Note 9 - Stock-based Compensation

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

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 or during the first six months of 2014 due to the pending merger with Firstbank.

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.

In conjunction with the Firstbank merger, all of our outstanding restricted stock awards, which were schedule to cliff vest in full in November, 2014, became fully vested as of June 1, 2014, resulting in the recognition of compensation expense of $0.2 million in the second quarter of 2014 to reflect the accelerated vesting of the restricted stock awards. As of June 30, 2014, there was no unrecognized compensation cost related to unvested stock option grants under our various stock-based compensation plans, and no unrecognized compensation cost related to unvested restricted stock awards under our Stock Incentive Plan of 2006.

Also in conjunction with the Firstbank merger, we assumed, and issued Mercantile stock options in replacement of, all outstanding stock option grants that had been issued to Firstbank employees under the Firstbank Corporation Stock Option and Restricted Stock Plan of 1997 and the Firstbank Corporation 2006 Stock Compensation Plan. In general, stock option grants for 50 shares or less fully vested after one year from date of grant, while stock option grants for more than 50 shares vested over a five-year period at 20% of the grant per annum starting one year from the date of grant. The stock option grants expire ten years from the date of grant. There were approximately 282,200 Mercantile stock options issued as a result of the merger, with about 258,400 of the stock option grants fully vested and exercisable, on the Merger Date. The remaining 23,800 stock options vest over the next six to 18 months. Unrecognized compensation cost related to the unvested stock options was less than $100,000 as of June 30, 2014, which is expected to be fully recognized by November, 2015.

A summary of restricted stock activity from grants issued under the Mercantile plans during the first six months of 2014 and the 2013 and 2012 calendar years is as follows:

	2014					2013					2012
				Weighted					Weighted					Weighted
				Average					Average					Average
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Nonvested at beginning of year		63,800		$	14.30		66,100		$	14.30		38,650		$	6.20
Granted		0		NA			0		NA			66,100			14.30
Vested		(63,300	)		14.30		0		NA			(38,266	)		6.20
Forfeited		(500	)		14.30		(2,300	)		14.30		(384	)		6.20
Nonvested at end of period		0		$	NA		63,800		$	14.30		66,100		$	14.30

A summary of stock option activity from grants issued under the various Mercantile plans during the first six months of 2014 and the 2013 and 2012 calendar years is as follows:

	2014					2013					2012
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		60,876		$	33.11		152,896		$	26.15		214,903		$	22.40
Granted		0		NA			0		NA			0		NA
Exercised		(2,845	)		17.74		(51,055	)		13.72		(50,930	)		10.83
Forfeited or expired		(1,141	)		37.55		(40,965	)		31.30		(11,077	)		23.77
Outstanding at end of period		56,890		$	33.79		60,876		$	33.11		152,896		$	26.15
Options exercisable at period-end		56,890		$	33.79		60,876		$	33.11		152,896		$	26.15

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. Except for the stock options awarded in connection with the merger, no stock option grants were made during 2012 or 2013 or during the first six months of 2014.

Options issued under the various Mercantile plans outstanding at June 30, 2014 were as follows:

					Outstanding					Exercisable
							Weighted Average	Weighted				Weighted
Range of							Remaining	Average				Average
Exercise							Contractual	Exercise				Exercise
Prices					Number		Life (years)	Price		Number		Price
	$6.21	-	$	8.00		2,700	1.4	$	6.21		2,700	$	6.21
	$32.01	-	$	36.00		51,300	0.9		34.87		51,300		34.87
	$40.01	-	$	44.00		2,890	0.3		40.28		2,890		40.28
	Outstanding at end of period					56,890	0.9	$	33.79		56,890	$	33.79

Information related to options issued under the various Mercantile plans outstanding at June 30, 2014 and year-end 2013 and 2012 is as follows:

	2014		2013		2012
Minimum exercise price	$	6.21	$	6.21	$	6.21
Maximum exercise price		40.28		40.28		40.28
Average remaining option term (years)		0.9		1.4		1.9

Information related to stock option grants and exercises issued under the various Mercantile plans during the first six months of 2014 and the 2013 and 2012 calendar years is as follows:

	2014		2013		2012
Aggregate intrinsic value of stock options exercised	$	11,000	$	408,000	$	307,000
Cash received from stock option exercises		50,000		289,000		227,000
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 issued under the various Mercantile plans outstanding and exercisable at June 30, 2014 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.

A summary of stock option activity from grants issued under the various former Firstbank plans that became part of Mercantile’s plans upon consummation of the merger during the month of June, 2014, is as follows:

				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at beginning of year		0		$	NA
Granted		0			NA
Assumed as part of merger		282,178			15.48
Exercised		(3,075	)		7.80
Forfeited or expired		0		NA
Outstanding at end of period		279,103		$	15.57
Options exercisable at period-end		255,373		$	16.44

Options issued under the various Firstbank plans outstanding at June 30, 2014 were as follows:

					Outstanding					Exercisable
							Weighted Average	Weighted				Weighted
Range of							Remaining	Average				Average
Exercise							Contractual	Exercise				Exercise
Prices					Number		Life (years)	Price		Number		Price
	$4.00	-	$	8.00		78,855	5.4	$	6.54		62,215	$	6.90
	$8.01	-	$	12.00		31,830	5.4		8.60		24,740		8.60
	$12.01	-	$	16.00		46,000	3.4		16.00		46,000		16.00
	$20.01	-	$	24.00		85,962	1.9		22.43		85,962		22.43
	$24.01	-	$	28.00		36,456	0.4		24.46		36,456		24.46
Outstanding at end of period						279,103	3.3	$	15.57		255,373	$	16.44

Information related to options issued under the various Firstbank plans outstanding at June 30, 2014 is as follows:

Minimum exercise price	$	7.80
Maximum exercise price		24.46
Average remaining option term (in years)	3.3

Information related to stock option grants and exercises issued under the various Firstbank plans during the month of June, 2014, is as follows:

Aggregate intrinsic value of stock options exercised	$	40,000
Cash received from stock option exercises		24,000
Tax benefit realized from stock option exercises		0
Weighted average per share fair value of stock options granted	NA

The aggregate intrinsic value of all stock options issued under the various Firstbank plans outstanding and exercisable at June 30, 2014 was $2.1 million.

On June 26, 2014, we granted a total of 7,375 shares of common stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer payments for the period of July 1, 2014 through December 31, 2014. The associated $155,000 cost will be expensed on a straightline basis over the last six months of 2014.