4. Stock Compensation Plans

First Defiance has established equity based compensation plans for its directors and employees. On February 27, 2018, the Board adopted, and the shareholders approved at the 2018 Annual Shareholders Meeting, the First Defiance Financial Corp. 2018 Equity Incentive Plan (the “2018 Equity Plan”). The 2018 Equity Plan replaced all existing plans, although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the 2018 Equity Plan was approved. 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 2018 Equity Plan. The 2018 Equity Plan allows for issuance of up to 900,000 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, 2019, 20,200 options to acquire First Defiance shares were outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted vest 20% per year. 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.

The Company approved a Short-Term Incentive Plan (“STIP”) and a Long-Term Equity Incentive Plan (“LTIP”) for selected members of management.

Under the 2018 and 2019 STIPs, the participants could earn between 10% 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 STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year. The participants are required to be employed on the day of payout in order to receive the payment.

Under each LTIP, the participants could earn between 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 41,676 and 69,014 RSUs to the participants in the 2018 and 2019 LTIPs, respectively, effective January 1 in the year the award was made, which represents the maximum target award. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive the payment. A total of 48,363 RSUs were issued to the participants of the 2016 LTIP in the first quarter of 2019 for the three year performance period ended December 31, 2018.

In the six months ended June 30, 2019, the Company also granted to employees 13,916 RSUs and 24,651 shares of restricted stock. Of the 24,651 restricted shares granted, 5,258 were issued to directors and have a one-year vesting period. The remaining 19,393 were issued to employees and have a three-year vesting period. The fair value of all granted restricted shares was determined by the stock price on the date of the grant.

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.

There were no options granted during the three or six months ended June 30, 2019, or June 30, 2018.

Following is stock option activity under the plans during the six months ended June 30, 2019:


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate Intrinsic
		Exercise		Contractual	Value
	Options Outstanding	Price		Term (in years)	(in 000’s)
Options outstanding, January 1, 2019	39,400	$	14.00
Forfeited or cancelled	—		—
Exercised	(19,200)		10.15
Granted	—		—
Options outstanding, June 30, 2019	20,200	$	17.66	5.27	$	221
Vested or expected to vest at June 30, 2019	20,200	$	17.66	5.27	$	221
Exercisable at June 30, 2019	14,500	$	17.48	4.90	$	161

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Proceeds of options exercised	$	6	$	55	$	191	$	111
Related tax benefit recognized		—		6		4		28
Intrinsic value of options exercised		30		781		390		1,034

As of June 30, 2019, there was $27,000 of total unrecognized compensation cost 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 1.3 years.

At June 30, 2019, 160,995 RSUs and 48,919 restricted stock grants were unvested. Compensation expense is recognized over the performance period based on the achievements of targets as established under the plan documents. A total expense of $437,000 and $960,000 was recorded during the three and six months ended June 30, 2019 compared to an expense of $343,000 and $907,000 for the three and six months ended June 30, 2018. There was approximately $457,000 and $961,000 included within other liabilities at June 30, 2019 and December 31, 2018, respectively, 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, 2019	144,586	$	23.94	30,372	$	28.48
Granted	82,930		25.61	78,922		22.25
Vested	(54,771)		20.13	(60,375)		21.17
Forfeited	(11,750)		25.63	—		—
Unvested at June 30, 2019	160,995	$	25.72	48,919	$	27.18

The maximum amount of compensation expense that may be recorded for the 2019 STIP and the active LTIPs at March 31, 2019, is approximately $4.8 million. However, the estimated expense expected to be recorded as of June 30, 2019, based on the performance measures in the plans, is $3.8 million of which $2.0 million is unrecognized at June 30, 2019, and will be recognized over the remaining performance periods.