10-K 1 ophc-10k_123112.htm ANNUAL REPORT ophc-10k_123112.htm

Washington, D.C. 20549
For the fiscal year ended December 31, 2012
Commission File Number: 000-50755
(Exact name of registrant as specified in its charter) 
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2477 East Commercial Blvd., Fort Lauderdale, FL 33308
(Address of principal executive offices)
Registrant’s telephone number, including area code: (954) 776-2332
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1993. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer     o
Accelerated filer     o
Non-accelerated filer       o
Smaller reporting company     x
(Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No x
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (21,795,217 shares) on June 30, 2012, was approximately $13,949,000, computed by reference to the closing market price at $0.64 per share as of June 30, 2012. For purposes of this information, the outstanding shares of common stock owned by directors and executive officers of the registrant were deemed to be shares of common stock held by affiliates.
The number of shares of common stock, par value $0.01 per share, of the registrant outstanding as of March 27, 2013 was 31,511,201 shares.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 2013, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the issuer’s fiscal year end are incorporated by reference into Part III, Items 10 through 14, of this Annual Report on Form 10-K.


PART I      
Item 1.   1  
Item 2.     19  
Item 3.     19  
Item 4.     19  
PART II        
Item 5.     20  
Item 6.     21  
Item 7.     22  
Item 8.     41  
Item 9.     83  
Item 9A(T).     83  
Item 9B.     84  
PART III        
Item 10.     85  
Item 11.     85  
Item 12.     85  
Item 13.     86  
Item 14.     86  
PART IV        
Item 15.     87  

Forward-Looking Statements
We have made forward-looking statements in this Annual Report about the financial condition, results of operations, and business of our company. These statements are not historical facts and include expressions concerning the future that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among other things, the following possibilities:
•          general economic conditions, either nationally or regionally, that are less favorable than expected resulting in, among other things, a deterioration in credit quality and an increase in credit risk-related losses and expenses;
•          changes in the interest rate environment that reduce margins;
•          competitive pressure in the banking industry that increases significantly;
•          changes that occur in the regulatory environment; and
•          changes that occur in business conditions and the rate of inflation.
When used in this Annual Report, the words "believes," "estimates," "plans," "expects," "should," "may," "might," "outlook," and "anticipates," as well as similar expressions, as they relate to OptimumBank Holdings, Inc., or its management, are intended to identify forward-looking statements.
OptimumBank Holdings, Inc. is a Florida corporation (the "Company") formed in 2004 as a bank holding company for OptimumBank (the "Bank"). The Company's only business is the ownership and operation of the Bank and its Bank’s subsidiaries. The Bank is Florida state chartered bank established in 2000, with deposits insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank offers a variety of community banking services to individual and corporate customers through its three banking offices located in Broward County, Florida. The Bank has 17 wholly-owned subsidiaries primarily engaged in holding and disposing of foreclosed real estate and one subsidiary primarily engaged in managing foreclosed real estate.
The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). OptimumBank is subject to the supervision and regulation of the State of Florida Office of Financial Regulation ("OFR") and the FDIC. OptimumBank is a member of the Federal Home Loan Bank of Atlanta.
At December 31, 2012, the Company had total assets of $143.7 million, net loans of $85.2 million, total deposits of $101.6 million and stockholders' equity of $6.9 million. During 2012, the Company incurred a net loss of $4.7 million.

Recent Developments
Consent Order and Written Agreement.
On April 16, 2010, the Bank agreed to the issuance of the Consent Order by the FDIC and the OFR (the “Consent Order”), which required the Bank to take certain measures to improve its safety and soundness. Under the Consent Order, the Bank was required to take certain measures to improve its capital position, reduce its level of problem assets, reduce its loan concentrations in certain portfolios, improve management practices and board supervision and assure that its reserve for loan losses is maintained at an appropriate level. Among the corrective actions required were for the Bank to have and maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12% beginning 90 days from the issuance of the Consent Order.
In addition to the Consent Order, on June 22, 2010, the Company entered into the Written Agreement, with the Federal Reserve Bank of Atlanta, which required the Company to take certain measures to ensure the Bank complied with the Consent Order. Under the Written Agreement, the Company is subject to restrictions on paying interest on debt, or paying dividends or distributions on stock, including its common stock, as well as incurring additional debt or redeeming stock. Additional details on the Consent Order and the Written Agreement are contained in “Business-Supervision and Regulation- Consent Order- and -Written Agreement.”
In order to address the capital requirements of the Consent Order, during 2011 and 2012, the Company sold approximately 30.6 million shares of its common stock in a private placement offering. The Company received net proceeds of approximately $12.3 million through the sale of approximately 30,639,250 shares at a price of $0.40 per share. The Company contributed approximately $12.0 million of the net proceeds to the Bank.
At December 31, 2012, after giving effect to $12.3 million in the new capital, the Bank had a Tier 1 leverage ratio of 8.12%, which exceeded the 8% requirement of the Consent Order and a total risk-based capital ratio of 11.48%, which was below the 12% requirement of the Consent Order. At December 31, 2012, the Bank would have needed approximately $600,000 in additional capital in order to comply with the total risk-based capital ratio requirement of the Consent Order. Additional information on the Bank’s capital adequacy is contained in “Item 7- Management’s Discussion and Analysis of Results of Operations and Financial Condition.”
Proposed Sale of Shares to Moishe Gubin.
In the fourth quarter of 2011, the Company entered into an agreement with Moishe Gubin, the Chairman of our Board of Directors, to sell 6,750,000 shares to Mr. Gubin at a price of $0.40 per share, or a total of $2.7 million. In March 2013, the Company and Mr. Gubin amended this agreement to increase the number of shares to be purchased to 7,333,333, to decrease the price to $0.30 per share and to extend the outside closing date to September 30, 2013. The Company is seeking to complete the transaction with Mr. Gubin in order to assist the Bank in meeting the capital requirements of the Consent Order and to increase its lending and investment portfolio.
The amended transaction with Mr. Gubin is subject to approval by the Federal Reserve Board of Governors and the OFR. Although Mr. Gubin has filed the required applications with Federal Reserve and the OFR, together with several amendments, these agencies have not yet approved the applications. At the time present, neither the Company nor Mr. Gubin is able to predict when or if the applications will be approved.

