UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 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 March 31,
2010





OR





 ̈
            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 0-19214





UNION NATIONAL FINANCIAL
CORPORATION


(Exact
Name of Registrant as Specified in its Charter)





Pennsylvania
              
              23-2415179(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              
              (I.R.S.
      Employer Identification
                Number)570
      Lausch Lane, Suite 300
                Lancaster,
      Pennsylvania
              
              17601(Address
      of Principal Executive
                Offices)
              
              (Zip
      Code)





(717)
492-2222


(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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes  ̈  No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “accelerated filer, large accelerated
filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
One):





Large
accelerated filer  ̈    Accelerated
filer  ̈    Non-accelerated
filer  ̈    Smaller
reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the 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.





2,742,395 shares of $0.25 (par) common
stock were outstanding as of May 13, 2010.









UNION
NATIONAL FINANCIAL CORPORATION


FORM
10-Q


INDEX





PAGE NO.PART
      I – FINANCIAL
    INFORMATIONItem
      1.
                                            Financial
      Statements (Unaudited)Consolidated
      Statements of Financial ConditionAs
      of March 31, 2010 and December 31, 2009
                                            1Consolidated
      Statements of OperationsFor
      the Three Months Ended March 31, 2010 and 2009
                                            2Consolidated
      Statements of Changes in Stockholders’ EquityFor
      the Three Months Ended March 31, 2010 and 2009
                                            3Consolidated
      Statements of Cash FlowsFor
      the Three Months Ended March 31, 2010 and 2009
                                            4Notes
      to Unaudited Consolidated Financial Statements
                                            5 -
      24Item
      2.
                                            Management’s
      Discussion and Analysis ofFinancial
      Condition and Results of Operations
                                            24
      - 39Item
      3.
                                            Quantitative
      and Qualitative Disclosures about Market Risk
                                            40Item
      4.
                                            Controls
      and Procedures
                                            40PART
      II – OTHER
INFORMATIONItem
      1.
                                            Legal
      Proceedings
                                            40Item
      1A.
                                            Risk
      Factors
                                            40Item
      2.
                                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                                            40Item
      3.
                                            Defaults
      upon Senior Securities
                                            40Item
      4.
                                            (Removed
      and Reserved)
                                            40Item
      5.
                                            Other
      Information
                                            40Item
      6.
                                            Exhibits
                                            41Signatures
                                            
                                            44





Unless
the context otherwise requires, the terms “Union National,” “we,” “us,” and
“our” refer to Union National Financial Corporation and its consolidated
subsidiary.








PART I – FINANCIAL
INFORMATION





Item
1.  Financial Statements


Union
National Financial Corporation


Consolidated
Statements of Financial Condition


(Unaudited;
Dollars in thousands, except share and per share data)





March 31,
                  2010
                
                
                December 31,
                  2009AssetsCash
      and Due from Banks
                
                $
                8,247
                
                
                $
                8,807Interest-Bearing
      Demand Deposits in Other Banks
                
                
                51,483
                
                
                
                34,533Total
      Cash and Cash Equivalents
                
                
                59,730
                
                
                
                43,340Interest-Bearing
      Time Deposits in Other Banks
                
                
                7,024
                
                
                
                9,229Investment
      Securities Available for Sale
                
                
                60,757
                
                
                
                60,546Loans
      and Leases, Net of Unearned Income
                
                
                333,028
                
                
                
                339,274Less:  Allowance
      for Credit Losses
                
                
                (5,995
                )
                
                
                (5,858
                )Net
      Loans and Leases
                
                
                327,033
                
                
                
                333,416Premises
      and Equipment, Net
                
                
                11,158
                
                
                
                11,403Restricted
      Investment in Bank Stocks
                
                
                3,727
                
                
                
                3,727Bank-Owned
      Life Insurance
                
                
                11,641
                
                
                
                11,539Other
      Real Estate Owned
                
                
                8,170
                
                
                
                5,383Other
      Assets
                
                
                10,691
                
                
                
                11,061Total
      Assets
                
                $
                499,931
                
                
                $
                489,644LiabilitiesDeposits:Noninterest-Bearing
                
                $
                60,043
                
                
                $
                54,331Interest-Bearing
                
                
                356,882
                
                
                
                350,434Total
      Deposits
                
                
                416,925
                
                
                
                404,765Long-Term
      Debt
                
                
                30,834
                
                
                
                33,334Junior
      Subordinated Debentures
                
                
                17,341
                
                
                
                17,341Other
      Liabilities
                
                
                3,103
                
                
                
                2,868Total
      Liabilities
                
                
                468,203
                
                
                
                458,308Stockholders’
      EquityPreferred
      Stock (Series A), liquidation value $1,000 per shareShares
      authorized - 5,000; Issued – 1,275 at March 31, 2010 and December 31,
      2009
                
                
                1,275
                
                
                
                1,275Common
      Stock, par value $0.25 per shareShares
      authorized - 20,000,000; Issued – 3,110,584 and 3,109,105 at March 31,
      2010 and December 31, 2009, respectively; Outstanding - 2,742,395 and
      2,740,916 at March 31, 2010 and December 31, 2009,
      respectively
                
                
                778
                
                
                
                777Surplus
                
                
                13,896
                
                
                
                13,891Retained
      Earnings
                
                
                22,906
                
                
                
                22,921Accumulated
      Other Comprehensive Income (Loss)
                
                
                206
                
                
                
                (195
                )Treasury
      Stock, at cost;  368,189 at March 31, 2010 and December 31,
      2009
                
                
                (7,333
                )
                
                
                (7,333
                )Total
      Stockholders’ Equity
                
                
                31,728
                
                
                
                31,336Total
      Liabilities and Stockholders’ Equity
                
                $
                499,931
                
                
                $
                489,644





See
accompanying notes to unaudited consolidated financial
statements.


