FIRST NATIONAL CORP /VA/ - Quarter Report: 2005 September (Form 10-Q)

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-23976

FIRST NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)


Virginia		54-1232965
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

112 West King Street, Strasburg, Virginia		22657
(Address of principal executive offices)		(Zip Code)

(540) 465-9121

(Registrant’s telephone number, including area code)

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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 11, 2005, 2,922,860 shares of common stock, par value $1.25 per share, of the registrant were outstanding.

TABLE OF CONTENTS


		Page
Part I – Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets	3

	Consolidated Statements of Income	4

	Consolidated Statements of Cash Flows	6

	Consolidated Statements of Changes in Shareholders’ Equity	8

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

Item 4.	Controls and Procedures	27

Part II – Other Information

Item 1.	Legal Proceedings	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults upon Senior Securities	27

Item 4.	Submission of Matters to a Vote of Security Holders	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

Part I – Financial Information

Item 1. Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share data)


	(unaudited) September 30, 2005			December 31, 2004
Assets
Cash and due from banks	$	12,322		$	7,655
Federal funds sold		2,321			—
Interest-bearing deposits in banks		685			116
Securities available for sale, at fair value		62,584			63,366
Loans held for sale		—			190
Loans, net of allowance for loan losses, 2005, $3,374, 2004, $2,877		361,758			320,197
Premises and equipment, net		13,168			12,175
Interest receivable		1,515			1,334
Other assets		3,856			3,792

Total assets	$	458,209		$	408,825

Liabilities and Shareholders’ Equity

Liabilities
Deposits:
Noninterest-bearing demand deposits	$	85,053		$	68,882
Savings and interest-bearing demand deposits		147,625			135,881
Time deposits		139,673			116,182

Total deposits	$	372,351		$	320,945
Federal funds purchased		—			6,313
Other borrowings		47,227			45,240
Company obligated mandatorily redeemable capital securities		8,248			8,248
Accrued expenses and other liabilities		1,677			1,979
Commitments and contingencies		—			—

Total liabilities	$	429,503		$	382,725

Shareholders’ Equity
Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2005, 2,922,860 shares; 2004, 2,924,124 shares	$	3,653		$	3,655
Surplus		1,465			1,465
Retained earnings		23,654			20,687
Accumulated other comprehensive income (loss), net		(66	)		293

Total shareholders’ equity	$	28,706		$	26,100

Total liabilities and shareholders’ equity	$	458,209		$	408,825

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Income

Three months ended September 30, 2005 and 2004

(in thousands, except per share data)


	(unaudited) September 30, 2005		(unaudited) September 30, 2004
Interest and Dividend Income
Interest and fees on loans	$	6,158	$	4,623
Interest on federal funds sold		5		6
Interest on deposits in banks		20		10
Interest and dividends on securities available for sale:
Taxable interest		523		486
Tax-exempt interest		100		97
Dividends		30		31

Total interest and dividend income	$	6,836	$	5,253

Interest Expense
Interest on deposits	$	1,891	$	1,224
Interest on federal funds purchased		28		8
Interest on company obligated mandatorily redeemable capital securities		129		88
Interest on other borrowings		504		512

Total interest expense	$	2,552	$	1,832

Net interest income	$	4,284	$	3,421
Provision for loan losses		169		220

Net interest income after provision for loan losses	$	4,115	$	3,201

Noninterest Income
Service charges	$	676	$	688
Fees for other customer services		405		279
Gains on sale of premises and equipment		1		—
Gains on sale of loans		112		37
Other operating income		73		28

Total noninterest income	$	1,267	$	1,032

Noninterest Expense
Salaries and employee benefits	$	1,602	$	1,337
Occupancy		178		186
Equipment		258		223
Advertising		83		93
Stationery and supplies		114		99
Telecommunications		48		58
Legal and professional fees		56		73
Other operating expense		655		664

Total noninterest expense	$	2,994	$	2,733

Income before income taxes	$	2,388	$	1,500
Provision for income taxes		777		494

Net income	$	1,611	$	1,006

Earnings per common share, basic and diluted	$	0.55	$	0.35

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Income

Nine months ended September 30, 2005 and 2004

(in thousands, except per share data)


	(unaudited) September 30, 2005			(unaudited) September 30, 2004
Interest and Dividend Income
Interest and fees on loans	$	16,870		$	12,950
Interest on federal funds sold		14			10
Interest on deposits in banks		55			20
Interest and dividends on securities available for sale:
Taxable interest		1,545			1,630
Tax-exempt interest		308			293
Dividends		104			65

Total interest and dividend income	$	18,896		$	14,968

Interest Expense
Interest on deposits	$	4,972		$	3,617
Interest on federal funds purchased		94			33
Interest on company obligated mandatorily redeemable capital securities		356			162
Interest on other borrowings		1,608			1,436

Total interest expense	$	7,030		$	5,248

Net interest income	$	11,866		$	9,720
Provision for loan losses		580			668

Net interest income after provision for loan losses	$	11,286		$	9,052

Noninterest Income
Service charges	$	1,922		$	2,010
Fees for other customer services		1,035			771
Gains (losses) on sale of premises and equipment		(10	)		435
Gains on sale of loans		223			134
Gains on sale of securities, available for sale		18			—
Other operating income		99			52

Total noninterest income	$	3,287		$	3,402

Noninterest Expense
Salaries and employee benefits	$	4,713		$	3,872
Occupancy		535			543
Equipment		705			651
Advertising		228			293
Stationery and supplies		304			281
Telecommunications		146			191
Legal and professional fees		129			327
Other operating expense		1,972			1,926

Total noninterest expense	$	8,732		$	8,084

Income before income taxes	$	5,841		$	4,370
Provision for income taxes		1,883			1,398

Net income	$	3,958		$	2,972

Earnings per common share, basic and diluted	$	1.35		$	1.02

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows

Nine months ended September 30, 2005 and 2004

(in thousands)


	(unaudited) September 30, 2005			(unaudited) September 30, 2004
Cash Flows from Operating Activities
Net income	$	3,958		$	2,972
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
Depreciation and amortization		580			519
Origination of loans held for sale		(14,634	)		(12,437	)
Proceeds from sale of loans available for sale		15,047			12,689
Provision for loan losses		580			668
Gains on sale of securities available for sale		(18	)		—
(Gains) losses on sale of bank premises and equipment		10			(435	)
Gains on sale of loans		(223	)		(134	)
Gain on sale of foreclosed real estate		(19	)		—
Accretion of security discounts		(15	)		(20	)
Amortization of security premiums		188			288
Changes in assets and liabilities:
(Increase) decrease in interest receivable		(181	)		164
Increase in other assets		(334	)		(32	)
Decrease in accrued expenses and other liabilities		(117	)		(297	)

Net cash provided by operating activities	$	4,822		$	3,945

Cash Flows from Investing Activities
Proceeds from sales of securities available for sale	$	4,758		$	—
Proceeds from maturities, calls, and principal payments of securities available for sale		8,807			13,839
Purchase of securities available for sale		(13,482	)		(1,561	)
Increase in federal funds sold		(2,321	)		(7,461	)
Purchase of premises and equipment		(1,585	)		(854	)
Proceeds from sale of premises and equipment		2			527
Net increase in loans		(42,141	)		(58,610	)
Proceeds from sale of foreclosed real estate		289			—

