21. Stock Option Plans

First Defiance has established incentive stock option 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 the 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 option or restricted share awards.

As of December 31, 2011, 317,800 options have been granted 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 officer's, which vest 40% in 2011 and then 20% annually, subject to certain other limitations required by the Emergency Economic Stabilization Act of 2008. All options expire ten years from date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

On August 15, 2011, the Company approved a Short-Term and a Long-Term Equity Incentive Plan for selected members of management. The Plans are effective January 1, 2011 and provide for cash and/or equity benefits if certain performance targets are achieved. Awards issued under these Plans will reduce the amount of awards available to be issued under the 2010 Equity Plan.

The Short-Term Equity Incentive Plan includes nine members of management. These participants may earn up to 25% to 45% of their 2011 salary for potential payout under the Short-Term Equity Incentive Plan. The final amount of benefit was determined at December 31, 2011 based on the achievement of certain targets which each contribute from 10% to 25% of the total potential benefit earned. The targets include diluted earnings per share, net charge offs to average loans, non-performing assets to total assets, classified assets to total assets, return on average equity and return on average assets. Two of the Participants in the Plan are high-compensated employees ("HCE's") who are not eligible to receive cash payments and therefore their total potential benefit will be paid out as restricted share awards. These participants earned a total of 13,554 awards as a result of targets being achieved. The expense associated with payment of these awards was considered an equity arrangement for accounting purposes and was accounted for as a component of equity. For the year ended December 31, 2011 total expense of $162,000 has been recorded through equity associated with the estimated benefits to these participants. The remaining participants have the option to receive their potential benefits in cash, restricted share awards, or a combination thereof. Accordingly any expense associated with payment of these benefits is considered a liability award for accounting purposes and will be accounted for as an accrued liability. For the year ended December 31, 2011 total expense of $220,000 was recorded and is included within other liabilities. The benefits earned under this plan will be paid out as follows 50% in the first quarter of 2012, 25% in the first quarter of 2013, and 25% in the first quarter of 2014. The participants are required to be employed on the day of payout in order to receive such payment.

The Long-Term Equity Incentive Plan includes nine members of management. These participants may earn up to 25% to 45% of their 2011 salary for potential payout under the Long-Term Equity Incentive Plan. The final amount of benefit will be determined at December 31, 2012 based on the achievement of certain targets which each contribute from 33% to 34% of the total potential benefit earned. The targets include a peer comparison of return on average equity, earnings per share growth and revenue growth. Two of the Participants in the Plan are high-compensated employees ("HCE's") who are not eligible to receive cash payments and therefore their total potential benefit will be paid out as restricted share awards. These participants may earn up to a maximum of 13,554 awards if all targets are achieved. Any estimated expense associated with payment of these awards is considered an equity arrangement for accounting purposes and will be accounted for as a component of equity. For the year ended December 31, 2011 total expense of $49,000 has been recorded through equity associated with the estimated benefits to these participants. The remaining participants have the option to receive their potential benefits in cash, restricted share awards, or a combination thereof. Accordingly any expense associated with payment of these benefits is considered a liability award for accounting purposes and will be accounted for as an accrued liability. For the year ended December 31, 2011 total expense of $60,000 was recorded and is included within other liabilities. The benefits earned under this plan will be paid out in full in the first quarter of 2013. The participants are required to be employed on the day of payout in order to receive such payment.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model using the assumptions noted in the table below. 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 options granted was determined using the following weighted-average assumptions as of grant date.

Year Ended December 31

2011

2010

2009

Risk-free interest rate

—

1.57

3.38

Expected term

—

7.2 years

6.4 years

Expected stock price volatility

—

44.6

26.1

Dividend yield

—

0.00

3.62

The following table summarizes stock option activity for 2011:


	Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in $000s)
Outstanding at January 1, 2011		415,000	$	19.17
Granted		—		—
Exercised		850		12.59
Forfeited/Expired		96,350		15.34

Outstanding at December 31, 2011		317,800	$	20.35		4.94	$	317

Vested or expected to vest at December 31, 2011		317,800	$	20.35		4.94	$	317

Exercisable at December 31, 2011		238,840	$	22.30		4.33	$	118

Information related to the stock option plans follows:


	Year Ended December 31.
	2011		2010		2009
	*(in thousands, except per share amounts)*
Intrinsic value of options exercised	$	1	$	1	$	1
Cash received from option exercises		11		3		5
Tax benefit realized from option exercises		—		—		—
Weighted average fair value of options granted		—	$	4.05	$	1.88

As of December 31, 2011, there was $122,000 of total unrecognized compensation cost related to non-vested stock options granted under the Company Stock Option Plans. The cost is expected to be recognized over a weighted-average period of 1.9 years.

In March 2011, First Defiance granted restricted stock awards ("RSA") under the 2010 Equity Plan, which provides for the issuance of shares to directors, officers and employees. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock was determined using the closing price of First Defiance common stock on the date of the grant. The restricted stock shares fully vest on the second anniversary of the grant date.


Unvested Shares	Shares		Weighted-Average Grant Date Fair Value Per Share
Unvested at January 1, 2011		—	$	—
Granted		18,292		12.56
Vested		—		—
Forfeited		—		—

Unvested at December 31, 2011		18,292		12.56

As of December 31, 2011, there was $39,000 of total unrecognized compensation cost related to unvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.18 years.

As of December 31, 2011 and 2010, 326,708 and 345,000 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