5%, 8.5% and
7.5% as of December 31, 1995, 1994, and 1993, respectively.  For 1995
there was no assumed rate of increase in future compensation due to
the freeze on plan benefits.  The rate of increase of future
compensation levels for 1994 was 4% for the period 1994-1995, 4.5% for
the period 1996-1997 and 5% thereafter.  The rate of increase in
future compensation levels for 1993 was 4%.  The expected long-term
rate of return on assets used was 8% in 1995, 8% in 1994 and 1993.

Employee Stock Ownership Plan/ 401(k) Plan 

Under the terms of the Company's Employee Stock Ownership Plan (ESOP),
eligible employees are entitled to contribute up to 15% of their
compensation to the ESOP, and the Company contributes a percentage of
the amounts contributed by the employees, as authorized by the
Company's Board of Directors. The Company contributed approximately
127% of the amounts contributed by the employees (200% of up to 4.5%
of individual employee compensation in 1995) and approximately 75% of
the amounts contributed by employees (82% of up to 4.5% of individual
employee compensation) in 1994 and 1993.  Substantially all
contributions to the ESOP are funded with cash and are used to
purchase the Company's common stock.
                          
(6) EMPLOYEE BENEFIT PLANS (Continued)

Performance Progress Sharing Plan

The Company maintains a Performance Progress Sharing Plan. Substan-
tially all Company employees are eligible to participate in this plan,
and awards are based on performance of the Company measured against
goals established by the Board of Directors.

Deferred Compensation Plans

Through December 1995, the Bank maintained an Executive Salary
Continuation Plan and a Deferred Compensation Plan for Directors.  In
December 1995 the Bank and participants in its Executive Salary
Continuation Plan and in the Fixed Growth Program of its Deferred
Compensation Plan for Directors agreed to amend or terminate the
existing plans.  In satisfaction of all liabilities under those plans,
the Bank agreed to make payments to, or credits for, the participants. 
Pursuant to these agreements, the Bank established several new plans
(the New Plans), to which it made lump sum payments.  The New Plans
used those payments, in part, to purchase newly-issued common stock of
the Company at its market price.  The purchases have been accounted
for as treasury stock transactions in the Company's consolidated
financial statements.  The portions of the payments made to the New
Plans that were not invested in the common stock of the Company are
included as investments in the consolidated financial statements, and
are classified as trading.  In conjunction with the amendment and
termination of the existing plans, the Bank either sold or surrendered
certain life insurance policies and used the proceeds as a partial
source to fund the lump sum payments made to the New Plans.  As a
result of these transactions, the Bank recognized increased earnings
of $673,000.  To the extent the obligations of the Company under the
New Plans are based on investments by the New Plans in other than 
shares of the Company the investments will be revalued at each
reporting date with a corresponding adjustment to compensation
expense.  In addition, the obligation related to certain treasury
shares, originally purchased for $200,000, will be revalued at each
reporting date, with a corresponding adjustment to compensation
expense.

In addition, the Company continues to maintatin the floating growth
(savings) program of the deferred compensation plan for Directors. 
Benefits accrue based on the Directors' fees deferred and a monthly
allowance for interest at a rate that is fixed from time to time at
the discretion of the Board of Directors.  The benefits under the
Savings Program of the Deferred Compensation Plan for Directors and
the New Plans are generally payable starting on the January 2
following a participant's 65th birthday or earlier death, and will be
distributed to the participant (or upon the participant's death, to
the participant's designated beneficiary) in accordance with the Plan. 

Phantom Stock Plan

The Company maintains a Phamtom Stock Plan, wherein certain key
officers of the Bank were entitled to receive an annual award of
phantom shares of stock for up to five consecutive years.  All such
awards were granted by June 30, 1993.  In December of 1995 the Bank
entered into agreements with certain participants in the Bank's
Phantom Stock Plan (the Plan).  The Bank agreed to pay, and those
participants agreed to accept, lump sum amounts in full satisfaction
of the Bank's obligations under the Plan.  The Bank made the agreed-
upon payments in January, 1996.

A summary of expenses relating to the Company's various employee
benefit plans for each of the three years in the period ended December
31, 1995 is as follows:

                                    1995       1994      1993
-----------------------------------------------------------------
  Pension Plan                   $(249,566)  $ 243,580 $  177,141     
  Employee Stock Ownership Plan/
  401(k) Plan                      807,605     348,468   285,199      
  Performance Progress Sharing Plan      0           0   264,000      
  Deferred Compensation Plans       25,185     303,939   272,946      
  Phantom Stock Plan                67,677    (179,227)   249,600     
-----------------------------------------------------------------
                                  $650,901   $ 716,760  1,248,886     
=================================================================

(7) INCOME TAXES

The benefit for income taxes for each of the three years in the period
ended December 31, 1995 consists of the following:

                         1995           1994           1993
-------------------------------------------------------------
Current            $(3,092,159)    $(  952,147)   $(4,385,126)   
Prepaid             (  692,726)     (1,890,304)    (   25,360)   
--------------------------------------------------------------
                   $(3,784,885)    $(2,842,451)   $(4,410,486)   
============================================================== 

Prepaid and deferred income taxes result from differences between the
loss for financial reporting and tax reporting relating primarily to
the provision for possible loan losses.  The net deferred tax asset
amounted to approximately $3,793,000 and $5,084,000 at December 31,
1995 and 1994, respectively. As of December 31, 1995 and 1994, the
Company had tax refunds receivable of $682,000 and $6,211,214,
respectively.  These tax assets are included in other assets in the
accompanying consolidated balance sheets. 


The components of the net deferred tax asset as of December 31, 1995
and 1994 are as follows:

                                      1995           1994
---------------------------------------------------------------------
Reserve for Possible Loan Losses   $6,780,000     $7,700,000     
Deferred Compensation               1,428,000      1,543,000     
Unrealized Securities Losses         (251,000)       347,000     
Loan Fees                             193,000        253,000     
Depreciation                         (393,000)      (428,000)    
Accrued Liabilities                   524,000        287,000     
Capital Loss Carryforwards            431,000        545,000     
Investments in Limited Partnerships  (542,000)      (296,000)    
Excess Servicing on Sold Mortgages    ( 8,000)       (19,000)
Loan Market Adjustment             (8,630,000)    (4,640,000)
Other                                (706,000)      (623,000)    
Tax Credit Carryforward             3,276,000        960,000
NOL Carryforward                    1,752,000               0              
Core Deposit                          370,000               0
---------------------------------------------------------------------- 
                                   $4,224,000      $5,629,000    
Valuation Allowance                  (431,000)      (545,000)    
----------------------------------------------------------------------
                                   $3,793,000     $5,084,000     
======================================================================

A valuation allowance is provided when it is more likely than not that
some portion of the net prepaid tax asset will not be realized.  The
Bank has established a valuation allowance for capital loss
carryforwards since such losses may only be utilized against future
capital gains.

The following is a reconciliation of the federal income tax provision
(benefit), calculated at the statutory rate, to the recorded provision
(benefit) for income taxes:
                                             
                               1995             1994        1993
---------------------------------------------------------------------
Applicable Statutory Federal
 Income Tax (benefit)      $(2,593,120)      $(1,949,042) $(3,465,299)
(Reduction) Increase in 
 Taxes Resulting From:  
Loss on Investment Securities (114,226)          (24,780)     40,018 
Tax-exempt Income             ( 86,879)         (187,301)   (213,631) 
Tax Credits                   (851,250)         (707,750)   (960,750) 
Other, Net                    (139,410)           26,422     189,176  
---------------------------------------------------------------------
                           $(3,784,885)      $(2,842,451) $(4,410,486)
======================================================================

The state of Vermont assesses a franchise tax for banks in lieu of
income tax.  The franchise tax is assessed based on deposits and
amounted to approximately $277,000, $290,000 and $247,000 in 1995,
1994 and 1993, respectively.  These amounts are included in other
expenses in the accompanying consolidated statements of operations.
                         