Net cash used in investing activities	$	(45,673	)	$	(54,120	)

Cash Flows from Financing Activities
Net increase in demand deposits and savings accounts	$	27,915		$	30,164
Net increase in time deposits		23,491			4,633
Proceeds from other borrowings		58,000			24,000
Principal payments on other borrowings		(56,013	)		(15,310	)
Proceeds from issuance of company obligated mandatorily redeemable capital securities		—			5,000
Cash dividends paid		(965	)		(877	)
Acquisition of common stock		(28	)		—
Decrease in federal funds purchased		(6,313	)		(507	)

Net cash provided by financing activities	$	46,087		$	47,103

Increase (decrease) in cash and cash equivalents	$	5,236		$	(3,072	)

Cash and Cash Equivalents
Beginning	$	7,771		$	10,919
Ending	$	13,007		$	7,847

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows

(Continued)

Nine months ended September 30, 2005 and 2004

(in thousands)


	(unaudited) September 30, 2005			(unaudited) September 30, 2004
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	6,934		$	5,272

Income taxes	$	2,005		$	916

Supplemental Disclosures of Noncash Investing Activities
Unrealized loss on securities available for sale	$	(544	)	$	(315	)

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

Nine months ended September 30, 2005 and 2004

(in thousands, except share and per share data)

(unaudited)


	Common Stock			Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Comprehensive Income			Total
Balance, December 31, 2003	$	3,655		$	1,465	$	17,680		$	703					$	23,503
Comprehensive income:
Net income		—			—		2,972			—		$	2,972			2,972
Other comprehensive loss, net of tax, unrealized holding losses arising during the period (net of tax, $107)		—			—		—			(208	)		(208	)		(208	)

Total comprehensive income												$	2,764

Cash dividends ($0.30 per share)		—			—		(877	)		—						(877	)

Balance, September 30, 2004	$	3,655		$	1,465	$	19,775		$	495					$	25,390


	Common Stock			Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income			Total
Balance, December 31, 2004	$	3,655		$	1,465	$	20,687		$	293					$	26,100
Comprehensive income:
Net income		—			—		3,958			—		$	3,958			3,958
Other comprehensive loss, net of tax, unrealized holding losses arising during the period (net of tax, $179)		—			—		—			—			(347	)		—
Reclassification adjustment (net of tax, $6)		—			—		—			—			(12	)		—

Other comprehensive loss (net of tax, $185)		—			—		—			(359	)		(359	)		(359	)

Total comprehensive income												$	3,599

Cash dividends ($0.33 per share)		—			—		(965	)		—						(965	)
Acquisition of 1,264 shares of common stock		(2	)		—		(26	)		—						(28	)

Balance, September 30, 2005	$	3,653		$	1,465	$	23,654		$	(66	)				$	28,706

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

Note 1. General

The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiaries, including First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications consisting of a normal and recurring nature considered necessary to present fairly the financial positions at September 30, 2005 and December 31, 2004, and the results of operations for the three and nine months ended September 30, 2005 and 2004 and cash flows and changes in shareholders’ equity for the nine months ended September 30, 2005 and 2004.

Operating results for the three and nine month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. Certain reclassifications have been made to prior period balances to conform to the current period presentation.

Note 2. Securities

The Company invests in U.S agency and mortgage-backed securities, obligations of state and political subdivisions, corporate equity securities and restricted securities. Restricted securities include required equity investments in certain correspondent banks. Amortized costs and fair values of securities available for sale at September 30, 2005 and December 31, 2004 were as follows:


	*(in thousands)* September 30, 2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. agency and mortgage-backed securities	$	49,798	$	96	$	(516	)	$	49,378
Obligations of states and political subdivisions		9,532		214		(23	)		9,723
Corporate equity securities		6		129		—			135
Restricted securities		3,348		—		—			3,348

	$	62,684	$	439	$	(539	)	$	62,584


	*(in thousands)* December 31, 2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. agency and mortgage-backed securities	$	50,049	$	432	$	(224	)	$	50,257
Obligations of states and political subdivisions		9,885		195		(46	)		10,034
Corporate equity securities		6		87		—			93
Restricted securities		2,982		—		—			2,982

	$	62,922	$	714	$	(270	)	$	63,366

The Company had no securities classified as held to maturity at September 30, 2005 or December 31, 2004.

Notes to Consolidated Financial Statements

(unaudited)

At September 30, 2005 and December 31, 2004, investments in an unrealized loss position that are temporarily impaired were as follows:


	*(in thousands)* September 30, 2005
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)
U.S. agency and mortgage- backed securities	$	30,784	$	(304	)	$	8,427	$	(212	)	$	39,211	$	(516	)
Obligations of states and political subdivisions		252		(1	)		1,441		(22	)		1,693		(23	)

	$	31,036	$	(305	)	$	9,868	$	(234	)	$	40,904	$	(539	)


	*(in thousands)* December 31, 2004
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)
U.S. agency and mortgage- backed securities	$	12,226	$	(61	)	$	5,816	$	(163	)	$	18,042	$	(224	)
Obligations of states and political subdivisions		2,463		(29	)		532		(17	)		2,995		(46	)
	$	14,689	$	(90	)	$	6,348	$	(180	)	$	21,037	$	(270	)

The table above provides information about securities that have been in an unrealized loss position for less than twelve consecutive months and securities that have been in an unrealized loss position for twelve consecutive months or more. All of the securities with unrealized losses are considered temporarily impaired and are a result of interest rate factors. These securities have not suffered credit deterioration, and the Company has the ability to hold these issues until maturity. At September 30, 2005, there were twenty-six U.S. agency and mortgage-backed securities and six obligations of state and political subdivisions in an unrealized loss position. Ninety-eight percent of the Company’s investment portfolio had AAA credit ratings with a weighted-average repricing term of 3.3 years at September 30, 2005.

Note 3. Loans

Loans at September 30, 2005 and December 31, 2004 are summarized as follows:


	*(in thousands)*
	September 30, 2005		December 31, 2004
Mortgage loans on real estate:
Construction	$	42,289	$	42,538
Secured by farm land		2,195		2,298
Secured by 1-4 family residential		98,580		94,960
Other real estate loans		143,871		111,506
Loans to farmers (except those secured by real estate)		1,911		449
Commercial and industrial loans (except those secured by real estate)		40,851		37,059
Consumer loans		30,058		31,075
Deposit overdrafts		280		338
All other loans		5,097		2,851

Total loans	$	365,132	$	323,074
Allowance for loan losses		3,374		2,877

Loans, net	$	361,758	$	320,197

Notes to Consolidated Financial Statements

(unaudited)

Note 4. Allowance for Loan Losses

Transactions in the allowance for loan losses for the nine months ended September 30, 2005 and for the year ended December 31, 2004 were as follows:


	*(in thousands)*
	September 30, 2005			December 31, 2004
Balance at beginning of year	$	2,877		$	2,547
Provision charged to operating expense		580			810
Loan recoveries		165			89
Loan charge-offs		(248	)		(569	)

Balance at end of period	$	3,374		$	2,877

Note 5. Other Borrowings

The Company had unused lines of credit totaling $58.2 million available with non-affiliated banks at September 30, 2005. This amount primarily consists of a blanket floating lien agreement with the Federal Home Loan Bank of Atlanta under which the Bank can borrow up to 19% of its total assets.

