COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this proxy statement with management. Based on the review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement for filing with the SEC.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis 

Philosophy

Our philosophy in setting compensation policies for executive officers is to align pay with performance, while at the same time providing competitive compensation that will attract and retain executive talent. Our Compensation Committee believes that executive compensation should be directly linked to continuous improvements in corporate performance and increasing shareholder value over the long term. The design of executive compensation programs affects all employees by setting general levels of compensation and helping to create an environment of goals, rewards and expectations. Because we believe the performance of every employee is important to our success, we are mindful of the effect of executive compensation and incentive programs on all our employees.

We believe that the compensation of our executive officers should reflect their performance as a management team and as individuals. By setting key operating objectives, such as growth in revenues, growth of operating earnings and earnings per share, and growth or maintenance of market share, we expect to be successful in providing increasing value to our shareholders. We believe that the performance of our executive officers in managing our business, when considered in light of general economic and specific company, industry and competitive conditions, should be the basis for determining their overall compensation. We also believe that their compensation should not be based on short-term results, whether favorable or unfavorable, but rather on long-term operating results which truly reflect the ability of our executives to manage our business. Long-term gains in shareholder value will be reflected in executive compensation through our stock-based compensation and other equity incentive programs.

Our policy for allocating between currently paid and long-term compensation is to provide adequate base compensation to attract and retain personnel, while offering incentives to maximize long-term value for our shareholders. We provide cash compensation in the form of a base salary to meet competitive salary norms and reward good performance on an annual basis, and, in years when the Compensation Committee determines it appropriate, in the form of bonus compensation to reward superior performance against short-term goals. We provide stock-based compensation to reward superior performance against specific objectives and long-term strategic goals. Our Compensation Committee granted performance-based restricted stock to our executive officers in 2019 and 2018, and restricted stock subject to time-based vesting in 2017.

Our Compensation Committee reviews and takes into consideration elements such as the following in setting compensation policies:

Our Compensation Committee’s goal is to establish salary compensation for the executive officers based upon our operating performance relative to comparable peer companies over a three-year period. In setting base salaries, consideration is given to salary compensation of executive officers with comparable qualifications, experience and responsibilities at financial institutions within our peer group. Operating performance and salary compensation information is obtained from the annual SNL Executive Compensation Review for Banks and Thrifts. We also utilize industry compensation studies prepared by the Michigan Bankers Association and an independent public accounting firm, but to a lesser degree.

Our Compensation Committee may engage an independent compensation consultant periodically to conduct a competitive analysis of our executive compensation program relative to the market. In 2017, the Compensation Committee engaged Pearl Meyer to provide a market analysis of our executive compensation program, including base salary, target annual incentive, target total cash compensation, long-term incentives and total direct compensation. The Compensation Committee concluded that Pearl Meyer is independent under applicable SEC and NASDAQ rules, based on the Committee’s review of the services provided to the Committee and information provided by Pearl Meyer, and concluded that no conflict of interest existed that would prevent Pearl Meyer from independently advising the Compensation Committee.

In its analysis, Pearl Meyer utilized four compensation surveys and a peer group comprised of 15 financial institutions of similar size in the Midwest.  The peer group of companies used by Pearl Meyer, which was utilized by the Compensation Committee as a reference for 2019 and 2020 compensation decisions, is listed below. 

Consistent with the Compensation Committee’s philosophy and guiding principles for determining overall executive compensation, the Compensation Committee does not target any particular percentile at which to align compensation. However, the Compensation Committee will use the peer group median as a reference point when making pay decisions. Although the median is used as a reference point, actual levels of pay depend on a variety of factors such as experience and individual and Company performance.

Base Salary

In view of our operating performance and financial condition, the increase in the size of the organization, and changes in responsibilities under our management succession plan, our Compensation Committee increased the base salaries of each of our executive officers in 2018 and 2019.  The market analysis provided by Pearl Meyer indicated that the base salary for Mr. Kaminski was significantly below the median for comparable positions.  Based on the recommendation of our Compensation Committee, the Board increased the 2020 base salary for Mr. Kaminski by approximately 4%, and Mr. Reitsma received a 4% merit increase in his 2020 base salary. The 2020 base salaries for each of Mr. Christmas, Mr. Worthington and Ms. Wiersma were not increased, as the Board concluded that their base salaries were at least equal to the median for comparable positions.

Executive Officer Bonus Compensation

For most years, it has been our policy to provide cash bonus awards for eligible executive officers and employees based on predetermined performance goals. We believe that paying such cash awards:

We adopted bonus plans for our executive officers in each of 2017, 2018 and 2019 as described below.

Bonus Plans for 2019

On May 23, 2019, we adopted an executive officer bonus plan for 2019 (the “2019 Executive Officer Plan”), which provided for cash bonuses for our executive officers.