(8) OTHER BORROWED FUNDS

Other borrowed funds consist of the following at December 31, 1995 and 1994:

                                1995           1994
--------------------------------------------------------
Treasury Tax and Loan Notes   $2,085,422     $3,294,734     
Federal Funds Purchased        3,250,000     15,000,000     
---------------------------------------------------------
                              $5,335,422     $18,294,734    
=========================================================


The Bank may borrow up to $24,000,000 in federal funds on an unsecured basis.  
The following table provides certain information regarding other borrowed 
funds for each of the two years in the period ended December 31, 1995:

                                                  Weighted       Weighted  
                    Maximum                       Average        Average
                    Month-end      Average        Annual         Rate
                    Amount         Amount         Interest       on Amounts
1995                Outstanding    Outstanding    Rate           Outstanding
------------------------------------------------------------------------------
Treasury Tax and 
 Loan Notes         $4,957,123      $3,083,449    5.61%          5.16%
Federal Funds 
 Purchased          $9,500,000         $975,555   5.96%          5.38%

1994
------------------------------------------------------------------------------
Treasury Tax and 
 Loan Notes         $4,723,829     $3,136,365     3.83%          5.10%          
Federal Funds 
 Purchased         $16,900,000     $1,388,438     4.09%          6.18%
               

(9) DEBT

Debt outstanding consists of the following at December 31, 1995
and 1994:

                                   1995                1994
---------------------------------------------------------------
10% Senior Subordinated Debt           0          $ 4,800,000 
9% Mortgage Note, payable
 in monthly installments of 
 $1,736 (principal and 
 interest) through 2020          $205,441             207,860 
1% Mortgage Note, payable 
 in monthly installments of 
 $2,542 (principal and 
 interest) through 2039         1,189,316           1,191,506 
9.81% Capital Notes                     0          10,000,000 
9.81% Capital Notes                     0          10,000,000 
Federal Home Loan Bank Notes
 Payable, interest rates from
 4.83% to 8.66% due 1996 
 through 2001                 14,030,000           18,030,000 
---------------------------------------------------------------
                             $15,424,757          $44,229,366 
===============================================================
Maturities of debt subsequent to December 31, 1995 are:  1996 -
$4,841; 1997 - $9,005,288; 1998 - $5,771; 1999 - $6,293 and
$6,402,564 thereafter.

Under the Federal Home Loan Bank agreement,the Bank pledged as
collateral mortgages on 1-to-4 family residences totaling
approximately $7,200,000.  As of December 31, 1995, the Company
is in compliance with all of the covenants of the Federal Home
Loan Bank agreements.
    
On June 30, 1995, in accordance with a specific plan authorized
by the Federal Reserve, the Bank prepaid the outstanding $18
million of Capital Notes, which carried an interest rate of
9.81%, using funds from operations.  The Bank was released from
any further obligations under the Capital Notes Agreement.  A
prepayment premium of $701,400 was paid to the noteholders.  the
prepayment premium is reflected in interest expense in the
accompanying consolidated statement of operations.

On December 20, 1995, in accordance with a specific plan
authorized by the Federal Reserve, the Company prepaid $2,400,000
in obligations under the Senior Subordinated Debt Agreement which
carried an interest rate of 10%, using funds provided by the
issuance of common stock of the Company in conjunction with the settlement 
of the deferred compensation plans (see Note 6).  The Company was
released from any further obligations under the Senior Debt
Agreement.  No prepayment premium was required.  The debt was
contractually scheduled to be repaid on June 1, 1996.                        

(10)  ACQUISITION

On June 4, 1993, the Bank purchased certain assets and assumed the
deposits and certain other liabilities of the New First National
Bank of Vermont (NFNBV) from the FDIC.  NFNBV was a three-bank
holding company conducting banking activities primarily in 
eastern Vermont.  NFNBV had been taken over by the FDIC in
January 1993.  The acquisition involved an assumption of net
deposits and liabilities which resulted in the Bank receiving a
cash payment from the FDIC of approximately $5.7 million.  The Bank
subsequently acquired certain NFNBV property and equipment from the
FDIC for approximately $1.5 million which was payable to the FDIC
on June 3, 1994.  The acquisition was accounted for using the
purchase method of accounting and, accordingly, the acquired assets
and liabilities have been recorded at their estimated fair market
values at the date of acquisition.  The operating results related
to the assets and liabilities of NFNBV are included in the
Company's consolidated statement of operations since the date of
the acquisition.

In accordance with the purchase method of accounting, the purchase
price has been allocated to the assets acquired and liabilities
assumed based on their fair market value at the date of
acquisition.  Included in the purchase price allocation is the
establishment of an allowance for possible loan losses of $2
million and a core deposit intangible of approximately $4.5
million, which is being amortized over 15 years using the straight-
line method.  The fair market value of the assets acquired and
liabilities assumed is summarized as follows (in thousands):

  Cash                                     $  5,290       
  Federal Funds Sold                          6,075       
  Investment Securities                       4,118       
  Loans                                      23,909    
  Segregated Assets                         154,537
  Allowance for Possible Loan Losses         (2,000)
  Premises and Equipment                      1,509
  Other Assets                                1,523
  Intangible Asset - Core Deposit Intangible  4,478          
  Deposits                                 (203,031)   
  Other Liabilities                            (537)
     Cash Payment From the FDIC, Net of
     Settlement Amount Payable for 
     Premises and Equipment                $ (4,129)
                                           =========



Under the terms of the acquisition, the Bank will receive financial
assistance (loss sharing) with respect to certain acquired loans
charged off by the Bank during the three years subsequent to the
acquisition.  The FDIC will reimburse the Bank, on a quarterly
basis, 80% of net charge-offs and certain expenses related to loans
subject to loss sharing up to cumulative losses aggregating $41.1
million, after which the reimbursement rate will be 95% of net
charge-offs on the loans.  The Bank received $2,950,840, $6,248,802
and $1,674,615 in reimbursements from the FDIC for the years ended
December 31, 1995, 1994 and 1993, respectively.  Acquired loans
subject to loss sharing are classified as Segregated Assets in the
accompanying consolidated balance sheets.

In addition, under the terms of the acquisition approval received
from the State of Vermont Department of Banking, Insurance and
Securities, the Bank is required to, among other things, maintain
Tier 1 leverage capital at the higher of 5.5% or the minimum
regulatory leverage capital required by the FDIC, and to refrain
from paying dividends from the Bank to the Company if the Bank's
capital is below the minimum capital requirement.  The Bank and the
Company were in compliance with all the terms of the acquisition
approval agreement with the state of Vermont during 1995.

During 1995 and 1994, the Company reviewed the status of the core
deposits related to the acquisition and determined that the
attrition of certain deposits within the purchased branches of
NFNBV resulted in an impairment in the value of the core deposit
intangible.  Accordingly, the Company wrote down the carrying value
of the core deposit intangible by $458,300 and $686,296 in 1995 and 1994,
respectively.  These charges against current earnings are included
in other expenses.


(11) STOCKHOLDERS' EQUITY

Vermont state law requires the Bank to appropriate a minimum of 10% of
net income to surplus until such time as appropriated amounts equal
10% of deposits and other liabilities.  The Company's stockholders'
equity includes $6,561,600 as of December 31, 1995 and 1994 of such
appropriations.  Vermont state law also restricts the payment of
dividends under certain circumstances.  In addition, as discussed in
Note 1, the Company may not declare or pay a dividend without the
approval of the Federal Reserve.  

(12) RESTRUCTURING

The Company began a restructuring project during 1995 to reduce
ongoing operating costs and increase noninterest income.  As a result,
the Bank has implemented a plan to reduce its workforce by
approximately 250 employees.  All employees were offered the
opportunity to voluntarily terminate their employment which would
entitle them to a severance package equal to one week's pay for each
year of service plus four additional weeks.  Employees whose age plus
years of service  with the Company equalled at least 60 were offered
an early retirement option whereby, in lieu of the plan described
above, five years would be added to both their years of service and
their age for purposes of determining vested benefits through the
pension plan.  The total severance charges realized by the Company as
a result of the restructuring project were approximately $1.3 million. 
The incremental cost of the enhanced early retirement benefit realized
during 1995 was approximately $728,000.