1


Union
National Financial Corporation


Consolidated
Statements of Operations


(Unaudited;
Dollars in thousands, except per share data)





Three Months Ended March 31,2010
                
                
                2009Interest
      IncomeInterest
      and Fees on Loans and Leases
                
                $
                5,009
                
                
                $
                5,385Investment
      Securities:Taxable
      Interest
                
                
                438
                
                
                
                595Tax-Exempt
      Interest
                
                
                –
                
                
                
                22Dividends
                
                
                9
                
                
                
                13Other
                
                
                66
                
                
                
                34Total
      Interest Income
                
                
                5,522
                
                
                
                6,049Interest
      ExpenseDeposits
                
                
                1,681
                
                
                
                2,302Long-Term
      Debt
                
                
                393
                
                
                
                645Junior
      Subordinated Debentures
                
                
                189
                
                
                
                231Total
      Interest Expense
                
                
                2,263
                
                
                
                3,178Net
      Interest Income
                
                
                3,259
                
                
                
                2,871Provision
      for Credit Losses
                
                
                496
                
                
                
                313Net
      Interest Income after Provision for Credit Losses
                
                
                2,763
                
                
                
                2,558Non-Interest
      IncomeService
      Charges on Deposit Accounts
                
                
                458
                
                
                
                473Other
      Service Charges, Commissions, Fees
                
                
                288
                
                
                
                267Alternative
      Investment Sales Commissions
                
                
                167
                
                
                
                110Income
      from Fiduciary Activities
                
                
                47
                
                
                
                46Earnings
      from Bank-Owned Life Insurance
                
                
                102
                
                
                
                108Other
      Income
                
                
                41
                
                
                
                43Net
      Gain on Sale of Investment Securities
                
                
                77
                
                
                
                411Other-than-temporary
      Impairments (“OTTI”) of Securities
                
                
                –
                
                
                
                (839
                )Portion
      of OTTI Recognized in Other Comprehensive Income
                
                
                –
                
                
                
                –Net
      OTTI Losses on Securities
                
                
                –
                
                
                
                (839
                )Total
      Non-Interest Income
                
                
                1,180
                
                
                
                619Non-Interest
      ExpenseSalaries,
      Wages, and Employee Benefits
                
                
                1,798
                
                
                
                1,946Net
      Occupancy
                
                
                462
                
                
                
                478Data
      and ATM Processing
                
                
                406
                
                
                
                404Professional
      Fees and Regulatory Assessments
                
                
                206
                
                
                
                257Furniture
      and Equipment
                
                
                218
                
                
                
                246FDIC
      Insurance
                
                
                228
                
                
                
                120Pennsylvania
      Shares Tax
                
                
                95
                
                
                
                89Advertising
      and Marketing
                
                
                38
                
                
                
                67Supplies
      and Postage
                
                
                60
                
                
                
                74Other
      Expense
                
                
                511
                
                
                
                333Total
      Non-Interest Expense
                
                
                4,022
                
                
                
                4,014Loss
      Before Benefit from Income Taxes
                
                
                (79
                )
                
                
                (837
                )Benefit
      from Income Taxes
                
                
                (82
                )
                
                
                (328
                )Net
      Income (Loss)
                
                
                3
                
                
                
                (509
                )Preferred
      Stock Dividends
                
                
                18
                
                
                
                –Net
      Loss Available to Common Stockholders
                
                $
                (15
                )
                
                $
                (509
                )Loss
      Per Common ShareBasic
      and Diluted
                
                $
                (0.01
                )
                
                $
                (0.19
                )Cash
      Dividends Paid Per Common Share
                
                
                –
                
                
                
                –




See
accompanying notes to unaudited consolidated financial
statements.


2


Union
National Financial Corporation


Consolidated
Statements of Changes in Stockholders’ Equity


(Unaudited;
Dollars in thousands, except share data)





Three Months Ended March 31, 2010Shares of
                      Common
                      Stock
                      Outstanding
                    
                    
                    Preferred
                      Stock
                    
                    
                    Common
                      Stock
                    
                    
                    Surplus
                    
                    
                    Retained
                      Earnings
                    
                    
                    Accumulated
                      Other
                      Comprehensive
                      (Loss) Income
                    
                    
                    Treasury
                      Stock
                    
                    
                    TotalBalance
      at December 31, 2009
                    
                    
                    2,740,916
                    
                    
                    $
                    1,275
                    
                    
                    $
                    777
                    
                    
                    $
                    13,891
                    
                    
                    $
                    22,921
                    
                    
                    $
                    (195
                    )
                    
                    $
                    (7,333
                    )
                    
                    $
                    31,336Comprehensive
      Income:Net
      Income
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    3
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    3Net
      Change in Unrealized Gains on Available- for-Sale Securities, Net of
      Tax
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    401
                    
                    
                    
                    –
                    
                    
                    
                    401Total
      Comprehensive Income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    404Issuance
      of Common Stock under Dividend Reinvestment Plan
                    
                    
                    1,479
                    
                    
                    
                    –
                    
                    
                    
                    1
                    
                    
                    
                    5
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    6Cash
      Dividends Paid to Preferred Stockholders
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (18
                    )
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (18
                    )Balance
      at March 31, 2010
                    
                    
                    2,742,395
                    
                    
                    $
                    1,275
                    
                    
                    $
                    778
                    
                    
                    $
                    13,896
                    
                    
                    $
                    22,906
                    
                    
                    $
                    206
                    
                    
                    $
                    (7,333
                    )
                    
                    $
                    31,728





Three Months Ended March 31, 2009Shares of
                    Common
                    Stock
                    Outstanding
                  
                  
                  Preferred
                    Stock
                  
                  
                  Common
                    Stock
                  
                  
                  Surplus
                  
                  
                  Retained
                    Earnings
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    Income
                  
                  
                  Treasury
                    Stock
                  
                  
                  TotalBalance
      at December 31, 2008
                  
                  
                  2,720,076
                  
                  
                  $
                  –
                  
                  
                  $
                  785
                  
                  
                  $
                  14,868
                  
                  
                  $
                  23,434
                  
                  
                  $
                  36
                  
                  
                  $
                  (8,329
                  )
                  
                  $
                  30,794Comprehensive
      Income:Net
      Loss
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (509
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (509
                  )Net
      Change in Unrealized Gains on Available- for-Sale Securities, Net of
      Tax
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  640
                  
                  
                  
                  –
                  
                  
                  
                  640Total
      Comprehensive Income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  131Issuance
      of Common Stock under Dividend Reinvestment Plan
                  
                  
                  982
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  4
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  4Balance
      at March 31, 2009
                  
                  
                  2,721,058
                  
                  
                  $
                  –
                  
                  
                  $
                  785
                  
                  
                  $
                  14,872
                  
                  
                  $
                  22,925
                  
                  
                  $
                  676
                  
                  
                  $
                  (8,329
                  )
                  
                  $
                  30,929





See
accompanying notes to unaudited consolidated financial
statements.