The maximum amount that could be allocated to the bonus pool was $606,561 under the 2019 Executive Officer Plan provided, however, that the maximum amount will be appropriately adjusted if (a) a newly hired employee becomes eligible to participate in the plan, (b) a participant's base salary is adjusted during the year, or (c) a participant becomes ineligible before December 31, 2019.

Payment from the bonus pool under the 2019 Executive Officer Plan, if any, was based on the achievement of targets under the following metrics for 2019, which were established by our Compensation Committee:

(*)   Measured pre bonus-accrual and excluding unbudgeted one-time/non-core income and expenses

The target levels are based on GAAP financial measures, other than the wholesale funds target, which is calculated as brokered deposits plus Federal Home Loan Bank (“FHLB”) advances, divided by total deposits plus repurchase agreements plus FHLB advances.

The award amount was paid to each executive officer pro rata based on a uniform percentage of the executive officer's 2019 salary, not to exceed 40% of the 2019 salary of the Chief Executive Officer; 35% of the 2019 salary of each of the President of the Bank and the Chief Financial Officer; and 27.5% of the 2019 salary of each of the Chief Operating Officer and the Human Resources Director.  Any bonus awards that were earned under the 2019 Executive Officer Plan were paid to the executive officers on or before March 15, 2020. 

Payments under the 2019 Executive Officer Plan were subject to specified conditions, qualifications, and clawback provisions.  The 2019 Executive Officer Plan, to the extent provided for in the 2019 Executive Officer Plan, may be amended by the Compensation Committee of our Board of Directors.

We attained 87.5% of the targets established in the 2019 Executive Officer Plan.  The bonus pool of $530,741 under the 2019 Executive Officer Plan was paid to our executive officers as follows: 

Payments under the 2019 Executive Officer Bonus are reported in the "Non-Equity Incentive Plan Compensation" column of the Summary Compensation Table.

Bonus Plans for 2018

On May 24, 2018, we adopted an executive officer bonus plan for 2018 (the “2018 Executive Officer Plan”). The 2018 Executive Officer Plan provided for cash bonuses for our executive officers.

The maximum amount that could be allocated to the bonus pool was $616,237 under the 2018 Executive Officer Plan provided, however, that the maximum amount will be appropriately adjusted if (a) a newly hired employee becomes eligible to participate in the plan, (b) a participant's base salary is adjusted during the year, or (c) a participant becomes ineligible before December 31, 2018.

Payment from the bonus pool under the 2018 Executive Officer Plan, if any, was based on the achievement of targets under the following metrics for 2018, which were established by our Compensation Committee:

(*) Measured pre bonus-accrual and excluding unbudgeted one-time/non-core income and expenses

The target levels are based on GAAP financial measures, other than the wholesale funds target, which is calculated as brokered deposits plus Federal Home Loan Bank (“FHLB”) advances, divided by total deposits plus repurchase agreements plus FHLB advances. 

The award amount was paid to each executive officer pro rata based on a uniform percentage of the executive officer's 2018 salary, not to exceed 40% of the 2018 salary of each of the Executive Chairman and the Chief Executive Officer; 35% of the 2018 salary of each of the President of the Bank and the Chief Financial Officer; 32.5% of the 2018 salary of the Chief Operating Officer; and 27.5% of the 2018 salary of the Human Resources Director.  Any bonus awards that were earned under the 2018 Executive Officer Plan were paid to the executive officers on or before March 15, 2019. 

Payments under the 2018 Executive Officer Plan are subject to specified conditions, qualifications, and clawback provisions.  The 2018 Executive Officer Plan, to the extent provided for in the 2018 Executive Officer Plan, may be amended by the Compensation Committee of our Board of Directors.

We attained 87.5% of the targets established in the 2018 Executive Officer Plan.  The bonus pool of $539,207 under the 2018 Executive Officer Plan was paid to our executive officers as follows: 

          (*) Measured pre bonus-accrual and excluding non-core income and expenses

The target levels were based on GAAP financial measures, other than the wholesale funds target, which was calculated as brokered deposits plus Federal Home Loan Bank (“FHLB”) advances, divided by total deposits plus repurchase agreements plus FHLB advances. 

The award amount was paid to each executive officer pro rata based on a uniform percentage of the executive officer's 2017 salary (not to exceed 30% of each executive officer's 2017 salary, and taking into account the adjustment made to Mr. Price's base salary following the 2017 annual meeting of shareholders.)  Any bonus awards that were earned under the 2017 Executive Officer Plan were paid to the executive officers on or before March 15, 2018. 

Payments under the 2017 Executive Officer Plan are subject to specified conditions, qualifications, and clawback provisions.  The 2017 Executive Officer Plan, to the extent provided for in the 2017 Executive Officer Plan, may be amended by the Compensation Committee of our Board of Directors.