In conjunction with the restructuring project the Company engaged a
consulting firm to assist in the identification of possible workforce
reductions and the implementation of the restructure plan.  The fee
earned by these consultants is, in part, contingent upon actual future
operating cost reductions and the increase in noninterest income, and
the Company has recognized expenses associated with fees to these
consultants of approximately $2 million in 1995.  The Company remains
subject to an agreement with these consultants whereby the Company is
required to remit additional funds to the consultants in the event
actual cost reductions and increases in noninterest income in 1996
exceed the amounts anticipated.

(13) COMMITMENTS AND CONTINGENCIES

During the fall of 1994, lawsuits were brought against the Company,
the Bank, the Trust Company (collectively referred to as "the
Companies") and certain directors of the Companies.  These lawsuits 
related to certain investments managed for Trust Company clients and
placed in the Piper Jaffray Institutional Government Income Portfolio. 
Separately, and before the suits were filed, the Companies had
initiated a review of those investments.  As a result of the review,
the Trust Company paid to the affected Trust Company clients a total
of approximately $9.2 million in December 1994.  The payments do not
constitute a legal settlement of any claims in the lawsuits.  However,
based on consultation with legal counsel, management believes that
further liability, if any, of the Companies on account of matters
complained of in the lawsuits will not have a material adverse effect
on the consolidated financial position and results of operations of
the Company.  In December 1994, the Trust Company received a payment
of $6,000,000 from its insurance carriers in connection with these
matters, which was treated as a reduction in amounts reimbursed to
Trust customers in the accompanying consolidated statement of
operations.  The Companies are separately pursuing claims against
Piper Jaffray Companies, Inc. and others on account of the losses that
gave rise to the $9.2 million payment by the Companies.  Any recovery
obtained as a result of such efforts is subject to the terms of an
agreement between the Companies and their insurance carriers.  The
attorneys representing the plaintiffs in one of the lawsuits discussed
above have taken the position that amounts recovered by the Companies
on these claims should be paid to the affected Trust Company clients
(net of legal fees to those attorneys), in addition to the $9.2
million already paid.  The matter is presently before the United
States District Court for the District of Minnesota.  

The attorneys representing the plaintiffs in one of the lawsuits
discussed above requested an award of attorneys' fees for allegedly
causing the Companies to make the $9.2 million payment, and asked the
court to order the Trust Company to withhold payment of $500,000.  The
Trust Company has resisted the claims for payment of such fees from
its clients' funds, and, as a result, the Trust Company was directed
to place the sum of $500,000 into escrow pending a ruling by the
Court.  There is the possibility that the Companies may be required to
remit all or part of these funds to those attorneys, but based upon
consultation with legal counsel, management believes there is no
substantial basis for any liability on the part of the Companies for
the payment of such fees.   

The Bank is also involved in various legal proceedings arising in the
normal course of business.  Based upon consultation with legal
counsel, management believes that the resolution of these matters will
not have a material effect on the consolidated financial position and
results of operations of the Company.                      
                    

(14) PARENT COMPANY
<TABLE>
The Parent Company's investments in its subsidiaries are recorded using the equity method
of accounting.  Summarized financial information relative to the Parent Company only balance
sheets at December 31, 1995 and 1994 and statements of operations and cash flows for each of
the three years in the period ended December 31, 1995 is as follows:
<CAPTION>
Balance Sheets  - December 31,     1995         1994
Assets:                        --------------------------
<S>                           <C>           <C>
Investment in and Advances
  to Subsidiaries *           $41,843,980   $45,509,683
 Other Investments                       0       585,140
 Other Assets                      972,452     1,045,147
                               --------------------------
    Total Assets               $42,816,432   $47,139,970
                               ==========================
Liabilities and Equity Capital:
 Notes Payable                          $0    $4,800,000
 Other Liabilities               2,567,569        40,000
 Equity Capital                 40,248,863    42,299,970
                                 --------------------------
    Total Liabilities and
     Equity Capital            $42,816,432   $47,139,970
                               ==========================
<CAPTION>
Statements of Operations for the Year Ended December 31,     1995        1994        1993
                                                         ------------------------------------
<S>                                                       <C>         <C>         <C>
 Dividends from the Merchants Bank*                               $0          $0    $848,585
 Equity in Undistributed Earnings (Loss) of Subsidiaries* (4,021,297) (2,679,429) (6,365,554)
 Other Expense, Net                                           72,360    (374,142)   (450,636)
 Benefit from Income Taxes                                   106,998     163,547     186,036
                                                         ------------------------------------
 Net Loss                                                 ($3,841,939)($2,890,024)($5,781,569)
                                                          ====================================
 Statements of Cash Flows for the Year Ended December 31,     1995        1994        1993
                                                           ------------------------------------
  Cash Flows from Operating Activities:
    Net Loss                                               ($3,841,939)($2,890,024)($5,781,569)
    Adjustments to Reconcile Net Income (Loss) to Net Cash
      Provided by (Used in) Operating Activities:
      Amortization                                                   0       6,360      15,265
      Gains on Investment Securities                          (309,020)    (91,780)    (76,316)
     (Increase) Decrease  in Miscellaneous Receivables        (612,543)    (11,425)    998,729
      Increase (Decrease) in Miscellaneous Payables          2,527,569     (20,000)   (868,585)
      Equity in Undistributed
            Losses of Subsidiaries                           4,021,297   2,679,429   6,365,554
                                                           ------------------------------------
    Net Cash Provided by (Used in) Operating Activities     $1,785,364   ($327,440)   $653,078
                                                           ------------------------------------
  Cash Flows from Investing Activities:
    Repayment of Advances from Subsidiaries                  1,035,460   2,263,399   2,379,917
    Proceeds from Sales of Investment Securities               643,931     682,030     271,316
                                                           ------------------------------------
  Net Cash Provided by Investing Activities                 $1,679,391  $2,945,429  $2,651,233
                                                           ------------------------------------
  Cash Flows From Financing Activities:
    Sale of Treasury Stock                                     178,730           0     388,998
    Acquisition of Treasury Stock                           (2,082,525)          0    (132,058)
    Issuance of Common Stock                                 2,553,802           0           0
    Cash Dividends Paid                                              0           0    (838,050)
    Principal Payments on Debt                              (4,800,000) (2,400,000) (2,400,000)
                                                           ------------------------------------
  Net Cash Used in Financing Activities                    ($4,149,993)($2,400,000)($2,981,110)
                                                           ------------------------------------
  Increase (decrease) in Cash and Cash Equivalents            (685,238)    217,989     323,201
  Cash and Cash Equivalents at Beginning of Year               986,733     768,744     445,543
                                                           ------------------------------------
  Cash and Cash Equivalents at End of Year                    $301,495    $986,733    $768,744
                                                           ====================================
  Total Interest Paid                                         $333,333    $580,000    $820,000
  Taxes Paid                                                         0      50,000   1,190,000

  *Account balances are partially or fully eliminated in consolidation.
</TABLE>
 
 
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK 
 
The Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers.  These financial instruments primarily
include commitments to extend credit and financial guarantees. 
Such instruments involve, to varying degrees, elements of credit
and interest rate risk that are not recognized in the
accompanying consolidated balance sheets.

Exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to
extend credit and financial guarantees written is represented by
the contractual amount of those instruments. The Bank generally
requires collateral to support such financial instruments in
excess of the contractual amount of those instruments and,
therefore, is in a fully secured position.  The Bank uses the
same credit policies in making commitments as it does for
on-balance sheet instruments.  The contractual amounts of these
financial instruments at December 31, 1995 and 1994 were as
follows:
                                             Contractual
                                                Amount
-----------------------------------------------------------------
1995

Financial Instruments Whose Contract
Amounts Represent Credit Risk:
Commitments to Extend Credit                 $92,596,000
Standby Letters of Credit                      6,550,000
Loans Sold with Recourse                       1,832,000

---------------------------------------------------------------

1994


Financial Instruments Whose Contract
Amounts Represent Credit Risk:
Commitments to Extend Credit                $107,454,000
Standby Letters of Credit                      8,857,000
Loans Sold with Recourse                       2,194,000
 

-----------------------------------------------------------------


Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract.  Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. 
Since a portion of the commitments are expected to expire without
being drawn upon, the total commitment amount does not
necessarily represent a future cash requirement.  The Bank
evaluates each customer's creditworthiness on a case-by-case
basis.  The amount of collateral obtained by the Bank upon
extension of credit is based on management's credit evaluation of
the counterparty, and an appropriate amount of real and/or
personal property is obtained as collateral.

