Note 12 - Stock-based Compensation

12 Months Ended

Dec. 31, 2014

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

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

NOTE 12 – 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. During 2014, stock option and restricted stock grants were provided to certain employees through the Stock Incentive Plan of 2006. In addition, stock grants were provided to directors as retainer payments during 2014 through the Stock Incentive Plan of 2006.

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 were 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 vested after two years. No payments were required from employees for the restricted stock awards. The restricted stock awards granted to certain employees during 2014 fully vest after three years. The stock options granted to certain employees during 2014, which were at 110% of the market price on the date of grant, fully vest after two years and expire after seven years. At year-end 2014, there were approximately 277,000 shares authorized for future incentive awards.

In conjunction with the Firstbank merger, all of our outstanding restricted stock awards, which were scheduled to vest in full in November, 2014, became fully vested on 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. The unrecognized compensation cost related to unvested stock options was less than $0.1 million as of December 31, 2014, which will be recognized as expense over the next two years. The unrecognized compensation cost related to restricted stock grants was $2.0 million as of December 31, 2014, which will be recognized as expense over the next three years.

Also in conjunction with the Firstbank merger, we issued Mercantile stock options in replacement of all outstanding Firstbank stock option grants that had been previously 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 date of grant. The stock option grants expire ten years from 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 date of merger. Unrecognized compensation cost related to the unvested stock options was less than $0.1 million as of December 31, 2014, which will be fully expensed during 2015.

A summary of restricted stock activity from grants issued under the Mercantile Stock Incentive Plan of 2006 during the past three 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		101,490			20.13		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 year		101,490		$	20.13		63,800		$	14.30		66,100		$	14.30

A summary of stock option activity from grants issued under various Mercantile plans during the past three 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		6,488			22.15		0		NA			0		NA
Exercised		(2,845	)		17.74		(51,055	)		13.72		(50,930	)		10.83
Forfeited or expired		(29,184	)		34.60		(40,965	)		31.30		(11,077	)		23.77
Outstanding at end of year		35,335		$	31.09		60,876		$	33.11		152,896		$	26.15
Options exercisable at year-end		28,847		$	33.11		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.

The fair value of stock options granted during 2014 was determined using the following weighted-average assumptions as of the grant date. No stock options were granted during 2013 or 2012.

	2014
Risk-free interest rate		1.56	%
Expected option life (Years)		5
Expected stock price volatility		26	%
Dividend yield		2.5	%

Options issued under various Mercantile plans outstanding at year-end 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	0.9	$	6.21		2,700	$	6.21
$20.01	-	$24.00		6,488	6.9		22.15		0	NA
$32.01	-	$36.00		26,147	0.9		35.88		26,147		35.88
Outstanding at year end				35,335	2.0	$	31.09		28,847	$	33.11

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

	2014		2013		2012
Minimum exercise price	$	6.21	$	6.21	$	6.21
Maximum exercise price		35.88		40.28		40.28
Average remaining option term (Years)	2.0		1.4		1.9

Information related to stock option grants and exercises issued under various Mercantile plans during 2014, 2013 and 2012 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	$	2.72		NA		NA

The aggregate intrinsic value of all stock options issued under various Mercantile plans outstanding and exercisable at December 31, 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 various Firstbank plans that became part of Mercantile’s plans upon consummation of the merger on June 1, 2014 is as follows:

	2014
				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at beginning of year		0			0
Granted		0			0
Replaced as part of merger		282,178			15.48
Exercised		(27,740	)		8.34
Forfeited or expired		(36,456	)		24.46
Outstanding at end of year		217,982		$	14.89
Options exercisable at year-end		210,777		$	15.22

Options issued under various Firstbank plans outstanding at year-end 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		63,590	4.9	$	6.53		56,385	$	6.70
$8.01	-	$12.00		68,430	3.7		13.20		68,430		13.20
$20.01	-	$25.00		85,962	1.4		22.43		85,962		22.43
Outstanding at year end				217,982	3.1	$	14.89		210,777	$	15.22

Information related to options issued under various Firstbank plans outstanding at year-end 2014 is as follows:

	2014
Minimum exercise price	$	5.19
Maximum exercise price		24.46
Average remaining option term (Years)	3.1

Information related to stock option grants and exercises issued under various Firstbank plans during 2014 is as follows:

	2014
Aggregate intrinsic value of stock options exercised	$	333,000
Cash received from stock option exercises		232,000
Tax benefit realized from stock option exercises		116,000
Weighted average per share fair value of stock options granted	NA

The aggregate intrinsic value of all stock options issued under various Firstbank plans outstanding and exercisable at December 31, 2014 was $1.3 million. Shares issued as a result of the exercise of stock option grants have been authorized and previously unissued shares.

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 June 1, 2014 through December 31, 2014. The associated $0.2 million cost was expensed on a straightline basis over the last six months of 2014.