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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

or

For the transition period from                      to                     

Commission File Number: 0-23976

FIRST NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

(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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 6, 2005, 2,924,124 shares of common stock, par value $1.25 per share, of the registrant were outstanding.

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Part I – Financial Information

FIRST NATIONAL CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share data)

See Notes to Consolidated Financial Statements

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FIRST NATIONAL CORPORATION

Consolidated Statements of Income

Three months ended March 31, 2005 and 2004

(in thousands, except per share data)

See Notes to Consolidated Financial Statements

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FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows

Three months ended March 31, 2005 and 2004

(in thousands)

See Notes to Consolidated Financial Statements

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FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows

(Continued)

Three months ended March 31, 2005 and 2004

(in thousands)

See Notes to Consolidated Financial Statements

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FIRST NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

Three months ended March 31, 2005 and 2004

(in thousands, except per share data)

(unaudited)

See Notes to Consolidated Financial Statements

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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 March 31, 2005 and December 31, 2004, and the results of operations, cash flows and changes in shareholders’ equity for the three months ended March 31, 2005 and 2004.

Operating results for the three month period ended March 31, 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

Amortized costs and fair values of securities available for sale at March 31, 2005 and December 31, 2004 were as follows:

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

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Notes to Consolidated Financial Statements

(unaudited)

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

The table above provides information about securities that have been in an unrealized loss position for less than twelve consecutive months, and also those securities that have been in an unrealized loss position for twelve consecutive months or more. 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. All of the securities with unrealized losses are considered temporarily impaired due to interest rate factors. These securities have not suffered credit deterioration and the Company has the ability to hold these issues until maturity. At March 31, 2005, there were twenty-four U.S. agency and mortgage-backed securities and twelve 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 3.4 years at March 31, 2005.

Note 3. Loans

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

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Notes to Consolidated Financial Statements

(unaudited)

Note 4. Allowance for Loan Losses

Transactions in the allowance for loan losses for the three months ended March 31, 2005 and 2004 were as follows:

Note 5. Other Borrowings

The Company had unused lines of credit totaling $43.4 million available with non-affiliated banks at March 31, 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 assets.

At March 31, 2005, the Company had borrowings from the Federal Home Loan Bank system totaling $45.0 million which mature through March 17, 2008. The interest rate on these notes payable ranged from 3.15% to 6.49% and the weighted average rate was 4.24%. The Company had collateral pledged on these borrowings at March 31, 2005 including real estate loans totaling $66.0 million and Federal Home Loan Bank stock and securities with a book value of $5.5 million.

The Bank had a $236 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 March 31, 2005 and December 31, 2004 with the minimum regulatory guidelines were as follows:

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Notes to Consolidated Financial Statements

(unaudited)

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 March 31, 2005 was 6.24%. 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 March 31, 2005 was 5.63%. 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 March 31, 2005, the total amount of trust preferred securities issued by the Trust can be included in the Company’s Tier 1 capital.

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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, amended, and the Internal Revenue Code of 1986, as amended.

Components of the net periodic benefit cost of the plan for the quarter ended March 31, 2005 and 2004 were as follows:

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 three months ended March 31, 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. Both 2005 and 2004 financial information in this report have been restated to reflect the stock split, as appropriate. The stock split is payable on April 29, 2005 to shareholders of record March 30, 2005. As a result of the stock split, the Company has 8,000,000 shares of common stock authorized and 2,924,124 shares outstanding, at a par value of $1.25 per share.

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 discussed in Note 9 above.

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The following discussion and analysis of the financial condition and results of operations of the Company for the three months ended March 31, 2005 should be read in conjunction with the consolidated financial statements and related notes. The results of operations for the three months ended March 31, 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 community-oriented and offers services customarily provided by full-service banks, 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 and medium-sized businesses in the northern Shenandoah Valley region of Virginia.

Net income for the three months ended March 31, 2005 was $985 thousand, an increase of $88 thousand or 9.8% compared to $897 thousand for the same period in 2004. Net income per share, basic and diluted, increased $0.03 to $0.34 for the three months ended March 31, 2005 from $0.31 for the same period in 2005. The increase in earnings resulted from a 17.0% increase in the Company’s net interest income and a 2.4% increase in noninterest income, offset by a 13.3% increase in noninterest expense when comparing the same periods. The increase in noninterest expense was primarily attributable to increases in salaries and benefits associated with merit increases and the addition of the Bank’s Trust and Asset Management Department. The annualized return on average assets was 0.96% for the first three months of 2005 compared to 1.02% during the same period in 2004. The annualized return on average equity increased 14 basis points to 15.15% for the three months ended March 31, 2005 compared to 15.01% for the same period in 2004.

Comparing March 31, 2005 to March 31, 2004, total assets increased 15.3% or $56.3 million to $422.8 million from $366.5 million. Loans, net of the allowance for loan losses increased 24.9% or $66.2 million to $332.7 from $266.5 million comparing the same dates. Total deposits increased 13.0% or $38.1 million to $330.9 million at March 31, 2005 from $292.8 million at March 31, 2004. Company obligated mandatorily redeemable capital securities, commonly known as trust preferred securities, increased to $8.3 million from $3.1 million resulting from the issuance of trust preferred securities on June 8, 2004.

During the first quarter of 2005, total assets increased 3.4% to $422.8 million at March 31, 2005 from $408.8 million at December 31, 2004. Growth occurred primarily in the loan portfolio where loans, net of the allowance for loan losses, increased 3.9% or $12.5 million to $332.7 million at March 31, 2005 from $320.2 million at December 31, 2004. The securities portfolio increased $1.3 million to $64.7 million at March 31, 2005 from $63.4 million at December 31, 2004.

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:

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