3


Union
National Financial Corporation


Consolidated
Statements of Cash Flows


(Unaudited;
Dollars in thousands)





Three Months Ended March 31,2010
                
                
                2009Cash
      Flows from Operating ActivitiesNet
      Income (Loss)
                
                $
                3
                
                
                $
                (509
                )Adjustments
      to Reconcile Net Income (Loss) to Net Cash Provided by Operating
      Activities:Depreciation
      and Amortization
                
                
                270
                
                
                
                313Provision
      for Credit Losses
                
                
                496
                
                
                
                313Net
      Amortization of Investment Securities Premiums
                
                
                120
                
                
                
                90Net
      Investment Securities Gains on Sales
                
                
                (77
                )
                
                
                (411
                )Net
      OTTI Losses on Securities
                
                
                –
                
                
                
                839Provision
      for Deferred Income Taxes
                
                
                130
                
                
                
                451Earnings
      from Bank-Owned Life Insurance
                
                
                (102
                )
                
                
                (108
                )Increase
      in Accrued Interest Receivable
                
                
                (38
                )
                
                
                (69
                )Decrease
      (Increase) in Other Assets
                
                
                62
                
                
                
                (1,531
                )Increase
      in Other Liabilities
                
                
                235
                
                
                
                1,366Net
      Cash Provided by Operating Activities
                
                
                1,099
                
                
                
                744Cash
      Flows from Investing ActivitiesProceeds
      from Sales of Available-for-Sale Securities
                
                
                16,479
                
                
                
                23,152Proceeds
      from Maturities and Principal Repayments on Available-for-Sale
      Securities
                
                
                2,519
                
                
                
                5,108Purchases
      of Available-for-Sale Securities
                
                
                (18,644
                )
                
                
                (27,327
                )Proceeds
      from Calls, Maturities and Sales (Purchases) ofTime
      Deposits in Other Banks
                
                
                2,205
                
                
                
                (980
                )Net
      Decrease in Loans and Leases
                
                
                3,100
                
                
                
                1,290Purchases
      of Premises, Equipment and Software
                
                
                (16
                )
                
                
                (138
                )Net
      Cash Provided by Investing Activities
                
                
                5,643
                
                
                
                1,105Cash
      Flows from Financing ActivitiesNet
      (Decrease) Increase in Demand Deposits and Savings
Accounts
                
                
                (1,003
                )
                
                
                8,318Net
      Increase in Time Deposits
                
                
                13,163
                
                
                
                15,994Payments
      on Long-Term Debt
                
                
                (2,500
                )
                
                
                –Issuance
      of Common Stock, Net of Costs
                
                
                6
                
                
                
                4Cash
      Dividends Paid to Preferred Stockholders
                
                
                (18
                )
                
                
                –Net
      Cash Provided by Financing Activities
                
                
                9,648
                
                
                
                24,316Net
      Increase in Cash and Cash Equivalents
                
                
                16,390
                
                
                
                26,165Cash
      and Cash Equivalents at Beginning of Period
                
                
                43,340
                
                
                
                31,837Cash
      and Cash Equivalents at End of Period
                
                $
                59,730
                
                
                $
                58,002Supplemental
      Disclosures of Cash Flow InformationInterest
      Paid
                
                $
                2,321
                
                
                $
                3,154Income
      Tax Paid
                
                
                –
                
                
                
                250Supplemental
      Schedule of Noncash ActivitiesTransfers
      to Other Real Estate Owned
                
                $
                2,787
                
                
                $
                349





See
accompanying notes to unaudited consolidated financial
statements.


4


Union
National Financial Corporation


Notes
to Unaudited Consolidated Financial Statements





Note
1 – Basis of Presentation





The
accompanying unaudited consolidated financial statements include the accounts of
Union National Financial Corporation (“Union National”) and its subsidiary Union
National Community Bank (the “Bank”).   All material intercompany
accounts and transactions have been eliminated in
consolidation.  Union National’s trust subsidiaries, Union National
Capital Trust I and Union National Capital Trust II, which were established
during 2003 and 2004 for the purpose of issuing $11,000,000 of trust capital
securities, are not consolidated.





Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
in the United States of America (“GAAP”) have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission
(“SEC”).  The consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals and adjustments)
necessary to present fairly our financial position as of March 31, 2010 and
December 31, 2009, and the related consolidated statements of operations,
changes in stockholders’ equity and cash flows for each of the periods ended
March 31, 2010 and 2009.  The results of operations for interim
periods are not necessarily indicative of operating results expected for the
full year.  These interim consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in Union National’s Annual Report on Form 10-K for the year ended
December 31, 2009, and with Union National’s Forms 8-K, and other reports, that
were filed during 2010 with the SEC.





Union
National has evaluated events and transactions occurring subsequent to the
balance sheet date of March 31, 2010, for items that should potentially be
recognized or disclosed in the consolidated financial statements. The evaluation
was conducted through the date these consolidated financial statements were
issued.





Note
2 – Use of Estimates





The
process of preparing consolidated financial statements in conformity with GAAP
requires the use of estimates and assumptions that affect the reported amounts
of certain types of assets, liabilities, revenues and
expenses.  Accordingly, actual results may differ from estimated
amounts.  Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for credit losses, the valuation of deferred tax assets, the assessment of
other-than-temporary impairment of investment securities, the potential
impairment of restricted stock and fair value disclosures.


5


Note
3 – Recent Accounting Pronouncements





ASU
2009-16. In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2009-16, “Transfers and Servicing
(Accounting Standards Codification (“ASC”) Topic 860) - Accounting for Transfers
of Financial Assets”. This ASU amends the Codification for the issuance of FASB
Statement No. 166, Accounting for Transfers of Financial Assets - an amendment
of FASB Statement No. 140.





The
amendments in this ASU improve financial reporting by eliminating the exceptions
for qualifying special-purpose entities from the consolidation guidance and the
exception that permitted sale accounting for certain mortgage securitizations
when a transferor has not surrendered control over the transferred financial
assets. In addition, the amendments require enhanced disclosures about the risks
that a transferor continues to be exposed to because of its continuing
involvement in transferred financial assets.  Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting.





This
guidance became effective January 1, 2010, and did not have a significant impact
on Union National’s financial condition or results of operations.





ASU
2009-17. In
October 2009, the FASB issued ASU 2009-17, “Consolidations (ASC Topic 810) -
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities”.  This Update amends the Codification for the
issuance of FASB Statement No. 167, “Amendments to FASB Interpretation No.
46(R)”.