Standby letters of credit and financial guarantees written are
conditional commitments issued by the Bank to guarantee
performance of a customer to a third party.  Those guarantees are
primarily issued to support public and private borrowing
arrangements.  Most guarantees extend for less than two years,
and 75% are for less than $100,000.  The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.  The Bank
obtains real and/or personal property as collateral for those
commitments for which collateral is deemed to be necessary.

The Bank enters into commitments to sell loans which involve
market and interest rate risk.  At December 31, 1995 and 1994,
the remaining commitments to deliver loans pursuant to master
commitments with secondary market investors amounted to
approximately $8,947,000 and $30,081,000, respectively.  Failure
to fulfill delivery requirements of commitments may result in
payment of certain fees to the investors.  Individual commitments
to sell loans require the Bank to make delivery at a specific
future date of a specified amount, at a specified price or yield. 
Loans are generally sold without recourse and, accordingly, risks
arise principally from movements in interest rates.                       

(16) FAIR VALUE OF FINANCIAL INSTRUMENTS

INVESTMENTS
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents and stock in the Federal Home Loan
Bank of Boston (FHLB) approximate fair values.  Fair value for
investment securities is determined from quoted market prices,
when available.  If quoted market prices are not available, fair
values are based on quoted market prices of comparable
instruments.  

An analysis of the estimated fair value of the investment
securities as of December 31, 1995 and 1994 is as follows:

                       1995                         1994
               --------------------------------------------------
               Carrying    Calculated        Carrying  Calculated
               Amount      Fair Value         Amount   Fair Value
-----------------------------------------------------------------
                                     (In Thousands)
  Debt         $97,206     $97,943          $102,111   $100,343  
  Marketable
    Equity
    Securities     310         310               661      1,196
-----------------------------------------------------------------
               $97,516     $98,253           $102,772   $101,539
=================================================================

LOANS
The fair value of variable rate loans that reprice frequently and
have no significant credit risk is based on carrying values.  The
fair value of fixed rate (one-to-four family residential)
mortgage loans, and other consumer loans, is based on quoted
market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics.  The fair value for other loans is estimated
using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers
of similar credit quality.  

An analysis of the estimated fair value of the loan portfolio
(including segregated assets) as of December 31, 1995 and 1994 is
as follows:

                       1995                         1994
               --------------------------------------------------
               Carrying    Calculated        Carrying  Calculated
               Amount     Fair Value         Amount    Fair Value
-----------------------------------------------------------------
                                     (In Thousands)
Net Loans      $433,490    $418,743          $490,626  $482,619 
=================================================================

DEPOSITS
The fair value of demand deposits approximates the amount
reported in the consolidated balance sheets.  The fair value of
variable rate, fixed term certificates of deposit also
approximate the carrying amount reported in the consolidated
balance sheets.  The fair value of fixed rate and term
certificates of deposit is estimated using a discounted cash flow
which applies interest rates currently being offered for deposits
of similar remaining maturities.  

An analysis of the estimated fair value of deposits as of
December 31, 1995 and 1994 is as follows:


                       1995                         1994
               --------------------------------------------------
                   Carrying  Calculated      Carrying  Calculated
                    Amount   Fair Value       Amount   Fair Value
-----------------------------------------------------------------
                                      (In Thousands)
Demand Deposits   $85,417    $85,804         $94,467   $94,493
Savings, NOW and 
 Money Markets    278,242    278,242         293,656    293,364 
Time Deposits Over  
  $100,000         20,473     20,792          23,281     23,127
Other Time        160,382    162,881         170,821    171,195
-----------------------------------------------------------------
                 $544,514   $547,719         $582,225 $582,179
=================================================================

DEBT
The fair value of debt is estimated using current market rates
for borrowings of similar remaining maturity.

An analysis of the estimated fair value of the debt of the
Company as of December 31, 1995 and 1994 is as follows:

                       1995                         1994
               --------------------------------------------------
               Carrying    Calculated        Carrying  Calculated
                Amount     Fair Value         Amount   Fair Value
-----------------------------------------------------------------
                                      (In Thousands)
Debt           $15,425        $15,990        $44,229     $44,022
=================================================================






COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties.  For fixed rate
loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. 
The fair value of financial standby letters of credit is based on
fees currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with
the counterparties.  The fair value of commitments to extend
credit and standby letters of credit is $101,000 and $117,000 as
of December 31, 1995 and 1994, respectively.

<TABLE>
(17) SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION (in thousands):

<CAPTION>

                                              1995                                           1994
                         ----------------------------------------------  ---------------------------------------------

                             Q1       Q2       Q3       Q4      YEAR        Q1       Q2       Q3       Q4      YEAR
-----------------------------------------------------------------------  ---------------------------------------------
<S>                        <C>      <C>      <C>      <C>      <C>        <C>      <C>      <C>      <C>      <C>     
Interest and Fee Income    $13,053  $13,362  $12,460  $12,440  $51,315    $13,348  $13,019  $13,304  $13,648  $53,319


Interest Expense             5,872    6,647    5,407    5,076   23,002      5,414    5,614    5,585    5,764   22,377
-----------------------------------------------------------------------  ---------------------------------------------
Net Interest Income         $7,181   $6,715   $7,053   $7,364  $28,313     $7,934   $7,405   $7,719   $7,884  $30,942

Provision for Possible
   Loan Losses (A)           2,700    7,600      900      900   12,100      1,250    1,250    1,750    5,750   10,000
Non-Interest Income (B)      2,210    2,094    3,524    1,987    9,815      2,104    2,235    2,219    2,231    8,789
Non-Interest Expense (C)     7,180    7,992   11,116    7,367   33,655      7,105    7,294    7,422   13,643   35,464
-----------------------------------------------------------------------  ---------------------------------------------
Income (Loss) Before Provision
 (Benefit) for Inc. Taxes    ($489) ($6,783) ($1,439)  $1,084  ($7,627)    $1,683   $1,096     $766  ($9,278) ($5,733)
Provision (Benefit)
  For Income Taxes            (528)  (2,732)    (717)     192   (3,785)       245       91      (13)  (3,166)  (2,843)
-----------------------------------------------------------------------  ---------------------------------------------
Net Income (Loss)              $39  ($4,051)   ($722)    $892  ($3,842)    $1,438   $1,005     $779  ($6,112) ($2,890)
-------------------------==============================================  =============================================

Earnings (Loss) Per Share    $0.01   ($0.95)  ($0.17)   $0.21   ($0.90)     $0.34    $0.24    $0.18   ($1.44)  ($0.68)
-------------------------==============================================  =============================================

Dividends Per Share          $0.00    $0.00    $0.00    $0.00    $0.00      $0.00    $0.00    $0.00    $0.00    $0.00
                         ==============================================  =============================================

(A) During the fourth quarter of 1994, as a result of significant increases in nonperforming assets and the continuing
weakness in the regional economy the Company provided reserves for possible loan losses of $5 million in addition to the
planned provision of $1.75 million.  During the second quarter of 1995, the Bank provided an additional $5 million for
the reserve for possible loan losses to cover further exposure identified during loan renewals and restructures.

(B) The Bank recognized a gain of $1.6 million in conjunction with the curtailment of its pension plan during the third
    quarter of 1995.

