First National (FXNC) 8-K First National Corporation Announces Third Quarter Profit

Exhibit 99.1

Contact:
Scott C. Harvard	M. Shane Bell
President and CEO	Executive Vice President and CFO
(540) 465-9121	(540) 465-9121
sharvard@fbvirginia.com	sbell@fbvirginia.com
News Release
October 29, 2012

First National Corporation Announces Third Quarter Profit

Strasburg, Virginia (October 29, 2012) --- First National Corporation (the “Company”) (OTCBB: FXNC), the parent company of First Bank (the “Bank”), announced today its third consecutive profitable quarter.

Scott C. Harvard, President and CEO of the Company and the Bank commented, “The third quarter was one of continued improvement for our banking company.  Improved asset quality, continued profitability, and higher capital levels are positive indications that our banking team is on the right track.  In addition, we were pleased to exit the TARP program during the quarter through an auction that found strong interest from private investors and allowed the Treasury to exit with a tidy profit.”

Highlights for the Third Quarter

· First National exited TARP program, U. S. Department of the Treasury no longer owns shares

· Third consecutive profitable quarter

· Net interest margin was 3.78%

· Nonperforming assets decreased 49% from the same quarter one year ago and 11% from the second quarter of 2012

· Provision for loan losses decreased to $805 thousand compared to $5.6 million from the same quarter one year ago

· Allowance for loan losses totaled $14.0 million or 3.69% of total loans

· Bank capital ratios continued to exceed well capitalized guidelines

Earnings

For the three month period ended September 30, 2012, net income totaled $688 thousand compared to a net loss of $2.9 million for the third quarter of 2011.  Net income available to common shareholders totaled $462 thousand or $0.09 per basic and diluted share, a significant improvement over the net loss available to common shareholders of $3.1 million, or $1.05 per basic and diluted share for the same quarter one year ago.  The earnings improvement was primarily attributable to an improvement in asset quality, which resulted in a decrease in the provision for loan losses to $805 thousand in the third quarter of 2012 compared to $5.6 million for the same period of 2011.  In addition, the provision for other real estate owned decreased $901 thousand to $26 thousand for the third quarter of 2012 compared to $927 thousand for the same period of 2011. Return on average assets was 0.52% and return on average equity was 6.11% for the third quarter of 2012, compared to (2.11%) and (23.78%), respectively, for the third quarter of 2011.

Net interest income totaled $4.7 million for the third quarter of 2012 compared to $5.0 million for the same period one year ago.  The net interest margin was 3.78% compared to 3.98% for the same period one year ago.  Noninterest income increased 9% to $1.6 million compared to the same period one year ago. The increase was primarily a result of gains on sale of securities.  Decreases in revenues from service charges on deposit accounts and ATM and check card fees were partially offset by increases from gains on sales of loans and trust and investment advisory fees when comparing the periods.

Noninterest expense decreased 14% to $4.7 million for the third quarter of 2012 compared to $5.4 million for the same period in 2011, primarily from reduced provision for other real estate owned.

First National Exits TARP Program

In August, the Treasury sold its preferred stock in First National Corporation to private investors. The Treasury invested $13.9 million in the Company in 2009.  Since that time, interest payments and auction proceeds paid to the Treasury totaled approximately $15.5 million.

Asset Quality

The provision for loan losses was $805 thousand, which resulted in a total allowance for loan losses of $14.0 million or 3.69% of total loans at September 30, 2012.  This compared to a provision for loan losses of $5.6 million and an allowance for loan losses of $18.5 million, or 4.52% of total loans, at the end of the same quarter in 2011. Nonperforming assets decreased 49% to $14.3 million at September 30, 2012 compared to $28.3 million at September 30, 2011. The reduction was primarily attributable to non-accrual loans decreasing from $22.7 million at the end of the third quarter of 2011 to $9.0 million at the end of the third quarter of 2012. Other real estate owned decreased by $253 thousand to $5.3 million. Net charge-offs for the period declined to $755 thousand from $851 thousand in the third quarter of 2011.

Year-to-Date Performance

For the nine months ended September 30, 2012, net income totaled $1.9 million compared to net loss of $2.8 million for the same period in 2011.  After the effective dividend on preferred stock, net income available to common shareholders was $1.2 million, or $0.33 per basic and diluted share, compared to net loss available to common shareholders of $3.5 million, or $1.18 per basic and diluted share, for the same period in 2011.

Net interest income was $14.6 million compared to $15.1 million for same period in 2011.  The net interest margin was 3 basis points lower and average interest-earning assets were $15.7 million lower when comparing the two periods.  The net interest margin was 3.93% compared to 3.96% for the same period in 2011. The provision for loan losses totaled $3.5 million compared to $9.4 million for the same period in 2011.