We attained 90% of the targets established in the 2017 Executive Officer Plan.  The bonus pool of $419,596 under the 2017 Executive Officer Plan was paid to our executive officers as follows:  Mr. Price, $60,489; Mr. Kaminski, $117,450; Mr. Reitsma, $89,107; Mr. Christmas, $94,500; and Mr. Worthington, $58,050.  The payments were 27% of the base salary of each executive officer.  Payments under the 2017 Executive Officer Bonus are reported in the "Non-Equity Incentive Plan Compensation" column of the Summary Compensation Table.

Stock Incentive Plan

The overall objective for our stock-based compensation is to provide an equitable and competitive means to reward our executive and other officers for their contributions to our long-range success. Our goal is to meet the following objectives:

In recent years, we have utilized restricted stock as our primary long-term incentive tool to retain and motivate our key employees. In 2017, we granted restricted stock subject to time-based vesting to our executive officers and other key employees. We believe this is an excellent way to reward them for, and to motivate them toward, superior performance. Restricted stock is an important retention instrument in that it has immediate value to the recipient. Unlike stock option grants that create economic value only if the stock price appreciates above the price at the date of grant, restricted stock provides value and motivation to the recipient even if the stock price declines.

The restricted stock granted in 2017, 2018 and 2019 to key employees other than our executive officers is subject to a three-year vesting period to encourage retention as well as provide value to our executive officers. 

For 2018 and 2019, our Compensation Committee determined that grants of performance-based restricted stock would be made to our executive officers, and restricted stock subject to time-based vesting would be made to other key employees.  In order to become vested in their restricted stock, our executive officers would need to be employed throughout the three-year performance period, which satisfies a retention goal, and Mercantile must meet certain pre-determined financial performance goals.  The Compensation Committee believes it is important for the restricted stock, which is intended to be a long-term incentive, to focus our executive officers on, and reward them for, the achievement of multi-year performance objectives.  The performance goals were set at a target performance level.  If Mercantile meets the target performance level, the executive officers would be vested in the number of shares designated as the “target award.”  Performance levels would also be set at a maximum level to provide an incentive for superior performance, and at a threshold level, below which no shares would be earned.  Depending on Mercantile’s performance relative to the performance goals, the executive officers could earn between 0% and 150% of the target award. 

Performance-Based Restricted Stock for the 2019-2021 Performance Period

Our Compensation Committee determined the goals and the target number of shares for the 2019-2021 performance period in the Fall of 2018. For the performance period of 2019-2021, our Compensation Committee set the target number of shares by reference to the 2019 base salary of each executive officer, as follows:  Mr. Kaminski, 50%; Mr. Reitsma and Mr. Christmas, 45%; Mr. Worthington, 40%; and Ms. Wiersma, 35%. The number of shares of performance-based restricted stock earned during the performance period will be based upon Mercantile’s achievement of certain performance levels for each of the measurement criteria.  The performance goals for the performance period are based on a comparison of Mercantile’s average performance over the performance period (i.e., the summation of performance for calendar years 2019, 2020 and 2021 divided by three) for:

Our Compensation Committee will determine whether the performance goals have been met by taking into consideration Mercantile’s performance as compared to budget.  In addition, our Compensation Committee will take into consideration the 3-year average of the median performance for the Peer Group with respect to ROAA, Diluted EPS Growth and ROE, business unit and individual performance and such other factors as the Compensation Committee may determine and approve in its sole discretion.  The “Peer Group” means a group of similarly sized financial institutions located in the Midwest, as determined by the Compensation Committee in its sole discretion; provided, however, that a financial institution will be deleted from the Peer Group for 2021 if it has not reported its year-end financial results by January 31, 2022.  Following the Compensation Committee’s determination, the shares will become vested, in whole or in part, on February 15, 2022. 

Performance-Based Restricted Stock for the 2020-2022 Performance Period

Our Compensation Committee determined the goals and the target number of shares for the 2020-2022 performance period in the Fall of 2019. For the performance period of 2020-2022, our Compensation Committee set the target number of shares by reference to the 2020 base salary of each executive officer, as follows:  Mr. Kaminski, 55%; Mr. Reitsma, 50%; Mr. Christmas, 45%; and Mr. Worthington and Ms. Wiersma, 35%. The number of shares of performance-based restricted stock earned during the performance period will be based upon Mercantile’s achievement of certain performance levels for each of the measurement criteria.  The performance goals for the performance period are based on a comparison of Mercantile’s average performance over the performance period (i.e., the summation of performance for calendar years 2020, 2021 and 2022 divided by three) for:

Our Compensation Committee will determine whether the performance goals have been met by taking into consideration Mercantile’s performance as compared to budget.  In addition, our Compensation Committee will take into consideration the 3-year average of the median performance for the Peer Group with respect to ROAA, Diluted EPS Growth and ROE, business unit and individual performance and such other factors as the Compensation Committee may determine and approve in its sole discretion.  The “Peer Group” means a group of similarly sized financial institutions located in the Midwest, as determined by the Compensation Committee in its sole discretion; provided, however, that a financial institution will be deleted from the Peer Group for 2022 if it has not reported its year-end financial results by January 31, 2023.  Following the Compensation Committee’s determination, the shares will become vested, in whole or in part, on February 15, 2023. 

