4. 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 replaced all pre-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 June 30, 2015, 96,820 options are 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 2014, the Company approved a 2014 Short-Term (“STIP”) Equity Incentive Plan and a 2014 Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.

Under the 2014 STIP, the participants may earn up to 30% 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 benefits under the 2014 STIP were determined as of December 31, 2014 and paid out in cash in the first quarter of 2015. The participants are required to be employed on the day of payout in order to receive such payment.

Under the 2014 LTIP, the participants may earn up to 20% to 45% of their salary 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 30,538 RSU’s to the participants in the 2014 LTIP effective January 1, 2014, which represents the maximum target award. The amount of benefit under the 2014 LTIP will be determined individually at the end of the 36 month performance period ending December 31, 2016. The awards will vest at the end of the performance period ending December 31, 2016. The benefits earned under the 2014 LTIP will be paid out in equity in the first quarter of 2017. The participants are required to be employed on the day of payout in order to receive such payment.

In 2015, the Company approved a 2015 STIP and a 2015 LTIP for selected members of management.

Under the 2015 STIP, the participants may earn up to 30% 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 benefits under the 2015 STIP will be determined as of December 31, 2015 and will be paid out in cash in the first quarter of 2016. The participants are required to be employed on the day of payout in order to receive such payment.

Under the 2015 LTIP, the participants may earn up to 20% to 45% of their salary 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 24,757 RSU’s to the participants in the 2015 LTIP effective January 1, 2015, which represents the maximum target award. The amount of benefit under the 2015 LTIP will be determined individually at the end of the 36 month performance period ending December 31, 2017. The awards will vest at the end of the performance period ending December 31, 2017. The benefits earned under the 2015 LTIP will be paid out in equity in the first quarter of 2018. The participants are required to be employed on the day of payout in order to receive such payment.

In the second quarter of 2015, the Company granted 2,160 restricted shares to directors. These shares have a one-year vesting period.

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 stock. 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.

The fair value of stock options granted during the six months ended June 30, 2015 was determined at the date of grant using the Black-Scholes stock option-pricing model and the following assumptions:

	Six Months ended
	June 30, 2015		June 30, 2014
Expected average risk-free rate	2.04	%	1.64	%
Expected average life	10.00 years		7.44 years
Expected volatility	42.00	%	44.62	%
Expected dividend yield	2.10	%	2.17	%

The weighted-average fair value of options granted was $13.13 for the six months ended June 30, 2015 and $11.25 for the six months ended June 30, 2014.

Following is activity under the plans during the six months ended June 30, 2015:

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, 2015		173,720	$	20.80
Forfeited or cancelled		(5,100)		25.36
Exercised		(78,050)		22.01
Granted		6,250		32.94
Options outstanding, June 30, 2015		96,820	$	20.37		3.72	$	1,661
Vested or expected to vest at June 30, 2015		96,820	$	20.37		3.72	$	1,661
Exercisable at June 30, 2015		82,170	$	18.74		2.77	$	1,544

As of June 30, 2015, there was $157,000 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 4.06 years.

At June 30, 2015, 74,545 RSU’s and 7,927 stock grants were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established with the plan documents. A total expense of $477,000 was recorded during the six months ended June 30, 2015 compared to an expense of $130,000 for the same period in 2014. The lower expense in the first six months of 2014 was due to accrual reversals primarily from the 2013 LTIP adjusting for the actual payout in year one as well as adjusting the estimated payouts in year two and three. There was approximately $193,000 included within other liabilities at June 30, 2015 related to the STIP.

	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, 2015		91,812	$	21.00		5,767	$	25.97
Granted		24,757		32.30		15,006		19.51
Vested		(12,846)		17.20		(12,846)		17.20
Forfeited		(29,178)		19.48		-		-
Unvested at June 30, 2015		74,545	$	25.86		7,927	$	27.95

The maximum amount of compensation expense that may be recorded for the 2015 STIP and the 2013, 2014 and 2015 LTIPs at June 30, 2015 is approximately $3.6 million. However, the estimated expense expected to be recorded as of June 30, 2015 based on the performance measures in the plans, is $1.8 million of which $967,000 is unrecognized at June 30, 2015 and will be recognized over the remaining performance periods.