At September 30, 2005, the Company had borrowings from the Federal Home Loan Bank system totaling $47.0 million which mature through March 17, 2008. The interest rate on these notes payable ranged from 3.15% to 5.52% and the weighted average rate was 4.07%. The Company had collateral pledged on these borrowings at September 30, 2005 including real estate loans totaling $66.7 million and Federal Home Loan Bank stock and securities with a book value of $4.9 million.

At September 30, 2005, the Bank had a $227 thousand note payable, secured by a deed of trust, which requires monthly payments of $2 thousand and matures January 3, 2016. The fixed interest rate on this loan is 4.00%.

Note 6. Capital Requirements

A comparison of the capital of the Company and the Bank at September 30, 2005 and December 31, 2004 with the minimum regulatory guidelines were as follows:


	*(dollars in thousands)*
	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
At September 30, 2005:
Total Capital (to Risk Weighted Assets):
Consolidated	$	40,058	10.75	%	$	29,808	8.00	%		N/A	N/A
First Bank	$	39,526	10.62	%	$	29,765	8.00	%	$	37,206	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	36,684	9.84	%	$	14,904	4.00	%		N/A	N/A
First Bank	$	36,152	9.72	%	$	14,882	4.00	%	$	22,323	6.00	%
Tier 1 Capital (to Average Assets):
Consolidated	$	36,684	8.12	%	$	18,079	4.00	%		N/A	N/A
First Bank	$	36,152	8.01	%	$	18,058	4.00	%	$	22,572	5.00	%

Notes to Consolidated Financial Statements

(unaudited)


At December 31, 2004:
Total Capital (to Risk Weighted Assets):
Consolidated	$	36,589	11.25	%	$	26,011	8.00	%		N/A	N/A
First Bank	$	36,010	11.09	%	$	25,969	8.00	%	$	33,134	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	33,712	10.37	%	$	13,005	4.00	%		N/A	N/A
First Bank	$	33,133	10.21	%	$	12,984	4.00	%	$	19,880	6.00	%
Tier 1 Capital (to Average Assets):
Consolidated	$	33,712	8.44	%	$	15,978	4.00	%		N/A	N/A
First Bank	$	33,133	8.31	%	$	15,956	4.00	%	$	19,946	5.00	%

Note 7. Company Obligated Mandatorily Redeemable Capital Securities

On March 11, 2003, First National (VA) Statutory Trust I (Trust I), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities, commonly known as trust preferred securities. On March 26, 2003, $3.0 million of trust preferred securities were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest. The interest rate at September 30, 2005 was 7.11%. The securities have a mandatory redemption date of March 26, 2033, and are subject to varying call provisions beginning March 26, 2008. The principal asset of Trust I is $3.1 million of the Company’s junior subordinated debt securities with maturities and interest rates comparable to the trust preferred securities.

On June 8, 2004, First National (VA) Statutory Trust II (Trust II), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On June 17, 2004, $5.0 million of trust preferred securities were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest. The interest rate at September 30, 2005 was 6.49%. The securities have a mandatory redemption date of June 17, 2034, and are subject to varying call provisions beginning June 17, 2009. The principal asset of Trust II is $5.2 million of the Company’s junior subordinated debt securities with maturities and interest rates comparable to the trust preferred securities.

While these securities are debt obligations of the Company, they are included in capital for regulatory capital ratio calculations. Under present regulations, the trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy purposes as long as their amount does not exceed 25% of Tier 1 capital, including total trust preferred securities. The portion of the trust preferred securities not considered as Tier 1 capital, if any, may be included in Tier 2 capital. As of September 30, 2005, the total amount of trust preferred securities issued by the Trust can be included in the Company’s Tier 1 capital.

Notes to Consolidated Financial Statements

(unaudited)

Note 8. Benefit Plans

The Bank has a noncontributory, defined benefit pension plan for all full-time employees over 21 years of age with at least one year of credited service. Benefits are generally based upon years of service and average compensation for the five highest-paid consecutive years of service. The Bank’s funding practice has been to make at least the minimum required annual contribution permitted by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended.

Components of the net periodic benefit cost of the plan for the nine months ended September 30, 2005 and 2004 were as follows:


	Pension Benefits
	For the three months ended September 30,						For the nine months ended September 30,
	2005			2004			2005			2004
Service cost	$	48,776		$	37,514		$	146,328		$	112,542
Interest cost		55,237			48,831			165,711			146,493
Expected return on plan assets		(49,095	)		(33,212	)		(147,285	)		(99,636	)
Amortization of net obligation at transition		(1,407	)		(1,407	)		(4,221	)		(4,221	)
Amortization of prior service cost		818			818			2,454			2,454
Amortization of net loss		12,630			9,415			37,890			28,245

Net periodic benefit cost	$	66,959		$	61,959		$	200,877		$	185,877

The Company previously disclosed in its consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2004, that it expected to contribute $267,835 to its pension plan for the 2005 plan year. The Company did not make a contribution to the pension plan for the 2005 plan year during the nine months ended September 30, 2005. The Company is planning to make the contribution for the 2005 plan year during the fourth quarter of 2005.

In addition to the defined benefit pension plan, the Company maintains a 401(k) plan and an employee stock ownership plan for eligible employees. The Bank also maintains a Split Dollar Life Insurance Plan that provides life insurance coverage to insurable directors. See Note 11 of the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 for additional information about the Company’s benefit plans.

Note 9. Stock Split

On March 16, 2005, the Board of Directors of the Company declared a two-for-one stock split of the Company’s common stock, including authorized and unissued shares. The stock split was payable on April 29, 2005 to shareholders of record March 30, 2005. As a result of the stock split, the Company had 8,000,000 shares of common stock authorized, at a par value of $1.25 per share, and 2,924,124 shares outstanding at April 29, 2005. Subsequent to the stock split, the Company purchased and retired 1,264 shares of its common stock, resulting in 2,922,860 shares outstanding at September 30, 2005. Prior period financial information in this report has been restated to reflect the stock split, as appropriate.

Note 10. Earnings per Share

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. There are no potential common shares that would have a dilutive effect. All amounts have been retroactively restated to reflect the two-for-one stock split discussed in Note 9 above.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations of the Company for the three and nine months ended September 30, 2005 should be read in conjunction with the consolidated financial statements and related notes. The results of operations for the three and nine month periods ended September 30, 2005 may not be indicative of the results to be achieved for the year.

EXECUTIVE OVERVIEW

First National Corporation (the Company) is the financial holding company of First Bank (the Bank), First National (VA) Statutory Trust I (Trust I) and First National (VA) Statutory Trust II (Trust II). The Trusts were formed for the purpose of issuing redeemable capital securities, commonly known as trust preferred securities. The Bank owns First Bank Financial Services, Inc., which invests in partnerships that provide title insurance and investment services.