Historically, we have made stock-based awards annually in the Fall in conjunction with the performance review of our executive and other officers. It has been our practice, when stock-based compensation awards are made, to make them to all recipients on the same date. In 2019 and 2018, we awarded shares of performance-based restricted stock to our executive officers, and shares of time-vested restricted stock to 93 and 104 key employees, respectively.  In 2017, we awarded shares of restricted stock to 94 key employees, including our executive officers.   

Stock Ownership Guidelines

Our Board, on the recommendation of our Compensation Committee, adopted stock ownership guidelines for our executive officers that became effective on January 1, 2018. The stock ownership guidelines require each named executive officer to own our stock at the following levels:

The time period for attainment of the stock ownership levels set forth above is five years from the later of January 1, 2018 or the date on which a named executive officer becomes subject to the guidelines.

All shares beneficially owned by each named executive officer will be credited toward the target level under the guidelines, including:

Perquisites

We limit the perquisites that we make available to our executive officers. We believe that providing excessive perquisites to executive officers sends mixed messages to the rest of our employees and can destroy the “team” effort. Our executive officers are entitled to a few benefits that are not generally available to all of our employees. We do not provide a defined benefit pension plan, post-retirement health coverage (other than certain COBRA benefits as discussed below), or similar benefits for our executive officers or other employees.

During 2019, we provided the following perquisites for our executive officers:

IRC Section 162(m)

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to their chief executive officer or certain other highly compensated officers. For taxable years before 2018, qualifying performance-based compensation was not subject to the deduction limitation if certain requirements are met. We periodically reviewed the potential consequences of Section 162(m) and considered whether to structure some or all of the performance-based portion of our executive compensation so that it was not subject to the deduction limitations of Section 162(m).

The performance-based compensation exception was eliminated for compensation paid in taxable years after December 31, 2017 and the limit on deductibility was expanded to include all named executive officers.  As a result, Section 162(m) no longer permits a public company to take a deduction for any compensation paid to its named executive officers in excess of $1 million, unless the compensation is provided under a written binding contract in effect on November 2, 2017 that was not materially modified on or after that date.

Post-Employment Compensation

We do not provide a defined benefit pension plan or post-retirement health insurance coverage for our executive officers or other employees. Our executive officers and most of our other employees are eligible to participate in our 401(k) plan. We provide for each eligible participant a matching contribution to the 401(k) plan. Effective on and after January 1, 2014, we made a matching contribution that “dollar for dollar” is equal to the first 4.25% of each participant’s contribution to the 401(k) plan. On and after April 1, 2018, our matching contribution is "dollar for dollar" on the first 5.00% of each participant's contribution to the 401(k) plan.  All of our executive officers participated in our 401(k) plan during 2019.

All employees, except our executive officers and certain key employees, are employees-at-will and do not have an employment agreement. The employment agreements that we have with our executive officers are described below under the heading “Employment Agreements.” We do not provide post-employment health insurance coverage or other benefits to any employee, except those provided for executive officers and key employees in their employment agreements.

Change in Control Agreements

On November 29, 2018, we entered into an amended change in control agreement with each of our executive officers.  The change in control agreements for the executive officers provide for a lump sum payment if the executive officer is terminated without “Cause” or terminates employment for “Good Reason” (as those terms are defined under the employment agreements) within 24 months after a change in control of Mercantile or the Bank.   The lump sum payment would be in addition to severance payments under each officer's respective employment agreement. 

In entering into the change in control agreements, we took into account that, prior to 2015, the employment agreements with our executive officers did not provide any benefits if the officer were to be terminated in connection with a change in control.  We believe that a pending or threatened change in control would provide significant distraction for our executive officers. We believe that providing an additional payment to each executive officer in the event that he or she is involuntarily terminated within 24 months after a change in control will provide the officer with financial protection and is an incentive to maintain a high level of dedication to Mercantile and the Bank in the event of a pending or threatened change in control. 

Additional information regarding the change in control agreements is included below under the heading "Potential Payments Upon Termination or Change in Control." 

Overview of the Compensation Process

The composition of compensation for our executive officers can include: salary, cash bonus, stock-based awards, health, disability and life insurance and perquisites. The elements of executive compensation are discussed at the meetings of our Compensation Committee. During the Fall of each year, the Compensation Committee discusses the base salaries and cash bonus plan, if any, for the next year for our executive officers, and makes recommendations to the Board of Directors for its approval. The Board of Directors usually approves the Compensation Committee’s recommendations; though if it does not, it could ask the Compensation Committee to prepare revised recommendations. At or about the same time, in years when stock-based awards are to be made, the Compensation Committee grants stock-based awards to our executive and other officers.

