NOTE

– 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. No stock option or restricted stock grants were made during

2013

due to the pending merger with Firstbank. During

2014

and

2015,

stock option and restricted stock grants were provided to certain employees through the Stock Incentive Plan of

2006.

During

2016,

stock option and restricted stock grants were provided to certain employees through the Stock Incentive Plan of

2016.

Stock grants were provided to directors as retainer payments during

2014

and

2015

through the Stock Incentive Plan of

2006,

and during

2016

through the Stock Incentive Plan of

2016.

The Stock Incentive Plan of

2006

expired on

January

18,

2016,

and was effectively replaced with the Stock Incentive Plan of

2016

that was approved by shareholders in

May,

2016.

Under the Stock Incentive Plan of

2006

and the Stock Incentive Plan of

2016,

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. Price, vesting and expiration date parameters are determined by Mercantile’s Compensation Committee on a grant-by-grant basis. No payments are required from employees for restricted stock awards. The restricted stock awards granted during

2014,

2015

and

2016

fully vest after

three

years. The stock options granted during

2014,

2015

and

2016,

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

2016,

there were approximately

407,000

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

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,

2016,

which will be recognized as expense in

2017.

The unrecognized compensation cost related to restricted stock grants was

$4.3

million as of

December

31,

2016,

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

shares or less fully vested after

one

year from date of grant, while stock option grants for more than

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. The remaining

23,800

stock option grants vested during

2015.

A summary of restricted stock activity from grants issued under Mercantile plans during the past

three

years is as follows:

	2016					2015					2014
	Shares			Weighted Average Fair Value		Shares			Weighted Average Fair Value		Shares			Weighted Average Fair Value

Nonvested at beginning of year		155,501		$	22.25		101,490		$	20.13		63,800		$	14.30
Granted		86,250			32.19		65,933			25.14		101,490			20.13
Vested		(7,622	)		20.23		(4,666	)		20.13		(63,300	)		14.30
Forfeited		(5,786	)		21.90		(7,256	)		20.13		(500	)		14.30
Nonvested at end of year		228,343		$	26.09		155,501		$	22.25		101,490		$	20.13

A summary of stock option activity from grants issued under Mercantile plans during the past

three

years is as follows:

	2016					2015					2014
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price

Outstanding at beginning of year		11,308		$	24.50		35,335		$	31.09		60,876		$	33.11
Granted		6,500			36.22		4,820			27.66		6,488			22.15
Exercised		(1,000	)		22.15		(2,700	)		6.21		(2,845	)		17.74
Forfeited or expired		0			NA		(26,147	)		35.88		(29,184	)		34.60
Outstanding at end of year		16,808		$	29.17		11,308		$	24.50		35,335		$	31.09
Options exercisable at year-end		5,488		$	22.15		0		$	NA		28,847		$	33.11

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

2016,

2015

and

2014

was determined using the following weighted-average assumptions as of the grant date.

	2016			2015			2014

Risk-free interest rate		1.78	%		1.67	%		1.56	%
Expected option life (years)		5			5			5
Expected stock price volatility		26	%		29	%		26	%
Dividend yield		2.5	%		2.5	%		2.5	%

Options issued under Mercantile plans outstanding at year-end

2016

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

$20.0 0	-	$24.00		5,488		4.9	$	22.15		5,488	$	22.15
$24.01	-	$28 .00		4,820		5.9		27.66		0		NA
$36.00	-	$40 .00		6,500		6.9		36.22		0		NA
Outstanding at year end				16,808		6.0	$	29.17		5,488	$	22.15

Information related to options issued under various Mercantile plans outstanding at year-end

2016,

2015

and

2014

is as follows:

	2016		2015		2014

Minimum exercise price	$	22.15	$	22.15	$	6.21
Maximum exercise price		36.22		27.66		35.88
Average remaining option term (years)		6.7		6.3		2.0

Information related to stock option grants and exercises issued under various Mercantile plans during

2016,

2015

and

2014

is as follows:

	2016		2015		2014

Aggregate intrinsic value of stock options exercised	$	6,000	$	36,000	$	11,000
Cash received from stock option exercises		22,000		17,000		50,000
Tax benefit realized from stock option exercises		0		0		0
Weighted average per share fair value of stock options granted		5.25		4.41		2.72

The aggregate intrinsic value of all stock options issued under Mercantile plans outstanding and exercisable at

December

31,

2016

was

$0.1

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

A summary of stock option activity from grants issued under Firstbank plans that became part of Mercantile’s plans upon consummation of the merger on

June

2014

is as follows:

	2016					2015					2014
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price

Outstanding at beginning of year		123,887		$	12.64		217,982		$	14.89		0		$	NA
Granted		0			NA		0			NA		0			NA
Replaced as part of merger		0			NA		0			NA		282,178			15.48
Exercised		(71,711	)		13.33		(56,417	)		15.50		(27,740	)		8.34
Forfeited or expired		(7,901	)		22.00		(37,678	)		21.39		(36,456	)		24.46
Outstanding at end of year		44,275		$	9.86		123,887		$	12.64		217,982		$	14.89
Options exercisable at year-end		44,275		$	9.86		123,887		$	12.64		210,777		$	15.22

Options issued under Firstbank plans outstanding at year-end

2016

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		23,975		2.2	$	6.73		23,975	$	6.73
$8.01	-	$12.00		6,700		2.7		8.60		6,700		8.60
$12.01	-	$16.0 0		13,600		0.7		16.00		13,600		16.00
Outstanding at year end				44,275		1.8	$	9.86		44,275	$	9.86

Information related to options issued under Firstbank plans outstanding at year-end

2016,

2015

and

2014

is as follows:

	2016		2015		2014

Minimum exercise price	$	5.19	$	5.19	$	5.19
Maximum exercise price		16.00		22.00		24.46
Average remaining option term (years)		1.8		2.7		3.1

Information related to stock option grants and exercises issued under Firstbank plans during

2016,

2015

and

2014

is as follows:

	2016		2015		2014

Aggregate intrinsic value of stock options exercised	$	1,945,000	$	420,000	$	333,000
Cash received from stock option exercises		956,000		874,000		232,000
Tax benefit realized from stock option exercises		681,000		147,000		116,000
Weighted average per share fair value of stock options granted		NA		NA		NA

The aggregate intrinsic value of all stock options issued under various Firstbank plans outstanding and exercisable at

December

31,

2016

was

$1.2

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

January

2015,

we granted a total of

5,994

shares of common stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer payments for the period of

January

2015

through

May

31,

2015.

The associated

$0.1

million cost was expensed on a straightline basis over the

first

five

months of

2015.

May

28,

2015,

we granted a total of

14,100

shares of common stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer payments for the period of

June

2015

through

May

31,

2016.

The associated

$0.3

million cost was expensed on a straightline basis over the respective

twelve

month period. On

June

2016,

we granted a total of

13,000

shares of common stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer payments for the period of

June

2016

through

May

31,

2017.

The associated

$0.3

million cost is being expensed on a straightline basis over the respective

twelve

month period.