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                                                                   EXHIBIT 10.12


                           INDEMNIFICATION AGREEMENT


         This Indemnification Agreement ("Agreement") is made as of this 10th
day of October, 1997, by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and Donald R. Harding ("Indemnitee"), a director
of the Company.

         WHEREAS, the Company and Indemnitee recognize the substantial increase
in corporate litigation subjecting officers and directors to expensive
litigation risks; and

         WHEREAS, Indemnitee does not regard the current protection available
as adequate given the present circumstances, and Indemnitee and/or other
officers and directors of the Company may not be willing to serve as officers
and/or directors without adequate protection; and

         WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and/or
directors of the Company and to indemnify its officers and/or directors so as
to provide them with the maximum protection permitted by law.

         NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:

         1.      Indemnification.

                 (a)      Generally.  The Company shall indemnify Indemnitee if
Indemnitee is or is threatened to be made a named defendant or respondent in
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such an
action, suit or proceeding, or any inquiry or investigation that could lead to
such an action, suit or proceeding, because Indemnitee (i) is or was a
director, officer, employee or agent of the Company, (ii) is or was serving at
the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation,  employee benefit plan, other enterprise or other
entity, or (iii) any action or inaction by Indemnitee while acting in any
capacity described in clauses (i) and (ii) of this Section 1(a), if, and only
if, it is determined that Indemnitee met the standard of conduct required in
Section 1(b) hereof, such determination to be made in accordance with Section
1(c) hereof.

                 (b)      Standard of Conduct.  The Company shall indemnify
Indemnitee pursuant to Section 1(a) hereof if, and only if, it is determined in
accordance with Section 1(c) hereof that Indemnitee (i) acted in good faith;
(ii) reasonably believed (A) in the case of conduct in Indemnitee's official
capacity as a director of the Company, that Indemnitee's conduct was in the
best interests of the Company and (B) in all other cases, that Indemnitee's
conduct was at least not opposed to the best interests of the Company;
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and (iii) in the case of any criminal proceeding, had no reasonable cause to
believe Indemnitee's conduct was unlawful.  The termination of a proceeding by
judgment, order, settlement, or conviction, or on a plea of nolo contendere or
its equivalent is not of itself determinative that Indemnitee did not meet the
requirements set forth in this Section 1(b).

                 (c)      Indemnification Procedure.  Within thirty (30) days
following receipt of a request for indemnification to be provided pursuant to
Section 1(a) hereof, a determination shall be made whether Indemnitee has met
the standard of conduct required for indemnification, as set forth in Section
1(b) hereof.  Such determination shall be made (i) by the Board of Directors by
a majority vote of a quorum consisting of directors who at the time of the vote
are not named defendants or respondents in the proceeding, (ii) if such a
quorum cannot be obtained, by a majority vote of a committee of the Board of
Directors, designated to act in the matter by a majority vote of all directors,
such committee consisting solely of two (2) or more directors who at the time
of the vote are not named defendants or respondents in the proceeding, (iii) by
special legal counsel selected by the Board of Directors or a committee of the
Board of Directors by vote as set forth in clause (i) or (ii) of this Section
1(c), or, if such quorum cannot be obtained and such a committee cannot be
established, by the Board of Directors by a majority vote of all directors or
(iv) by the Company's shareholders in a vote that excludes the shares held by
persons/entities who/which are named defendants or respondents in the
proceeding.  Promptly upon determination that Indemnitee has met the standard
of conduct required for indemnification, payment will be made to Indemnitee.
Indemnitee may contest a determination that Indemnitee has not met the relevant
standard of conduct for indemnification by petitioning a court of appropriate
jurisdiction to make an independent determination respecting the right of
indemnification, in accordance with the terms of Section 3 hereof.

