EXHIBIT 99.1


FIRST NATIONAL CORPORATION

Earnings Release

First Quarter Ended March 31, 2005

April 21, 2005




First National Corporation (OTCBB: FXNC) reported net income of $985 thousand or $0.67 per basic and diluted share for the quarter ended March 31, 2005.  This is a 9.8% increase over the $897 thousand in net income or $0.61 per basic and diluted share for the quarter ended March 31, 2004.  The annualized return on average equity and average assets were 15.15% and 0.96%, respectively, for the quarter ended March 31, 2005, compared to 15.01% and 1.02%, respectively, for the quarter ended March 31, 2004. Harry S. Smith, President & CEO of First National Corporation stated, “We are pleased with the Company’s financial performance, considering increasing competition in the market and costs associated with the addition of trust and asset management services during the quarter, when comparing the first quarter of 2005 to the first quarter of 2004.  In January 2005, the Trust and Asset Management Department of First Bank actively began operations.  Their performance during the first quarter exceeded our expectations.  The Department is managed by a team of trust professionals with substantial experience providing trust and investment services.”


Net interest income increased 17.0% to $3.6 million for the quarter ended March 31, 2005 from $3.1 million for the same period in 2004.  The increase was attributable to an 18.9% increase in average interest-earning assets over the same period.  The net interest margin was 3.83% for the quarter ended March 31, 2005, compared to 3.86% for the same period in 2004.


Noninterest income increased to $899 thousand for the quarter ended March 31, 2005, compared to $878 thousand for the same period in 2004.  Service charges on deposit accounts, which included overdraft fees, decreased slightly to $585 thousand for the quarter ended March 31, 2005.   This decrease was offset by an increase in fees for other customer services which increased 14.0% to $269 thousand for the quarter ended March 31, 2005, compared to $236 thousand for the same period in 2004.   Fees for other customer services included ATM fees, brokerage fees, trust and asset management fees, and gains on the sale of mortgage loans.  Noninterest expense increased 13.3% to $2.9 million for the quarter ended March 31, 2005, compared to $2.5 million for the same period in 2004.  Salaries and employee benefits increased over the comparable period in 2004 as a result of salary increases and hiring additional employees to support business growth.  The increase in noninterest expense was also attributable to the addition of the Trust and Asset Management Department.  

 

Total assets increased 15.3% to $422.8 million at March 31, 2005 from $366.5 million at March 31, 2004.  The majority of the asset growth occurred in the loan portfolio.  Loans, net of the allowance for loan losses, increased 24.9% from $266.5 million at March 31, 2004 to $332.7 million at March 31, 2005.  The allowance for loan losses totaled $3.1 million or 0.91% of total loans at March 31, 2005, compared to $2.5 million or 0.94% of total loans at March 31, 2004.  Net charge-offs were $55 thousand for the quarter ended March 31, 2005, compared to $182 thousand for the comparable period of 2004.  The loan loss provision was $245 thousand for the quarter ended March 31, 2005 and $163 thousand for the comparable period of 2004.  The allowance for loan losses has increased over the last year, which is primarily attributable to the growth in the loan portfolio.  The overall quality of the loan portfolio has improved, which is reflective in the ratio of allowance for loan losses to total loans.







Total deposits increased 13.0% or $38.1 million to $330.9 million at March 31, 2005 from $292.8 million at March 31, 2004.  The deposit mix remained consistent with prior periods as noninterest-bearing demand deposits, savings and interest-bearing demand deposits and time deposits comprised 22.1%, 41.3% and 36.6%, respectively, of total deposits at March 31, 2005, compared to 21.5%, 39.8% and 38.7% for the same period in 2004.  Other borrowings totaled $45.2 million at March 31, 2005, compared to $44.5 million at March 31, 2004.


Shareholders’ equity totaled $26.2 million at March 31, 2005, an increase of 7.8% over the March 31, 2004 balance of $24.3 million.  The book value of the Corporation was $17.95 per share and total common shares outstanding were 1,462,062 at March 31, 2005.  Cash dividends paid during the quarter ended March 31, 2005 and 2004 were $0.22 per share and $0.20 per share, respectively.  As announced earlier, the Corporation declared a two-for-one stock split on March 16, 2005 with respect to shares of its common stock payable on April 29, 2005 to shareholders of record as of March 30, 2005.


Certain information in this discussion may include forward looking statements that are subject to risks and uncertainties.  These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals.  The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.


These forward looking statements are subject to significant uncertainties because they are based upon or are affected by certain factors.  We have identified factors in our Annual Report on Form 10-K for the year ended December 31, 2004, which can be accessed from our website at www.firstbank-va.com.


Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements.  In addition, our past results of operations do not necessarily indicate our future results.


First National Corporation, headquartered in Strasburg, Virginia, is the financial holding company of First Bank. First Bank operates nine retail bank branches in the northern Shenandoah Valley region of Virginia, including Shenandoah County, Warren County, Frederick County and the City of Winchester.  First Bank also owns First Bank Financial Services, Inc., which invests in partnerships that provide investment services and title insurance.



