20. Stock Compensation Plans

First Defiance has established equity based compensation plans for its directors and employees. On March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan replaces all existing plans. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up to 350,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.

As of December 31, 2013, 251,020 options have been granted pursuant to the 2010 equity plan and previous plans, and remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans vest 20% per year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

In August 2011, the Company approved a 2011 Short-Term (“STIP”) Equity Incentive Plan and a 2011 Long-Term (“LTIP”) Equity Incentive Plan for selected members of management. The Plans were effective January 1, 2011 and provide for cash and/or equity benefits if certain performance targets are achieved. Equity awards issued under these plans will reduce the amount of the awards available to be issued under the 2010 Equity Plan.

In March 2012, the Company approved a 2012 STIP and a 2012 LTIP for selected members of management. The plans were effective January 1, 2012 and provide for cash and/or equity benefits if certain performance targets are achieved. Equity awards issued under these plans will reduce the amount of awards available to be issued under the 2010 Equity Plan.

Under the 2011 and 2012 STIPs the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate and/or market area performance targets during the calendar year. The final value of the awards to be made under the 2012 STIP will be determined as of December 31 of each year and will be paid out in cash and/or equity, as elected by the participant, in accordance with the following vesting schedule: 50% in the first quarter after the calendar year, 25% on the one-year anniversary of the grant date, and 25% on the second-year anniversary. The participants are required to be employed on the day of payout in order to receive an award. In December 2012, the Company amended the 2011 STIP and accelerated the payout, so that the remaining 50% of the award was paid in December 2012, rather than 25% at the beginning of 2013 and 25% at the beginning of 2014.

Under the 2011 and 2012 LTIPs the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets either over a two or three year period. The final amount of benefit under the 2011 LTIP was determined as of December 31, 2012 and the final amount of benefit under the 2012 LTIP will be determined as of December 31, 2014. The benefits earned under the plans will be paid out in cash and/or equity, as elected by the participant, in the first quarter following the close of the performance period. The participants are required to be employed on the day of payout in order to receive the payment.

In March 2013, the Company approved a 2013 STIP and a 2013 LTIP for selected members of management. Under the 2013 STIP the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of awards earned under the 2013 STIP will be determined as of December 31, 2013 and will be paid out in cash in the first quarter of 2014. The participants are required to be employed on the day of payout in order to receive such payment.

Under the 2013 LTIP the participants may earn up to 25% to 45% of their salary, depending upon their position, for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three year period. The Company granted 86,065 RSUs to the participants in this plan effective January 1, 2013, which represents the maximum target award. The amount of benefit under the 2013 LTIP will be determined individually at the 12 month period ending December 31, 2013, the 24 month period ending December 31, 2014 and the 36 month period ending December 31, 2015. The awards’ vesting will be as follows: 16.7% of the target award after the end of the performance period ending December 31, 2013, 27.8% of the target award at the end of the performance period ending December 31, 2014 and 55.5% of the target award at the end of the performance period ending December 31, 2015. The RSUs shall vest between 0% and 100% of the applicable portion of the target award based on the portion of the performance targets that are achieved. RSUs settle in common shares in the first quarter following the close of the applicable performance period. The participants are required to be employed on the day of payout in order to receive the payment. Equity awards issued under these plans will reduce the amount of awards available to be issued under the 2010 Equity Plan.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on historical volatilities of the Company’s common shares. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free

interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. There were no stock options granted in 2013, 2012 or 2011.

Following is activity under the plans during 2013:

Stock options:	Options Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2013	312,350	$	20.33
Forfeited or cancelled	(22,000)		22.31
Exercised	(39,330)		16.55
Granted	-		-
Options outstanding, December 31, 2013	251,020	$	20.75	3.16	$	1,415
Vested or expected to vest at December 31, 2013	251,020	$	20.75	3.16	$	1,415
Exercisable at December 31, 2013	240,350	$	21.26	3.06	$	1,239

Information related to the stock option plans follows:

	Year Ended December 31
	2013		2012		2011

	(in thousands, except per share amounts)
Intrinsic value of options exercised	$	310	$	4	$	1
Cash received from option exercises		350		5		11
Tax benefit realized from option exercises		54		-		-
Weighted average fair value of options granted		-		-		-

As of December 31, 2013, there was $6,000 of total unrecognized compensation costs related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 0.3 years.

At December 31, 2013, 106,061 RSU’s were outstanding. Compensation expense is recognized over the performance period based on the achievement of established targets. Total expense of $1.0 million, $677,000 and $492,000 was recorded during the years ended December 31, 2013, 2012 and 2011, respectively, and approximately $540,000 and $530,000 is included within other liabilities at December 31, 2013 and 2012, respectively, related to the STIPs and LTIPs.

	Restricted Stock Units			Stock Grants
		Weighted-Average			Weighted-Average
		Grant Date			Grant Date
Unvested Shares	Shares	Fair Value		Shares	Fair Value

Unvested at January 1, 2013	38,871	$	14.74	11,260	$	13.28
Granted	91,187		19.42	20,639		15.77
Vested	(20,639)		15.77	(31,899)		14.89
Forfeited	(3,358)		11.97	-		-
Unvested at December 31, 2013	106,061	$	18.66	-	$	-

The maximum amount of compensation expense that may be earned for the 2013 STIP and the 2012 and 2013 LTIPs at December 31, 2013 is approximately $2.9 million. However, the estimated expense expected to be earned as of December 31, 2013 based on the performance measures in the plans, is $1.9 million of which $787,000 is unrecognized at December 31, 2013 and will be recognized over the remaining performance period.

As of December 31, 2013 and 2012, 202,405 and 290,234 shares, respectively, were available for grant under the Company’s stock option plans. Options forfeited or cancelled under all plans except the 2010 plan are no longer available for grant to other participants.