                 (d)      Limitation on Indemnification.  Except to the extent
permitted by Section 1(e) hereof, Indemnitee may not be indemnified under
Section 1(a) hereof in respect of a proceeding (i) in which Indemnitee is found
liable on the basis that personal benefit was improperly received by
Indemnitee, whether or not the benefit resulted from an action taken in
Indemnitee's official capacity, or (ii) in which Indemnitee is found liable to
the Company.  Indemnitee shall be deemed to have been found liable in respect
of any claim, issue or matter only after Indemnitee shall have been so adjudged
by a court of competent jurisdiction after exhaustion of all appeals therefrom.

                 (e)      Scope of Indemnification.  The Company shall
indemnify Indemnitee under Section 1(a) hereof against judgments, penalties
(including excise and similar taxes), fines, settlements, and reasonable
expenses actually incurred by Indemnitee in connection with the proceeding
(including court costs and attorneys' fees); but if Indemnitee is found liable
to the Company or is found liable on the basis that personal benefit was
improperly received by Indemnitee, the indemnification (i) will be limited to
reasonable expenses actually incurred by Indemnitee in connection with the
proceeding and (ii) shall not be made in respect of any proceeding in which
Indemnitee shall have




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been found liable for willful or intentional misconduct in the performance of
Indemnitee's duty to the Company.

         2.      Expenses.

                 (a)      Mandatory Indemnification of Expenses.  The Company
shall indemnify Indemnitee against reasonable expenses incurred by Indemnitee
in connection with a proceeding in which Indemnitee is a named defendant or
respondent because Indemnitee is or was a director, or was serving in such
other capacity described in clauses (i) and (ii) of Section 1(a) hereof, if
Indemnitee has been wholly successful, on the merits or otherwise (including a
settlement), in the defense of the proceeding.

                 (b)      Reasonable Expense Determination.  Authorization of
indemnification and determination as to reasonableness of expenses must be made
in the same manner as the determination that indemnification is permissible
under Section 1(c) hereof, except that if the determination that
indemnification is permissible is made by special legal counsel under clause
(iii) of Section 1(c) hereof, authorization of indemnification and
determination as to reasonableness of expenses must be made in the manner
specified by clause (iii) of Section 1(c) hereof for the selection of special
legal counsel.

                 (c)      Advancement of Expenses.  Reasonable expenses
incurred by Indemnitee who was, is, or is threatened to be made a named
defendant or respondent in a proceeding shall be paid or reimbursed by the
Company, in advance of the final disposition of the proceeding and without the
determination specified in Section 1(c) hereof or the authorization or
determination specified in Section 2(b) hereof, after the Company receives (i)
a written affirmation by Indemnitee of Indemnitee's good faith belief that
Indemnitee has met the standard of conduct necessary for indemnification under
Section 1(b) hereof and (ii) a written undertaking by or on behalf of
Indemnitee to repay the amount paid or reimbursed if it is ultimately
determined that Indemnitee has not met that standard or if it is ultimately
determined that indemnification of Indemnitee against expenses incurred by
Indemnitee in connection with that proceeding is prohibited by Section 1(e)
hereof.

         3.      Enforcement of Rights.  The right to indemnification or
advances as provided by this Agreement shall be enforceable by Indemnitee in
any court of competent jurisdiction.  The burden of proving that
indemnification or advances are appropriate shall be on Indemnitee.  Neither
the failure of the Company (including its Board of Directors, a committee of
its Board of Directors, independent legal counsel or shareholders) to have made
a determination prior to the commencement of such action that indemnification
or advances are proper under the circumstances because Indemnitee has met the
applicable standard of conduct, nor an actual determination by the Company
(including its Board of Directors, a committee of its Board of Directors,
independent legal counsel or shareholders) that Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that Indemnitee has not met the





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applicable standard of conduct.  The Company agrees to indemnify Indemnitee
against and hold Indemnitee harmless from any judgments, fines, losses, claims,
costs (including, without limitation, costs of settlement actually and
reasonably incurred by Indemnitee) and expenses (including, without limitation,
attorney's fees and court costs) sustained or incurred by Indemnitee in
connection with a successful action, suit or proceeding to establish
Indemnitee's rights to indemnification or advances pursuant to this Agreement.

