EXHIBIT 99.1

   

      [ex99002.gif]


 

FIRST NATIONAL

CORPORATION


Contact:  M. Shane Bell, EVP/CFO


sbell@firstbank-va.com

News Release

(540) 465-9121

July 21, 2005



FIRST NATIONAL CORPORATION ANNOUNCES INCREASE IN 2ND QUARTER EARNINGS


FOR IMMEDIATE RELEASE (Strasburg, Virginia) --- First National Corporation (OTCBB: FXNC) reported second quarter 2005 earnings of $1.4 million or $0.47 per basic and diluted share.  This is a 27.4% increase compared to earnings of $1.1 million or $0.37 per basic and diluted share for the second quarter of 2004.  Net interest income increased 23.6% to $3.9 million for the second quarter of 2005 compared to $3.2 million for the second quarter of 2004.  


Noninterest income decreased to $1.1 million for the quarter ended June 30, 2005 compared to $1.5 million for the same period in 2004 as a result of the sale of property in 2004 which generated a gain of $454 thousand.  Noninterest expense increased slightly to $2.9 million for the quarter ended June 30, 2005 from $2.8 million for the same period in 2004.


For the six months ended June 30, 2005, net income was $2.3 million or $0.80 per basic and diluted share.  This is a 19.4% increase over the $2.0 million in net income or $0.67 per basic and diluted share for the six months ended June 30, 2004.  The annualized return on average equity and average assets were 17.70% and 1.11%, respectively, for the six months ended June 30, 2005, compared to 16.43% and 1.10%, respectively, for the six months ended June 30, 2004.


Net interest income increased 20.4% to $7.6 million for the six months ended June 30, 2005 from $6.3 million for the same period in 2004.  The increase was primarily attributable to an 18.8% increase in average interest-earning assets over the same period.  The net interest margin increased 6 basis points to 3.88% for the six months ended June 30, 2005, compared to 3.82% for the same period in 2004.


Noninterest income decreased to $2.0 million for the six months ended June 30, 2005, compared to $2.4 million for the same period in 2004 as a result of the sale of property in 2004 which generated a gain of $454 thousand.  Service charges on deposit accounts, which included overdraft fees, decreased slightly to $1.2 million for the six months ended June 30, 2005 compared to $1.3 million for the same period in 2004.   This decrease was offset by an increase in fees for other customer services which increased 28.0% to $630 thousand for the six months ended June 30, 2005, compared to $492 thousand for the same period




in 2004.  Fees for other customer services include ATM and check card fees, trust and asset management fees and brokerage fees.  


Noninterest expense increased 7.2% to $5.7 million for the six months ended June 30, 2005, compared to $5.4 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.  This increase was offset by a decrease in legal and professional fees for the six months ended June 30, 2005 compared to the same period in 2004.

 

Total assets increased 19.9% to $448.5 million at June 30, 2005 from $374.1 million at June 30, 2004.  The majority of the asset growth occurred in the loan portfolio.  Loans, net of the allowance for loan losses, increased 23.3% to $353.4 million at June 30, 2005 from $286.6 million at June 30, 2004.  The allowance for loan losses totaled $3.2 million or 0.90% of total loans at June 30, 2005, compared to $2.8 million or 0.96% of total loans at June 30, 2004.  Net charge-offs were $66 thousand for the six months ended June 30, 2005, compared to $228 thousand for the comparable period of 2004, resulting in a lower loan loss provision of $411 thousand for the six months ended June 30, 2005 compared to $448 thousand for the same period in 2004.  The allowance for loan losses has increased over the last year, which is attributable to the growth of the loan portfolio.  The overall quality of the loan portfolio has improved, which is reflected in the ratio of allowance for loan losses to total loans.