Noninterest income increased 30% to $5.6 million compared to the same period one year ago, primarily as a result of gains on sale of securities.  Revenues from fees for other customer services and gains on sales of loans increased while ATM and check card income and service charges on deposit accounts decreased slightly when comparing the periods.

Noninterest expense decreased 3% to $14.0 million compared to the same period in 2011, primarily from reduced provision for other real estate owned.  Net gains on sale of other real estate owned totaled $297 thousand for the nine months ended September 30, 2012, compared to $28 thousand for the same period in 2011.  The provision for other real estate owned totaled $595 thousand for the nine months ended September 30, 2012, compared to $1.1 million for the same period in 2011.

Cautionary Statements

The Company notes to investors that past results of operations do not necessarily indicate future results.  Certain factors that affect the Company’s operations and business environment are subject to uncertainties that could in turn affect future results.  These factors are identified in the Annual Report on Form 10-K for the year ended December 31, 2011, which can be accessed from the Company’s website at www.fbvirginia.com, as filed with the Securities and Exchange Commission.

About the Company

First National Corporation, headquartered in Strasburg, Virginia, is the bank holding company of First Bank. First Bank offers loan, deposit, trust and investment products and services from 10 office locations in the northern Shenandoah Valley region of Virginia, including Shenandoah County, Warren County, Frederick County and the City of Winchester.   First Bank also owns First Bank Financial Services, Inc., which invests in entities that provide investment services and title insurance.

FIRST NATIONAL CORPORATION

Quarterly Performance Summary

 (in thousands, except share and per share data)

	(unaudited) For the Three Months Ended						(unaudited) For the Nine Months Ended
Income Statement	9/30/2012			9/30/2011			9/30/2012			9/30/2011
Interest and dividend income
Interest and fees on loans	$	5,189		$	5,666		$	16,001		$	17,317
Interest on federal funds sold		3			2			12			13
Interest on deposits in banks		11			2			19			15
Interest and dividends on securities available for sale:
Taxable interest		494			595			1,542			1,618
Tax-exempt interest		55			121			228			365
Dividends		19			16			57			50
Total interest and dividend income	$	5,771		$	6,403		$	17,859		$	19,378
Interest expense
Interest on deposits	$	928		$	1,204		$	2,874		$	3,810
Interest on trust preferred capital notes		60			109			182			327
Interest on other borrowings		47			42			192			175
Total interest expense	$	1,035		$	1,355		$	3,248		$	4,312
Net interest income	$	4,736		$	5,048		$	14,611		$	15,066
Provision for loan losses		805			5,575			3,455			9,395
Net interest income (loss) after provision for loan losses	$	3,931		$	(527	)	$	11,156		$	5,671
Noninterest income
Service charges on deposit accounts	$	544		$	590		$	1,569		$	1,626
ATM and check card fees		369			391			1,129			1,172
Trust and investment advisory fees		365			350			1,079			1,076
Fees for other customer services		78			84			283			231
Gains on sale of loans		51			25			143			94
Gains on sale of securities available for sale		167			-			1,285			41
Gains on sale of premises and equipment		2			-			2			-
Other operating income		33			33			95			58
Total noninterest income	$	1,609		$	1,473		$	5,585		$	4,298
Noninterest expense
Salaries and employee benefits	$	2,398		$	2,299		$	7,155		$	6,867
Occupancy		333			347			996			1,019
Equipment		294			325			907			973
Marketing		120			109			293			314
Stationery and supplies   Legal and professional fees		67 293			88 276			234 741			254 746
ATM and check card fees		161			162			480			492
FDIC assessment		176			181			533			588
Gains on sale of other real estate owned, net		(47	)		(36	)		(297	)		(28	)
Provision for other real estate owned		26			927			595			1,103
Other real estate owned expense		99			133			450			325
Other operating expense		737			577			1,908			1,806
Total noninterest expense	$	4,657		$	5,388		$	13,995		$	14,459
Income (loss) before income taxes	$	883		$	(4,442	)	$	2,746		$	(4,490	)
Income tax provision (benefit)		195			(1,556	)		889			(1,662	)
Net income (loss)	$	688		$	(2,886	)	$	1,857		$	(2,828	)
Effective dividend and accretion on preferred stock		226			224			677			670
Net income (loss) available to common shareholders	$	462		$	(3,110	)	$	1,180		$	(3,498	)
Common Share and Per Common Share Data
Net income (loss), basic and diluted	$	0.09		$	(1.05	)	$	0.33		$	(1.18	)
Shares outstanding at period end		4,901,464			2,955,649			4,901,464			2,955,649
Weighted average shares, basic and diluted		4,901,464			2,955,649			3,623,191			2,952,568
Book value at period end	$	6.21		$	10.75		$	6.21		$	10.75
Cash dividends	$	-		$	-		$	-		$	0.20

FIRST NATIONAL CORPORATION

Quarterly Performance Summary

(in thousands, except share and per share data)