The
amendments in this ASU replace the quantitative-based risks and rewards
calculation for determining which reporting entity, if any, has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which reporting entity has the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic
performance and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. An approach that is expected to be
primarily qualitative will be more effective for identifying which reporting
entity has a controlling financial interest in a variable interest
entity.  The amendments in this ASU also require additional
disclosures about a reporting entity’s involvement in variable interest
entities, which will enhance the information provided to users of financial
statements.





This
guidance became effective January 1, 2010, and did not have a significant impact
on Union National’s financial condition or results of
operations.


6


Note
4 – Earnings (Loss) Per Common Share





Basic
earnings (loss) per common share is computed by dividing net income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the period.  Diluted earnings (loss) per common
share reflects the potential dilution that could occur if (i) preferred stock
shares were converted to common stock shares, and (ii) options to issue common
stock were exercised.  Potential common shares that may be issued
related to outstanding stock options are determined using the treasury stock
method.  For the three months ended March 31, 2010, there were no
preferred stock conversions, which potentially would have a dilutive
effect.  Stock options outstanding which had no intrinsic value, and
therefore were not included in the diluted earnings (loss) per common share
computation, were 78,674 and 91,958 as of March 31, 2010 and 2009,
respectively.  Accordingly, the dilutive earnings (loss) per common
share for each period was not affected by the impact of stock options
outstanding.





The
computation of basic and diluted earnings (loss) per common share, net income
(loss) available to common shareholders, and weighted-average number of shares
outstanding for the three months ended March 31, 2010 and 2009, are presented
below (amounts, except earnings (loss) per share, in thousands):





Three Months Ended March 31,2010
                  
                  
                  2009Net
      Loss Available to Common Stockholders
                  
                  $
                  (15
                  )
                  
                  $
                  (509
                  )Weighted-average
      Common Shares Outstanding
                  
                  
                  2,742
                  
                  
                  
                  2,720Basic
      Loss Per Common Share
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.19
                  )Weighted-average
      Common Shares Outstanding
                  
                  
                  2,742
                  
                  
                  
                  2,720Effect
      of Diluted Securities:Convertible
      Preferred Stock (1)
                  
                  
                  –
                  
                  
                  
                  –Stock
      Options
                  
                  
                  –
                  
                  
                  
                  –Total
      Weighted-average Common Shares and Equivalents
                  
                  
                  2,742
                  
                  
                  
                  2,720Diluted
      Loss Per Common Share
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.19
                  )





(1)    Had
Union National not been in a loss position for the three months ended March 31,
2010, the impact on diluted earnings (loss) per common share would have been an
additional 319,000 weighted-average common shares outstanding for convertible
preferred stock that was issued beginning in September 2009.  This
would reflect the potential dilution that could occur if preferred stock shares
were converted to common stock shares.  There were no shares of
preferred stock outstanding at March 31, 2009.


7


Note
5 – Investment Securities Available For Sale





The
amortized cost and fair value of investment securities are presented in the
tables below as of March 31, 2010 and December 31, 2009 (in
thousands).  The unrealized gains (losses) for these investment
securities have been recorded in accumulated other comprehensive income (loss),
net of related tax expense (benefit), which amounted to a net unrealized gain of
$206,000 at March 31, 2010, as compared to a net unrealized loss of ($195,000)
at December 31, 2009, recorded in accumulated other comprehensive income
(loss).  At March 31, 2010, the amortized cost of the private issuer
mortgage-backed securities and corporate securities reflect cumulative
reductions for other-than-temporary impairment charges of $1,191,000 and
$530,000, respectively. During 2009, other-than-temporary impairment charges on
the private issuer mortgage-backed securities were adjusted accordingly for the
cumulative effect of the adoption of ASC Topic 320, “Investments – Debt and
Equity Securities”, as discussed on page 10 under the section
“Other-Than-Temporary Impairment of Investment Securities”.





At March 31, 2010Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueU.S.
      Agency Mortgage-Backed Securities
                  
                  $
                  45,287
                  
                  
                  $
                  116
                  
                  
                  $
                  (141
                  )
                  
                  $
                  45,262U.S.
      Agency Bonds and Structured Notes
                  
                  
                  12,528
                  
                  
                  
                  15
                  
                  
                  
                  (12
                  )
                  
                  
                  12,531Private
      Issuer Mortgage-Backed Securities
                  
                  
                  2,313
                  
                  
                  
                  269
                  
                  
                  
                  –
                  
                  
                  
                  2,582Corporate
      Securities
                  
                  
                  246
                  
                  
                  
                  69
                  
                  
                  
                  –
                  
                  
                  
                  315Equity
      Securities
                  
                  
                  70
                  
                  
                  
                  8
                  
                  
                  
                  (11
                  )
                  
                  
                  67Total
      Investment Securities
                  
                  $
                  60,444
                  
                  
                  $
                  477
                  
                  
                  $
                  (164
                  )
                  
                  $
                  60,757





At December 31, 2009Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueU.S.
      Agency Mortgage-Backed Securities
                  
                  $
                  53,752
                  
                  
                  $
                  26
                  
                  
                  $
                  (384
                  )
                  
                  $
                  53,394Private
      Issuer Mortgage-Backed Securities
                  
                  
                  2,468
                  
                  
                  
                  170
                  
                  
                  
                  –
                  
                  
                  
                  2,638Obligations
      of State and Political Subdivisions
                  
                  
                  4,016
                  
                  
                  
                  –
                  
                  
                  
                  (201
                  )
                  
                  
                  3,815Corporate
      Securities
                  
                  
                  535
                  
                  
                  
                  96
                  
                  
                  
                  –
                  
                  
                  
                  631Equity
      Securities
                  
                  
                  71
                  
                  
                  
                  8
                  
                  
                  
                  (11
                  )
                  
                  
                  68Total
      Investment Securities
                  
                  $
                  60,842
                  
                  
                  $
                  300
                  
                  
                  $
                  (596
                  )
                  
                  $
                  60,546





Investment
securities carried at fair value of $57,793,000 and $57,209,000 at March 31,
2010 and December 31, 2009, respectively, were pledged to secure public and
government entity deposits, trust deposits, and as collateral for the Bank’s
borrowing availability at the Federal Reserve Bank.


8


The
amortized cost and fair value of investment securities at March 31, 2010 and
December 31, 2009, by contractual maturity, are shown below (in
thousands).  Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.