The amended transaction with Mr. Gubin is also subject to approval by the shareholders of the Company. The Company expects to submit the issue to the shareholders for approval at the Company’s 2013 annual meeting.
If the required regulatory approvals are received, the Company would receive proceeds from the transaction of $2.2 million. The agreement terminates if the conditions are not fulfilled and the closing does not occur by September 30, 2013. Substantially all the proceeds from the transaction will be utilized by the Company to increase the capital of the Bank.
As of March 15, 2013, the Company had 31,511,201 outstanding shares of common stock, including 2,612,143 shares that were beneficially owned by Mr. Gubin. Upon the issuance of 7,333,333 additional shares of Company’s common stock to Mr. Gubin, and assuming no other issuance of shares of Company common stock, Mr. Gubin would own approximately 9,945,476 shares of the Company’s common stock, or 25.6% of the total outstanding shares.
If the $2.2 million proceeds of the transaction with Mr. Gubin had been contributed to the Bank as of December 31, 2012, the Bank’s tier 1 leverage and total risk-based capital ratios (on a pro forma basis) would have improved to 9.6% and 13.3%, respectively.
The actual improvement in the Bank’s capital ratios after the transaction of Mr. Gubin is completed will depend on the closing date of the Gubin Transaction; the level of the Bank’s assets and liabilities at that time, the amount of the Bank’s losses between December 31, 2012 and the date of the closing, and the amount of any additional capital received from other sources.
The additional $2.2 million in capital from Mr. Gubin is expected to provide the Company and the Bank with additional working capital to implement the Bank’s business plan, including addressing non-performing loans and funding expanded lending and investment activities.
The Board has agreed to amend the terms of the transaction with Mr. Gubin in order to reduce the price per share from $0.40 per share to $0.30 per share, and to increase the number of shares to be purchased from 6,750,000 shares to 7,333,333 shares. The Company has agreed to these changes because of the continuing losses incurred by the Company in 2012 and the decrease of the Company’s book value per share from $0.30 at December 31, 2011 to $0.22 at December 31, 2012. The Company agreed to increase the number of shares to be purchased in order to partially offset the decrease in the net proceeds of the sale to Mr. Gubin.
Banking Products
Our revenues are primarily derived from interest on, and fees received in connection with, real estate, and other loans, and from interest from mortgage-backed securities and short-term investments. The principal sources of funds for our lending activities are deposits, borrowings, repayment of loans, and the repayment, or maturity of investment securities. Our principal expenses are the interest paid on deposits, and operating and general administrative expenses.
As is the case with banking institutions generally, our operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. We face strong competition in attracting deposits (our primary source of lendable funds) and originating loans.

We provide a range of consumer and commercial banking services to individuals and businesses. The basic services we offer include: demand interest-bearing and noninterest-bearing accounts, money market deposit accounts, NOW accounts, time deposits, credit cards, cash management, direct deposits, notary services, money orders, night depository, travelers' checks, cashier's checks, domestic collections, savings bonds, bank drafts, automated teller services, drive-in tellers, and banking by mail. In addition, we make residential and commercial real estate loans and consumer loans. We provide ATM cards, as a part of the Star, Presto and Cirrus networks, thereby permitting customers to utilize the convenience of ATMs worldwide. We do not have trust powers and provide no trust services.
Our continuing goal is to become one of the leading community banking organizations in Broward County, Florida through steady, reasonable and controlled growth and a prudent operating strategy.
Our operating and business strategy emphasizes:
·   Local management and local decision making resulting in rapid, personalized customer service, rapid credit decisions and expedited closings;
·   Maintaining our presence in Broward County through a branch network- we currently have three branch banking offices in Broward County;
·   Real estate, commercial and consumer lending activities by originating adjustable rate residential and commercial mortgage loans, commercial loans, and consumer loans for our customers;
·   Maintaining high credit quality through strict underwriting criteria, our knowledge of the real estate values and borrowers in our market area;
·   Personalized products and service - we strive to provide innovative financial products, high service levels and to maintain strong customer relationships. We seek customers who prefer to conduct business with a locally owned and managed institution.
Our management is focusing its efforts on a long-term strategy with the following objectives:
·   Stabilize the Loan Portfolio- Management is devoting significant resources to the identification and workout of problem loans.
·   Increase and Diversify Loan Originations- Management is focused on increasing its loan production to add more interest bearing assets and interest income to its asset based. In addition, management is diversifying its loan originations and portfolio to include commercial and consumer loans, in addition to residential and commercial real estate loans.
·   Lower the Cost of Deposits- Management is focused on changing the Bank’s deposit mix by replacing higher cost interest bearing time deposits with non-interest bearing demand deposits.

·   Increase Capital Ratios- Management continues to seek additional sources of capital in order to increase the Bank’s capital ratios, allow the Bank to grow, implement its business plan and return to profitability.
Lending Activities
We offer real estate, commercial and consumer loans, to individuals and small businesses and other organizations that were located in or conduct a substantial portion of their business in our market area. Our market area consists of the tri-county area of Broward, Miami-Dade and Palm Beach counties. Our net loans at December 31, 2012 were $85.2 million, or 59.2% of total assets. The interest rates we charge on loans varied with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. We have no foreign loans or loans for highly leveraged transactions.
Our loan portfolio is concentrated in two major areas: residential and commercial real estate loans. As of December 31, 2012, 91.8% of our loan portfolio consisted of loans secured by mortgages on real estate, of which approximately 34.3% of the total loan portfolio was secured by one-to-four family residential properties. Our real estate loans are located primarily in our tri-county market area.
Our real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase or improvement of, or investment in, real estate. These real estate loans were made at fixed or variable interest rates and are normally adjustable rate mortgages which adjust annually after the initial three to five year period. Our fixed rate loans generally are for terms of five years or less, and are repayable in monthly installments based on a maximum 30-year amortization schedule.
Loan originations are derived primarily from director and employee referrals, existing customers and direct marketing. Loan originations have also been derived from existing customers, and referrals from existing customers, and Company directors and employees.
Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions including interest rates, and risks inherent in dealing with individual borrowers. A significant portion of our portfolio is collateralized by real estate in south Florida, and we are susceptible to local economic downturns. We attempt to minimize credit losses through various means. On larger credits, we rely on the cash flow and assets of a debtor as the source of repayment as well as the value of the underlying collateral. We also generally limit our loans to 80% of the value of the underlying real estate collateral. We generally charge a prepayment penalty if a loan is repaid within the first two to three years of origination to recover any fees we paid for the origination of the loan.
Due to the effects of the current recession, our earnings have been materially affected by required provisions for loan losses, and to a lesser degree, reduced interest income and increased loan administration expenses, stemming primarily from deterioration in our commercial real estate and land loan portfolios. For the two year period of October 2009 through September 2011, due to the need for the Bank to reduce its exposure to credit risk and preserve regulatory capital, we have limited our lending activities to restructuring, modifying, or extending existing loans and lending to purchasers of real estate properties owned by the Bank. Since completion of the capital raise in the last quarter of 2012, we have resumed lending activities.

Deposit Activities
Deposits are the major source of our funds for lending and other investment activities. We consider the majority of our regular savings, demand, NOW, money market deposit accounts and CD's under $100,000 to be core deposits. These accounts comprised approximately 72.9% of our total deposits at December 31, 2012. Approximately 61.9% of our deposits at December 31, 2012 were certificates of deposit. Generally, we attempt to maintain the rates paid on our deposits at a competitive level. Time deposits of $100,000 and over made up approximately 27.1% of our total deposits at December 31, 2012. Although these large deposits are not traditionally considered core deposits, the majority of these deposits have served as a stable source of funds in our targeted market. The majority of our deposits are generated from Broward County.
We have used brokered deposits to facilitate the funding of our mortgage lending activities in circumstances when larger than anticipated loan volumes occur and there is not enough time to fund the additional loan demand through traditional deposit solicitation. The time frame from the initial order to the final funding of brokered deposits is generally one to three days. The rates paid on these brokered deposits are typically equal to or slightly less than the high end of the interest rates in OptimumBank's competitive market area. Since December 2009, we have no longer solicited or renewed existing brokered deposits due to regulatory restrictions. Brokered deposits amounted to 0.3% and 0.4% of our total deposits at December 31, 2012 and 2011, respectively.
Our investment securities portfolio was approximately $18.6 million and $29.0 million at December 31, 2012 and 2011, respectively, representing 12.9% and 18.8% of our total assets. At December 31, 2012, approximately 34.7% of this portfolio was invested in U.S. government agency mortgage-backed securities and 65.3% of this portfolio was invested in private mortgage-backed securities. Mortgage backed securities generally have a shorter life than the stated maturity. Our investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risk levels while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.
Federal funds sold is the excess cash we have available over and above daily cash needs. This money is invested on an overnight basis with approved correspondent banks.
Correspondent Banking
Correspondent banking involves one bank providing services to another bank which cannot provide that service for itself from an economic or practical standpoint. We are required to purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies, overline and liquidity loan participations, and sales of loans to or participations with correspondent banks.
We have established a correspondent relationship with Independent Bankers Bank of Florida. We pay for such services in cash as opposed to keeping compensating balances. We also sell loan participations to other banks with respect to loans which exceed our lending limit.
Data Processing
We outsource most of our data processing services, including an automated general ledger and deposit accounting; however, we service all our loans in-house.