	(unaudited) For the Three Months Ended						(unaudited) For the Nine Months Ended
	9/30/2012			9/30/2011			9/30/2012			9/30/2011
Key Performance Ratios
Return on average assets		0.52	%		(2.11	%)		0.47	%		(0.69	%)
Return on average equity		6.11	%		(23.78	%)		6.18	%		(7.75	%)
Net interest margin		3.78	%		3.98	%		3.93	%		3.96	%
Efficiency ratio (1)		75.27	%		68.16	%		71.90	%		68.45	%
Average Balances
Average assets	$	526,908		$	541,794		$	528,239		$	547,593
Average earning assets		502,418			511,141			501,268			516,956
Average shareholders’ equity		44,816			48,142			40,115			48,798
Asset Quality
Loan charge-offs	$	799		$	903		$	2,583		$	7,137
Loan recoveries		44			52			240			208
Net charge-offs		755			851			2,343			6,929
Non-accrual loans		8,998			22,707			8,998			22,707
Other real estate owned, net		5,323			5,576			5,323			5,576
Nonperforming assets		14,321			28,283			14,321			28,283
Loans over 90 days past due, still accruing		2,176			673			2,176			673
Troubled debt restructurings (accruing)		1,578			6,192			1,578			6,192
Special mention loans		21,719			28,519			21,719			28,519
Substandard loans (accruing)		46,308			49,334			46,308			49,334
Doubtful loans		-			8,555			-			8,555

	9/30/2012			9/30/2011
Capital Ratios
Tier 1 capital	$	54,138		$	51,609
Total capital		59,036			57,005
Total capital to risk-weighted assets		15.43	%		13.62	%
Tier 1 capital to risk-weighted assets		14.15	%		12.33	%
Leverage ratio		10.28	%		9.56	%
Balance Sheet
Cash and due from banks	$	6,655		$	6,409
Interest-bearing deposits in banks		19,564			16,316
Securities available for sale, at fair value		95,839			85,460
Restricted securities, at cost		1,973			2,889
Loans, net of allowance for loan losses		366,703			390,706
Premises and equipment, net		19,181			19,657
Interest receivable		1,581			1,660
Other assets		10,186			18,424
Total assets	$	521,682		$	541,521
Noninterest-bearing demand deposits	$	83,916		$	81,836
Savings and interest-bearing demand deposits		207,058			190,388
Time deposits		165,984			185,798
Total deposits	$	456,958		$	458,022
Other borrowings		6,082			25,106
Trust preferred capital notes		9,279			9,279
Other liabilities		4,540			3,099
Total liabilities	$	476,859		$	495,506

FIRST NATIONAL CORPORATION

Quarterly Performance Summary

(in thousands, except share and per share data)

	(unaudited)
	9/30/2012			9/30/2011
Balance Sheet (continued)
Preferred stock	$	14,372		$	14,229
Common stock		6,127			3,695
Surplus		6,813			1,644
Retained earnings		17,683			24,859
Accumulated other comprehensive income (loss), net		(172	)		1,588
Total shareholders’ equity	$	44,823		$	46,015
Total liabilities and shareholders’ equity	$	521,682		$	541,521
Loan Data
Mortgage loans on real estate:
Construction and land development	$	44,725		$	49,310
Secured by farm land		5,924			5,987
Secured by 1-4 family residential		128,354			120,014
Other real estate loans		169,198			189,499
Loans to farmers (except those secured by real estate)		2,067			2,293
Commercial and industrial loans (except those secured by real estate)		22,149			30,356
Consumer installment loans		7,452			10,487
Deposit overdrafts		109			165
All other loans		774			1,097
Total loans	$	380,752		$	409,208
Allowance for loan losses		14,049			18,502
Loans, net	$	366,703		$	390,706

(1) The efficiency ratio is computed by dividing noninterest expense excluding the provision for other real estate owned and gains and losses on other real estate owned by the sum of net interest income on a tax equivalent basis and noninterest income excluding gains and losses on sales of securities and premises and equipment.  Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for 2012 and 2011 was 34%.  Net interest income on a tax equivalent basis was $4,772 and $5,124 for the three months ended September 30, 2012 and 2011, respectively, and $14,750 and $15,294 for the nine months ended September 30, 2012 and 2011.  Noninterest income excluding gains and losses on sales of securities and premises and equipment was $1,440 and $1,485 for the three months ended September 30, 2012 and 2011, respectively, and $4,298 and $4,257 for the nine months ended September 30, 2012 and 2011, respectively. The efficiency ratio is a non-GAAP financial measure that management believes provides investors with important information regarding operational efficiency.  Such information is not in accordance with generally accepted accounting principles (GAAP) and should not be construed as such.  Management believes such financial information is meaningful to the reader in understanding operational performance, but cautions that such information not be viewed as a substitute for GAAP.