March 31, 2010
                  
                  
                  December 31, 2009Maturity
                  
                  Amortized
                    Cost
                  
                  
                  Fair Value
                  
                  
                  Amortized
                    Cost
                  
                  
                  Fair ValueDue
      in One Year or Less
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  –Due
      After One Year Through Five Years
                  
                  
                  6,031
                  
                  
                  
                  6,028
                  
                  
                  
                  –
                  
                  
                  
                  –Due
      After Five Years Through Ten Years
                  
                  
                  6,497
                  
                  
                  
                  6,503
                  
                  
                  
                  –
                  
                  
                  
                  –Due
      After Ten Years
                  
                  
                  246
                  
                  
                  
                  315
                  
                  
                  
                  4,551
                  
                  
                  
                  4,44612,774
                  
                  
                  
                  12,846
                  
                  
                  
                  4,551
                  
                  
                  
                  4,446U.S.
      Agency Mortgage-Backed Securities
                  
                  
                  45,287
                  
                  
                  
                  45,262
                  
                  
                  
                  53,752
                  
                  
                  
                  53,394Private
      Issuer Mortgage-Backed Securities
                  
                  
                  2,313
                  
                  
                  
                  2,582
                  
                  
                  
                  2,468
                  
                  
                  
                  2,638Equity
      Securities
                  
                  
                  70
                  
                  
                  
                  67
                  
                  
                  
                  71
                  
                  
                  
                  68Total
      Investment Securities
                  
                  $
                  60,444
                  
                  
                  $
                  60,757
                  
                  
                  $
                  60,842
                  
                  
                  $
                  60,546





The
following tables present investment securities with gross unrealized losses that
are not deemed to be other-than-temporarily impaired, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, at March 31, 2010 and December 31, 2009 (in
thousands):





At March 31, 2010Less than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair
                    Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
                    LossesU.S.
      Agency Mortgage-Backed Securities
                  
                  $
                  28,516
                  
                  
                  $
                  (141
                  )
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  28,516
                  
                  
                  $
                  (141
                  )U.S.
      Agency Bonds and Structured Notes
                  
                  
                  6,016
                  
                  
                  
                  (12
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  6,016
                  
                  
                  
                  (12
                  )Equity
      Securities
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  18
                  
                  
                  
                  (11
                  )
                  
                  
                  18
                  
                  
                  
                  (11
                  )Temporarily
      Impaired Securities
                  
                  $
                  34,532
                  
                  
                  $
                  (153
                  )
                  
                  $
                  18
                  
                  
                  $
                  (11
                  )
                  
                  $
                  34,550
                  
                  
                  $
                  (164
                  )





At December 31, 2009Less than 12 Months
                    
                    
                    12 Months or More
                    
                    
                    TotalFair
                      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      LossesU.S.
      Agency Mortgage-Backed Securities
                    
                    $
                    41,565
                    
                    
                    $
                    (384
                    )
                    
                    $
                    –
                    
                    
                    $
                    –
                    
                    
                    $
                    41,565
                    
                    
                    $
                    (384
                    )Obligations
      of State and Political Subdivisions
                    
                    
                    3,815
                    
                    
                    
                    (201
                    )
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    3,815
                    
                    
                    
                    (201
                    )Equity
      Securities
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    18
                    
                    
                    
                    (11
                    )
                    
                    
                    18
                    
                    
                    
                    (11
                    )Temporarily
      Impaired Securities
                    
                    $
                    45,380
                    
                    
                    $
                    (585
                    )
                    
                    $
                    18
                    
                    
                    $
                    (11
                    )
                    
                    $
                    45,398
                    
                    
                    $
                    (596
                    )





Debt
securities include mortgage-backed securities, bonds, structured notes,
corporate securities and obligations of state and political
subdivisions.  At March 31, 2010, there were fifteen debt securities
with unrealized losses of $153,000 that amounted to 0.4% of their amortized
cost, as compared to December 31, 2009, when there were twenty-seven debt
securities with unrealized losses of $585,000 that amounted to 1.3% of their
amortized cost.  Management believes that the unrealized losses
reflect temporary declines primarily due to changes in interest rates subsequent
to the acquisition of specific securities.  These temporary declines
have been provided for in other comprehensive income (loss).  All of
the obligations of state and political subdivisions outstanding at December 31,
2009, were sold in 2010, and as a result of positive market movements, net gains
of $25,000 were realized on these securities.


9





Equity
securities held are comprised primarily of common stock holdings in other
financial institutions.  There were nine and ten equity securities
with unrealized losses totaling $11,000 at both March 31, 2010 and December 31,
2009, respectively.  Union National has the ability and intent to hold
these investments for a reasonable period of time sufficient for each security
to increase in value to Union National’s cost, and none are in companies with
known debt defaults or deferrals.  Management does not consider the
equity securities to be other-than-temporarily impaired at March 31,
2010.





For the
three months ended March 31, 2010 and 2009, Union National received gross
proceeds of $16,479,000 and $23,152,000, respectively, on the sale of investment
securities.  The following tables present information related to the
realized gains and losses on the sales of investment securities, and losses
recognized on the other-than-temporary impairment of investment securities, for
the three months ended March 31, 2010 and 2009 (in thousands):





Three Months Ended March 31, 2010Gross
                  Realized
                  Gains
                
                
                Gross
                  Realized
                  Losses
                
                
                Other-than-
                  temporary
                  Impairment
                  Losses
                
                
                Net GainsU.S.
      Agency Mortgage-Backed Securities
                
                $
                47
                
                
                $
                –
                
                
                $
                –
                
                
                $
                47Obligations
      of State and Political Subdivisions
                
                
                24
                
                
                
                –
                
                
                
                –
                
                
                
                24Corporate
      Securities
                
                
                5
                
                
                
                –
                
                
                
                –
                
                
                
                5Equity
      Securities
                
                
                1
                
                
                
                –
                
                
                
                –
                
                
                
                1Total
                
                $
                77
                
                
                $
                –
                
                
                $
                –
                
                
                $
                77





Three Months Ended March 31, 2009Gross
                  Realized
                  Gains
                
                
                Gross
                  Realized
                  Losses
                
                
                Other-than-temporary
                  Impairment
                  Losses
                
                
                Net Gains
                  (Losses)U.S.
      Agency Mortgage-Backed Securities
                
                $
                443
                
                
                $
                (32
                )
                
                $
                –
                
                
                $
                411Corporate
      Securities
                
                
                –
                
                
                
                –
                
                
                
                (839
                )
                
                
                (839
                )Total
                
                $
                443
                
                
                $
                (32
                )
                
                $
                (839
                )
                
                $
                (428
                )





Other-Than-Temporary
Impairment of Investment Securities


In
determining fair value and assessing the potential for other-than-temporary
impairment (“OTTI”) of investment securities  as of March 31, 2010,
management primarily considered accounting principles and guidance from ASC
Topic 320, “Investments – Debt and Equity Securities”, and ASC Topic 820, “Fair
Value Measurements and Disclosures”.  Additionally, management
considered SEC guidance including SAB Topic 5M, “Miscellaneous Accounting –
Other Than Temporary Impairment of Certain Investments in Debt and Equity
Securities”, and additional interpretive guidance SEC Press Release #2008-234,
“SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value
Accounting”.