As part of the Compensation Committee’s process, it meets with our Human Resource Director and reviews the elements of each executive officer’s compensation during the preceding three years. Typically, the Human Resource Director makes compensation recommendations to the Compensation Committee for each of our executive officers (other than with respect to her own compensation). The Compensation Committee may accept or reject all or any part of such recommendations. As part of our Human Resource Director’s process of formulating her recommendations, she may confer with our President and Chief Executive Officer. Our executive officers are not present when our Human Resource Director makes her recommendations, or during the Compensation Committee’s deliberations on the compensation of our executive officers.  Our Human Resources Director is not present during the Compensation Committee’s deliberations on her compensation.  

Compensation Risk Assessment

The Compensation Committee reviews our compensation policies and practices with our Senior Risk Officer every six months, and does not believe that they are reasonably likely to have a material adverse effect on us by encouraging our executive officers to take unnecessary or excessive risks that threaten our value. The Compensation Committee does not believe that the features of our compensation plans make it likely that taking unnecessary or excessive risks that threaten our value will provide greater compensation than actions that involve a prudent level of risk.

Based on its review, the Compensation Committee believes that our compensation policies and procedures do not pose any unnecessary risks, and do not encourage employees to manipulate reported earnings to enhance the compensation of any employee.

Shareholder Advisory Vote on Executive Compensation

At our 2019 annual meeting, our shareholders voted on an advisory proposal to approve the compensation of our executive officers as disclosed in our proxy statement for that annual meeting. Approximately 98.5% of the 9,734,575 votes cast on the proposal voted in favor of the proposal. Our Compensation Committee considered the result of this vote, viewed the result as favorable, and sought to maintain consistent compensation policies and procedures.

Employment Agreements

The Bank and Mercantile have entered into employment agreements with our executive officers, Messrs. Kaminski, Reitsma, Christmas and Worthington, and Ms. Wiersma, which provide for their employment, annual base compensation, and severance, as well as confidentiality and non-compete arrangements. The employment agreements for each executive officer were amended and restated effective as of December 31, 2018 so that the terms would be uniform. Each agreement establishes an employment period that extends an additional year, each December 31, so that as of each December 31, there are three years remaining in the employment period. The annual extension of the employment period can be avoided by the Bank, Mercantile, or the officer giving notice to the others that the employment period is not to be extended.

The employment agreements provide the officers with annual base salaries for each year in the amounts established from year to year by the Board of Directors of the Bank. The annual base salary for each year for each officer may not be less than the amount established for the immediately preceding year. The Board of Directors established the annual base salaries of each executive officer as follows: 

In addition to the annual base salary, the employment agreements provide that the officers are entitled to participate in our employee benefit and incentive compensation plans, including health insurance, life and disability insurance, stock option, profit sharing and retirement plans. Under the 2019 Executive Officer Plan, our officers received the following bonus payments for 2019:  Mr. Kaminski, $174,650 (35% of 2019 salary); Mr. Reitsma, $113,552 (30.625% of 2019 salary); Mr. Christmas, $114,819 (30.625% of 2019 salary); Mr. Worthington, $62,563 (24.0625% of 2019 salary); and Ms. Wiersma, $65,157 (24.0625% of 2019 base salary).

Additional information regarding the employment agreements, including compensation and benefits payable to the officers on termination of employment and officer confidentiality and non-compete obligations, is included below under the heading “Potential Payments Upon Termination or Change In Control.”

Salary and Bonus Compared to Total Compensation

We have not established a proportion that salary and bonus should be of an executive officer’s total compensation. As indicated in the Summary Compensation Table above, the proportion for 2019 that salary and bonus were of total compensation ranged from approximately 65.9% to 73.1% for our executive officers.

Restricted Stock Awards

The stock awards shown in the table above are restricted stock that was awarded to the named executive officers by our Compensation Committee on November 21, 2019, under our Stock Incentive Plan of 2016.  The grant of performance-based restricted stock to the executive officers would vest at the end of a 3-year performance period (January 1, 2020-December 31, 2022), depending on whether Mercantile satisfied pre-determined performance goals.  The performance goals were set at a target performance level.  If Mercantile meets the target performance level, the executive officers would be vested in the number of shares designated as the “target award” shown in the table above.  Performance levels were also set at a maximum level to provide an incentive for superior performance, and at a threshold level, below which no shares would be earned.  Depending on Mercantile’s performance relative to the performance goals, the executive officers could earn between 0% and 150% of the target award. The restricted stock is forfeited if the executive officer ceases to be employed with us, or ceases to serve as a Board member prior to the restricted stock vesting, subject to accelerated or pro-rated vesting at the target award level as provided for in the applicable restricted stock award agreement in the event of the executive officer's death, disability, retirement, termination other than for “Cause,” a change in control, or exercise of discretion by the Compensation Committee.  The executive officers are entitled to receive cash dividends on their restricted stock to the same extent as other holders of our common stock.