Contacts:

Harry S. Smith

M. Shane Bell

President & CEO

Executive Vice President & CFO

hsmith@firstbank-va.com

sbell@firstbank-va.com

(540) 465-9121

(540) 465-9121











QUARTERLY PERFORMANCE SUMMARY

First National Corporation (OTCBB: FXNC)

(in thousands, except per share data)

 

  
 

For the Quarter Ended


INCOME STATEMENT 


3/31/2005 


3/31/2004 

Interest and dividend income 

  

  Interest and fees on loans 

$      5,131 

$      4,081 

  Interest on federal funds sold 

7 

2 

  Interest on deposits in banks 

16 

5 

  Interest and dividends on securities available for sale: 

  

    Taxable interest 

496 

587 

    Nontaxable interest 

106 

100 

    Dividends 

31 

17 

Total interest and dividend income 

$       5,787 

$      4,792 

   

Interest expense 

  

  Interest on deposits 

$      1,449 

$      1,160 

  Interest on federal funds purchased 

27 

14 

  Interest on company obligated mandatorily redeemable securities 

108 

34 

  Interest on other borrowings 

            564 

   475 

Total interest expense 

$      2,148 

$      1,683 

   

Net interest income 

$      3,639 

$      3,109 

Provision for loan losses 

            245 

163 

Net interest income after provision for loan losses 

$      3,394 

$      2,946 

   

Noninterest income 

  

  Service charges 

$         585 

$         633 

  Fees for other customer services 

269 

236 

  (Losses) on sale of premises and equipment 

-- 

(6)

  Gains on sale of loans 

56 

25 

  Other 

(11)

 (10)

Total noninterest income 

$         899 

$         878 

   

Noninterest expense 

  

  Salaries and employee benefits 

$      1,525 

$      1,203 

  Occupancy 

175 

179 

  Equipment 

222 

211 

  Advertising 

76 

96 

  Stationery and supplies 

104 

95 

  Telecommunications 

51 

65 

  Other 

  705 

674 

Total noninterest expense 

$      2,858 

$      2,523 

   

Income before income taxes 

$      1,435 

$      1,301 

Provision for income taxes 

450 

404 

Net income 

$         985 

$         897 

   







QUARTERLY PERFORMANCE SUMMARY

First National Corporation (OTCBB: FXNC)

(in thousands, except per share data)

  
 

For the Quarter Ended

 


3/31/2005


3/31/2004

SHARE AND PER SHARE DATA

  

Net income, basic and diluted

$        0.67 

$         0.61

Shares outstanding at period end

1,462,062

1,462,062

Weighted average shares, basic and diluted

1,462,062

1,462,062

Book value at period end

$       17.95

$       16.65

Cash dividends

$         0.22

$         0.20

   

KEY PERFORMANCE RATIOS

  

Return on average assets

0.96%

1.02%

Return on average equity

15.15%

15.01%

Net interest margin

3.83%

3.86%

Efficiency ratio (1)

61.98%

62.20%

   

ASSET QUALITY

  

Loan charge-offs

$          115

$          188

Loan recoveries

60

6

Net charge-offs

55

182

Nonaccrual loans

291

436

Nonperforming loans

291

436

Repossessed assets

77

212

   

BALANCE SHEET

  

Cash and due from banks

$       6,692

$       8,143         

Federal funds sold

--

5,165

Interest-bearing deposits in banks

765

450

Securities available for sale, at fair value

64,675

69,229

Loans held for sale

400

956

Loans, net of allowance for loan losses

332,720

266,485

Premises and equipment, net

12,221

11,497

Interest receivable

1,425

1,413

Other assets

         3,855

        3,280

  Total assets

$   422,753

$   366,618

   

Noninterest-bearing demand deposits

$     73,230

$     63,033

Savings and interest-bearing demand deposits

136,648

116,463

Time deposits

     120,980

    113,266

  Total deposits

$   330,858

$   292,762

   

Federal funds purchased

$     10,036

$              --

Other borrowings

45,236

44,542

Company obligated mandatorily redeemable capital securities

8,248

3,093

Accrued expenses and other liabilities

         2,127

        1,879

  Total liabilities

$   396,505

$   342,276

   







QUARTERLY PERFORMANCE SUMMARY

First National Corporation (OTCBB: FXNC)

(in thousands, except per share data)

  
 

For the Quarter Ended



BALANCE SHEET (CONT’D)


3/31/2005


3/31/2004

Common stock

$           3,655

$           3,655

Surplus

1,465

1,465

Retained earnings

21,350

18,285

Accumulated other comprehensive income (loss), net

             (222)

                937

  Total shareholders’ equity

$         26,248

$         24,342

   

  Total liabilities and shareholders’ equity

$       422,753

$       366,618

   

Average balances

  

Total assets

$       416,288

$       352,523

Total shareholders’ equity

$         26,369

$         24,030

   