10


In order
to determine whether unrealized losses in the fair value of investment
securities are other-than-temporary, management regularly reviews the entire
portfolio of investment securities for possible OTTI, analyzing factors
including but not limited to the underlying creditworthiness of the issuing
organization, the length of time for which the fair value of the investment
securities has been less than cost, and independent analysts’ opinions about
circumstances that could affect the performance of the investment
securities.  In assessing potential OTTI for debt securities, other
considerations include (i) whether management intends to sell the security, or
(ii) if it is more likely than not that management will be required to sell the
security before recovery, or (iii) if management does not expect to recover the
entire amortized cost basis.  In assessing potential OTTI for equity
securities, consideration is given tomanagement’s intention and
ability to hold the securities until recovery, which may be at maturity, of any
unrealized losses.





Effective
April 1, 2009, the accounting principles and guidance referenced above requires
that the credit-related portion of OTTI on debt securities be recognized in
earnings, while the noncredit-related portion of OTTI on debt securities not
expected by management to be sold be recognized in other comprehensive
income.  Management determined that OTTI recorded in 2008 against a
private-issuer mortgage-backed security, not expected to be sold, had both
credit-related and noncredit-related portions of OTTI; however, in 2008, the
entire OTTI charge on this investment security was recognized in
earnings.  The noncredit-related portion was determined to be $306,000
pre-tax.  Accordingly, on April 1, 2009, a cumulative effect
adjustment was recorded in the after-tax amount of $202,000 to increase retained
earnings and decrease unrealized gains (losses) in accumulated other
comprehensive income (loss) for the noncredit-related portion of the OTTI
recorded in 2008.





During
2009, one of the previously impaired corporate securities (USCap Funding V) was
fully impaired, completely written off and declared as a worthless asset for tax
purposes.  This impaired corporate security had a cumulative credit
related OTTI of $936,000 at December 31, 2009.  The following table
summarizes the cumulative credit related OTTI charges recognized as components
of earnings for investment securities held with a recorded fair value at March
31, 2010.  The beginning balance on January 1, 2010, was adjusted to
reflect the elimination of the worthless security discussed above (in
thousands):





Balance
      at January 1, 2010
                  
                  $
                  2,352Sale
      of impaired security during 2010
                  
                  
                  (631
                  )Additional
      OTTI taken for credit losses during 2010
                  
                  
                  –Balance
      at March 31, 2010
                  
                  $
                  1,721





As of
March 31, 2010, Union National’s investment balances include three securities
with recorded impairments.  The fair value of these impaired
investments was $2,897,000 as compared to an original amortized cost of
$6,950,000. The following table provides additional information related to these
three investment securities(in
thousands):





At March 31, 2010Original
                        Amortized
                      
                      Investment Rating
                      
                      
                      Current
                        Amortized
                      
                      
                      Fair
                      
                      
                      OTTIDescription of Investment Security
                      
                      Cost
                      
                      Original
                      
                      Current
                      
                      
                      Cost
                      
                      
                      Value
                      
                      
                      TakenCountrywide
      Alt Ln 2005-83CB A3
                      
                      $
                      3,018
                      
                      AAA
                      
                      CC
                      
                      
                      $
                      1,146
                      
                      
                      $
                      1,299
                      
                      
                      $
                      711Countrywide
      Alt Ln 2005-75CB A4
                      
                      
                      2,932
                      
                      AAA
                      
                      CCC
                      
                      
                      
                      1,167
                      
                      
                      
                      1,283
                      
                      
                      
                      480InCaps
      Funding II Junior Note
                      
                      
                      1,000
                      
                      BBB
                      
                      B
                      
                      
                      
                      246
                      
                      
                      
                      315
                      
                      
                      
                      530Total
      Securities with OTTI
                      
                      $
                      6,950
                      
                      
                      
                      
                      
                      
                      
                      $
                      2,559
                      
                      
                      $
                      2,897
                      
                      
                      $
                      1,721


11


As
discussed more thoroughly in Note 12 – Fair Value of Assets and
Liabilities and Fair Value of Financial Instruments, the fair value of
these investment securities was determined by calculating the net present value
of the expected future cash flows of each security, with qualitative
risk-adjusted discounting for potential credit risks and nonperformance in the
underlying issuers, and market sector illiquidity concerns. In accordance with
ASC Topic 820, when an active market for a security does not exist, the use of
management estimates that incorporate current market participant expectations of
future cash flows, and include appropriate risk premiums, is
acceptable.  Management’s judgment was that, as of March 31, 2010, the
facts and circumstances indicated significant illiquidity and an inactive market
for these types of investments when other relevant observable inputs were not
available; therefore, expected cash flows were used as a reasonable basis in
determining the fair value of the corporate investment securities.





During
2009, four of the Bank’s private issuer securities were downgraded to below
investment grade (another private issuer mortgage-backed security was downgraded
to below investment grade in 2008).  Accordingly, the Bank recorded
$1,504,000 of other-than-temporary impairment charges for the year ended
December 31, 2009 including (i) $859,000 related to three corporate securities
supported primarily by obligations from other financial industry entities, and
(ii) $645,000 related to two private issuer mortgage-backed securities not
guaranteed by the U.S. government ($839,000 of the $1,504,000
other-than-temporary impairment charges for the year ended December 31, 2009,
were recorded in the first quarter of 2009).  Management determined
that, due to severe illiquidity and distress in the financial markets, the
unrealized declines in the value of these investments were other-than-temporary
and credit related, requiring the write-down and related impairment charge to
earnings.  For the securities with impairment charges recorded,
interest income payments received subsequent to impairment are fully applied to
principal further reducing the amortized cost of these investments.





In the
first quarter of 2010, one of the previously impaired corporate securities
(InCaps Funding II Senior Note) held at December 31, 2009, was sold for
$277,000.   At the time of the sale, the security had $631,000 of
previously recorded impairments, and an adjusted amortized cost of $272,000,
which resulted in a $5,000 gain that was recorded on the sale.