(C) During the third quarter of 1995 the Bank began a restructuring project.  The Bank recognized total severance charges
of $1.5 million and total fees to consultants of $2.2 million in conjunction with the restructuring.
</TABLE>
<TABLE>
                     Merchants Bancshares, Inc.
                   Five Year Summary of Operations
      (Not Covered by Report of Independent Public Accountants)

<CAPTION>
 For the years ended                               1995      1994      1993      1992      1991
 -------------------------------------------------------------------------------------------------
<S>                                            <C>       <C>       <C>       <C>       <C>        
 Interest and Investment Income                $  51,315 $  53,319 $  51,474 $  49,239 $  57,249
 Interest Expense                                 23,002    22,377    21,956    24,051    32,104
 -------------------------------------------------------------------------------------------------
 Net Interest Income                           $  28,313 $  30,942 $  29,518 $  25,188 $  25,145

  Provision for Possible Loan Losses              12,100    10,000    23,822     8,050     7,243
 -------------------------------------------------------------------------------------------------
 Net Interest Inc. after Prov. for Loan Losses $  16,213 $  20,942 $   5,696 $  17,138 $  17,902
 -------------------------------------------------------------------------------------------------
 Non-interest Income                           $   9,815 $  15,038 $  12,128 $  10,195 $   9,376
 Non-interest Expense                             33,655    41,712    28,016    21,081    21,238
 -------------------------------------------------------------------------------------------------
 INCOME (LOSS) BEFORE INCOME TAXES             $  (7,627)$  (5,732)$ (10,192)$   6,252 $   6,040
 Prov. (benefit) for Income Taxes (Nts 3 and 8)   (3,785)   (2,842)   (4,410)      575       909
 -------------------------------------------------------------------------------------------------
 NET INCOME (LOSS)                             $  (3,842)$  (2,890)$  (5,782)$   5,677 $   5,131
 -------------------------------------------------------------------------------------------------


 SELECTED AVERAGE BALANCES (IN THOUSANDS)
   Total Assets                                $ 642,487 $ 709,077 $ 705,516 $ 602,317 $ 592,343
   Average Earning Assets                        575,551   620,070   627,049   542,157   537,806
   Loans                                         481,047   514,843   515,805   441,291   471,141
   Total Deposits                                556,242   598,305   570,957   490,908   488,831
   Debt                                           28,707    45,433    47,835    42,171    35,007
   Stockholders' Equity                           40,848    46,331    48,511    51,548    48,668
   Stockholders' Equity plus Loan Loss Reserve    58,794    65,322    59,999    59,028    54,707

 SELECTED RATIOS
 Net Income (Loss) to:
   Average Stockholders' Equity                    -9.41%    -6.24%   -11.92%    11.01%    10.53%
   Average Assets                                  -0.60%    -0.41%    -0.82%     0.94%     0.86%
 Avg Stockholders' Equity to Avg Total Assets       6.36%     6.53%     6.88%     8.56%     8.22%
 Avg Primary Capital to Avg Total Assets            9.15%     9.21%     8.50%     9.80%     9.24%
 Common Dividend Payout Ratio                       0.00%     0.00%     1.00%       58.48%    62.69%
 Loan Loss Reserve to Total Loans at Year End       3.61%     3.90%     3.50%     1.73%     1.41%
 Net Charge-Offs to Average Loans                   3.28%     1.97%     1.95%     1.65%     1.20%

 PER SHARE (Note 1)
   Net Income (Loss)                           $   (0.90)$   (0.68)$   (1.37)$    1.39 $    1.21
   Cash Dividends                                   0.00      0.00      0.20      0.80      0.78
   Year End Book Value                              9.38     10.00     10.74     12.39     11.82
 Other
   Cash Dividends Paid (In Thousands)          $       0 $       0 $     848 $   3,320 $   3,231
   Stock Dividends Issued                            0.0%      0.0%      0.0%      3.0%      2.0%


 (Note 1): All stock dividends and splits are reflected retroactively.
           See Note 11 of Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>

                  Merchants Bancshares, Inc. and Subsidiaries
                  Interest Management Analysis

<CAPTION>

(Taxable Equivalent, in thousands)                      1995                 1994               1993
----------------------------------------------------------------------------------------------------------
<S>                                                   <C>                   <C>                <C>      
Total Average Assets                                  $642,487              $709,077           $705,516
----------------------------------------------------------------------------------------------------------
                                                 1995       % of       1994      % of     1993      % of
NET INTEREST INCOME:                                       Assets               Assets             Assets

<S>                                           <C>            <C>     <C>         <C>    <C>         <C>   
Interest and Dividend Income                  $  48,822       7.60%   50,041      7.06%  47,194      6.69%
Fees on Loans                                     2,492       0.39%    3,571      0.50%   4,598      0.65%
----------------------------------------------------------------------------------------------------------
Total                                         $  51,314       7.99%   53,612      7.56%  51,792      7.34%
Interest Expense                                 23,002       3.58%   22,377      3.16%  21,956      3.11%
----------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision for
   Possible Loan Losses                       $  28,312       4.40%   31,235      4.40%  29,836      4.23%
Provision for Possible Loan Losses               12,100       1.88%   10,000      1.41%  23,822      3.38%
----------------------------------------------------------------------------------------------------------
  Net Interest Income                         $  16,212       2.52%   21,235      2.99%   6,014      0.85%
----------------------------------------------====================   =====================================
OPERATING EXPENSE ANALYSIS:
Non-Interest Expense
  Personnel                                   $  13,434       2.09%   13,196      1.86%  12,305      1.74%
  Occupancy Expense                               2,178       0.34%    2,324      0.33%   1,949      0.28%
  Equipment Expense                               2,069       0.32%    2,004      0.28%   1,880      0.27%
  Other                                          15,974       2.49%   17,939      2.53%  10,208      1.45%
----------------------------------------------------------------------------------------------------------
Total Non-Interest Expense                    $  33,655       5.24%   35,463      5.00%  26,342      3.74%
----------------------------------------------------------------------------------------------------------
Less Non-Interest Income
 Service Charges on Deposits                  $   3,184       0.50%    3,452      0.49%   3,571      0.51%
 Other, Including Securities Gains (Losses)       6,632       1.03%    5,337      0.75%   6,883      0.98%
----------------------------------------------------------------------------------------------------------
Total Non-Interest Income                     $   9,816       1.53%    8,789      1.24%  10,454      1.49%
----------------------------------------------------------------------------------------------------------
Net Operating Expense                         $  23,839       3.71%   26,674      3.76%  15,888      2.25%
----------------------------------------------====================   =====================================


SUMMARY:
Net Interest Income                           $  16,212       2.52%   21,235      2.99%   6,014      0.85%
  Less: Net Overhead                             23,839       3.71%   26,674      3.76%  15,888      2.25%
----------------------------------------------------------------------------------------------------------
Profit Before Taxes -
  Taxable Equivalent Basis                    $  (7,627)     -1.19%   (5,439)    -0.77%  (9,874)    -1.40%
Net Profit (Loss) After Taxes                 $  (3,842)     -0.60%   (2,890)    -0.41%  (5,781)    -0.82%
----------------------------------------------==================== =======================================
</TABLE>

             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS


      The following discussion and analysis of financial condition
and results of operations of the Company and its subsidiaries for
the three years ended December 31, 1995 should be read in
conjunction with the consolidated financial statements and notes
thereto and selected statistical information appearing elsewhere in
this annual report.  The information is discussed on a fully
taxable equivalent basis.  Particular attention should be given to
the INTEREST MANAGEMENT ANALYSIS and OPERATING EXPENSE ANALYSIS
TABLES immediately preceding this discussion upon which this
discussion is primarily based.  The financial condition and
operating results of the Company essentially reflect the operations
of its principal subsidiary, The Merchants Bank.