Internet Banking
We maintain a website at www.optimumbank.com where customers can access account balances, view current account activity and their previous statement, view images of paid checks and transfer funds between accounts. Our website provides information regarding our Visa credit card offering.
We encounter strong competition both in making loans and in attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws which permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of our business, we compete with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that we do not currently provide. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.
To compete, we rely upon specialized services, responsive handling of customer needs, and personal contacts by our officers, directors, and staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.
As of December 31, 2012, we had 19 full-time employees, including executive officers. The employees are not represented by a collective bargaining unit. We consider relations with employees to be good.
Supervision and Regulation
Banks and their holding companies are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, regulations and enforcement actions affecting OptimumBank Holdings and OptimumBank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of our company and our bank. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders.
Consent Order. In 2008, the Company and the Bank began to experience a substantial increase in impaired and non-performing loans and associated credit losses due to the nationwide economic recession and the related drop in real estate values in south Florida. As a result, the Company’s net income for 2008 was only $520,000. These trends continued in 2009 and 2010, with the result that the Company and the Bank sustained net losses of $11.5 million in 2009 and $8.5 million in 2010, primarily from significant increases in the provision for loan losses. These operating losses have eroded OptimumBank's regulatory capital and weakened its financial condition. As a result of these losses and other related operating issues, on April 16, 2010, OptimumBank was required to enter into a Consent Order with the FDIC and Florida Office of Financial Regulation, and, on June 22, 2010, the Company was required to enter into a Written Agreement with the Federal Reserve Bank of Atlanta, or Federal Reserve.

The Consent Order imposes a number of requirements on the Bank intended to improve the Bank's condition, including a requirement that the Bank maintain a ratio of Tier 1 capital to adjusted total assets (the “Tier 1 Leverage Ratio”) of 8.0%, and a ratio of total risk based capital to risk-weighted assets of 12.0% (the “Total Risk Based Capital Ratio”). On December 31, 2011, the Bank had a Tier 1 Leverage ratio of 7.76% and a Total Risk Based Capital Ratio of 12.48%.
The Consent Order contains the following principal requirements:
·   The Bank is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer, a chief lending officer and a chief financial officer, who are given the authority to implement the provisions of the Consent Order.
·   Any proposed changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the OFR.
·   The Bank is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a minimum Tier 1 leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.
·   The Bank must undertake over a two-year period a scheduled reduction of the balance of loans classified “substandard” and “doubtful” in its 2009 FDIC examination by at least 75%.
·   The Bank is required to reduce the volume of its adversely classified private label mortgage backed securities under a plan acceptable to the FDIC and OFR.
·   The Bank must submit to the FDIC and the OFR for their review and comment a written business/strategic plan covering the overall operation of the Bank.
·   The Bank must implement a plan to improve earnings, addressing goals and strategies for improving and sustaining earnings, major areas for improvement in the Bank’s operating performance, realistic and comprehensive budgets and a budget review process.
·   The Bank must revise and implement its written lending and collection policy to provide effective guidance and control of the lending function. The Bank is required to revise, implement and incorporate recommendations of the FDIC and OFR with respect to the following policies or plans:
○     Lending and Collection Policies
○     Investment Policy
○     Liquidity, Contingency Funding and Funds Management Plan
○     Interest Rate Risk Management Policy
○     Internal Loan Review and Grading System

○     Internal Control Policy
○     A plan to reduce concentration in commercial real estate loans.
·   The Bank must develop and implement a satisfactory interest rate risk management policy that is appropriate to the size of the Bank and the complexity of its assets.
·   The Bank may not pay any dividends or bonuses without the prior approval of the FDIC.
·   The Bank may not accept, renew or rollover any brokered deposits except with the prior approval of the FDIC.
·   The Bank is required to notify the FDIC prior to undertaking asset growth of 10% or more per annum while the Consent Order remains in effect.
·   The Bank is required to file periodic progress reports with the FDIC and the OFR.
Management believes that the Bank is currently in substantial compliance with all the requirements of the Consent Order except for the following requirements:
·   Maintenance of a Tier 2 capital ratio of 12%;
·   Scheduled reduction by October 31, 2011 of 60% of loans classified as substandard and doubtful in the 2009 FDIC Examination;
·   Retention of a qualified chief executive officer; and
·   Development of a plan to reduce Bank’s concentration in commercial real estate loans acceptable to the supervisory authorities.
The Bank has implemented comprehensive policies and plans to address all of the requirements of the Consent Order and has incorporated recommendations from the FDIC and OFR into these policies and plans.
Written Agreement with the Federal Reserve. The Written Agreement between the Company and the Federal Reserve requires the Company to serve as a source of strength to certain aspects of the capitalization, operation and management of the Bank. The Company also agreed that while the Written Agreement remains in effect, without prior approval of the Federal Reserve, it will not:
·   declare or pay dividends.
·   directly or indirectly take dividends or any other form of payment representing a reduction in capital from OptimumBank.
·   make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities.
·   incur, increase, or guarantee any debt or purchase or redeem any shares of its stock.

·   appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position.
Management believes that the Company is in substantial compliance with all the provisions of the Written Agreement with the Federal Reserve.
Dodd-Frank Act. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, into law. The Dodd-Frank Act will have a broad impact on the financial services industry, including potentially significant regulatory and compliance changes including, among other things, (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) potential changes to capital and liquidity requirements; (3) changes to regulatory examination fees; (4) changes to assessments to be paid to the FDIC for federal deposit insurance; and (5) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Board of Governors of the Federal Reserve System, or the Federal Reserve, the Office of the Comptroller of the Currency, or the OCC, and the Federal Deposit Insurance Corporation, or the FDIC. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations, or principles or changes thereto, may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors and shareholders.
The following items provide a brief description of the impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively.
Increased Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than existing regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. Compliance with heightened capital standards may reduce our ability to generate or originate revenue-producing assets and thereby restrict revenue generation from banking and non-banking operations. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. Compliance with new regulatory requirements and expanded examination processes could increase the Company’s cost of operations.
The Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent Consumer Financial Protection Bureau, or the Bureau, within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. Generally, we will not be directly subject to the rules and regulations of the Bureau. However, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against certain state-chartered institutions. Any such new regulations could increase our cost of operations and, as a result, could limit our ability to expand into these products and services.

Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the FDIC’s Deposit Insurance Fund, or the DIF, will be calculated. Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. Several of these provisions could increase the FDIC deposit insurance premiums paid by us. The Dodd-Frank Act also provides that, effective one year after the date of enactment, depository institutions may pay interest on demand deposits.
Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.
Transactions with Insiders. Insider transaction limitations are expanded through the strengthening on loan restrictions to insiders and the expansion of the types of transactions subject to the various limits.
Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. Current banking law limits a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
Company Regulation
General. As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), OptimumBank Holdings is subject to the regulation and supervision of, and inspection by, the Federal Reserve Board (“Federal Reserve”). OptimumBank Holdings also is required to file with the Federal Reserve annual reports and other information regarding its business operations, and those of its subsidiaries. In the past, the BHCA limited the activities of bank holding companies and their subsidiaries to activities which were limited to banking, managing or controlling banks, furnishing services to or performing services for their subsidiaries or engaging in any other activity which the Federal Reserve determined to be so closely related to banking or managing or controlling banks as to be properly incident thereto. Under the Gramm-Leach-Bliley Financial Modernization Act of 1999 which is discussed below, bank holding companies now have the opportunity to seek broadened authority, subject to limitations on investment, to engage in activities that are “financial in nature” if all of their subsidiary depository institutions are well capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act, which is also discussed below.