Total deposits increased 16.8% or $50.9 million to $354.6 million at June 30, 2005 from $303.7 million at June 30, 2004.  The deposit mix remained consistent with prior periods as noninterest-bearing demand deposits, savings and interest-bearing demand deposits and time deposits comprised 22.6%, 40.3% and 37.1%, respectively, of total deposits at June 30, 2005, compared to 22.4%, 40.2% and 37.4% for the same period in 2004.  Other borrowings, principally Federal Home Loan Bank advances, totaled $55.2 million at June 30, 2005, compared to $35.2 million at June 30, 2004.


Shareholders’ equity totaled $27.5 million at June 30, 2005, an increase of 14.5% over the June 30, 2004 balance of $24.1 million.  The book value of the Corporation was $9.42 per share and total common shares outstanding were 2,922,860 at June 30, 2005.  Cash dividends paid during the six months ended June 30, 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 is a full service community bank offering traditional banking, trust and investment services from 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.




QUARTERLY PERFORMANCE SUMMARY

First National Corporation (OTCBB: FXNC)

(in thousands, except share and per share data)

    
 

For the Three Months Ended

For the Six Months Ended


INCOME STATEMENT


6/30/2005


6/30/2004


6/30/2005


6/30/2004

Interest and dividend income

    

  Interest and fees on loans

$          5,581 

$            4,246 

$       10,712 

$        8,327 

  Interest on federal funds sold

2 

2 

9 

4 

  Interest on deposits in banks

19 

5 

35 

10 

  Interest and dividends on securities available for sale:

    

    Taxable interest

526 

557 

1,022 

1,144 

    Nontaxable interest

102 

96 

208 

196 

    Dividends

          43 

                    17 

                  74 

                34 

Total interest and dividend income

$          6,273 

$            4,923 

$       12,060 

$        9,715 

     

Interest expense

    

  Interest on deposits

$          1,632 

$            1,233 

$         3,081 

$        2,393 

  Interest on federal funds purchased

39 

11 

66 

25 

  Interest on company obligated mandatorily redeemable     securities


119 


40 


227 


74 

  Interest on other borrowings

                540 

                  449 

            1,104 

              924 

Total interest expense

$          2,330 

$            1,733 

$         4,478 

$        3,416 

     

Net interest income

$          3,943 

$            3,190 

$         7,582 

$        6,299 

Provision for loan losses

                166 

                  285 

               411 

              448 

Net interest income after provision for loan losses

$          3,777 

$            2,905 

$         7,171 

$        5,851 

     

Noninterest income

    

  Service charges

$             661 

$               689 

$         1,246 

$        1,322 

  Fees for other customer services

361 

256 

630 

492 

  Gains (losses) on sale of premises and equipment

(11)

441 

(11)

435 

  Gains on sale of loans

55 

72 

111 

97 

  Gains on sale of securities

18 

                -- 

18 

                -- 

  Other

                  37 

                    34 

                 26 

                24 

Total noninterest income

$          1,121 

$            1,492 

$         2,020 

$        2,370 




Noninterest expense

    

  Salaries and employee benefits

$          1,586 

$            1,332 

$         3,111 

$        2,535 

  Occupancy

182 

178 

357 

357 

  Equipment

225 

217 

447 

428 

  Advertising

69 

104 

145 

200 

  Stationery and supplies

86 

73 

190 

182 

  Other

                732 

                  924 

            1,488 

           1,649 

Total noninterest expense

$          2,880 

$            2,828 

$         5,738 

$        5,351 

     

Income before income taxes

$          2,018 

$            1,569 

$         3,453 

$        2,870 

Provision for income taxes

                656 

                  500 

            1,106 

              904 

Net income

$          1,362 

$            1,069 

$         2,347 

$        1,966 

     

SHARE AND PER SHARE DATA (1)

    