LOAN DATA

  

Mortgage loans on real estate:

  

  Construction

$         48,589

$         29,829

  Secured by farm land

2,254

2,590

  Secured by 1-4 family residential

91,606

77,413

  Other real estate loans

120,981

91,268

Loans to farmers (except those secured by real estate)

721

359

Commercial and industrial loans (except those secured by real estate)


37,939


33,057

Consumer installment loans

30,579

32,404

Deposit overdrafts

211

392

All other loans

             2,906

             1,701

  Total loans

$       335,786

$       269,013

Allowance for loan losses

             3,066

             2,528

Loans, net

$       332,720

$       266,485

   

CAPITAL RATIOS

  

Tier 1 Capital

$         34,376

$         26,405

Total Capital

37,442

28,933

Total Capital to Risk Weighted Assets

11.05%

10.23%

Tier 1 Capital to Risk Weighted Assets

10.14%

9.34%

Leverage Ratio

8.26%

7.49%

   

(1) The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income excluding securities gains and losses.  This is a non-GAAP financial measure that we believe provides investors with important information regarding operational efficiency.  Such information is not in accordance with generally accepted accounting principles (GAAP) and should not be construed as such.  Net interest income on a tax equivalent basis was $3,713 and $3,178 for the period ended March 31, 2005 and 2004, respectively.  Noninterest income excluding securities gains and losses was $899 and $878 for the period ended March 31, 2005 and 2004, respectively.  Management believes such financial information is meaningful to the reader in understanding operational performance, but cautions that such information not be viewed as a substitute for GAAP.

  








FIRST NATIONAL CORPORATION

Consolidated Average Balances, Yields and Rates

Three Months Ended March 31, 2005 and 2004

(dollars in thousands)


Three months ended March 31,

 

2005

2004

  

Interest

  

Interest

 


ASSETS

Average

Balance

Income/

Expense

Yield/

Rate (3)

Average

Balance

Income/

Expense

Yield/

Rate (3)

Balances at correspondent

      

 banks – interest-bearing

$         908

$          16

     7.14%

$         355

$            5

6.04%

Securities:

      

  Taxable

      52,813

        528

     4.05%

     61,068

604

     3.98%

  Tax-exempt (1)

      10,024

          161

     6.52%

        9,247

          152

     6.60%

  Total securities

      62,837

689

     4.45%

     70,315

        756

     4.32%

Loans: (2)

      

  Taxable

    325,472

5,092

6.35%  

256,170

4,047

6.35%

  Tax-exempt (1)

        3,655

            58

6.41%  

        3,320

            51

     6.24%

  Total loans

    329,127

      5,150

6.35%  

    259,490

4,098

6.35%

Federal funds sold

          738

              7

     3.58%

          907

              2

     0.86%

 Total earning assets

    393,610

      5,862

     6.04%

   331,067

      4,861

5.91%

Less: allowance for loan losses

     (2,951)

  

     (2,588)

  

Total nonearning assets

25,629

  

      24,137

  

   Total assets

$   416,288

  

$   352,616

  
       

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Interest-bearing deposits:

      

 Checking

$      62,267

$       248

     1.61%

$    60,775

$         182

     1.20%

 Money market savings

        13,259

          37

     1.12%

      10,982

16

     0.59%

 Regular savings

        60,962

         244

     1.62%

      44,262

            75

     0.68%

 Certificates of deposit:

      

  Less than $100,000

        72,799

554

     3.09%

      69,505

        584

     3.38%

  Greater than $100,000

        46,119

         367

     3.23%

      36,941

          303

     3.30%

Total interest-bearing deposits

      255,406

      1,450

     2.30%

    222,465

        1,160

     2.10%

Federal funds purchased

         3,786

          27

     2.91%

3,536

            14

     1.62%

Company obligated mandatorily

      

 redeemable capital securities

         8,248

         108

     5.30%

3,093

            34

     4.44%

Other borrowings

        49,138

         564

     4.65%

      40,791

          475

     4.68%

Total interest-bearing liabilities

      316,578

2,149

     2.75%

    269,885

        1,683

     2.51%

Noninterest-bearing liabilities

      

 Demand deposits

        71,255

  

      56,644

  

 Other liabilities

         2,086

  

        2,057

  

Total liabilities

      389,919

  

    328,586

  

Shareholders’ equity

        26,369

  

      24,030

  

  Total liabilities and

      

   shareholders’ equity

$   416,288

  

$   352,616

  

Net interest income

 

$    3,713

  

$      3,178

 

Interest rate spread

  

     3.29%

  

     3.40%

Interest expense as a percent of

     

 average earning assets

  

     2.21%

  

     2.04%

Net interest margin

  

     3.83%

  

     3.86%

       


(1) Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 34%. The tax-equivalent adjustment was $75 thousand and $69 thousand for 2005 and 2004, respectively.

(2) Loans placed on nonaccrual status are reflected in the balances.

(3) Annualized