In this regard, the BHCA prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Generally, bank holding companies, such as OptimumBank Holdings, are required to obtain prior approval of the Federal Reserve to engage in any new activity not previously approved by the Federal Reserve.
Change of Control. The BHCA also requires that every bank holding company obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, including the parties’ performance under the Community Reinvestment Act (discussed below) and various competitive factors. As described in greater detail below, pursuant to the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company is permitted to acquire banks in states other than its home state.
The BHCA further prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Bank has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any person or group of persons must obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding common stock of a bank holding company, or otherwise obtaining control or a “controlling influence” over the bank holding company. 
Interstate Banking and Branching. The Interstate Banking and Branching Act provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible subject to certain limitations. Florida also has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least three years. Interstate branching and consolidation of existing bank subsidiaries in different states is permissible. A Florida bank also may establish, maintain, and operate one or more branches in a state other than Florida pursuant to an interstate merger transaction in which the Florida bank is the resulting bank.
Financial Modernization. The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) sought to achieve significant modernization of the federal bank regulatory framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the GLB Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of such firms in a “financial services holding company.” We have no current plans to utilize the structural options created by the GLB Act.

Securities Regulation and Corporate Governance. The Company’s common stock is registered with the Securities and Exchange Commission (the “SEC”) under Section 12(g) of the Securities Exchange Act of 1934, and we are subject to restrictions, reporting requirements and review procedures under federal securities laws and regulations. We are also subject to the rules and reporting requirements of the NASDAQ Global Market, on which our common stock is traded. Like other issuers of publicly traded securities, we must also comply with the corporate governance reforms enacted under the Sarbanes-Oxley Act of 2002 (“The Sarbanes-Oxley Act”) and the rules of the SEC and NASDAQ Stock Market adopted pursuant to the Sarbanes Oxley Act. Among other things, these reforms, effective as of various dates, require certification of financial statements by the chief executive officer and chief financial officer, prohibit the provision of specified services by independent auditors, require pre-approval of independent auditor services, define director independence and require certain committees, and a majority of a subject company’s board of directors, to consist of independent directors, establish additional disclosure requirements in reports filed with the SEC, require expedited filing of reports, require management evaluation and auditor attestation of internal controls, prohibit loans by the issuer (but not by certain depository institutions) to directors and officers, set record-keeping requirements, mandate complaint procedures for the reporting of accounting and audit concerns by employees, and establish penalties for non-compliance.
Bank Regulation
General. OptimumBank is chartered under the laws of the State of Florida, and its deposits are insured by the FDIC to the extent provided by law. OptimumBank is subject to comprehensive regulation, examination and supervision by the FDIC and the Florida Office of Financial Regulation, or Florida OFR, and to other laws and regulations applicable to banks. Such regulations include limitations on loans to a single borrower and to its directors, officers and employees; limitations on the types of activities a state bank can conduct, restrictions on the opening and closing of branch offices; the maintenance of required capital ratios; the granting of credit under equal and fair conditions; and the disclosure of the costs and terms of such credit. OptimumBank is examined periodically by the FDIC and the Florida OFR, to whom it submits periodic reports regarding its financial condition and other matters. The FDIC and the Florida OFR have a broad range of powers to enforce regulations under their jurisdiction, and to take discretionary actions determined to be for the protection and safety and soundness of banks, including the institution of cease and desist orders and the removal of directors and officers. The FDIC and the Florida OFR also have the authority to approve or disapprove mergers, consolidations, and similar corporate actions.
Consent Order. On April 16, 2010, OptimumBank was required to enter into a Consent Order with the FDIC and the Florida Office of Financial Regulation. Under the Consent Order, the Bank is required to implement a number of corrective measures intended to improve the Bank’s condition, including a requirement to maintain certain minimum capital ratios. The Consent Order also contains significant operating restrictions. The principal requirements of the Consent Order are described in “Business- - Supervision and Regulation- Consent Order.”
Capital Adequacy Requirements. Banks are required to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity (excluding the unrealized gain (loss) on available-for-sale securities), trust preferred securities subject to certain limitations, and minus certain intangible assets. Tier 2 capital consists of the general allowance for credit losses except for certain limitations. An institution’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. At December 31, 2012, our Tier 1 and total risk-based capital ratios were 10.23% and 11.48%, respectively.

Banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 4%, but all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. At December 31, 2012, our leverage ratio was 8.12%.
The Consent Order imposes higher capital requirements on OptimumBank. Under the Consent Order, OptimumBank must maintain a Tier 1 Leverage Ratio of 8.0%, and a total risk based capital ratio of 12.0%. With a Tier 1 Leverage ratio of 8.12% and a Total Risk Based Capital Ratio of 11.48% at December 31, 2012, the Bank did not meet the total risk-based capital ratio as required by the Consent Order.
The FDIC Improvement Act of 1993 (“FDICIA”) contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically undercapitalized.”
The FDIC has issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital categories as follows:
·   an institution is “well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures;
·   an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater;
·   an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%;
·   an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and
·   an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets.
The FDIC, after an opportunity for a hearing, has authority to downgrade an institution from “well capitalized” to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns.
Generally, FDICIA requires that an “undercapitalized” institution must submit an acceptable capital restoration plan to the appropriate federal banking agency within 45 days after the institution becomes “undercapitalized” and the agency must take action on the plan within 60 days. The appropriate federal banking agency may not accept a capital restoration plan unless, among other requirements, each company having control of the institution has guaranteed that the institution will comply with the plan until the institution has been adequately capitalized on average during each of the three consecutive calendar quarters and has provided adequate assurances of performance. The aggregate liability under this provision of all companies having control of an institution is limited to the lesser of:

·   5% of the institution’s total assets at the time the institution becomes “undercapitalized” or
·   the amount which is necessary, or would have been necessary, to bring the institution into compliance with all capital standards applicable to the institution as of the time the institution fails to comply with the plan filed pursuant to FDICIA
An “undercapitalized” institution may not acquire an interest in any company or any other insured depository institution, establish or acquire additional branch offices or engage in any new business unless the appropriate federal banking agency has accepted its capital restoration plan, the institution is implementing the plan, and the agency determines that the proposed action is consistent with and will further the achievement of the plan, or the appropriate Federal banking agency determines the proposed action will further the purpose of the “prompt corrective action” sections of FDICIA.
If an institution is “critically undercapitalized,” it must comply with the restrictions described above. In addition, the appropriate Federal banking agency is authorized to restrict the activities of any “critically undercapitalized” institution and to prohibit such an institution, without the appropriate Federal banking agency’s prior written approval, from:
·   entering into any material transaction other than in the usual course of business;
·   engaging in any covered transaction with affiliates (as defined in Section 23A(b) of the Federal Reserve Act);
·   paying excessive compensation or bonuses; and
·   paying interest on new or renewed liabilities at a rate that would increase the institution’s weighted average costs of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institution’s normal market areas.
The "prompt corrective action" provisions of FDICIA also provide that in general no institution may make a capital distribution if it would cause the institution to become "undercapitalized." Capital distributions include cash (but not stock) dividends, stock purchases, redemptions, and other distributions of capital to the owners of an institution.
Additionally, FDICIA requires, among other things, that:
·   only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval and

