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Note 11 - Stock-based Compensation

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

NOTE 11 – 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. During 2015, stock option grants were provided to certain employees from the Stock Incentive Plan of 2006. Stock option grants were provided to certain employees during 2016 from the Stock Incentive Plan of 2016. During the years 2016 through 2019, restricted stock grants were provided to certain employees from the Stock Incentive Plan of 2016. During the years 2020 through 2022, restricted stock grants were provided to certain employees from the Stock Incentive Plan of 2020. Stock grants to directors as retainer payments during the years 2016 through 2019 were from the Stock Incentive Plan of 2016, while stock grants to directors as retainer payments during the years 2020 through 2022 were from the Stock Incentive Plan of 2020.

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. The Stock Incentive Plan of 2016 was effectively replaced with the Stock Incentive Plan of 2020 that was approved by shareholders in May, 2020.

Under the Stock Incentive Plan of 2006, the Stock Incentive Plan of 2016 and the Stock Incentive Plan of 2020, 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 the years 2016 through 2022 fully vest after three years and, in the case of performance-based restricted stock issued to executive officers in 2018 through 2022, are subject to the attainment of pre-determined performance goals. The stock options granted 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 2022, there were approximately 66,000 shares authorized for future incentive awards.

A summary of restricted stock activity from grants issued during the past three years is as follows:

		2022								2021								2020
		Shares				Weighted Average Fair Value				Shares				Weighted Average Fair Value				Shares				Weighted Average Fair Value

Nonvested at beginning of year			353,691			$	30.71				262,336			$	29.42				262,260			$	34.91
Granted			121,631				32.18				163,000				33.68				121,518				24.65
Vested			(94,010	)			34.86				(59,772	)			31.82				(85,445	)			37.08
Forfeited			(6,541	)			27.98				(11,873	)			29.54				(35,997	)			33.71
Nonvested at end of year			374,771			$	30.49				353,691			$	30.71				262,336			$	29.42

Of the restricted stock shares granted in 2022, 2021 and 2020, a total of 26,112 shares, 22,703 shares and 31,295 shares, respectively, are performance-based awards made to our Named Executive Officers at the target level and are subject to the attainment of pre-determined performance goals. Of the shares granted in 2022, a total of 11,350, 2,778 and 690 shares reflect increases in performance-based grants to our Named Executive Officers that were awarded in 2021, 2020 and 2019, respectively. Of the granted shares during 2021, a total of 11,454, 23,053 and 22,836 shares reflect increases in performance-based grants to our Named Executive Officers that were awarded in 2020, 2019 and 2018, respectively. Of the forfeited shares during 2020, a total of 13,709 shares and 14,681 shares reflect reductions in performance-based grants to our Named Executive Officers that were awarded in 2019 and 2018, respectively. These adjustments were based on an analysis of the pre-determined performance goals taking into account actual performance since the grant date and updated forecasts for the remainder of the three-year performance period.

A summary of stock option activity during the past three years is as follows:

		2022								2021								2020
		Shares				Weighted Average Exercise Price				Shares				Weighted Average Exercise Price				Shares				Weighted Average Exercise Price

Outstanding at beginning of year			7,700			$	34.89				9,700			$	32.83				10,700			$	30.25
Granted			0				NA				0				NA				0				NA
Exercised			(2,700	)			32.42				(2,000	)			24.91				(1,000	)			5.19
Forfeited or expired			0				NA				0				NA				0				NA
Outstanding at end of year			5,000			$	36.22				7,700			$	34.89				9,700			$	32.83
Options exercisable at year-end			5,000			$	36.22				7,700			$	34.89				9,700			$	32.83

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 the past three years.

Options at year-end 2022 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

$36.00	-	$37.00			5,000				0.9			$	36.22				5,000			$	36.22
Outstanding at year end					5,000				0.9			$	36.22				5,000			$	36.22

Information related to options outstanding at year-end 2022, 2021 and 2020 is as follows:

		2022				2021				2020

Minimum exercise price		$	36.22			$	27.66			$	22.15
Maximum exercise price			36.22				36.22				36.22
Average remaining option term (years)			0.9				1.7				2.4

Information related to stock option grants and exercises during 2022, 2021 and 2020 is as follows:

		2022				2021				2020

Aggregate intrinsic value of stock options exercised		$	16,000			$	13,000			$	17,000
Cash received from stock option exercises			36,000				50,000				3,000
Tax benefit realized from stock option exercises			0				0				0
Weighted average per share fair value of stock options granted			NA				NA				NA

No stock option awards outstanding and exercisable at December 31, 2022 were in-the-money. Shares issued as a result of the exercise of stock option grants have been authorized and were previously unissued shares.

On May 23, 2019, we granted about 12,000 shares of common stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer payments for the period of June 1, 2019 through May 31, 2020. The associated $0.4 million cost was expensed on a straight-line basis over the respective twelve month period. On June 1, 2020, we granted about 16,000 shares of common stock to our Corporate, Bank and Regional Advisory Boards of Directors for retainer payments for the period of June 1, 2020 through May 31, 2021. The associated $0.3 million cost was expensed on a straight-line basis over the respective twelve month period. On August 27, 2020, we granted about 1,700 shares of common stock to newly appointed Corporate and Bank Board members for retainer payments for the period of September 1, 2020 through May 31, 2021. The associated cost of less than $0.1 million was expensed over the respective nine-month period. On May 27, 2021, we granted about 10,500 shares of common stock to our Corporate and Bank Boards of Directors for retainer payments for the period of June 1, 2021 through May 31, 2022. The associated $0.3 million cost was expensed on a straight-line basis over the respective twelve-month period. On May 26, 2022, we granted about 10,300 shares of our common stock to our Corporate and Bank Board of Directors for retainer payments for the period of June 1, 2022 through May 31, 2023. The associated $0.3 million cost is being expensed on a straight-line basis over the respective twelve-month period. On June 9, 2022, we granted about 600 shares of common stock to a newly appointed Bank Board member for retainer payments for the period of June 1, 2022 through May 31, 2023. The associated cost of less than $0.1 million is being expensed on a straight-line basis over the respective twelve-month period. On November 25, 2022, we granted about 300 shares of common stock to a newly appointed Bank Board member for retainer payments for the period of November 1, 2022 through May 31, 2023. The associated cost of less than $0.1 million is being expensed on a straight-line basis over the respective seven-month period.

Stock-based compensation, reported as noninterest expense in the Consolidated Statements of Income, totaled $3.4 million, $3.8 million and $2.3 million in 2022, 2021 and 2020, respectively.