REGULATORY MATTERS
     During the second quarter of 1993, the FDIC and the State of 
Vermont Department of Banking, Insurance and Securities (the
Commissioner) performed a joint field examination of the Bank as of
March 31, 1993.  Additionally the Federal Reserve Bank of Boston
(Federal Reserve) performed a field examination of the Company as
of March 31, 1993.  As a result of these examinations, the Bank
entered into a Memorandum of Understanding (MOU) with the FDIC and
the Commissioner and a Written Agreement with the Federal Reserve. 
Under the terms of the MOU, the Bank is required to, among other
things, maintain a leverage capital ratio of at least 5.5% and
refrain from declaring dividends.  In April, 1995, the FDIC and the
Commissioner completed the field work related to their most recent
examination of the Bank as of December 31, 1994.  Based on their
examination the Bank is required to continue its efforts to correct
certain administrative and legal violations and enhance certain
operating policies before the MOU will be lifted.  Management
believes the Bank is in substantial compliance with all of the
provisions of the MOU as of December 31, 1995.  
     In February 1994, the Company and the Federal Reserve entered
into an agreement.  Under this agreement, among other things, the
Company may not declare or pay a dividend or incur any debt without
the approval of the Federal Reserve.  On December 29, 1995, the
Federal Reserve completed the field work related to their most
recent examination of the Company as of September 30, 1995.  No
substantive issues were brought up as a result of the examination. 
However, it appears that the Written Agreement will remain in place
until at least the next examination.
     Failure to maintain the minimum leverage capital ratio of 5.5%
(see Note 11) included in the MOU, or compliance with other
provisions of the MOU, or the agreement with the Federal Reserve,
could subject the Bank or the Company to additional actions by the
regulatory authorities.
     On December 16, 1994, the FDIC and the Commissioner completed
the field work related to their examination of the Merchants Trust
Company as of September 26, 1994.  On February 17, 1995 the Trust
Company entered into a Memorandum of Understanding with the FDIC
and Commissioner to correct certain operating, technical and
regulatory issues.  
     In December, 1995  the FDIC and the Commissioner completed the
field work related to their examination of the Merchants Trust
Company as of November 6, 1995.  Management continues to work to
address the issues raised in the MOU. Additionally, it appears that
the MOU will remain in place until at least the next examination.
     Management has actively responded to the above agreements, and
has continued to comply with the requirements of both the MOU and
the Written Agreement.

FDIC ASSISTED ACQUISITION
     The Company expanded its banking operations through an FDIC
assisted acquisition of the New First National Bank of Vermont
(NFNBV), a three bank holding company conducting banking activities
primarily in eastern  Vermont.  The acquisition enabled the Company
to enlarge its earning asset base and achieve economies of scale by
consolidating administration and operations, standardizing policies
and procedures, and providing uniform products and services. 
Management believes that the acquisition represented a very
attractive opportunity to expand the Company's operations into a
contiguous market area. 
     Under the terms of the Purchase and Assumption Agreement
between the Company and the FDIC, the Company purchased $178.4
million in loans, $154.5 million of which are covered under a Loss
Sharing Agreement with the FDIC.  Such loans are classified as
"Segregated Assets" in the consolidated financial statements.  Also
purchased were $11.4 million in cash and cash equivalents, $4.1
million of investment securities, $1.5 million of buildings and
equipment and $1.5 million of other assets.  A purchase accounting
adjustment was made to establish an allowance for possible loan
losses in the amount of $2 million, which represented managements'
estimate of general credit risks within the acquired portfolio, as
adjusted under the provisions of the Loss Sharing Agreement with
the FDIC.  The purchase price consisted of the assumption of all of
the deposit liabilities ($203 million) and $537,000 in other
liabilities.  Additionally, the Company received cash from the FDIC
in the amount of $4.1 million.  As a result, the Company recognized
a core deposit intangible at the purchase date in the amount of
$4.5 million which is being amortized over 15 years using the
straight-line method.  During 1995 and 1994, the Company reviewed
the value of the core deposit intangible by comparing purchased
deposit levels to current deposit levels in the branches purchased. 
These reviews indicated that significant deposit runoff had been
experienced and deemed permanent in nature.  Accordingly, the
carrying value of the core deposit intangible was written down by
$458,300 during 1995 and $686,000 during 1994.  The charges against
earnings are reflected in Other Expenses in the Consolidated
Statements of Operations.
     Under the terms of the Loss Sharing Agreement, the FDIC 
reimbursed the Bank, on a quarterly basis, 80% of the net charge-
offs and certain expenses relating to Segregated Assets up to
cumulative losses aggregating $41.1 million, after which the rate
will be 95% of net charge-offs on the loans.  The Loss Sharing
Agreement runs through June, 1996, after which time the Bank will
reimburse the FDIC 80% of all recoveries on the charged-off loans
for three years.  Subsequent to June, 1996, the FDIC is no longer
required to reimburse the Bank for additional charge-offs or
expenses related to Segregated Assets.

RESULTS OF OPERATIONS
     The Company recognized a net loss of $3,841,939 for the year
ended December 31, 1995, due primarily to the provision for
possible loan losses of $12.1 million (refer to the discussion
under "Provision for Possible Loan Losses" which follows), and the
recognition of $4 million in restructuring charges and related
consultant fees.
     Core earnings, excluding the provision for possible loan
losses, showed slight improvement from 1994 to 1995 due to
substantial reductions in non-performing assets.  The Company
realized $351,771 in net gains on investment securities as compared
to $72,884 in 1994.
     The Company recognized a net loss of $2,890,024 for the year
ended December 31, 1994, due primarily to the following three
items: provisions for possible loan losses of $10,000,000 (refer to
the discussion under "Provision For Possible Loan Losses" which
follows), an increase in the provision for writedowns of other real
estate owned of $2,392,000, and the net expenses related to the
reimbursement of Trust Company clients for losses related to
investments managed by the Trust Company and placed in the Piper
Jaffray Institutional Government Income Portfolio.  The net Trust
Company expenses totaled approximately $3,200,000 after an
insurance reimbursement of $6,000,000.  The Company continues to
pursue all available claims against Piper Jaffray Companies, Inc.
because of the losses.
    The net loss on a per share basis was $.90, $.68 and $1.37 for
the years ended December 31, 1995, 1994 and 1993, respectively. 
The cash dividends paid per share were $0.20 in 1993.  No dividends
were paid in 1995 or 1994.
     The net loss as a percentage of average equity capital was 
9.41%, 6.24% and 11.92% for 1995, 1994 and 1993, respectively.  The
ten-year average return on equity is 8.11%.  The net loss as a
percentage of average assets was .60%, .41% and .82% in 1995, 1994
and 1993, respectively.  The ten-year average return on assets is
 .57%.


NET INTEREST INCOME
     Net interest income before the provision for possible loan
losses is the difference between total interest, loan fee, and
investment income and total interest expense.  Net interest income
before the provision for possible loan losses is a key indicator of
a bank's performance in managing its assets and liabilities. 
Maximization and stability of this margin is the primary objective
of the Company.  Net interest income before the provision for
possible loan losses on a fully taxable equivalent basis decreased
8.5% from $31.2 million in 1994 to $28.5 million in 1995.  The
primary cause for this net decline was a decrease in average assets
of $66.6 million (9.39%) from 1994 to 1995.  Continued decreases in
the level of nonperforming assets increased net interest income
before the provision for possible loan losses as a percentage of
total average assets to 4.44% in 1995 from 4.40% in 1994 and the
average yield on earning assets to 8.91% in 1995 from 8.60% in
1994. 
     Net interest income before the provision for possible loan
losses was $31.2 million in 1994, up 4.7% from $29.8 million the
previous year.  This increase was primarily due to the higher
interest rate environment during 1994 and the impact of having the
higher asset base from the NFNBV acquisition for the entire year as
compared to 7 months for 1993.  Decreased levels of nonperforming
assets in 1994 helped to increase net interest income before the
provision for possible loan losses as a percentage of total average
assets to 4.40% in 1994 from 4.23% in 1993.
     Total interest income decreased 8.4% in 1995 from 1994.  The
decrease is due primarily to a $1.1 million (30.2%) decrease in
fees on loans as a result of a less favorable interest rate
environment during 1995 for refinancing of home mortgages.  Total
interest expense increased 2.79% from 1994 to 1995 due to a higher
overall interest rate environment which created a higher cost of
funds in 1995 as compared to 1994.  Total interest income increased
6.0% in 1994 from 1993  while total interest expense increased 1.9%
as the Company held its cost of core funding flat through fewer and
smaller increases in interest rates paid to depositors.  Included
in fees on loans and interest income are net gains on sales of
loans of $ 464,000 and $219,000 in 1995 and 1994, respectively. 
These net gains include the present value of the difference between
the weighted average interest rate on the sold loans serviced by
the Bank and the interest rate remitted to the investor, adjusted
for a normal servicing fee.
      Net interest income after the provision for possible loan
losses was $4.7 million lower in 1995 than 1994, due, in part, to
a $2.1 million increase in the provision for loans losses from 1994
to 1995.  Net interest income after the provision was $15.2 million
higher in 1994 than 1993.  Net interest income after the provision
in 1995 was 2.52% of average assets compared to 2.99% in 1994 and
 .85% in 1993.