·   the appropriate federal banking agency annually examine all insured depository institutions, with some exceptions for small, “well capitalized” institutions and state-chartered institutions examined by state regulators.
As of December 31, 2012, OptimumBank met the FDIC definition of an "adequately capitalized institution."
For additional information regarding OptimumBank's capital ratios and requirements, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Capital Adequacy."
Dividends. OptimumBank Holdings' ability to pay dividends is substantially dependent on the ability of OptimumBank to pay dividends to OptimumBank Holdings. As a state chartered bank, OptimumBank is subject to dividend restrictions set by Florida law and the FDIC. Except with the prior approval of the Florida OFR, all dividends of any Florida bank must be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts. Under the Federal Deposit Insurance Act, an FDIC-insured institution may not pay any dividend if payment would cause it to become undercapitalized or while it is undercapitalized. The FDIC and the Florida OFR also have the general authority to limit the dividend payment by banks if such payment may be deemed to constitute an unsafe and unsound practice. The Bank’s ability to pay dividends is further restricted under the Consent Order and the Company's ability to pay dividends is also restricted under its Written Agreement with the Federal Reserve. At December 31, 2012, the Bank and Company could not pay cash dividends.
Loans to One Borrower. Florida law generally allows a state bank such as OptimumBank to extend credit to any one borrower (and certain related entities of such borrower) in an amount up to 25% of its capital accounts, provided that the unsecured portion may not exceed 15% of the capital accounts of the bank. Based upon OptimumBank's capital, the maximum loan OptimumBank is currently permitted to make is approximately $3.1 million, provided the unsecured portion does not exceed approximately $1.8 million.
Transactions with Affiliates. Under federal law, federally insured banks are subject, with certain exceptions, to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower. In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.
Change of Bank Control. Florida law restricts the amount of voting stock of a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of financial institutions are less likely to benefit from the rapid increases in stock prices that often result from tender offers or similar efforts to acquire control of other companies.

Under Florida law, no person or group of persons may, directly or indirectly or acting by or through one or more persons, purchase or acquire a controlling interest in any bank which would result in the change in control of that bank unless the Florida OFR first shall have approved such proposed acquisition. A person or group will be deemed to have acquired “control” of a bank (i) if the person or group, directly or indirectly or acting by or through one, or more other persons, owns, controls, or has power to vote 25% or more of any class of voting securities of the bank, or controls in any manner the election of a majority of the directors of the bank, or (ii) if the Florida OFR determines that such person exercises a controlling influence over the management or policies of the bank. In any case where a proposed purchase of voting securities would give rise to a presumption of control, the person or group who proposes to purchase the securities must first file written notice of the proposal to the Florida OFR for its review and approval. Subsections 658.27(2)I and 658.28(3), Florida Statutes, refer to a potential change of control of a financial institution at a 10% or more threshold and rebuttable presumption of control. Accordingly, the name of any subscriber acquiring more than 10% of the voting securities of OptimumBank must be submitted to the Florida OFR for prior approval.
USA Patriot Act. The USA Patriot Act was enacted after September 11, 2001 to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in promulgation of several regulations that have a direct impact on banks. There are a number of programs that financial institutions must have in place such as: (i) Bank Secrecy Act/Anti-Money Laundering programs to manage risk; (ii) Customer Identification Programs to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorist or terrorist organizations; and (iii) monitoring for the timely detection and reporting of suspicious activity and reportable transactions. Over the past few years, enforcement, and compliance monitoring, of these anti-money laundering laws has dramatically increased. As a result, we have increased the attention and resources we dedicate to compliance with these laws.
Other Consumer Laws. Florida usury laws and federal laws concerning interest rates limit the amount of interest and various other charges collected or contracted by a bank. OptimumBank's loans are also subject to federal laws applicable to consumer credit transactions, such as the:
·   Federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers;
·   Community Reinvestment Act requiring financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low and moderate-income borrowers;
·   Home Mortgage Disclosure Act requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;
·   Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibitive factors in extending credit;
·   Real Estate Settlement Procedures Act which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;
·   Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies;
·   Fair and Accurate Credit Transactions Act which establishes additional rights for consumers to obtain and correct credit reports, addresses identity theft, and establishes additional requirements for consumer reporting agencies and financial institutions that provide adverse credit information to a consumer reporting agency; and

·   The rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws.
OptimumBank's deposit and loan operations are also subject to the:
·   The Gramm-Leach-Bliley Act of 1999 privacy provisions, which require us to maintain privacy policies intended to safeguard consumer financial information, to disclose these policies to our customers, and allow customers to “opt-out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;
·   Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
·   Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Other Regulation
Enforcement Powers. Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders. Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations.
Community Redevelopment Act. Bank holding companies and their subsidiary banks are subject to the provisions of the Community Reinvestment Act of 1977 ("CRA") and the regulations promulgated thereunder by the appropriate bank regulatory agency. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low-and moderate-income neighborhoods. The regulatory agency's assessment of the Bank's record is made available to the public. Further, such assessment is required of any bank which has applied to charter a bank, obtain deposit insurance coverage for a newly chartered institution, establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.
Effect of Governmental Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve monetary policies have had, and will likely continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of loans, investments and deposits through its open market operations in United States Government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirement against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Statistical Profile and Other Financial Data
Reference is hereby made to the statistical and financial data contained in the sections captioned “Selected Financial Data” and "Management's Discussion and Analysis of Financial Condition and Results of Operations," for statistical and financial data providing a review of our business activities.
The following table sets forth information with respect to our main office and branch offices as of December 31, 2012.
Year Facility Opened
Facility Status
Executive Office and Ft. Lauderdale Branch:
2477 East Commercial Boulevard Fort Lauderdale, Florida 33308
Plantation Branch Office:
10197 Cleary Boulevard
Plantation, Florida 33324
Deerfield Beach Branch Office:
2215 West Hillsboro Boulevard
Deerfield Beach, Florida 22442
Leased (1)
(1)    The lease is for a ten-year term, with two five-year options to renew, for 2,500 square feet. The monthly lease payment at December 31, 2012 was $6,642.
From time-to-time, we are involved in litigation arising in the ordinary course of our business. As of the date of the filing of this Form 10-K, we are of the opinion that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on our consolidated financial condition or results of operations.
Not applicable.