The Company’s banking subsidiary, First Bank, is a full service community bank that offers traditional bank services including individual and commercial demand and time deposit accounts, commercial and consumer loans, residential mortgages, credit card services, deposit services, personal trust services and wealth management services. The Bank offers internet banking access for banking services, and online bill payment for both consumers and commercial customers. Lending is focused on individuals and small to medium-sized businesses in the northern Shenandoah Valley region of Virginia.

Net income for the three months ended September 30, 2005 was $1.6 million, an increase of $605 thousand or 60.1% compared to $1.0 million for the same period in 2004. Net income per share, basic and diluted, increased $0.20 to $0.55 for the three months ended September 30, 2005 from $0.35 for the same period in 2004. The increase in earnings resulted from a 25.2% increase in the Company’s net interest income, a 23.2% decrease in the provision for loan losses and a 22.8% increase in noninterest income when comparing the same periods. The return on average assets was 1.41% for the third quarter of 2005, compared to 1.05% for the same period in 2004, while the return on average equity increased 657 basis points to 22.71% for the third quarter of 2005, compared to 16.14% for the same period in 2004.

For the nine months ended September 30, 2005, net income was $4.0 million, an increase of $986 thousand or 33.2% compared to $3.0 million for the same period in 2004. The increase in earnings resulted from a 22.1% increase in net interest income and a 13.2% decrease in the provision for loan losses, offset by a 3.4% decrease in noninterest income and an 8.0% increase in noninterest expense when comparing the same periods. The decrease in noninterest income was the result of net gains on sale of premises and equipment of $435 thousand in 2004 that included a $454 thousand gain on sale of property. Excluding the net gain on sale of premises and equipment, noninterest income increased 10.8%. Net income per share, basic and diluted, increased $0.33 to $1.35 for the nine months ended September 30, 2005 from $1.02 for the same period in 2004. The return on average assets was 1.22% for the first nine months of 2005 compared to 1.08% during the same period in 2004. The return on average equity increased 314 basis points to 19.44% for the nine months ended September 30, 2005 compared to 16.30% for the same period in 2004.

Net interest income increased for both the three and nine month periods due to improvements in the net interest margin as a result of increasing interest rates and growth in average interest-earning assets of 18.6% for the three month period and 18.7% for the nine month period, funded primarily by deposit growth. For both periods the provision for loan losses decreased as a result of less charge-offs and strong asset quality.

During the first nine months of 2005, total assets increased 12.1%, or $49.4 million, to $458.2 million at September 30, 2005 from $408.8 million at December 31, 2004. Asset growth occurred primarily in the loan portfolio where loans, net of the allowance for loan losses, increased 13.0% or $41.6 million to $361.8 million at September 30, 2005 from $320.2 million at December 31, 2004. The securities portfolio decreased slightly to $62.6 million at September 30, 2005 from $63.4 million at December 31, 2004. Asset growth was funded by deposits that increased 16.0% or $51.4 million to $372.4 million at September 30, 2005 from $320.9 at December 31, 2004.

The Company does not anticipate net income to increase in future periods at the same growth rate as recent periods. Factors that will impact net income include net interest income, which is not expected to grow at recent growth rates in future periods. Increases in net interest income will be determined by the ability to increase the balances of interest-earning assets, maintain the asset mix, attract funding from the local deposit market, and maintain the net interest margin. Competition for loans and deposits in the market, which has increased significantly recently, and changes in market rates will continue to create challenges in maintaining the net interest margin and growing the balance sheet. It will be more difficult to grow the loan portfolio if the rate of economic expansion slows in the local market.

The provision for loan losses is another factor that will impact net income. The provision is determined by asset quality, net charge-offs, loan growth and economic conditions. Economic conditions, which may not be as favorable in the near future, have a direct correlation with asset quality, net charge-offs and ultimately the required provision for loan losses. Noninterest income and noninterest expenses are the other factors impacting net income. The Company does not anticipate significant fluctuations in noninterest income in future periods. This is based on the expectation of slowing economic expansion in the market that could decrease the growth rate of fees earned for other customer services. Fees are generated from deposit transaction fees, brokerage fees and trust fees. Factors affecting fee income include customer behavior and the Company’s ability to grow its customer base. Noninterest expenses are anticipated to increase in future periods as the Company plans to expand its retail branch footprint in the current market area.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

The Company makes forward looking statements in this discussion that are subject to risks and uncertainties. These forward looking statements include statements regarding 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 factors including:

•

changes in general economic and business conditions in the market area;

•

risks inherent in making loans such as repayment risks and fluctuating collateral values;

•

the ability to successfully manage growth or implement growth strategies if the Company is unable to identify attractive markets, locations or opportunities to expand in the future;

•

competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

•

changing trends in customer profiles and behavior;

•

maintaining cost controls and asset qualities as we open or acquire new branches;

•

problems with technology utilized by us;

•

reliance on the management team, including the ability to attract and retain key personnel;

•

the successful management of interest rate risk;

•

changes in interest rates and interest rate policies;

•

maintaining capital levels adequate to support growth;

•

changes in banking and other laws and regulations applicable to us; and

•

demand, development and acceptance of new products and services.

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

CRITICAL ACCOUNTING POLICIES

General

The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The financial information contained within the financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of transactions would be the same, the timing of events that would impact transactions could change.

Allowance for loan losses

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Bank’s allowance for loan losses has two basic components: the specific allowance and the formula allowance. Both of these components are determined based upon estimates that can and do change when the actual events occur. The allowance for loan loss is comprised of the sum of the specific allowance and the formula allowance.

The specific allowance is typically used to individually allocate an allowance for larger balance, commercial, non-homogeneous loans. The specific allowance uses various techniques to arrive at an estimate of loss. First, analysis of the borrower’s overall financial condition, resources and payment record; the prospects for support from financial guarantors; and the fair market value of collateral, net of selling costs are used to estimate the probability and severity of inherent losses. Additionally, historical default rates and loss severities, internal risk ratings, industry and market conditions and trends, and other environmental factors are considered. The use of these values is inherently subjective and actual losses could differ from the estimates.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value (net of selling costs), and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction 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 market value of the collateral, net of selling costs, if the loan repayment is collateral dependent. The Bank does not separately identify individual consumer and residential loans for impairment disclosures.

The formula allowance is used for estimating the loss on pools of smaller-balance, homogeneous loans including residential mortgage loans, installment loans, other consumer loans, and outstanding loan commitments. This formula is also used for the remaining pool of larger balance, non-homogeneous loans, which were not allocated a specific allowance upon impairment review. The formula allowance begins with estimates of probable losses inherent in the loan portfolio based upon various statistical analyses. These include an analysis of historical delinquency and loss experience over a five-year period, together with analyses that reflect current economic trends and conditions. The formula allowance uses a historical loss view as an indicator of future losses. As a result, even though this history is regularly updated with the most recent loss information, it could differ from the loss incurred in the future.

LENDING POLICIES

General

The principal risk associated with each of the categories of loans in the Bank’s portfolio is the creditworthiness of its borrowers. Within each category, such risk is increased or decreased, depending on prevailing economic conditions. The risk associated with real estate mortgage , commercial and consumer loans varies, based on economic conditions, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies, based on the supply and demand for the type of real estate under construction.

