Note 14. Regulatory Matters

Dividends

The Company's dividend payments are made from dividends received from the Bank. The Bank, as a Virginia banking corporation, may pay dividends only out of its retained earnings. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.

Intercompany Transactions

The Bank's legal lending limit on loans to the Company are governed by Federal Reserve Act 23A, and differ from legal lending limits on loans to external customers. Generally, a bank may lend up to 10% of its capital and surplus to its Parent, if the loan is secured. If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least 20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for collateral in excess of the loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Company was approximately $2.3 million at December 31, 2011. There were no intercompany loans at December 31, 2011 and 2010, respectively.

Capital Requirements

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2011 and 2010, that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2011, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank's category.

The Company and the Bank's actual capital amounts and ratios are also presented in the following table.


	Actual					Minimum For Capital Adequacy Purposes					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
In thousands	Amount		Ratio			Amount		Ratio			Amount		Ratio
*December 31, 2011*
Total capital to risk-weighted assets Consolidated	$	34,502		22.51	%	$	12,263		8.00	%		n/a		n/a
Bank of Floyd		25,276		17.16	%		11,781		8.00	%	$	14,726		10.00	%
Tier I capital to risk-weighted assets Consolidated		32,574		21.25	%		6,132		4.00	%		n/a		n/a
Bank of Floyd		23,426		15.91	%		5,890		4.00	%		8,836		6.00	%
Tier I capital to average assets Consolidated		32,574		12.52	%		10,407		4.00	%		n/a		n/a
Bank of Floyd		23,426		9.27	%		10,107		4.00	%		12,634		5.00	%

*December 31, 2010*
Total capital to risk-weighted assets Consolidated	$	33,758		20.85	%	$	12,955		8.00	%		n/a		n/a
Bank of Floyd		24,010		15.47	%		12,413		8.00	%	$	15,517		10.00	%
Tier I capital to risk-weighted assets Consolidated		31,721		19.59	%		6,478		4.00	%		n/a		n/a
Bank of Floyd		22,061		14.22	%		6,207		4.00	%		9,310		6.00	%
Tier I capital to average assets Consolidated		31,721		12.99	%		9,770		4.00	%		n/a		n/a
Bank of Floyd		22,061		9.06	%		9,737		4.00	%		12,171		5.00	%