Our common stock currently trades on the NASDAQ Capital Market under the symbol "OPHC." The table below presents the high and low sales prices for the periods indicated.
  $ 5.10     $ 2.03  
  $ 4.64     $ 0.52  
  $ 1.63     $ 0.63  
  $ 0.80     $ 0.41  
  $ 5.43     $ 0.38  
  $ 3.75     $ 0.56  
  $ 0.74     $ 0.40  
  $ 0.68     $ 0.41  
We had approximately 872 holders registered or in street name as of December 31, 2012.
During the fourth quarter of 2012, the Company sold 400,000 shares of the Company’s common stock at a price of $0.40 per share to three affiliated investors in a transaction that was exempt from registration under Section 4(2) of the Securities Act of 1933. During the fourth quarter of 2012, the Company also issued 52,593 shares of the Company’s common stock to four directors in payment of directors’ fees in a transaction that was exempt from registration under Section 4(2) of the Securities Act of 1933. The shares had a value of $0.53 per share.
On June 20, 2012, the NASDAQ Stock Market has notified the Company that it has failed to comply with the NASDAQ Listing Rule requiring the Company to maintain a minimum bid price of $1.00 per share. We have been provided until June 17, 2013 to regain compliance with this requirement. The Company currently plans to implement a 4 for 1 reverse stock split to achieve this goal. In the event that the reverse stock split does not result in compliance, the Company’s common stock could be delisted from NASDAQ.
At December 31, 2012, the Bank and Company could not pay cash dividends and the Company does not anticipate that it will pay dividends on its common stock in the foreseeable future. Banking regulations place certain restrictions on dividends and loans or advances made by the Bank to the Company. The amount of cash dividends that may be paid by the Bank to the Company is based on the Bank's net earnings of the current year combined with the Bank's retained earnings of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Company must consider additional factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividends which the Company could declare. Furthermore, the Bank’s ability to pay dividends is restricted under the Consent Order issued by the FDIC and Florida Office of Financial Regulation and banking laws. The Company’s ability to pay dividends is also restricted under its Written Agreement with the Federal Reserve.

At December 31, or for the Year Then Ended
(Dollars in thousands, except per share figures)
    2012     2011     2010     2009     2008  
At Year End:                              
Cash and cash equivalents
  $ 23,611       22,776       14,367       36,784       3,220  
Securities held to maturity
    0       100       51,057       81,141       82,208  
Security available for sale
    18,648       28,907       0       0       244  
Loans, net
    85,209       89,217       113,542       134,126       160,699  
All other assets
    16,275        13,572        11,339        17,906        9,369  
Total Assets
  $  143,743       154,472       190,305       269,957       255,740  
Deposit accounts
    101,611       107,895       148,238       151,682       114,925  
Federal Home Loan Bank advances
    27,700       31,700       31,700       57,700       68,700  
Other borrowings
    0       0       0       41,800       41,800  
Junior subordinated debenture
    5,155       5,155       5,155       5,155       5,155  
All other liabilities
    2,367       2,936       2,377       2,332       2,395  
Stockholders' equity
    6,910       6,786        2,835        11,288        22,765  
Total Liabilities and Stockholders' Equity
  $  143,743        154,472       190,305       269,957       255,740  
For the Year:
Total interest income
    5,162       6,422       8,787       14,006       15,570  
Total interest expense
    2,581       3,427        4,867        8,351        9,211  
Net interest income
    2,581       2,995       3,920       5,655       6,359  
Provision (credit) for loan losses
    1,653       (149 )      3,645        15,794        1,374  
Net interest income (expense) after (credit)
provision for loan losses
    928       3,144       275       (10,139 )     4,985  
Noninterest income (expense)
    258       379       1,394       (145 )     393  
Noninterest expenses
    5,883       7,229        9,773        4,698        4,545  
(Loss) earnings before income taxes (benefit)
    (4,697 )     (3,706 )     (8,104 )     (14,982 )     833  
Income taxes (benefit)
    0       41       349        (3,501 )     313  
Net (loss) earnings
  $ (4,697 )     (3,747 )     (8,453 )     (11,481 )     520  
Net (loss) earnings per share, basic (1)
  $ (.17 )     (.82 )     (10.32 )     (14.01 )     .63  
Net (loss) earnings per share, diluted (1)
  $ (.17 )     (.82 )     (10.32 )     (14.01 )     .63  
Weighted-average number of shares
outstanding, basic (1)
    27,362,672       4,576,304       819,358       819,358       819,261  
Weighted-average number of shares outstanding, diluted (1)
    27,362,672       4,576,304       819,358       819,358       830,608  


Ratios and Other Data:
Return on average assets
    (3.1 )%     (2.1 )%     (3.8 )%     (4.2 )%     0.2 %
Return on average equity
    (60.3 )%     (204.0 )%     (127.6 )%     (55.6 )%     2.3 %
Average equity to average assets
    5.2 %     1.0 %     3.0 %     7.6 %     9.2 %
Net interest margin during the year
    1.9 %     1.8 %     1.9 %     2.1 %     2.6 %
Interest-rate differential during the year
    2.5 %     1.8 %     1.9 %     1.9 %     2.3 %
Net yield on average interest-earning assets
    3.9 %     3.8 %     4.2 %     5.3 %     6.4 %
Noninterest expenses to average assets
    3.6 %     4.1 %     4.4 %     1.7 %     1.8 %
Ratio of average interest-earning assets to
average interest-bearing liabilities
    1.1       1.0       1.0       1.1       1.1  
Nonperforming loans and foreclosed assets as a percentage of total assets at end of year
    19.5 %     23.0 %     19.8 %     10.9 %     2.0 %
Allowance for loan losses as a percentage of total loans at end of year
    2.8 %     2.6 %     3.2 %     6.5 %     1.2 %
Total number of banking offices     3       3       3       3       3  
Total shares outstanding at end of year (1)
    31,511,201       22,411,108       819,358       819,358       780,248  
Book value per share at end of year (1)
  $ .22       .30       3.46       13.78       29.17  

(1)  All share and per share amounts have been adjusted to reflect the 1-for-4 reverse stock split declared in October 2010 and 5% stock dividends declared in May 2009 and 2008.
The Company is a Florida corporation formed in 2004 as a one bank holding company for OptimumBank. The Bank is a Florida chartered bank established in 2000, with deposits insured by the Federal Deposit Insurance Corporation. The Bank is headquartered and has its corporate office in Fort Lauderdale, Florida, and operates three full service branch offices located in Broward County, Florida.
At December 31, 2012, the Company had total assets of $143.7 million, net loans of $85.2 million, and total deposits of $101.6 million and stockholders' equity of $6.9 million. During 2012, the Company had a net loss of $4.7 million.
Critical Accounting Policies
Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, we must use our best judgment to arrive at the carrying value of certain assets. One of the most critical accounting policies applied by us is related to the valuation of our loan portfolio.
A variety of estimates impact the carrying value of our loan portfolio including the calculation of the allowance for loan losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.

The calculation of the allowance for loan losses is a complex process containing estimates which are inherently subjective and susceptible to significant revision as current information becomes available. The allowance is established and maintained at a level we believe is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are determined by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs, the views of our regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis also requires consideration of the economic climate and direction, changes in the economic and interest rate environment which may impact a borrower's ability to pay, legislation impacting the banking industry and economic conditions specific to the tri-county region we serve in Southeast Florida. Because the calculation of the allowance for loan losses relies on our estimates and judgments relating to inherently uncertain events, results may differ from management’s estimates.
The allowance for loan losses is also discussed as part of "Loan Portfolio, Asset Quality and Allowance for Loan Losses" and in Note 3 of Notes to the Consolidated Financial Statements. Our significant accounting policies are discussed in Note 1 of Notes to the Consolidated Financial Statements.
Regulation and Legislation
As a state-chartered commercial bank, the Bank is subject to extensive regulation by the Florida Office of Financial Regulation, or Florida OFR, and the FDIC. We file reports with the Florida OFR and the FDIC concerning our activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. Periodic examinations are performed by the Florida OFR and the FDIC to monitor our compliance with the various regulatory requirements. The Company is also subject to regulation and examination by the Federal Reserve Board of Governors.
Loan Portfolio, Asset Quality and Allowance for Loan Losses
Our primary business is making real estate loans. This activity may subject us to potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond our control. For the past several years, there has been a dramatic decrease in housing and real estate values in south Florida, coupled with a significant increase in the rate of unemployment. With most of our loans concentrated in south Florida, the decline in local economic conditions has adversely affected the values of our real estate collateral. These trends have contributed to an increase in our impaired loans and reduced asset quality. As of December 31, 2012, our impaired loans were approximately $20.0 million, or 23.5% of the net loan portfolio. Impaired loans and real estate owned were approximately $31.0 million as of this same date, or 21.5% of total assets. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on our loan portfolio and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with impaired loans, and the net realizable value of real estate owned.