In an effort to manage the risk, the Bank’s loan policy authorizes loan amount approval limits for individual loan officers based on their position within the Bank and level of experience. The Bank’s Board of Directors approves all loan relationships greater than $1.3 million. The President & CEO and the Executive Vice President - Loan Administration can combine their lending limits to approve loan relationships up to $1.3 million. All loans greater than $750 thousand are reported to the Board. The Loan Committee consists of six non-management directors. The Committee approves the Bank’s Loan Policy and reviews loans that have been charged-off. It also reviews the allowance for loan loss adequacy calculation as well as the loan watch list and other management reports. The Committee meets on a monthly basis and the Chairman of the Committee then reports to the Board of Directors.

Residential loan originations are primarily generated by the Bank’s loan officer solicitations, referrals by real estate professionals, and existing or new bank customers. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of developers and continued business from customers. All completed loan applications are reviewed by the Bank’s loan officers. As part of the application process, information is obtained concerning the income, financial condition, employment and credit history of the applicant. If commercial real estate is involved, information is also obtained concerning cash flow available for debt service. Loan quality is analyzed based on the Bank’s experience and credit underwriting guidelines as well as the guidelines issued by the purchasers of loans, depending on the type of loan involved. Real estate collateral is appraised by independent fee appraisers who have been pre-approved by the Executive Vice President - Loan Administration.

Construction Lending

The Bank makes local construction loans, including residential and land acquisition and development loans. These loans are secured by the property under construction and the underlying land for which the loan was obtained. Construction and land development loans outstanding at September 30, 2005 and December 31, 2004, were $42.3 million, or 11.6% of gross loans, and $42.5 million, or 13.2% of gross loans, respectively. The majority of these loans have an average life of approximately one year and reprice monthly as key rates change. The interest rate charged on some of these loans float with the market, assisting the Bank in managing interest rate risk. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction lending is attributable to the fact that loan funds are advanced upon the security of the land or property under construction, which value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of appraised value, in addition to analyzing the creditworthiness of its borrowers. The Bank also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners.

Commercial Business Lending

Commercial business loans generally have a higher degree of risk than loans secured by real estate, but typically have higher yields. Commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as real estate. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. At September 30, 2005, commercial loans not secured by real estate totaled $40.9 million, or 11.2% of gross loans, as compared to $37.1 million, or 11.5%, at December 31, 2004.

Commercial Real Estate Lending

Commercial real estate loans are secured by various types of commercial real estate typically in the Bank’s market area, including multi-family residential buildings, commercial buildings and offices, hotels, small shopping centers, farms and churches. At September 30, 2005, commercial real estate loans totaled $146.1 million or 40.0% of the Bank’s gross loans, as compared to $113.8 million, or 35.2%, at December 31, 2004. In its underwriting of commercial real estate, the Bank may lend, under federal regulation, up to 85% of the secured property’s appraised value, although the Bank’s loan to original appraised value ratio on such properties is typically 80% or less in many cases. Commercial real estate lending entails significant additional risk, compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy, in general. The Bank’s commercial real estate loan underwriting criteria require an examination of debt service coverage ratios and the borrower’s creditworthiness, prior credit history and reputation, and the Bank typically requires personal guarantees or endorsements of the borrowers’ principal owners. The Bank also carefully evaluates the location of the collateral.

Residential Real Estate Lending

Residential lending activity may be generated by the Bank’s loan officer solicitations, referrals by real estate professionals, and existing or new bank customers. Loan applications are taken by a Bank loan officer. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. Loan quality is analyzed based on guidelines issued by the applicable secondary market investor. The non-conforming one-to-four family loans originated by the Bank that do not generally meet investor guidelines are underwritten using the Bank’s underwriting guidelines. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Executive Vice President - Loan Administration.

Typically, the Bank originates all fixed rate mortgage loans with the intent to sell to correspondent lenders. Depending on the financial goals of the Company, the Bank occasionally originates and retains non-conforming loans. At September 30, 2005, $98.6 million, or 27.0%, of the Bank’s loan portfolio consisted of one-to-four-family residential real estate loans as compared to $95.0 million, or 29.4%, at December 31, 2004.

In connection with residential real estate loans, the Bank requires title insurance, hazard insurance and, if required, flood insurance. Flood determination letters with life of loan tracking are obtained on all federally related transactions with improvements serving as security for the transaction. The Bank requires escrows for real estate taxes and insurance for secondary market loans.

Consumer Lending

The Bank offers various secured and unsecured consumer loans, including unsecured personal loans and lines of credit, automobile loans, deposit account loans, installment and demand loans, and credit card loans. At September 30, 2005, the Bank had consumer loans, including deposit overdraft balances, of $30.3 million, or 8.3% of gross loans, as compared to $31.4 million, or 9.7%, at December 31, 2004. Such loans are generally made to customers with whom the Bank has a pre-existing relationship.

Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured, such as lines of credit, or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on a proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the collateral in relation to the proposed loan amount.

RESULTS OF OPERATIONS

General

Net interest income represents the primary source of earnings for the Company. Net interest income equals the amount by which interest income on earning assets, predominately loans and securities, exceeds interest expense on interest-bearing liabilities, including deposits, other borrowings and trust preferred securities. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, are the components that impact the level of net interest income. The net interest margin is calculated by dividing tax equivalent net interest income by average earning assets. The provision for loan losses, noninterest income and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consists of income from service charges on deposit accounts; fees charged for other customer services; gains and losses from the sale of assets, including loans held for sale, securities, and premises and equipment; general and administrative expenses; and income tax expense.

Comparing the quarter ended September 30, 2005 to the same period in 2004, net income increased 60.1% to $1.6 million from $1.0 million. This increase was a result of an increase in net interest income of 25.2%, a decrease in the provision for loan losses of 23.2% and an increase in noninterest income of 22.8% for the same periods. These increases were offset by an increase in noninterest expenses of 9.5%.

For the nine months ended September 30, 2005, net income increased 33.2% to $4.0 million from $3.0 million for the same period in 2004. This increase was attributable to a 22.1% increase in net interest income and a 13.2% decrease in the provision for loan losses comparing these periods. These increases were offset by a decrease in noninterest income of 3.4% and an increase in noninterest expenses of 8.0%. Noninterest income decreased as a result of non-recurring net gains on sale of premises and equipment totaling $435 thousand in 2004. Excluding the net gains on sale of premises and equipment, noninterest income increased 10.8%.

The Company does not anticipate that net income will continue to increase at the recent growth rates in future periods. This is based primarily on expectations of slower balance sheet growth resulting from slowing economic expansion in the local market. Other factors include increasing pressure on the interest margin from market rates and competitors, and expansion plans of the Company’s retail banking network that is anticipated to increase noninterest expenses.

Net Interest Income

Net interest income was $4.3 million for the third quarter of 2005, which was an increase of $863 thousand or 25.2% over the $3.4 million reported for the same period in 2004. Continued growth in average earning assets, predominantly in the loan portfolio, as well as improvement in the net interest margin resulted in the increase in net interest income. The net interest margin for the third quarter of 2005 was 4.04%, an increase of 19 basis points when compared to 3.85% for the third quarter of 2004. Increasing interest rates combined with an asset sensitive balance sheet had a positive impact on the net interest margin when comparing the periods.