NET OPERATING EXPENSE
     Net operating expense (net overhead) is total noninterest
expense reduced by noninterest income.  Operating expense includes
all costs associated with staff, occupancy, equipment, supplies,
and all other noninterest expenses.  Noninterest income consists
primarily of fee income on deposit accounts, trust services, credit
card, corporate and data processing services, and gains or losses
on investment securities.
     Excluding the FDIC assistance received from loss-sharing, the
gain on the curtailment of the pension plan, and net gains on
investment securities, noninterest income earned in 1995 decreased
$815,000 (9.35%) from 1994.  The Trust Company fees and other items
included in noninterest income (excluding non-recurring items) make
up $547,000 of this decrease, the balance is due to a $268,000
decrease in service charge revenue.  The Bank's deposit base
decreased by $37 million (6.3%) during 1995 which resulted in the
decreased service charge revenue.  This decrease was more than
offset by the $1.56 million gain recognized as a result of the
Bank s curtailment of the pension plan.
     Excluding the FDIC assistance received from loss-sharing and
net gains on investment securities, noninterest income earned in
1994 increased $161,000 (1.9%) over the previous year.  The Trust
Company fees and all other items included under noninterest income
increased 5.6%, however, service charges on deposits decreased 3.5%
as the Bank adjusted its service charges to meet competition in its
market place.
     Noninterest expenses decreased $1.8 million (5.1%), not
including the amount of losses and write-downs on Segregated
Assets, which were reimbursed by the FDIC, in 1995 as compared to
1994.  There are several large transactions which contributed to
this decrease.  During 1995 the Bank began a restructuring project
to reduce ongoing operating costs and increase noninterest income
(see Note 12).  As a result the Bank has implemented a plan to
reduce its workforce by approximately 250 employees.  The total
charge for severance realized by the Bank was $1.3 million.  The
incremental cost of the enhanced early retirement benefit realized
during 1995 was approximately $728,000.  In conjunction with the
restructuring changes, the Bank engaged a consulting firm to assist
in the identification of areas where the Bank could reduce expenses
or enhance revenue.  The fee earned by these consultants is, in
part, contingent upon actual future operating cost reductions and
the increase in noninterest income.  The Bank has recognized
expenses associated with fees to these consultants of approximately
$2 million in 1995.  During 1994 the Company recognized a net
charge related to the Trust Company's reimbursement to its clients
due to investments in the Piper Jaffray Institutional Government
Income Portfolio totaling $3.2 million after the recognition of a
$6 million reimbursement from insurance carriers.  
     Losses and Write-downs of Other Real Estate Owned decreased
$805,000 from 1994 to 1995, due primarily to a decrease in the
amount provided for the reserve on the portfolio from $2.3 million
in 1994 to $1.4 million in 1995.  Additionally, during 1994 the
Bank wrote off the carrying value of one of its investments in real
estate limited partnerships totaling $546,000 due to significant
cash flow deficiencies experienced by the partnership which caused
the Bank to question the realizability of its investment.  The Bank
also wrote down the unamortized balance of the core deposit
intangible related to the acquisition of NFNBV in the amount of
$458,000 and $686,000 during 1995 and 1994, respectively.
     Noninterest expenses increased dramatically ($9.1 million or
34.6%, not including the amount of losses and write-downs on
Segregated Assets, which were reimbursed by the FDIC) in 1994 as
compared to 1993 due primarily to the 1994 transactions discussed
above.  
     Additionally, during 1994, salary and benefit expenses
increased $891,000 or 7.2% due primarily to the cost of carrying an
additional 10 branches for a full year as compared to only 7 months
during 1993.  The cost of FDIC insurance also increased by $531,000
due to the larger amount of deposits carried for the first full
year following the acquisition.
     When noninterest income is netted against noninterest expense,
net operating expense (net overhead) decreased $2.8 million (11%)
in 1995 from the 1994 level.  As a percent of average total managed
assets, net overhead decreased to 3.71% in 1995 from 3.76% in 1994. 
Net operating expense increased $10.8 million (68%) in 1994 from
1993.
     The Company recognized $851,000 in low-income housing tax
credits as a reduction in the provision for income taxes during
1995, $708,000 during 1994 and $961,000 during 1993.  As a
consequence of the operating losses incurred during 1995, 1994 and
1993, the Company recognized  tax benefits of $3.8 million, $2.8
million and $4.4 million including $851,000, $708,000 and $961,000
in low-income housing tax credits, respectively.  Additionally, as
of December 31, 1995 the Company has a cumulative prepaid tax asset
of approximately $4.5 million arising from timing differences
between the Company's book and tax reporting.  The prepaid tax
asset is included in other assets.

PROVISION FOR POSSIBLE LOAN LOSSES
     Beginning in the late 1980's, the New England region was
severely affected by a deterioration in the real estate market and
an economic recession.  During this period, the Company increased
its provision for possible loan losses and incurred costs
associated with troubled assets and lost income on nonaccrual
loans. The provision for possible loan losses charged to operations 
was $12,100,000 in 1995, $10,000,000 in 1994, and $23,822,000 in
1993.  Net charge-offs were $15,794,000 in 1995, $10,131,000 in
1994, and $13,174,000 in 1993.  In addition, a reserve for possible
loan losses of $2,000,000 was set up during 1993 related to the
loans acquired in connection with the acquisition of NFNBV, to
reflect the general credit risks within the acquired portfolio, net
of the effects of the Loss Sharing Agreement with the FDIC. 
     The reserve for possible loan losses (RPLL) was $16,234,000 at
December 31, 1995, $19,929,000 at December 31, 1994, and
$20,060,000 at December 31, 1993.  As a percent of loans
outstanding, the reserve for possible loan losses was 3.61%, 3.90%,
and 3.50% at year-end 1995, 1994, and 1993, respectively.  The
increased level in the reserve for possible loan losses reflects
management's current strategies and efforts to maintain the reserve
at a level adequate to provide for loan losses based on an
evaluation of known and inherent risks in the loan portfolio.   
Among the factors which management considers in establishing the
level of the reserve are overall findings from an analysis of
individual loans, the overall risk characteristics and size of the
loan portfolio, past credit loss history, management's assessment
of current economic and real estate market conditions and estimates
of the current value of the underlying collateral.  Further, during
the second quarter of 1995, as a result of ongoing weakness in the
regional economy, and management's ongoing strategy to resolve
problem loans, the Company provided incremental reserves for
possible loan losses of $5 million which supplemented the planned
provision of $2.6 million for the quarter.
     Nonperforming assets (loans past due 90 days or more and still
accruing, nonaccruing loans, restructured loans and other real
estate owned) decreased 31% to $35,055,000 at December 31, 1995
from $51,182,000 at year-end 1994.  Of the 1995 amount, $6,649,000
represents Segregated Assets, covered by the Loss Sharing Agreement
with the FDIC.  Excluding the FDIC's 80% exposure on the Segregated
Assets ($5,319,000), adjusted nonperforming assets totaled
$29,736,000, a decrease of 31% over the adjusted 1994 level.  At
December 31, 1993, nonperforming assets were reported to be
$64,299,000.
     The Company's policy is to classify a loan more than 90 days
past due with respect to principal or interest as a nonaccruing
loan, unless the underlying collateral is deemed to be collectible
as to both principal and interest and is in the process of
collection.  Income accruals are suspended on all nonaccruing
loans, and all previously accrued and uncollected interest is
charged against current income.  A loan remains on nonaccruing
status until the factors which suggest doubtful collectibility no
longer exist, or the loan is liquidated, or when the loan is
determined to be uncollectible and is charged off against the
reserve for possible loan losses.  In those cases where a
nonaccruing loan is secured by real estate, the Company can, and
usually does, initiate foreclosure proceedings.  The result of such
action is to force repayment of the loan through the proceeds of a
foreclosure sale or to allow the Company to take possession of the
collateral in order to manage a future resale of the real estate. 
Foreclosed property is recorded at the lower of its cost or
estimated fair value, less any estimated costs to sell.  Any cost
in excess of the estimated fair value on the transfer date is
charged to the reserve for possible loan losses, while further
declines in market values are recorded as an expense in other non-
interest expense in the statement of operations.  As of December
31, 1995 and 1994, the Company had valuation reserves against the
other real estate owned portfolio carrying values of $2,430,000 and
$2,991,000, respectively.
     The Company takes all appropriate measures to restore
nonperforming assets to performing status or otherwise liquidate
these assets in an orderly fashion so as to maximize their value to
the Company.  There can be no assurances that the Company will be
able to complete the disposition of nonperforming assets without
incurring further losses.

