12. Commitments, Contingencies and Concentrations of Risk

Legal Proceedings — In February 2004, the Bank was named in a class action lawsuit titled, “James Baker v. Century Financial, et al”, alleging various violations of Missouri’s Second Mortgage Loans Act (the “Missouri Act”) by charging and receiving fees and costs that were either wholly prohibited by or in excess of that allowed by the Missouri Act relating to origination fees, interest rates, and other charges. The class action lawsuit was filed in the Circuit Court of Clay County, Missouri. The complaint seeks restitution of all improperly collected charges, interest plus the right to rescind the mortgage loans or a right to offset any illegal collected charges, interest against the principal amounts due on the loans and punitive damages. In March 2005, the Bank’s motion for dismissal due to limitations was denied by the trial court without comment. The Bank’s “preemption” motion was denied in August 2006. The Bank has answered the plaintiffs’ complaint and the parties have exchanged and answered initial discovery requests. When the record is more fully developed, the Bank intends to raise the limitations issue again in the form of a motion for summary judgment.

In October 2012, a lawsuit was filed against the bank by a former employee, alleging wrongful termination on the basis of race, gender and disability (pregnancy). The plaintiff further alleges that the Bank did not reasonably accommodate her pregnancy or take reasonable steps necessary to prevent the alleged discrimination, harassment and retaliation. The lawsuit was filed in Orange County Superior Court. The complaint demands an unspecified amount of damages. The parties have agreed to arbitrate this matter with the American Arbitration Association.

The Company is not involved in any other pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.

Lease Commitments — The Company leases a portion of its facilities from non-affiliates under operating leases expiring at various dates through 2028. The following schedule shows the minimum annual lease payments, excluding any renewals and extensions, property taxes, and other operating expenses, due under these agreements:

	Year ending December 31,
	(in thousands)
2013	$	1,181
2014	2,280
2015	2,302
2016	2,049
2017	1,894
Thereafter	6,264
Total	$	15,970

Rental expense under all operating leases totaled $1.2 million for 2012, $926,000 for 2011, and $676,000 for 2010.

Share-Based Compensation — The following table provides a summary of the expenses the Company has recognized related to share-based compensation awards. The table below also shows the impact those expenses have had on diluted earnings per share and the remaining expense associated with those awards for the years ended December 31:

	2012		2011		2010
	(in thousands, except per share data)
Share-based compensation expense:
Stock option expense	$	177	$	208	$	86
Total share-based compensation expense	177		208		86
Total share-based compensation expense, net of tax	$	104	$	123	$	51

Diluted shares outstanding	10,984,034		10,630,720		11,057,404
Impact on diluted earnings per share	$	0.010	$	0.012	$	0.005

Unrecognized compensation expense:
Stock option expense	$	779	$	86	$	26
Total unrecognized share-based compensation expense	779		86		26
Total unrecognized share-based compensation expense, net of tax	$	460	$	51	$	15

Employment Agreements—The Company has entered into a three-year employment agreement with its Chief Executive Officer (“CEO”). This agreement provides for the payment of a base salary and a bonus based upon the CEO’s individual performance and the Company’s overall performance, provides a vehicle for the CEO’s use, and provides for the payment of severance benefits upon termination under specified circumstances. Additionally, the Bank has entered into three-year employment agreements with the following executive officers: Chief Banking Officer, the Chief Financial Officer and the Chief Credit Officer. The agreements provide for the payment of a base salary, a bonus based upon the individual’s performance and the overall performance of the Bank and the payment of severance benefits upon termination under specified circumstances.

Availability of Funding Sources—The Company funds substantially all of the loans, which it originates or purchases, through deposits, internally generated funds, and/or borrowings. The Company competes for deposits primarily on the basis of rates, and, as a consequence, the Company could experience difficulties in attracting deposits to fund its operations if the Company does not continue to offer deposit rates at levels that are competitive with other financial institutions. To the extent that the Company is not able to maintain its currently available funding sources or to access new funding sources, it would have to curtail its loan production activities or sell loans and investment securities earlier than is optimal. Any such event could have a material adverse effect on the Company’s results of operations, financial condition and cash flows.