NOTE 9 – STOCK-BASED COMPENSATION

Stock-based compensation plans are used to provide directors and employees with an increased incentive to contribute to our long-term performance and growth, to align the interests of directors and employees with the interests of our shareholders through the opportunity for increased stock ownership and to attract and retain directors and employees. From 2000 through 2005, stock option grants were provided to directors and certain employees through several stock option plans, including the 2000 Employee Stock Option Plan, 2004 Employee Stock Option Plan and Independent Director Stock Option Plan. During 2006, 2007 and 2008, stock option and restricted stock grants were provided to certain employees through the Stock Incentive Plan of 2006. No stock option or restricted stock grants were made during 2009, 2010 or 2011. During 2012, restricted stock grants were provided to directors and certain employees through the Stock Incentive Plan of 2006. No stock option or restricted stock grants were made during 2013 due to the pending merger with Firstbank Corporation (see Note 23).

Under our 2000 Employee Stock Option Plan and 2004 Employee Stock Option Plan, stock options granted to employees were granted at the market price on the date of grant, generally fully vested after one year and expired ten years from the date of grant. Stock options granted to non-executive officers during 2005 vested about three weeks after being granted. Under our Independent Director Stock Option Plan, stock options granted to non-employee directors are at 125% of the market price on the date of grant, fully vested after five years and expire ten years from the date of grant.

The Stock Incentive Plan of 2006 replaced all of our outstanding stock option plans for stock options not previously granted. Under the Stock Incentive Plan of 2006, incentive awards may include, but are not limited to, stock options, restricted stock, stock appreciation rights and stock awards. Incentive awards that are stock options or stock appreciation rights are granted with an exercise price not less than the closing price of our common stock on the date of grant, or for stock options granted in 2006 or 2007, the day before the date of grant, if the closing price was higher on the day before the date of grant. Price, vesting and expiration date parameters are determined by Mercantile’s Compensation Committee on a grant-by-grant basis. Generally, the stock options granted to employees during 2006, 2007 and 2008 fully vested after two years and expire after seven years. The restricted stock awards granted to certain employees during 2006, 2007 and 2008 fully vested after four years, while the restricted stock awards granted to directors and certain employees during 2012 fully vest after two years. No payments were required from employees for the restricted stock awards. At year-end 2013, there were approximately 384,000 shares authorized for future incentive awards.

There was no unrecognized compensation cost related to unvested stock options granted under our various stock-based compensation plans, and $0.4 million of total unrecognized compensation cost related to unvested restricted stock granted under our Stock Incentive Plan of 2006 as of December 31, 2013, which is expected to be fully recognized during 2014.

A summary of restricted stock activity is as follows:


	2013					2012					2011
				Weighted					Weighted					Weighted
				Average					Average					Average
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Nonvested at beginning of year		66,100		$	14.30		38,650		$	6.20		73,955		$	11.02
Granted		0			NA		66,100			14.30		0			NA
Vested		0			NA		(38,266	)		6.20		(28,533	)		17.57
Forfeited		(2,300	)		14.30		(384	)		6.20		(6,772	)		10.99

Nonvested at end of year		63,800		$	14.30		66,100		$	14.30		38,650		$	6.20

A summary of stock option activity is as follows:


	2013					2012					2011
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		152,896		$	26.15		214,903		$	22.40		262,042		$	21.18
Granted		0			NA		0			NA		0			NA
Exercised		(51,055	)		13.72		(50,930	)		10.83		(8,800	)		6.21
Forfeited or expired		(40,965	)		31.30		(11,077	)		23.77		(38,339	)		17.80

Outstanding at end of year		60,876		$	33.11		152,896		$	26.15		214,903		$	22.40

Options exercisable at year-end		60,876		$	33.11		152,896		$	26.15		212,643		$	22.57

The fair value of each stock option award is estimated on the date of grant using a closed option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities on our common stock. Historical data is used to estimate stock option expense and post-vesting termination behavior. The expected term of stock options granted is based on historical data and represents the period of time that stock options granted are expected to be outstanding, which takes into account that the stock options are not transferable. The risk-free interest rate for the expected term of the stock option is based on the U.S. Treasury yield curve in effect at the time of the stock option grant. No stock option grants were made during 2011, 2012 or 2013.

Options outstanding at year-end 2013 were as follows:


	Outstanding						Exercisable
			Weighted Average		Weighted				Weighted
Range of			Remaining		Average				Average
Exercise			Contractual		Exercise				Exercise
Prices	Number		Life		Price		Number		Price
$6.21 - $ 8.00		2,700		1.9 Years	$	6.21		2,700	$	6.21
$16.01 - $ 20.00		2,845		0.9 Years		17.74		2,845		17.74
$32.01 - $ 36.00		51,863		1.4 Years		34.87		51,863		34.87
$40.01 - $ 44.00		3,468		0.8 Years		40.28		3,468		40.28

Outstanding at year end		60,876		1.4 Years	$	33.11		60,876	$	33.11

Information related to options outstanding at year-end 2013, 2012 and 2011 is as follows:


	2013		2012		2011
Minimum exercise price	$	6.21	$	6.21	$	6.21
Maximum exercise price		40.28		40.28		40.28
Average remaining option term		1.4 Years		1.9 Years		2.8 Years

Information related to stock option grants and exercises during 2013, 2012 and 2011 follows:


	2013		2012		2011
Aggregate intrinsic value of stock options exercised	$	408,000	$	307,000	$	26,000
Cash received from stock option exercises		289,000		227,000		55,000
Tax benefit realized from stock option exercises		0		0		0
Weighted average per share fair value of stock options granted		NA		NA		NA

The aggregate intrinsic value of all stock options outstanding and exercisable at December 31, 2013 was less than $0.1 million.

Shares issued as a result of the exercise of stock option grants have been authorized and previously unissued shares.