The following table sets forth the composition of our loan portfolio:
At December 31,
% of
% of
% of
(dollars in thousands)
Residential real estate
  $ 30,064       34.32 %   $ 31,142       34.03 %   $ 40,130       34.27 %
Multi-family real estate
    3,916       4.47       4,109       4.49       4,213       3.60  
Commercial real estate
    39,126       44.66       44,312       48.42       55,119       47.07  
Land and construction
    7,276       8.30       11,783       12.87       17,292       14.77  
    7,158       8.17       0       .00       0       .00  
    70       .08       175       .19       358       .29  
Total loans
    87,610       100.00       91,521       100.00       117,112       100.00  
Add (deduct):
Allowance for loan losses
    (2,459 )             (2,349 )             (3,703 )        
Net deferred loan costs and discounts
    58               45               133          
Loans, net
  $ 85,209             $ 89,217             $ 113,542          
    At December 31,  
    2009     2008  
% of
% of
    (dollars in thousands)  
Residential real estate
  $ 55,915       39.06 %   $ 58,693       36.25 %
Multi-family real estate
    5,162       3.61       9,588       5.92  
Commercial real estate
    58,901       41.14       73,541       45.42  
Land and construction
    22,355       15.61       19,223       11.87  
    836        .58       878       .54  
Total loans
    143,169       100.00 %     161,923       100.00 %
Add (deduct):
Allowance for loan losses
Net deferred loan costs
and discounts
    320               682          
Loans, net
  $ 134,126             $ 160,699          

The following table sets forth the activity in the allowance for loan losses (in thousands):
Year Ended December 31,
    2012     2011     2010     2009     2008  
Beginning balance
  $ 2,349     $ 3,703     $ 9,363     $ 1,906     $ 692  
Provision (credit) for loan losses
    1,653       (149 )     3,645       15,794       1,374  
Loans charged off
    (1,848 )     (1,739 )     (9,424 )     (8,337 )     (160 )
     305        534        119       0       0  
Ending balance
  $ 2,459     $ 2,349     $ 3,703     $ 9,363     $ 1,906  
The allowance for loan losses represents our estimate of probable incurred losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The allowance for loan losses represented 2.81% and 2.57% of the total loans outstanding at December 31, 2012 and 2011, respectively.
We evaluate the allowance for loan losses on a regular basis. The allowance for loan losses is determined based on our periodic review of several factors: reviews and evaluation of individual loans, historical loan loss experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of two components. The first component consists of amounts specifically reserved (“specific allowance”) for specific loans identified as impaired, as defined by FASB Accounting Standards Codification No. 310 (“ASC 310”). Impaired loans are those loans that management has estimated will not repay as agreed upon. We measure impairment on a loan by loan basis for all our loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. A loan may be impaired (i.e. not expected to repay as agreed), but may be sufficiently collateralized such that we expect to recover all principal and interest eventually, and therefore no specific reserve is warranted.
The second component is a general reserve (“general allowance”) on all of our loans other than those identified as impaired. We group these loans into categories with similar characteristics and then apply a loss factor to each group which is derived from our historical loss experience for that category adjusted for qualitative factors such as economic conditions and other trends or uncertainties that could affect management's estimate of probable loss. The aggregate of these two components results in our total allowance for loan losses.

The following table sets forth our allowance for loan losses by loan type (dollars in thousands):
    At December 31,  
% of
% of
% of
Residential real estate
  $ 434       34.32 %   $ 566       34.03 %   $ 1,285       34.27 %
Multi-family real estate
    267       4.47       247       4.49       282       3.60  
Commercial real estate
    1,372       44.66       1,334       48.42       1,542       47.07  
Land and construction
    166       8.30       187       12.87       514       14.77  
    216       8.17       0       .00       0       .00  
    4       .08       15       .19       80       .29  
Total allowance for loan losses
  $ 2,459       100.00 %   $ 2,349       100.00 %   $ 3,703       100.00 %
Allowance for loan losses as
a percentage of total
loans outstanding
            2.81 %             2.57 %             3.16 %
    At December 31,  
% of
% of
Residential real estate
  $ 2,049       39.06 %   $ 928       36.25 %
Multi-family real estate
    489       3.61       62       5.92  
Commercial real estate
    1,466       41.14       463       45.42  
Land and construction
    5,227       15.61       444       11.87  
    132       .58       9       .54  
Total allowance for loan losses
  $ 9,363       100.00 %   $ 1,906       100.00 %
Allowance for loan losses as
a percentage of total
loans outstanding
            6.54 %             1.18 %

The following summarizes impaired loans (in thousands):
    December 31, 2012     At December 31, 2011  
With no related allowance recorded:
Residential real estate
  $ 7,573   $ 8,024     $ 0     $ 7,919     $ 8,465     $ 0  
Commercial real estate
    8,661     11,412       0       15,577       17,960       0  
Land and construction
    886       2,410       0       7,241       11,652       0  
    0       0       0       68       68       0  
With an allowance recorded:
Commercial real estate
    2,874       2,874       366       1,139       1,139       11  
Residential real estate
  $ 7,573     $ 8,024     $ 0     $ 7,919     $ 8,465     $ 0  
Commercial real estate
  $ 11,535     $ 14,286     $ 366     $ 16,716     $ 19,099     $ 11  
Land and construction
  $ 886     $ 2,410     $ 0     $ 7,241     $ 11,652     $ 0  
  $ 0     $ 0     $ 0     $ 68     $ 68     $ 0  
  $ 19,994     $ 24,720     $ 366     $ 31,944     $ 39,284     $ 11  
During 2012, 2011 and 2010, the average net investment in impaired loans and interest income recognized and received on impaired loans is as follows (in thousands):
      Year Ended December 31,  
      2012       2011       2010  
Average investment in impaired loans
  $ 25,743     $ 37,549     $ 33,987  
Interest income recognized on impaired loans
  $ 175     $ 367     $ 313  
Interest income received on a cash basis on impaired loans   $ 616     $ 834     $ 658  
Nonaccrual and past due loans were as follows as of December 31, 2012, 2011, 2010 and 2009 (in thousands):
    At December 31,  
Nonaccrual loans
  $ 17,079     $ 27,819     $ 34,530     $ 23,848  
Past ninety days or more, but still
accruing interest
  $ 0     $ 0     $ 0     $ 0  
Liquidity and Capital Resources
Liquidity represents an institution's ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities. Our ability to respond to the needs of depositors and borrowers and to benefit from investment opportunities is facilitated through liquidity management.
Our primary sources of cash during the year ended December 31, 2012 were from principal repayments of securities available for sale of $11.0 million and proceeds from sale of common stock of $3.7 million. Cash was used primarily to repay $6.3 million of deposits, repay $4 million of Federal Home Loan Bank advances and fund $2.3 million of loans. In order to increase our core deposits, we have priced our deposit rates competitively. We will adjust rates on our deposits to attract or retain deposits as needed. We obtain funds primarily from depositors in our market area.
In addition to obtaining funds from depositors, we may borrow funds from other financial institutions. We are a member of the Federal Home Loan Bank of Atlanta, which allows us to borrow funds under a pre-arranged line of credit equal to $31.7 million. As of December 31, 2012, we had $27.7 million in borrowings outstanding from the Federal Home Loan Bank of Atlanta to facilitate loan fundings and manage our asset and liability structure.