BALANCE SHEET ANALYSIS
     Total assets at December 31, 1995 decreased $79.8 million
(11.4%) from the previous year end.  Much of this shrinkage is
attributable to steps taken by the Bank to address its portfolio of
troubled assets, as well as to realignments within the portfolio.  
Of the $57 million decrease in loans and Segregated Assets, $18 million 
was due to charge offs, and $6.3 million was due to the sale of 
non-performing loans.  The remainder of the decrease ($32.7 million) 
was the result of payoffs
of non-performing obligations and scheduled amortization greater
than the level of new loan originations.  Additionally, during
1995, the Bank's OREO portfolio decreased by $5.5 million (41%) due
to aggressive steps taken by the Bank to liquidate these assets. 
Total deposit balances decreased during 1995 by $38 million, as
customers' continued to move savings balances to other bank and
non-bank competitors, partly as a result of the continued low
interest rate environment.
     Total assets at December 31, 1994 decreased $40.2 million
(5.5%) from the previous year end.  All of this reduction occurred
in the loan and Segregated Asset portfolios, as new loan
originations slowed considerably due to the higher interest rate
environment and the sluggish economy.  The Bank originated and sold
$42.8 million in mortgages during 1994, approximately half the 1993
level.  Of the decrease in loans and Segregated Assets, $13 million
was due to charge-offs, and the remainder of the decrease ($49.2
million) was accounted for by payoffs and scheduled amortization
greater than the level of new loan originations.  Total deposit
balances decreased during 1994 by $37 million, as customers'
savings moved to other bank and nonbank competitors.
     The investment portfolio, primarily U.S. Treasury debt
securities with short maturities, and GNMA and FNMA mortgage-backed
securities, decreased by $3 million (2.9%) during 1995 as a result
of an overall smaller balance sheet.  Although deposit balances
continued to decrease, the Company was able to maintain its
liquidity position throughout the year.
     The investment portfolio, primarily U.S. Treasury debt
securities with short maturities, grew $14.8 million (17.0%) during
1994 as the Company invested excess funds during a period of lower
loan demand.  Although deposit balances continued to decrease, the
Company was able to increase its liquidity position throughout the
year.
     
LIQUIDITY
     Liquidity, as it pertains to banking, can be defined as the
ability to generate cash in the most economical way to satisfy loan
demand, deposit withdrawal demand, and to meet other business
opportunities which require cash.  Sources of liquidity for banks
include short term liquid assets, cash generated from loan
repayments and amortization, borrowing, deposit generation, and
earnings.  The Merchants Bank has a number of sources of liquid
funds, among these sources are: $24,000,000 in unused Federal Funds
lines of credit at year-end 1995; an overnight line of credit with
the Federal Home Loan Bank (FHLB) of $15 million; and an estimated
borrowing capacity with FHLB of $38 million.  Only 3.6% of total
resources were funded by large certificates of deposit at December
31, 1995 and 1994.

EFFECTS OF INFLATION
     The financial nature of the Company's Balance Sheet and
Statement of Operations is more clearly affected by changes in
interest rates than by inflation,  but inflation does affect the
Company because as prices increase the money supply tends to
increase, the size of loans requested tends to increase, total bank
assets increase, and interest rates are affected by inflationary
expectations.  In addition, operating expenses tend to increase
without a corresponding increase in productivity.  There is no
precise method, however, to measure the effects of inflation on the
Company's financial statements.  Accordingly, any examination or
analysis of the financial statements should take into consideration
the possible effects of inflation.

ACCOUNTING PRONOUNCEMENTS
     In March, 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed of.  The statement would apply to fiscal years beginning
after December 15, 1995.  Additionally, in May, 1995, the FASB
issued SFAS No. 122, Accounting for Mortgage Servicing Rights. The
Bank is required to adopt the new statement prospectively on
January 1, 1996.  Management does not believe that the adoption of
these standards will have a significant impact on the Bank's
consolidated financial condition or future results of operations.

CAPITAL RESOURCES
     Capital growth is essential to support deposit and asset
growth and to ensure strength and safety of the Company.  Net
losses reduced the Company's capital by $3,842,000 in 1995,
$2,890,000 in 1994 and (including the effect of dividends paid) by
$6,630,000 in 1993.  Dividend Reinvestment (DRP) and Employee Stock
Ownership Plan (ESOP) requirements were satisfied by open market
purchases of stock during 1993.  No new equity capital was
generated from the sale of common stock to DRP and ESOP
participants during 1995, 1994 or 1993 although this could be an
important source of capital if management felt additional capital
was necessary.  Over the three year period, the equity capital of
the Company has decreased $5,471,000 or 11.9%.
     As a state chartered bank, the Bank's primary regulator is the
Federal Deposit Insurance Corporation (FDIC).  Accordingly, the
Bank is affected by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) which was enacted in August 1989
the Federal Deposit Insurance Corporation Improvement Act (FDICIA)
enacted in December 1992.
  The Bank is subject to regulatory capital regulations which
provide for two capital requirements - a leverage requirement and
a risk-based capital requirement.  The leverage requirement
provides for a minimum "core" capital consisting primarily of
common stockholders' equity of 3% of total adjusted assets for
those institutions with the most favorable composite regulatory
rating.  Under the terms of the MOU, the Bank is required to
maintain a leverage capital ratio of at least 5.5% and refrain from
declaring dividends without the prior approval of the FDIC.  The
Company is also required to refrain from declaring dividends
without the Federal Reserve's prior permission. The risk-based
capital requirement of FIRREA provides for minimum capital levels
based on the risk weighted assets of the Bank.  The guidelines
require banks to meet a minimum Tier 1 risk-based capital ratio of
4.0% and a total risk-based capital ratio of 8.0% as of December
31, 1994.
     The Bank's leverage capital ratio is 6.15% and  5.94% at
December 31, 1995 and 1994, respectively.  As of December 31, 1995
and 1994, the Bank's risk-based Tier 1 capital ratios are 8.19% and
8.13% and the total risk-based ratios are 9.45% and 10.96%.  All
the Bank's capital measurements exceeded risk-based regulatory
minimums as of December 31, 1995.
     At the present time, Merchants Bancshares, Inc. has the
following sources of equity capital available as approved by
stockholders and regulatory authority:
     A.   Common Stock ($0.01 par value)
          Shares Authorized:   4,700,000
          Shares Issued and Outstanding at 
          December 31, 1994:  4,343,620
     B.   Preferred Stock, Class A
          Non-voting ($0.01 par value)
          Shares Authorized:  200,000
          Shares Outstanding:  -0-
     C.   Preferred Stock, Class B
          Voting ($0.01 par value)
          Shares Authorized:  1,500,000
          Shares Outstanding:  -0-
     The Preferred Stock was authorized by shareholders at the
Annual Meeting held on May 15, 1984.  While the Company has no
present intention to issue any Preferred Stock, the Board of
Directors of the Company may do so in the future for any lawful
purpose.  The two preferred issues afford the ability to offer a
broader range of securities and thus increase the ability to
structure capital transactions on terms and conditions beneficial
to the Company.