Note
6 – De-Leveraging and Restructuring Activities





In 2010,
the Bank continued with de-leveraging activities by prepaying $2,500,000 of FHLB
advances, which had a fixed weighted average interest cost of 4.67%, incurring
$89,000 of debt prepayment penalties, which were included in other non-interest
expense. The balance of long-term debt was reduced to $30,834,000 at March 31,
2010 from $33,334,000 at December 31, 2009.





There
were no FHLB advances prepaid during the first quarter of 2009, however, for the
year ended December 31, 2009, the Bank prepaid $17,000,000 of FHLB advances,
which had a fixed weighted average interest cost of 5.36%, incurring $536,000 of
debt prepayment penalties.  During 2009, the Bank also repaid a
$5,241,000 brokered CD with an interest cost of 3.90% that matured on October
15, 2009.


12


Note
7 – Junior Subordinated Debentures





Union
National had three issuances of junior subordinated debentures, totaling
$17,341,000, outstanding as of March 31, 2010 and December 31,
2009.





On July
28, 2006, the Bank issued $6,000,000 of subordinated debentures due September
15, 2021 with a five-year initial fixed rate of 7.17%, and then an annual coupon
rate, reset quarterly, based on three-month London Interbank Offered Rate
(“LIBOR”) plus 1.65%.





In
December 2003, Union National Capital Trust I (“UNCT I”) issued $8,248,000 of
floating-rate debentures due January 23, 2034, of which $248,000 is related to
Union National’s capital contribution.  UNCT I provides for quarterly
distributions at a variable annual coupon rate that is reset quarterly, based on
three-month LIBOR plus 2.85%.  The coupon rate was 3.10% and 3.13% at
March 31, 2010 and December 31, 2009, respectively.





In
October 2004, Union National Capital Trust II (“UNCT II”) issued $3,093,000 of
debentures due November 23, 2034, of which $93,000 is related to Union
National’s capital contribution.  UNCT II provides for quarterly
distributions at a variable annual coupon rate that is reset quarterly, based on
three-month LIBOR plus 2.00%. The coupon rate was 2.25% and 2.27% at March 31,
2010 and December 31, 2009, respectively.





All of
the junior subordinated debentures are callable at Union National’s option
beginning at five years from the date of issuance.  These debentures
do not have to be called in full.  UNCT I became callable in December
2008, UNCT II became callable in October 2009, and the Bank’s junior
subordinated debenture will become callable in July 2011.  All three
issuances of junior subordinated debentures qualify as a component of risk-based
capital for regulatory purposes.  For additional information related
to Federal Reserve pre-approval requirements related to payments on UNCT I and
UNCT II, refer to the section Memorandum of Understanding with the
Federal Reserve Bank in Note 9 – Enforcement Actions with
Bank Regulatory Agencies.





Interest
expense on junior subordinated debentures was $189,000 and $231,000 for the
three months ended March 31, 2010 and 2009, respectively.





Note
8 – Stock Issued Under Private Placement Offerings and Dividend Reinvestment
Plan





Preferred Stock Private
Placement Offering


On
September 15, 2009, Union National filed with the Pennsylvania Department
of State two Statements with
Respect to Shares which, effective upon filing, designated two series of
preferred stock as “5% Non-Cumulative Non-Voting Convertible Perpetual Preferred
Stock, Series A” (“Series A Preferred Stock”), and “6% Non-Cumulative Non-Voting
Non-Convertible Perpetual Preferred Stock, Series B” (“Series B Preferred
Stock”), and set forth the voting and other powers, designations, preferences
and relative, participating, optional or other rights, and the qualifications,
limitations or restrictions of the Series A Preferred Stock and Series B
Preferred Stock. On March 1, 2010, Union National terminated the offering of
both series of its Convertible Perpetual Preferred Stock.





Sales of Preferred
Stock:


Union
National has sold shares of its Non-Cumulative Non-Voting Convertible Perpetual
Preferred Stock, Series A (“Series A Preferred Stock”), in transactions exempt
from registration under the Securities Act of 1933, pursuant to Section 4(2)
thereof.





During
the offering, Union National sold 1,275 shares of its Series A Preferred Stock
for total gross proceeds of $1,275,000, which were offset by issuance costs of
$57,000.  At March 31, 2010, there were no Series B Preferred stock
shares outstanding as there was no Series B Preferred stock shares sold or
issued during the offering.


13


The
following table summarizes the Series A Preferred Stock shares sold and the
gross proceeds received through the private placement offering (dollars in
thousands):





Period
                
                Shares
                
                
                Gross
                  ProceedsSeptember
      25, 2009 – September 30, 2009
                
                
                700
                
                
                $
                700October
      1, 2009 – December 31, 2009
                
                
                575
                
                
                
                575January
      1, 2010 – February 28, 2010 (1)
                
                
                –
                
                
                
                –Total
                
                
                1,275
                
                
                $
                1,275





(1)
            On
      March 1, 2010, Union National terminated the offering of both series of
      its Convertible Perpetual Preferred Stock.





As of
March 31, 2010, none of the 1,275 Series A Preferred Stock Shares issued
converted to common stock.





Terms of the Series A
Preferred Stock:


Dividends
on the Series A Preferred Stock are payable quarterly in arrears if, when,
and as declared by Union National’s Board of Directors, at a rate of 5.00% per
year on the liquidation preference of $1,000 per share. Dividends, if declared,
will be payable quarterly on January 31, April 30, July 31, and October 31 of
each year (each a “Dividend Payment Date”).  The first scheduled
dividend was paid on January 31, 2010, and subsequent to March 31, 2010, the
scheduled dividend for April 30, 2010 was paid.  For additional
information related to Federal Reserve pre-approval requirements related to
dividend payments on Preferred Stock, refer to the sectionMemorandum of Understanding with the
Federal Reserve Bank in Note 9 – Enforcement Actions with
Bank Regulatory Agencies.  In the case of the dividend payable
on January 31, 2010, such dividend was prorated based on the number of days
elapsed from the date of purchase to January 31, 2010 over a quarterly dividend
period of ninety (90) days.  Dividends on the Series A Preferred
Stock are non-cumulative.