Our securities portfolio is comprised primarily of mortgage-backed securities. The securities portfolio is categorized as either "held to maturity" or "available for sale." Securities held to maturity represent those securities which we have the positive intent and ability to hold to maturity. These securities are carried at amortized cost. Securities available for sale represent those investments which may be sold for various reasons including changes in interest rates and liquidity considerations. These securities are reported at fair market value and unrealized gains and losses are excluded from earnings and reported in other comprehensive income.
The following table sets forth the amortized cost and fair value of our securities portfolio (in thousands):
At December 31, 2012:  
Securities available for sale:            
Mortgage-backed securities
  $ 16,325     $ 15,629  
U.S. Government and agency securities
    2,097       3,019  
    $ 18,422     $ 18,648  
At December 31, 2011:            
Securities available for sale:            
Mortgage-backed securities
  $ 23,853     $ 22,864  
U.S. Government and agency securities
     5,992        6,043  
    $ 29,845     $ 28,907  
At December 31, 2010:                
Securities held to maturity:                
Mortgage-backed securities   $ 50,957     $ 48,739  

The following table sets forth, by maturity distribution, certain information pertaining to the securities portfolio (dollars in thousands):

One Year
After One
But Within
After Five
Ten Years
After Ten
At December 31, 2012:                                    
Mortgage-backed securities
  $ 0     $ 0     $ 2,915     $ 12,510     $ 15,425       4.57 %
U.S. Government and agency securities
    2,997        0        0        0         2,997       0.96 %
    $ 2,997     $ 0     $ 2,915     $ 12,510     $ 18,422          
At December 31, 2011:                                    
Mortgage-backed securities
  $ 0     $ 0     $ 4,373     $ 19,480     $ 22,853       4.03 %
U.S. Government and agency securities
    2,998       2,994        0        0         5,992       0.86 %
    $ 2,998     $ 2,994     $ 4,373     $ 19,480     $ 29,845          
At December 31, 2010:                                                
Mortgage-backed securities   $ 4,001     $ 5,988     $ 1,887     $ 39,081     $ 50,957      
In June 2011, the Company transferred securities with a book value of approximately $50.5 million from the held to maturity category to the available for sale category. The fair value of the securities was $49.8 million resulting in unrealized losses of approximately $0.7 million. The net unrealized loss was recorded in accumulated other comprehensive loss. Due to this transfer, the Company will be prohibited from classifying securities as held to maturity for a period of two years.
During the year ended December 31, 2010, the Company sold $44.9 million held to maturity securities in order to downsize and deleverage its balance sheet, recognizing net gains of $1.3 million. This action was taken in an effort to comply with a significant increase in the regulatory capital requirements imposed on the Bank under the Consent Order issued by the FDIC and Florida Office of Financial Regulation.
At December 31, 2012, $6.6 million of the $18.6 million in mortgage-backed securities ("MBS") were U.S. agency MBS and $12.0 million were private label MBS. Approximately $11.3 million of the private label MBS at December 31, 2011 were rated sub-investment grade securities by the securities rating agencies. In general, non-investment grade securities cannot be used to collateralize borrowings and are considered to be substandard assets by the Federal regulatory agencies.
Regulatory Capital Adequacy
Failure to meet minimum capital requirements can result in certain mandatory and, possibly, additional discretionary actions by federal and state regulators that, if undertaken, could have a direct material effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. In addition, the Consent Order imposes increased minimum capital requirements on the Bank.
Quantitative measures established by regulation and by the Consent Order to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. As of December 31, 2012, we did not meet the minimum applicable capital adequacy requirements. See "Supervision and Regulation – Bank Regulation- Capital Adequacy Requirements" with respect to the required Tier 1 capital to total assets ratios of 8%.

Our actual and required minimum capital ratios were as follows (in thousands):
Regulatory Capital Requirements
For Capital Adequacy Purposes
Minimum To Be
Well Capitalized Under
Prompt Corrective Provisions
Requirements of
Consent Order
    Amount     %     Amount     %     Amount     %     Amount     %  
As of December 31, 2012:
Total Capital to Risk-
Weighted Assets
  $ 13,506       11.48     $ 9,412       8.00     $ 11,765       10.00     $ 14,118       12.00  
Tier I Capital to Risk-
Weighted Assets
    12,035       10.23       4,706       4.00       7,059       6.00       N/A       N/A  
Tier I Capital
to Total Assets   
    12,035       8.12       5,932       4.00       7,415       5.00       11,864       8.00  
As of December 31, 2011:
Total Capital to Risk-
Weighted Assets
    14,382       12.48       9,221       8.00       11,526       10.00       13,832       12.00  
Tier I Capital to Risk-
Weighted Assets
    12,930       11.22       4,611       4.00       6,916       6.00       N/A       N/A  
Tier I Capital
to Total Assets   
    12,930       7.76       6,668       4.00       8,335       5.00       13,335       8.00  
As of December 31, 2010:
Total Capital to Risk-
Weighted Assets
    9,639       6.70       11,513       8.00       14,392       10.00       17,270       12.00  
Tier I Capital to Risk-
Weighted Assets
    7,817       5.43       5,757       4.00       8,635       6.00       N/A       N/A  
Tier I Capital
to Total Assets 
    7,817       4.02       7,786       4.00       9,733       5.00       15,572       8.00  
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest-rate risk inherent in our lending and deposit-taking activities. We do not engage in securities trading or hedging activities and do not invest in interest-rate derivatives or enter into interest rate swaps.
We may utilize financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 8 of Notes to Consolidated Financial Statements.
Our primary objective in managing interest-rate risk is to minimize the potential adverse impact of changes in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure. We actively monitor and manage our interest-rate risk exposure by managing our asset and liability structure. However, a sudden and substantial increase in interest rates may adversely impact our earnings, to the extent that the interest-earning assets and interest-bearing liabilities do not change or reprice at the same speed, to the same extent, or on the same basis.
We use modeling techniques to simulate changes in net interest income under various rate scenarios. Important elements of these techniques include the mix of floating versus fixed-rate assets and liabilities, and the scheduled, as well as expected, repricing and maturing volumes and rates of the existing balance sheet.

Asset Liability Management
As part of our asset and liability management, we have emphasized establishing and implementing internal asset-liability decision processes, as well as control procedures to aid in managing our earnings. Management believes that these processes and procedures provide us with better capital planning, asset mix and volume controls, loan-pricing guidelines, and deposit interest-rate guidelines, which should result in tighter controls and less exposure to interest-rate risk.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution’s interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. The gap ratio is computed as the amount of rate sensitive assets less the amount of rate sensitive liabilities divided by total assets. A gap is considered positive when the amount of interest-rate sensitive assets exceeds interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. During a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would adversely affect net interest income.
In order to minimize the potential for adverse effects of material and prolonged increases in interest rates on the results of operations, our management continues to monitor our assets and liabilities to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities. Our policies emphasize the origination of adjustable-rate loans, building a stable core deposit base and, to the extent possible, matching deposit maturities with loan repricing timeframes or maturities.

The following table sets forth certain information relating to our interest-earning assets and interest-bearing liabilities at December 31, 2012, that are estimated to mature or are scheduled to reprice within the period shown (dollars in thousands):
Gap Maturity / Repricing Schedule