For the nine months ended September 30, 2005, net interest income increased 22.1%, or $2.1 million, to $11.9 million as compared to $9.7 million for the same period in 2004. This increase was also attributable to continuing growth in average earning assets, predominantly in the loan portfolio, and an improvement in the net interest margin, which increased 11 basis points to 3.94% for the nine months ended September 30, 2005 compared to 3.83% for the same period in 2004. Increasing interest rates during the last nine months combined with an asset sensitive balance sheet had a positive impact on the net interest margin when comparing the periods.

The Company does not anticipate significant changes in net interest income resulting from key interest rate changes during the next 12 months based on the interest rate sensitivity analysis included in Item 3 (Quantitative and Qualitative Disclosures about Market Risk) below. However, the Company does not expect net interest income to increase at recent growth rates in future periods. This is based primarily on expectations that the market area will experience slower economic expansion, which directly impacts the Company’s ability to grow the loan portfolio. Other factors that may slow the growth of net interest income include net interest margin pressures caused by market rates and competition for loans and deposits in the local market.

The following tables provide information on average earning assets and interest-bearing liabilities for the three and nine months ended September 30, 2005 and 2004 as well as amounts and rates of tax equivalent interest earned and interest paid.

Average Balances, Income and Expense, Yields and Rates


	*(dollars in thousands)* Three months ended September 30,
	2005							2004
	Average Balance			Interest Income/ Expense		Yield/ Rate (3)		Average Balance			Interest Income/ Expense		Yield/ Rate (3)
ASSETS
Balances at correspondent banks - interest bearing	$	690		$	20	11.33	%	$	1,385		$	9	2.65	%
Securities:
Taxable		54,246			553	4.04	%		49,837			517	4.13	%
Tax-exempt (1)		9,545			151	6.30	%		8,951			147	6.53	%

Total securities		63,791			704	4.38	%		58,788			664	4.50	%
Loans: (2)
Taxable		359,057			6,114	6.76	%		295,477			4,588	6.18	%
Tax-exempt (1)		3,436			67	7.73	%		3,341			53	6.26	%

Total loans		362,493			6,181	6.76	%		298,818			4,641	6.18	%
Federal funds sold		662			5	2.89	%		1,722			7	1.50	%

Total earning assets		427,636			6,910	6.41	%		360,713			5,321	5.87	%
Less: allowance for loan losses		(3,307	)						(2,844	)
Total non-earning assets		27,656							24,545

Total assets	$	451,985						$	382,414

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Checking	$	64,158		$	318	1.97	%	$	67,833		$	227	1.33	%
Money market savings		13,277			47	1.39	%		11,451			24	0.82	%
Regular savings		70,116			399	2.26	%		46,816			102	0.86	%
Certificates of deposit:
Less than $100,000		76,983			627	3.23	%		70,610			553	3.12	%
Greater than $100,000		55,558			500	3.57	%		39,821			318	3.18	%

Total interest bearing deposits		280,092			1,891	2.68	%		236,531			1,224	2.06	%
Federal funds purchased		2,474			28	4.47	%		1,914			8	1.65	%
Company obligated mandatorily redeemable capital securities		8,248			129	6.19	%		8,248			89	4.28	%
Other borrowings		49,979			504	4.01	%		42,595			512	4.78	%

Total interest bearing liabilities		340,793			2,552	2.97	%		289,288			1,833	2.52	%
Noninterest bearing liabilities
Demand deposits		81,122							66,784
Other liabilities		1,928							1,543

Total liabilities		423,843							357,615
Shareholders’ equity		28,142							24,799

Total liabilities and shareholders’ equity	$	451,985						$	382,414

Net interest income				$	4,358						$	3,488

Interest rate spread						3.44	%						3.35	%
Interest expense as a percent of average earning assets						2.37	%						2.02	%
Net interest margin						4.04	%						3.85	%

(1)	Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 34%. The tax-equivalent adjustment was $74 thousand and $67 thousand for 2005 and 2004, respectively.

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

(3)	Annualized

Average Balances, Income and Expense, Yields and Rates


	*(dollars in thousands)* Nine months ended September 30,
	2005							2004
	Average Balance			Interest Income/ Expense		Yield/ Rate (3)		Average Balance			Interest Income/ Expense		Yield/ Rate (3)
ASSETS
Balances at correspondent banks - interest bearing	$	777		$	55	9.52	%	$	1,222		$	20	2.14	%

Securities:
Taxable		53,918			1,649	4.09	%		55,632			1,695	4.07	%
Tax-exempt (1)		9,673			466	6.44	%		9,060			443	6.54	%

Total securities		63,591			2,115	4.45	%		64,692			2,138	4.42	%
Loans: (2)
Taxable		342,129			16,750	6.55	%		275,497			12,847	6.23	%
Tax-exempt (1)		3,552			181	6.83	%		3,309			155	6.25	%

Total loans		345,681			16,931	6.55	%		278,806			13,002	6.23	%
Federal funds sold		559			14	3.32	%		1,164			11	1.20	%

Total earning assets		410,608			19,115	6.22	%		345,884			15,171	5.86	%
Less: allowance for loan losses		(3,139	)						(2,698	)
Total non-earning assets		26,705							24,034

Total assets	$	434,174						$	367,220

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Checking	$	63,119		$	844	1.79	%	$	64,813		$	606	1.25	%
Money market savings		13,210			124	1.25	%		10,847			55	0.67	%
Regular savings		65,019			944	1.94	%		44,796			250	0.75	%
Certificates of deposit:
Less than $100,000		75,343			1,781	3.16	%		71,604			1,749	3.26	%
Greater than $100,000		50,108			1,279	3.41	%		38,805			957	3.30	%

Total interest bearing deposits		266,799			4,972	2.49	%		230,865			3,617	2.09	%
Federal funds purchased		3,525			94	3.56	%		2,771			33	1.59	%
Company obligated mandatorily redeemable capital securities		8,248			356	5.77	%		5,087			162	4.27	%
Other borrowings		50,450			1,608	4.26	%		39,803			1,436	4.82	%

Total interest bearing liabilities		329,022			7,030	2.86	%		278,526			5,248	2.52	%
Noninterest bearing liabilities
Demand deposits		75,980							62,571
Other liabilities		1,951							1,762

Total liabilities		406,953							342,859
Shareholders’ equity		27,221							24,361

Total liabilities and shareholders’ equity	$	434,174						$	367,220

Net interest income				$	12,085						$	9,923

Interest rate spread						3.36	%						3.34	%
Interest expense as a percent of average earning assets						2.29	%						2.03	%
Net interest margin						3.94	%						3.83	%

(1)	Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 34%. The tax-equivalent adjustment was $220 thousand and $203 thousand for 2005 and 2004, respectively.

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

(3)	Annualized

Noninterest Income

Noninterest income increased 22.8% to $1.3 million for the three months ended September 30, 2005 compared to $1.0 million for the same period in 2004. This increase was primarily due to increases in fee income from other customer services, which increased 45.2% to $405 thousand for the three months ended September 30, 2005 compared to $279 thousand for the same period in 2004. Deposit transaction fees and trust fees contributed to this increase. Gains on sale of loans also contributed to the increase in noninterest income with a $75 thousand, or 202.7%, increase to $112 thousand for the three months ended September 30, 2005 compared to $37 thousand for the same period in 2004.