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Deferred Compensation Plan

The information in the table above pertains to our executive officers’ participation in the Bank’s non-qualified deferred compensation plan. Participants in the plan may elect to defer up to 100% of their salary and other cash compensation each year. Under the plan, the amount of any compensation deferred is credited with interest monthly at a rate equal to the prime rate as published in the Wall Street Journal, determined quarterly, on the first day of each quarter.

The plan provides that the Bank will pay to each executive officer, from his or her deferred compensation account, a lump sum payment or installment payments, whichever the officer elected, after he or she leaves employment with us due to normal retirement, early termination, disability, or a change of control.  If installment payments are elected on or after January 1, 2015, the maximum payment period is ten years.  If the executive officer dies before leaving employment, the Bank will distribute the payments to the executive officer’s designated beneficiary in a lump sum, or installments, if installments were elected. If death occurs during the time that payments are being made, the Bank will distribute the remaining payments to the executive officer’s designated beneficiary at the same time and in the same amounts that would have been distributed if the executive officer had not died.

The plan is subject to Section 409A of the Internal Revenue Code, which specifies requirements that non-qualified deferred compensation plans must meet in order to avoid adverse tax consequences for participants.

Potential Payments upon Termination or Change in Control 

Employment Agreements

We have entered into employment agreements with each of our executive officers. The agreement for each officer establishes an employment period that extends an additional year, each December 31, so that as of each December 31, there are three years remaining in the employment period. The annual extension of the employment period can be avoided by giving notice that the employment period is not to be extended. These agreements include provisions that provide compensation and benefits to the executive officers in the event that their employment with us is terminated:

The employment agreements also provide compensation and benefits to the officers in the event that their employment with us is terminated after the employment period and before they reach the age of 65, voluntarily by them if their annual base salary is reduced without Cause, or by us without Cause.

The terms “Cause” and “Good Reason” are defined in the employment agreements. Cause includes certain acts of dishonesty and intentional gross neglect, conviction of a felony, and certain intentional breaches of an officer’s obligations in the employment agreement relating to confidentiality of our information and not competing with us. Good Reason includes an assignment to the officer of a title or duties that are materially inconsistent with the officer’s position, titles, duties or responsibilities, and certain failure by us to comply in a material respect, even after notice to us, with our obligations to the officer under the employment agreement.

Termination During the Employment Period

The employment agreements provide the executive officers with compensation and benefits in the event that their employment is terminated by us without Cause or the officers elect to terminate their employment for Good Reason during the employment period. In such event, the officer in question is entitled to receive the greater of his or her annual base salary through the end of the employment period or (i) for Mr. Kaminski, $500,000; (ii) for Mr. Reitsma and Mr. Christmas, $350,000; and (iii) for Mr. Worthington and Ms. Wiersma, $250,000, in any case payable over 18 months. In addition, in the case of such a termination of employment, the officer is entitled to continue his or her participation in our life, disability and health insurance plans for 18 months, to the extent permitted under the plans, to an assignment of any assignable term life insurance policies owned by us insuring his or her life, and to $15,000 for out-placement, interim office and related expenses. 

For a termination of an executive officer by us during the employment period to be with Cause, it must be done within 90 days of our learning of the Cause. For a termination by the officer during the employment period to be with Good Reason, it must be done by the officer within 90 days of the officer learning of the Good Reason.

If an officer becomes disabled or dies during the employment period, the officer is entitled to compensation and benefits under his or her employment agreement. In the event of disability, the officer continues to receive his or her then current annual base salary through the end of the employment period, and any disability benefits payable under disability plans that we provide. The officer also continues to participate in our life, disability, and health insurance plans, through age 65, to the extent permitted under the plans. If the officer dies during the employment period, we are obligated to pay the officer’s legal representative a death benefit. The death benefit is (i) for Mr. Kaminski, $300,000; (ii) for Mr. Reitsma and Mr. Christmas, $200,000; and (iii) for Mr. Worthington and Ms. Wiersma, $100,000. In addition, if we own any life insurance insuring the life of the officer, the proceeds of the policies are payable to the named beneficiaries.

Under the employment agreements, in the event that an officer’s employment is terminated for Cause, the officer is not entitled to any accrued rights that the officer may then have under any of our stock incentive plans.

Termination After the Employment Period

The employment agreements provide compensation and benefits in the event that after the employment period and prior to the officer reaching the age of 65, the officer’s employment is terminated by us without Cause or the officer’s annual base salary is reduced without Cause, and the officer terminates his or her employment within 90 days of the reduction. In such event, the officer is entitled to receive an amount, for Mr. Kaminski of $500,000; for Mr. Reitsma or Mr. Christmas of $350,000; and for Mr. Worthington or Ms. Wiersma, of $250,000, payable over 18 months. In addition, in the case of such a termination of employment, the officer is entitled to continue his or her participation in our life, disability and health insurance plans for 18 months, to the extent permitted under the plans, to an assignment of any assignable term life insurance policies owned by us insuring his or her life, and to $15,000 for out-placement, interim office and related expenses. 