         4.      Additional Rights; Non-Exclusivity.

                 (a)      Scope.  Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest
extent permitted by law with respect to Indemnitee's actions and omissions in
the capacities described in clauses (i) and (ii) of Section 1(a) hereof,
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation,
the Company's Bylaws or by statute.  In the event of any change, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such change will be, ipso facto, within the purview of
Indemnitee's rights, and Company's obligations, under this Agreement.  In the
event of any change in any applicable law, statute, or rule which narrows the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such changes, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement shall have no effect on this
Agreement or the parties' rights and obligations hereunder.

                 (b)      Nonexclusivity.  The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which an Indemnitee
may be entitled under the Company's Articles of Incorporation, the Company's
Bylaws, any agreement, any vote of shareholders or disinterested Directors, the
Texas Business Corporation Act, or otherwise, with respect to Indemnitee's
actions and omissions in the capacities described in clauses (i) and (ii) of
Section 1(a) hereof.  The indemnification provided under this Agreement shall
continue as to Indemnitee even though Indemnitee may have ceased to be a
director or officer of the Company or to act in the capacities described in
clauses (i) and (ii) of Section 1(a) hereof.

         5.      Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.

         6.      Officer and Director Liability Insurance.  The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company





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to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing the officers and directors of the Company with
coverage for losses from wrongful acts, or to ensure the Company's performance
of its indemnification obligations under this Agreement.  Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage.

         7.      Severability.  Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do any
act in violation of applicable law.  The provisions of this Agreement shall be
severable as provided in this Section 7. If this Agreement or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
fullest extent permitted by any applicable portion of this Agreement that shall
not have been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms.  Furthermore, to the extent
any provision of this Agreement is deemed unenforceable, it is the intent of
the parties hereto that this Agreement be deemed amended to cause, to the
maximum extent permissible, such unenforceable provision to be enforceable.

         8.      Choice of Law.  This Agreement is made and entered into
pursuant to Section 2.02-1(G) of the Texas Business Corporation Act and this
Agreement shall be governed by and its provisions construed in accordance with
the laws of the State of Texas.

         9.      Notice/Cooperation by Indemnitee.  Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement.  Notice to the Company shall be directed to

                          Merchants Bancshares, Inc.
                          5005 Woodway, Suite 300
                          Houston, Texas  77056

Notice shall be deemed received three (3) days after the date postmarked if
sent by certified or registered mail, properly addressed. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.

         10.     Counterparts.  This Agreement may be executed in counterparts,
each of which shall constitute an original.





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         11.     Successors and Assigns.  This Agreement shall be binding upon
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.

         12.     Attorneys' Fees.  In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous.  In the event of
an action instituted by or in the name of the Company under this Agreement or
to enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that each of Indemnitee's material
defenses to such action were made in bad faith or were frivolous.

         13.     Miscellaneous.  For purposes of this Agreement, references to
"the Company" shall include, in addition to the Company, any domestic or
foreign predecessor entity of the Company in a merger, conversion,
consolidation or other transaction in which some or all of the liabilities of
the predecessor are transferred to the Company by operation of law and in any
other transaction in which the Company assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the subject
matter of this Agreement.  In addition, references contained in this Agreement
to "official capacity" shall mean (i) when used with respect to a director, the
office of director in the Company, (ii) when used with respect to a person
other than a director, the elective or appointive office in the Company held by
Indemnitee or the employment or agency relationship undertaken by Indemnitee on
behalf of the Company, but (iii) in both of the preceding clauses (i) and (ii)
does not include service for any other foreign or domestic corporation or any
employee benefit plan, other enterprise or other entity.


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         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

                                              MERCHANTS BANCSHARES, INC.    
                                                                            
                                                                            
                                              By:                           
                                                 ---------------------------
                                              Its:                          
                                                  --------------------------
                                              

AGREED TO AND ACCEPTED:
INDEMNITEE:


                          
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