For the nine months ended September 30, 2005, noninterest income decreased 3.4% to $3.3 million from $3.4 million for the same period in 2004. This decrease was a result of net gains on sale of premises and equipment totaling $435 thousand in 2004. Excluding the net gains on sale of premises and equipment, noninterest income increased 10.8%. For the nine months ended September 30, 2005, fees for other customer services increased 34.2% to $1.0 million compared to $771 thousand for the same period in 2004. Deposit transaction fees and trust fees contributed to this increase. For the nine months ended September 30, 2005, gains on sale of loans increased $89 thousand, or 66.4%, to $223 thousand compared to $134 thousand for the same period in 2004.

The Company is uncertain whether this increasing trend will continue in future periods, as fee income for other customer services is driven by customer behavior and the Company’s ability to grow its customer base. In addition, gains on sale of loans are not expected to significantly increase in future periods. These gains are driven by activity in the local residential real estate market, which is expected to slow due to economic conditions and increases in interest rates.

Noninterest Expense

For the three months ended September 30, 2005, noninterest expense increased 9.5% to $3.0 million compared to $2.7 million for the same period in 2004. For the nine months ended September 30, 2005, noninterest expense increased 8.0% to $8.7 million compared to $8.1 million for the same period in 2004. Salaries and employee benefits increased over the comparable periods of 2004, as a result of salary increases and hiring additional employees for the new Trust and Asset Management Department of the Bank during the first quarter of 2005. All other noninterest expense categories remained near prior year levels, for both three and nine month periods, except for legal fees, which decreased as a result of legal proceedings that occurred in the prior year. Noninterest expenses are anticipated to increase in future periods as the Company plans to expand its retail branch network within its existing market area.

Income Taxes

The Company has adopted FASB Statement No. 109, “Accounting for Income Taxes”. The Company’s income tax provision differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three and nine month periods ended September 30, 2005 and 2004. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income. The effective income tax rate for the three months ended September 30, 2005 and 2004 was 32.5% and 32.9%, respectively. For the nine months ended September 30, 2005 and 2004, the effective income tax rate was 32.2% and 32.0%, respectively. A more detailed discussion of the Company’s tax calculation is contained in Note 9 of the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

FINANCIAL CONDITION

General

The loan portfolio continued to drive balance sheet growth in the first nine months of 2005. Loans, net of the allowance for loan losses, increased $41.6 million or 13.0% to $361.8 million at September 30, 2005 from $320.2 million at December 31, 2004. The growth in loans was reflected in the 12.1% increase in assets during the first nine months of 2005. The growth was primarily funded by deposit growth of $51.4 million. Although the Company believes that its current market area will provide the ability to continue balance sheet and earnings growth, it anticipates slower economic expansion in future periods compared to recent growth trends. As a result, loan and deposit growth is not anticipated to continue growing at recent growth rates.

Loans

The Bank is an active lender with a loan portfolio which includes commercial and residential real estate loans, commercial loans, consumer loans (both installment and credit card), real estate construction loans and home equity loans. The Bank’s lending activity is focused on individuals and small to medium sized businesses in its primary trade area of the Virginia counties of Shenandoah, Warren, Clarke and Frederick and the City of Winchester. As a provider of community oriented financial services, the Bank does not attempt to geographically diversify its loan portfolio by undertaking significant lending activity outside its primary trade area.

Asset Quality

Asset quality remained high during the third quarter of 2005 with nonperforming assets decreasing to $304 thousand at September 30, 2005 from $653 thousand at December 31, 2004, representing 9.0% and 22.7% of the allowance for loan losses at September 30, 2005 and December 31, 2004, respectively. Net charge-offs were $15 thousand for the third quarter of 2005 compared to $107 thousand for the third quarter of 2004. In addition, nonaccrual loans remained at relatively low levels during the quarter. These improvements resulted in a lower loan loss provision of $169 thousand for the third quarter of 2005 compared to $220 thousand for the same period in 2004.

The amount allocated to the provision for loan losses represents management’s analysis of the existing loan portfolio and the related credit risks. The provision for loan losses is based upon management’s estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. The allowance for loan losses of $3.4 million at September 30, 2005 increased 17.3% from $2.9 million at December 31, 2004. The increases in the total allowance for loan losses were reflective of charge-off activity and growth in the loan portfolio. Loans, net of the allowance for loan losses increased $41.6 million, or 13.0%, to $361.8 million at September 30, 2005 from $320.2 million at December 31, 2004.

Management classifies as nonperforming assets both loans on which payment has been delinquent 90 days or more and for which there is a risk of loss to either principal or interest, and other real estate owned (OREO). OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. OREO is recorded at the lower of cost or market, less estimated selling costs, and is actively marketed by the Bank through brokerage channels. The Bank had no foreclosed real estate at September 30, 2005. Foreclosed real estate totaled $270 thousand at December 31, 2004.

Impaired loans of $224 thousand and $260 thousand at September 30, 2005 and December 31, 2004, respectively, have been recognized in conformity with SFAS No. 114. The related allowance for loan losses provided for these loans totaled $45 thousand and $28 thousand at September 30, 2005 and December 31, 2004, respectively. The average recorded investment in impaired loans during the nine months ended September 30, 2005 and the year ended December 31, 2004 was $242 thousand and $412 thousand, respectively.

Management believes, based upon its review and analysis, that the Bank has sufficient reserves to cover any losses inherent within the total loan portfolio. For each period presented, the provision for loan losses charged to expense was based on management’s judgment after taking into consideration all factors connected with the collectibility of the existing portfolio. Management considers economic conditions, historical loss factors, past due percentages, internally generated loan quality reports and other relevant factors when evaluating the loan portfolio. There can be no assurance, however, that additional provisions for loan losses will not be required in the future, including as a result of changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, on a national basis or in the Company’s market area, or changes in the circumstances of particular borrowers. For further discussion regarding the allowance for loan losses, see “Critical Accounting Policies” above.

Securities

Securities at September 30, 2005 were $62.6 million, a slight decrease from $63.4 million at December 31, 2004. The Company does not expect significant fluctuations in the securities portfolio in future periods. Investment securities are comprised of U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate equity securities and certain restricted securities. As of September 30, 2005, neither the Company nor the Bank held any derivative financial instruments in its respective investment security portfolios.

Deposits

Deposits at September 30, 2005 were $372.4 million, an increase of $51.4 million or 16.0% from $320.9 million at December 31, 2004, providing the funding for asset growth that occurred during the nine month period ended September 30, 2005. The deposit mix remained consistent with prior periods as noninterest-bearing demand deposits, savings and interest-bearing demand deposits and time deposits comprised 22.9%, 39.6% and 37.5%, respectively, of total deposits at September 30, 2005, compared to 21.5%, 42.3% and 36.2%, at December 31, 2004. The Company does not expect significant changes in its deposit mix in future periods. Although the Company anticipates funding future asset growth with deposits, it recognizes that changes in economic conditions and increasing competition will make it challenging to grow deposits at recent growth rates.

Liquidity

Liquidity represents the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, and investment securities and loans maturing within one year. As a result of the Bank’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Bank maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ borrowing needs.