Obligations of Executive Officers

Under the employment agreements, each officer agreed not to disclose, except as required by law, any confidential information relating to our business or customers, or use any confidential information in any manner adverse to us. In addition, each has agreed that for 18 months following his or her employment with us, the officer will not be employed by, or act as a director or officer of, any business engaged in banking within a 50 mile radius of any city in which at any time during the 18-month period we or the Bank has a branch or other office.

Change in Control Agreements

We have entered into a change in control agreement with each of our executive officers. If the officer's employment is terminated without Cause (as defined in the employment agreement) or if the officer terminates his or her employment for Good Reason (as defined in the employment agreement), in each case within 24 months after a "change in control," the officer will receive a lump sum payment within 15 days after the termination.  The amount of the lump sum payment is: (i) $500,000 for Mr. Kaminski; (ii) $350,000 for each of Mr. Reitsma and Mr. Christmas; and (iii) $250,000 for each of Mr. Worthington and Ms. Wiersma.  This amount is paid in addition to any other payments and benefits under the officer's employment agreement.  If the officer is a "specified employee" within the meaning of Section 409A of the Internal Revenue Code, payment is delayed until the first business day of the seventh month after the date on which termination of employment occurs. 

A "change in control" is defined as (a) a change in ownership of more than 50% of the total fair market value or total voting power of Mercantile or the Bank; (b) a change in effective control, which includes (i) an acquisition by a person of 30% or more of the total voting power of the stock of Mercantile or the Bank; or (ii) a majority of the members of the Board of Directors of Mercantile or the Bank is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors prior to the date of the appointment or election; or (c) an acquisition by a person of assets of Mercantile or the Bank with a total gross fair market value of more than 40% of the total gross fair market value of all assets of Mercantile or the Bank immediately prior to the acquisition. 

Rights Under the Stock Incentive Plan of 2006

In general, stock options granted under the Stock Incentive Plan of 2006 that are vested at the time employment terminates may be exercised by the executive officer within three months after termination of employment. However, if employment terminates due to death or disability, any vested stock options may be exercised within 12 months after the date of termination, but not later than the expiration date of the option. In addition, the Stock Incentive Plan of 2006 provides that all outstanding options granted under the plan are forfeited if an officer’s employment is terminated for Cause, whether or not the options are vested.

If an executive officer terminates employment due to death or disability, then restricted stock granted to him or her under the Stock Incentive Plan of 2006 will be partially vested. Also, if an executive officer terminates employment due to retirement, or we terminate the officer’s employment other than for Cause, restricted stock granted to him or her under the plan will be partially vested. The number of shares that will be vested is equal to the number of shares granted to the executive officer multiplied by the number of months that have elapsed since the grant date divided by the number of months in the vesting period. Our Compensation Committee has discretion to accelerate the vesting of restricted stock. Pursuant to this authority, in January 2017, the Compensation Committee adopted a policy that a participant would be 100% vested in his or her restricted stock if the officer retires on or after age 65 and would be partially vested in his or her restricted stock (in the manner previously described) if the officer retires at or after age 62, but before age 65, with 5 or more years of service with us. 

Rights Under the Stock Incentive Plan of 2016

In general, stock options granted under the Stock Incentive Plan of 2016 that are vested at the time employment terminates may be exercised by the executive officer within three months after termination of employment. However, if employment terminates due to death or disability, stock options become 100% vested and may be exercised within 12 months after the date of termination, but not later than the expiration date of the option. In addition, the Stock Incentive Plan of 2016 provides that all outstanding options granted under the plan are forfeited if an officer’s employment is terminated for Cause, whether or not the options are vested.

If an executive officer terminates employment due to death, disability or retirement at or after age 65, then restricted stock granted to him or her under the Stock Incentive Plan of 2016 will be 100% vested. If we terminate the employment of an executive officer other than for Cause, restricted stock granted to him or her under the plan will be partially vested. The number of shares that will be vested is equal to the number of shares granted to the executive officer multiplied by the number of months that have elapsed since the grant date divided by the number of months in the vesting period. Our Compensation Committee has discretion to accelerate the vesting of restricted stock. Pursuant to this authority, in January 2017, the Compensation Committee adopted a policy that a participant would be partially vested in his or her restricted stock (in the manner previously described) if the officer retires at or after age 62, but before age 65, with 5 or more years of service with us. 

Distribution from the Deferred Compensation Plan

Each executive officer will receive a distribution of his or her account under the deferred compensation plan upon termination of employment. Distributions will generally be delayed for six months after the termination of employment, to the extent required by Section 409A of the Internal Revenue Code. However, if employment is terminated due to Cause, or if an executive officer is subject to a final removal or prohibition order issued by a federal banking agency, then the executive officer will only receive a distribution of his or her own deferrals, without any interest credits.

