Stock Option Plans

12 Months Ended

Dec. 31, 2011

Note 15.

Stock Option Plans

Cornerstone has stock option plans which are more fully described below. For the years ended December 31, 2011, 2010 and 2009, Cornerstone recognized $79,140, $74,612 and $216,600, respectively, in compensation expense for all stock options.

No options were granted during 2010. For the years ended December 31, 2011 and 2009, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Years Ended December 31,
	2011			2009

Dividend yield		0.00	%		2.97	%
Expected life		7.0 years			7.0 years
Expected volatility		43.11	%		38.74	%
Risk-free interest rate		2.81	%		2.69	%

The expected volatility is based upon historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on Cornerstone’s history and expectation of dividend payouts.

Board of Directors plan:

Cornerstone has a stock option plan under which members of the Board of Directors, at the formation of the Bank, were granted options to purchase a total of up to 600,000 shares of common stock. Only non-qualified stock options may be granted under the Plan. In addition, members of the Board of Directors can be issued options under the Cornerstone 2002 Long-Term Incentive Plan to purchase up to 1,200,000 shares of Cornerstone stock. The options available for issuance to Board members under the 2002 Long-Term Incentive Plan are shared with officers and employees of Cornerstone. The exercise price of each option equals the market price of Cornerstone’s stock on the date of grant and the option’s maximum term is ten years, at which point they expire. Vesting for options granted during 2009, are 50% on each of the first and second anniversary of the grant date with full vesting occurring at the second anniversary date. At December 31, 2011, there is no additional compensation cost to be recognized as all opinions are fully vested. An analysis of this stock option plan is presented in the following table:

	Years Ended December 31,
	2011						2010				2009
			Average		Aggregate				Average					Average
			Exercise		Intrinsic				Exercise					Exercise
	Shares		Price		Value(1)		Shares		Price		Shares			Price

Outstanding at beginning of year		100,250	$	9.42				100,250	$	9.42		81,800		$	10.73
Granted		-		-				-		-		20,500			3.65
Exercised		-		-				-		-		-			-
Forfeited		45,000		13.65				-		-		(2,050	)		3.65
Outstanding at end of year		55,250	$	5.98	$	-		100,250	$	9.42		100,250		$	9.42
Options exercisable at year-end		55,250	$	5.98	$	-		91,025	$	10.01		75,400		$	10.96
Weighted-average fair value of options granted during the year	$	-					$	-			$	1.13

Board of Directors plan: (continued)

(1)

The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. This amount changes based on changes in the market value of Cornerstone's stock.

Information pertaining to options outstanding at December 31, 2011, is as follows:

				Options Outstanding			Options Exercisable
				Weighted	Weighted				Weighted
				Average	Average				Average
Exercise		Number		Remaining	Exercise		Number		Exercise
Prices		Outstanding		Life	Price		Exercisable		Price

$	5.44		16,000	2.2 Years	$	5.44		16,000	$	5.44
	9.23		8,000	3.2 Years		9.23		8,000		9.23
	7.99		12,800	6.2 Years		7.99		12,800		7.99
	3.65		18,450	7.2 Years		3.65		18,450		3.65

Outstanding at end of year			55,250	4.9 Years	$	5.98		55,250	$	5.98

The total fair value of shares that vested during 2011, 2010 and 2009 was approximately $11,900, $34,000 and $45,000, respectively.

Officer and Employee Plans:

Cornerstone has two stock option plans, the 1996 Cornerstone Statutory and Non-statutory Option Plan and the Cornerstone 2002 Long-Term Incentive Plan, under which officers and employees can be granted incentive stock options or non-qualified stock options to purchase a total of up to 220,000 and 1,200,000 shares, respectively, of Cornerstone’s common stock. The option price for incentive stock options shall be not less than 100 percent of the fair market value of the common stock on the date of the grant. The non-qualified stock options may be equal to or more or less than the fair market value of the common stock on the date of the grant. The stock options vest at 30 percent on the second and third anniversaries of the grant date and 40 percent on the fourth anniversary of the grant date. These options expire ten years from the grant date. At December 31, 2011, the total remaining compensation cost to be recognized on non-vested options is approximately $321,000. An analysis of the activity for each of the years ending December 31, 2011, 2010 and 2009, for this stock option plan follows:

Officer and Employee Plans: (continued)

	Years Ended December 31,
	2011							2010					2009
				Average		Aggregate					Average					Average
				Exercise		Intrinsic					Exercise					Exercise
	Shares			Price		Value(1)		Shares			Price		Shares			Price

Outstanding at beginning of year		520,900		$	5.79				799,675		$	6.18		755,425		$	6.63

Granted		221,000			1.67				-			-		115,850			3.65

Exercised		-			-				-			-		-			-

Forfeited		(169,300	)		4.31				(278,775	)	$	6.90		(71,600	)		6.77

Outstanding at end of year		572,600		$	4.63	$	-		520,900		$	5.79		799,675		$	6.18

Options exercisable at year-end		295,415		$	6.67	$	-		385,270		$	5.88		592,648		$	5.69

Weighted-average fair value of options granted during the year	$	.95						$	-				$	1.13

(1)

Information pertaining to options outstanding at December 31, 2011, is as follows:

		Options Outstanding					Options Exercisable
				Weighted	Weighted				Weighted
				Average	Average				Average
Exercise		Number		Remaining	Exercise		Number		Exercise
Price		Outstanding		Life	Price		Exercisable		Price

$	3.63		91,800	0.8 Years	$	3.63		91,800	$	3.63
	5.44		70,640	2.2 Years		5.44		70,640		5.44
	9.23		43,910	3.2 Years		9.23		43,910		9.23
	13.25		21,000	4.2 Years		13.25		21,000		13.25
	15.25		14,450	5.2 Years		15.25		14,450		15.25
	15.20		2,750	5.3 Years		15.20		2,750		15.20
	7.99		47,500	6.2 Years		7.99		28,500		7.99
	3.60		74,550	7.2 Years		3.60		22,365		3.60
	1.70		193,000	9.3 Years		1.70		-		-
	1.55		3,000	9.3 Years		1.55		-		-
	1.10		5,000	9.7 Years		1.10		-		-
	1.02		5,000	9.9 Years		1.02		-		-

Outstanding at end of year			572,600	5.7 Years	$	4.63		295,415	$	6.67

Officer and Employee Plans: (continued)

Information pertaining to non-vested options for the year ended December 31, 2011, is as follows:

				Weighted Average
	Number			Grant Date
	of Shares			Fair Value

Non-vested options, December 31, 2010		135,630		$	5.49
Granted		221,000			1.67
Vested		(43,495	)		6.91
Forfeited		(35,950	)		3.55

Non-vested options, December 31, 2011		277,185		$	2.47

The total fair value of shares that vested during 2011, 2010 and 2009 was approximately $56,000, $125,000 and $288,000, respectively.