At September 30, 2005, cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, securities, and loans maturing within one year were $94.5 million. At September 30, 2005, approximately 21.4% or $78.0 million of the loan portfolio would mature within a one-year period. At September 30, 2005, non-deposit sources of funds totaled $58.2 million, which included Federal Home Loan Bank (FHLB) borrowing availability of $39.9 million. During the first nine months of 2005, other borrowing activity included the repayment of three Fixed Rate Credit (FRC) advances totaling $25.0 million and three new FHLB advances. The three new FHLB advances included a FRC advance in the amount of $5.0 million with a six-month maturity, a FRC advance in the amount of $5.0 million with a two-year maturity and a FRC advance in the amount of $10.0 million with a two-month maturity. The Bank also borrowed Daily Rate Credit (DRC) advances during the first nine months of 2005 as an alternative to purchasing federal funds. At September 30, 2005, the Bank had $12.0 million in DRC advances outstanding.

Company Obligated Mandatorily Redeemable Capital Securities

See Note 7 of the Notes to Consolidated Financial Statements of this Form 10-Q.

Capital Resources

The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to the size, composition, and quality of the Company’s asset and liability levels and consistent with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses.

The Board of Governors of the Federal Reserve System has adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total capital to risk-weighted assets is 8.00%, of which at least 4.00% must be Tier 1 capital, composed of common equity, retained earnings and a limited amount of perpetual preferred stock, less certain goodwill items. The Company had a ratio of total capital to risk-weighted assets of 10.75% at September 30, 2005 and a ratio of Tier 1 capital to risk-weighted assets of 9.84%. Both of these exceed the capital requirements adopted by the federal regulatory agencies.

Commitments and Unfunded Credits

The Company is a party to credit related financial instruments with risk not reflected in the consolidated financial statements in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and rate lock commitments which would impact the Company’s liquidity and capital resources to the extent customers accept and/or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. With the exception of these financial instruments, the Company has no financial instruments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

Commitments to extend credit, which amounted to $71.0 million at September 30, 2005, and $49.2 million at December 31, 2004, represent legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Commercial and standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. At September 30, 2005 and December 31, 2004, the Company had $5.8 million and $5.3 million, respectively, in outstanding standby letters of credit.

At September 30, 2005 and December 31, 2004, the Company had rate-lock commitments to originate mortgage loans amounting to $1.8 million and $1.1 million, respectively. The Company had no loans held for sale at September 30, 2005 and $190 thousand at December 31, 2004. The Company has entered into commitments, on a best-effort basis to sell loans of approximately $1.8 million. Risks arise from the possible inability of counterparties to meet the terms of their contracts. These risks include liquidity risk, credit risk and interest rate risk. The Company does not expect any counterparty to fail to meet its obligations.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154 (“SFAS No. 154”), “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate this revision will have a material effect on its financial statements.

On December 16, 2004, the FASB issued Statement No. 123R (revised 2004), “Share-Based Payment” (FAS 123R), that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. The effective date of FAS 123R (as amended by the Securities and Exchange Commission (the “SEC”)) is for annual periods beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on the Company’s results of operations at the present time.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC rules and regulations and provides the SEC staff’s view regarding the valuation of share-based payment arrangements for public companies. SAB 107 does not impact the Company’s results of operations at the present time.

In November 2004, the Emerging Issues Task Force (“EITF” or the “Task Force”) published Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The Task Force discussed the meaning of other-than-temporary impairment and its application to certain investments carried at cost. The Task Force requested that the FASB staff consider other impairment models within GAAP when developing its views. The Task Force also requested that the scope of the impairment issue be expanded to include equity investments and investments subject to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and that the issue be addressed by the Task Force as a separate EITF issue. At the EITF meeting, the Task Force reached a consensus on one issue that certain quantitative and qualitative disclosures should be required for securities accounted for under Statement No. 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The FASB ratified the consensus on that one issue at its November 25, 2004 meeting. In September 2004, the FASB directed its staff to

issue two proposed FASB Staff Positions (“FSP”): Proposed FSP EITF Issue 03-1-a, which provides guidance for the application of paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of interest rate and/or sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays the effective date of Issue 03-1 for debt securities that are impaired because of interest rate and/or sector spread increases. In June 2005, the FASB reached a decision whereby it declined to provide additional guidance on the meaning of other-than-temporary impairment. The FASB directed its staff to issue EITF Issue 03-1-a as final and to draft a new FSP that will replace EITF Issue 03-1. The final FSP (retitled FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and it Application to Certain Investments”) would be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company does not anticipate this revision will have a material effect on its financial statements

Item 3. Quantitative and Qualitative Disclosures about Market Risk

General

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company’s market risk is composed primarily of interest rate risk. The Company’s Funds Management Committee (FMC) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk. The Board of Directors reviews and approves the guidelines established by FMC.

Interest rate risk is monitored through the use of three complimentary modeling tools: static gap analysis, earnings simulation modeling and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which measures aggregate repricing values, is less utilized since it does not effectively measure the investment options risk impact on the Company and is not addressed here. Earnings simulation and economic value models, which more effectively measure the cash flow impacts, are utilized by management on a regular basis and are explained below.

Earnings Simulation Analysis

Management uses simulation analysis to measure the sensitivity of net income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis.

Assumptions used in the model, including loan and deposit growth rates, are derived from seasonal trends, economic forecasts and management’s outlook, as are the assumptions used to project yields and rates for new loans and deposits. Maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are accounted for in the different rate scenarios.

The flat interest rate scenario is utilized by the Company for rate shock scenarios when preparing the earnings simulation analysis From this base, immediate, parallel rate shocks in 100 basis point increments are applied to see the impact on the Company’s earnings. The following table represents the interest rate sensitivity on projected net income for the twelve months ended September 30, 2006 (fully tax equivalent basis) for the Company using different rate scenarios:


Change in Yield Curve	*(in thousands)* Change in Net Income
+200 basis points	$	526
+100 basis points		299
Flat		—
- 100 basis points		(20	)
- 200 basis points		(333	)

Economic Value Simulation

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in economic value of equity over different rate environments is an indication of the longer term repricing risk in the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The following chart reflects the change in net market value over different rate environments at September 30, 2005:


Change in Yield Curve	*(in thousands)* Change in Economic Value of Equity
+200 basis points	$	(5,486	)
+100 basis points		(2,556	)
Flat		—
- 100 basis points		3,330
- 200 basis points		6,406

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC. An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2005 was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Company’s disclosure controls and procedures were effective.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company is a party or to which the property of the Company is subject.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

The following documents are attached hereto as Exhibits:

31.1

Certification of Chief Executive Officer, Section 302 Certification

31.2

Certification of Chief Financial Officer, Section 302 Certification

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


FIRST NATIONAL CORPORATION
(Registrant)

/s/ Harry S. Smith		November 10, 2005
Harry S. Smith		Date
President and Chief Executive Officer

/s/ M. Shane Bell		November 10, 2005
M. Shane Bell		Date
Executive Vice President and Chief Financial Officer

EXHIBIT INDEX


Number		Document
31.1		Certification of Chief Executive Officer, Section 302 Certification

31.2		Certification of Chief Financial Officer, Section 302 Certification

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

FIRST NATIONAL CORP /VA/ - Quarter Report: 2005 September (Form 10-Q)

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