Table of Potential Payments Upon Termination of Employment

The following tables provide information regarding compensation and benefits payable to our executive officers under their respective employment agreements, the Stock Incentive Plan of 2006 or the Stock Incentive Plan of 2016 upon termination of their employment. The amounts shown assume that termination of employment was effective as of December 31, 2019, the last business day of our 2019 fiscal year, and include estimates of the amounts that would be paid. The actual amounts would only be determined upon an officer’s termination of employment. The value of restricted stock that would have become vested due to termination without “Cause,” retirement, death or disability is based on the closing stock price of $36.47 on December 31, 2019.

Change in Control

If a change in control of Mercantile or the Bank occurs and the employment of an executive officer is terminated without Cause or the officer terminates his or her employment for Good Reason within 24 months after the change in control, the officer will receive a lump sum payment in addition to severance benefits under the employment agreement.  Options granted under the Stock Incentive Plan of 2006, according to their terms when granted, become fully vested upon a change in control and are exercisable during their remaining term, even if an executive officer’s employment terminates during the option term. According to their terms when awarded, shares of restricted stock awarded under the Stock Incentive Plan of 2006 become fully vested upon a change in control. A “change in control” is defined in the Stock Incentive Plan of 2006 as (a) the failure of the continuing directors to constitute a majority of the Board of Directors; (b) the acquisition by any person of ownership of 40% or more of the outstanding common stock of Mercantile; (c) a reorganization, merger or consolidation after which the Mercantile shareholders do not own at least 50% of the value and voting power of the outstanding capital stock of the entity surviving the transaction; (d) a liquidation or dissolution of Mercantile, or a sale of all or substantially all of its assets; or (e) any other change in control transaction that is reportable to the SEC under Item 6(e) of Schedule 14A of Regulation 14A issued under the Securities Exchange Act of 1934.

Under the Stock Incentive Plan of 2016, stock options and restricted stock awards may be assumed or a substitute award may be granted in connection with a change in control of Mercantile.  In such event, the executive officer will become 100% vested if, within one year after the change in control, the officer's employment is terminated without Cause or due to death or disability, or if the officer terminates his or her employment for Good Reason.  If the stock options and restricted stock awards are not assumed or a substitute award granted, then unless the Compensation Committee prescribes an economically equivalent alternative, shares of restricted stock and stock options will be 100% vested.  The awards will be cancelled immediately prior to the change in control, with the executive officer receiving a payment equal to the per share consideration paid to the shareholders in connection with the change in control transaction minus, in the case of stock options, the exercise price per share.  A “change in control” is defined in the Stock Incentive Plan of 2016 as (a) the failure of the continuing directors to constitute a majority of the Board of Directors; (b) the acquisition by any person of ownership of 30% or more of the outstanding common stock of Mercantile; (c) a reorganization, merger or consolidation after which the Mercantile shareholders do not own at least 50% of the value and voting power of the outstanding capital stock of the entity surviving the transaction; (d) a liquidation or dissolution of Mercantile, or a sale of all or substantially all of its assets; or (e) any other change in control transaction that is reportable to the SEC under Item 6(e) of Schedule 14A of Regulation 14A issued under the Securities Exchange Act of 1934.

Each executive officer will receive a distribution of his or her account under the deferred compensation plan if employment terminates within 12 months after a change in control. The value of each officer’s account as of December 31, 2019 is shown above in the table under the heading “Nonqualified Deferred Compensation For 2019.”

Potential Payments Upon a Change in Control

The following table provides information regarding the value of benefits that would be provided to our executive officers in the event of a change in control of Mercantile. A lump sum cash payment would be made pursuant to the terms of the officer's change in control agreement assuming there was both a change in control and a termination without Cause or a Good Reason termination on December 31, 2019.  The cash payments shown in the table below are in addition to severance payments that would be paid to the officer under his or her employment agreement in the event of a termination without Cause or a Good Reason termination during the employment period.  Under our Stock Incentive Plan of 2006 and our Stock Incentive Plan of 2016, there are provisions regarding a change in control. The amounts shown assume that the change in control occurred as of December 31, 2019, the last business day of our 2019 fiscal year, include estimates of the value of restricted stock that would be vested upon a change in control and reflect that incentive awards were not assumed or substituted by an acquiring company. The actual amounts would only be determined upon a change in control.

CEO Pay Ratio

As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of Robert B. Kaminski, Jr., our Chief Executive Officer (“CEO”).

For 2019, our last completed fiscal year:

Based on this information, for 2019, the ratio of the annual total compensation of Mr. Kaminski, our CEO, to the annual total compensation of our median employee was estimated to be 20 to 1. 

The pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our payroll and employment records and the methodology described below.  The SEC rules for identifying the median employee and calculating the pay ratio based on that employee’s annual compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices.  As a result, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios. 

We used the median employee identified in 2017 for purposes of calculating the CEO pay ratio.  There have been no changes in our employee population or employee compensation arrangements in 2019 that we believe would significantly impact the CEO pay ratio.