Net income, basic and diluted

$            0.47 

$              0.37 

$           0.80 

$          0.67 

Shares outstanding at period end

2,922,860 

2,924,124 

2,922,860 

2,924,124 

Weighted average shares, basic and diluted

2,923,791 

2,924,124 

2,923,956 

2,924,124 

Book value at period end

$            9.42 

$              8.23 

$           9.42 

$          8.23 

Cash dividends

$            0.11 

$              0.10 

$           0.22 

$          0.20 







QUARTERLY PERFORMANCE SUMMARY

First National Corporation (OTCBB: FXNC)

(in thousands, except share and per share data)

  
 


6/30/2005


6/30/2004

   

KEY PERFORMANCE RATIOS (YTD)

  

Return on average assets

1.11% 

1.10% 

Return on average equity

17.70% 

16.43% 

Net interest margin

3.88% 

3.82% 

Efficiency ratio (2)

58.98% 

60.77% 

   

ASSET QUALITY (YTD)

  

Loan charge-offs

$               177 

$           262 

Loan recoveries

111 

34 

Net charge-offs

66 

228 

Nonaccrual loans

318 

289 

Nonperforming loans

318 

289 

Repossessed assets

59 

142 

   

CAPITAL RATIOS

  

Tier 1 Capital

$          35,388 

$      32,182 

Total Capital

38,609 

34,949 

Total Capital to Risk Weighted Assets

10.71% 

11.73% 

Tier 1 Capital to Risk Weighted Assets

9.82% 

10.78% 

Leverage Ratio

8.16% 

8.77% 

   

BALANCE SHEET

  

Cash and due from banks

$            9,726 

$        8,799 

Interest-bearing deposits in banks

752 

1,120 

Securities available for sale, at fair value

66,277 

61,250 

Loans held for sale

459 

121 

Loans, net of allowance for loan losses

353,365 

286,599 

Premises and equipment, net

12,696 

11,404 

Interest receivable

1,520 

1,297 

Other assets

               3,689 

           3,495 

  Total assets

$        448,484 

$    374,085 

   

Noninterest-bearing demand deposits

$          80,041 

$      67,974 

Savings and interest-bearing demand deposits

142,876 

122,221 

Time deposits

           131,721 

       113,515 

  Total deposits

$        354,638 

$    303,710 

   

Federal funds purchased

$               994 

$        1,484 

Other borrowings

55,232 

35,249 

Company obligated mandatorily redeemable capital securities

8,248 

8,248 

Accrued expenses and other liabilities

               1,840 

           1,342 

  Total liabilities

$        420,952 

$    350,033 

   






QUARTERLY PERFORMANCE SUMMARY

First National Corporation (OTCBB: FXNC)

(in thousands, except share and per share data)

  
 


6/30/2005


6/30/2004

BALANCE SHEET (continued)

  

Common stock

$             3,653 

$         3,655 

Surplus

1,465 

1,465 

Retained earnings

22,365 

19,062 

Accumulated other comprehensive income (loss), net

                    49 

            (130)

  Total shareholders’ equity

$           27,532 

$       24,052 

   

  Total liabilities and shareholders’ equity

$         448,484 

$     374,085 

   

Average balances

  

Total assets

$         425,108 

$     359,466 

Total shareholders’ equity

$           26,740 

$       24,066 

   

LOAN DATA

  

Mortgage loans on real estate:

  

  Construction

$           43,320 

$       36,235 

  Secured by farm land

2,211 

2,344 

  Secured by 1-4 family residential

96,024 

86,981 

  Other real estate loans

139,097 

93,057 

Loans to farmers (except those secured by real estate)

673 

323 

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

41,074 

35,929 

Consumer installment loans

31,027 

32,398 

Deposit overdrafts

249 

244 

All other loans

               2,911 

           1,855 

  Total loans

$         356,586 

$     289,366 

Allowance for loan losses

               3,221 

           2,767 

Loans, net

$         353,365 

$     286,599 

   

(1)  Share and per share data for prior periods have been restated to give retroactive effect of the Company’s two-for-one stock split declared March 18, 2005.  The stock split was payable on April 29, 2005 to shareholders of record March 30, 2005.

(2)  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 $7,728 and $6,435 for the period ended June 30, 2005 and 2004, respectively.  Noninterest income excluding securities gains and losses was $2,001 and $1,492 for the period ended June 30, 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

Six Months Ended June 30, 2005 and 2004

(dollars in thousands)

 


Six months ended June 30,

  

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

$         821 

$          36 

     8.75% 

$      1,140 

$          10 

1.83% 

 

Securities:

      
 

  Taxable

      53,766 

1,096 

     4.11% 

     58,654 

1,178 

     4.04% 

 

  Tax-exempt (1)

      9,724 

          314 

     6.52% 

        9,022 

          297 

     6.61% 

 

  Total securities

      63,490 

1,410 

     4.48% 

     67,676 

        1,475 

     4.38% 

 

Loans: (2)

      
 

  Taxable

    335,525 

10,636 

6.43% 

265,396 

8,259 

6.26% 

 

  Tax-exempt (1)

        3,610 

          115 

     6.40% 

        3,293 

          102 

     6.24% 

 

  Total loans

    337,135 

      10,751 

     6.43% 

    268,689 

8,361 

     6.26% 

 

Federal funds sold

          507 

              9 

     3.60% 

          882 

              4 

     0.91% 

 

 Total earning assets

    401,953 

      12,206 

     6.12% 

   338,387 

      9,850 

5.85% 

 

Less: allowance for loan losses

     (3,054)

  

     (2,623)

  
 

Total nonearning assets

      26,209 

  

      23,702 

  
 

   Total assets

$   425,108 

  

$   359,466 

  
        
 

LIABILITIES AND SHAREHOLDERS’ EQUITY 

    
 

Interest-bearing deposits:

      
 

 Checking

$      62,591 

$       526 

     1.69% 

$    63,286 

$         378 

     1.20% 

 

 Money market savings

        13,176 

          77 

     1.19% 

      10,541 

31 

     0.59% 

 

 Regular savings

        62,427 

         545 

     1.76% 

      43,775 

          148 

     0.68% 

 

 Certificates of deposit:

      
 

  Less than $100,000

        74,509 

1,154 

     3.12% 

72,106 

1,196 

     3.33% 

 

  Greater than $100,000

        47,338 

         780 

     3.32% 

      38,292 

          639 

     3.36% 

 

Total interest-bearing deposits

      260,041 

      3,082 

     2.39% 

    228,000 

        2,392 

     2.11% 

 

Federal funds purchased

         4,060 

          66 

     3.27% 

3,204 

            25 

     1.57% 

 

Company obligated mandatorily

      
 

 redeemable capital securities

         8,248 

         227 

     5.56% 

3,490 

            74 

     4.25% 

 

Other borrowings

        50,689 

      1,103 

     4.39% 

      38,391 

          924 

     4.84% 

 

Total interest-bearing liabilities

      323,038 

4,478 

     2.80% 

    273,085 

        3,415 

     2.52% 

 

Noninterest-bearing liabilities

      
 

 Demand deposits

        73,367 

  

      60,442 

  
 

 Other liabilities

         1,963 

  

        1,873 

  
 

Total liabilities

      398,368 

  

    335,400 

  
 

Shareholders’ equity

        26,740 

  

      24,066 

  
 

  Total liabilities and

      
 

   shareholders’ equity

$   425,108 

  

$   359,466 

  
 

Net interest income

 

$    7,728 

  

$      6,435 

 
 

Interest rate spread

  

     3.32% 

  

     3.33% 

 

Interest expense as a percent of 

     
 

 average earning assets

  

     2.25% 

  

     2.03% 

 

Net interest margin

  

     3.88% 

  

     3.82% 

        

(1)  Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 34%. The tax-equivalent adjustment was $146 thousand and $136 thousand for 2005 and 2004, respectively.

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

(3)  Annualized