Holders
of the Series A Preferred Stock may convert their shares into common stock
at any time upon approval of the Board of Governors of the Federal Reserve
System (the “Federal Reserve”), if required, at the conversion prices listed
below:





Conversion Date:
                    
                    Conversion Price
                      per ShareSeptember
      15, 2009 through September 14, 2010
                    
                    $
                    4.00September
      15, 2010 through September 14, 2011
                    
                    $
                    6.25September
      15, 2011 through September 14, 2012
                    
                    $
                    7.50September
      15, 2012 through September 14, 2013
                    
                    $
                    8.75On
      or After September 15, 2013
                    
                    $
                    10.00





The
Series A Preferred Stock only may be redeemed by Union National upon prior
approval of the Federal Reserve. If Union National redeems the Series A
Preferred Stock on or prior to September 14, 2014, the redemption price will
include a premium decreasing over time from 2.5% to 0.5% of the liquidation
preference. The holders of the Series A Preferred Stock do not have voting
rights except as required by Pennsylvania Business Corporation Law of 1988, as
amended.


14


Dividend Reinvestment
Plan


Union
National maintains a Dividend Reinvestment Plan (“DRIP”) for record holders of
Union National’s common stock to provide a convenient method of investing cash
dividends payable upon their common stock and to provide participants with the
opportunity to make voluntary cash payments, from a minimum of $500 to a maximum
of $50,000 per calendar quarter, to purchase additional common shares at a 10%
discount to the fair market value of the shares on the effective purchase date
as defined by the DRIP.  There were no common dividends paid by Union
National in the first quarter of 2010; however, eligible stockholders made
voluntary cash payments totaling $6,000, which were used to purchase 1,479
common shares.  Union National reserved 200,000 common stock shares to
be issued under the DRIP, of which, 24,471 shares have been issued as of March
31, 2010.  As part of the proposed merger, as discussed in Note 14 –
Subsequent Event, the ability of stockholders to make direct cash purchases will
be suspended effective June 30, 2010.





Note
9 – Enforcement Actions with Bank Regulatory Agencies





Formal Written Agreement
with the Office of the Comptroller of the Currency
(“OCC”)


On August
27, 2009, the Bank, the wholly-owned banking subsidiary of Union National,
entered into a formal written agreement (the “Agreement”) with the
OCC.  Specifically, the Agreement requires the Bank to (1) establish a
compliance committee to monitor and coordinate the Bank’s adherence to the
provisions of the Agreement, (2) have the Board of Directors evaluate and
monitor executive management performance, (3) update its three year strategic
plan in accordance with specific guidelines set forth in the Agreement, (4)
update its three year capital program, (5) develop and implement systems to
provide for effective loan portfolio management, (6) take action to protect
criticized assets and implement a written program to eliminate the basis of
criticism of assets criticized by the OCC, (7) strengthen the Bank’s contingency
funding plan, (8) implement a written consumer compliance program, and (9) not
exceed the level of brokered deposits as of the date of the Agreement without
prior OCC approval.




The
Agreement supersedes the previous Memorandum of Understanding (“MOU”) entered
into between the Bank and the OCC on June 20, 2007.  The Agreement
effectively extends several of the provisions under the MOU, including requiring
a three year strategic plan and three year capital plan, improving the Bank’s
loan portfolio management, implementing an effective risk-based consumer
compliance audit program, and establishing a compliance committee.




Separate
from the Agreement, the OCC established individual minimum capital requirements
for the Bank requiring Tier 1 Capital to Average Total Assets of at least eight
percent (8%), Tier 1 Capital to Risk-Based Assets of at least nine and one-half
percent (9.5%), and Total Capital to Risk-Based Assets of at least twelve
percent (12%) effective beginning September 30, 2009.  These minimum
capital ratios are similar to the capital ratio targets agreed to between the
Bank and the OCC under the MOU which were Tier I Capital to Average Total Assets
of 8%, Tier I Capital to Risk-Based Assets of 9%, and Total Capital to
Risk-Based Assets of 12%.  At March 31, 2010, the Bank’s measure of
Tier I Capital to Average Total Assets was 8.34%, Tier I Capital to Risk-Based
Assets was 10.00%, and Total Capital to Risk-Based Assets was
12.72%.  At March 31, 2010, all three ratios exceeded the respective
OCC individual minimum capital requirements.  The Bank capital ratios
reflect the infusion to the Bank subsidiary of $700,000 of the $1,275,000
proceeds raised in Union National’s preferred stock private
placement.





Management
and the Board of Directors are committed to taking the necessary actions to
fully maintain the new minimum capital ratios and address the provisions of the
Agreement, and believe that the Bank has already made measurable progress in
addressing these requirements.  If the Bank does not continue to meet
the OCC’s requirements, the OCC could subject the Bank to such administrative
actions or sanctions as the OCC considers necessary.


15


Memorandum of Understanding
with the Federal Reserve Bank


On
January 28, 2010, Union National entered into an informal Memorandum of
Understanding with the Federal Reserve Bank (“FRB”).  Union National
is the registered bank holding company that wholly owns the Bank (the Bank
subsidiary is separately supervised by the Office of the Comptroller of the
Currency).  The Memorandum of Understanding, which is not a “written
agreement” for purposes of Section 8 of the Federal Deposit Insurance Act,
requires, among other things, Union National to seek prior approval by the FRB
before (i) declaring or paying dividends to stockholders, (ii) distributing
interest, principal or other sums on UNCT I and UNCT II junior subordinated
debentures, and (iii) incurring, increasing or guaranteeing any additional debt.
Subsequent to March 31, 2010, the FRB did approve the quarterly interest
payments for the second quarter of 2010 on the UNCT I and UNCT II junior
subordinated debentures and the preferred stock dividend payments.





Note
10 – Commitments, Guarantees and Contingencies





In the
ordinary course of business, Union National makes commitments to extend credit
to its customers through letters of credit, loan commitments and lines of
credit.  As of March 31, 2010, the Bank had $106,597,000 outstanding
in loan commitments and other unused lines of credit extended to its customers,
as compared to $110,791,000 at December 31, 2009.  The Bank does not
issue any guarantees that would require liability recognition or disclosure,
other than its standby letters of credit. Standby letters of credit written are
conditional commitments issued by Union National to guarantee the performance of
a customer to a third party.  Generally, all letters of credit, when
issued, have expiration dates within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.  The Bank generally holds collateral
and/or personal guarantees supporting these commitments.  There were
$5,725,000 and $6,199,000 of standby letters of credit outstanding as of March
31, 2010 and December 31, 2009, respectively.  Management believes
that the proceeds obtained through a liquidation of collateral and the
enforcement of guarantees would be sufficient to cover the potential amount of
future payments required under the corresponding standby letters of
credit.  The current amount of the liability at March 31, 2010 and
December 31, 2009, for Bank guarantees under standby letters of credit issued is
not considered to be material.





Effective
July 1, 2008, the Bank joined a health care expense management consortium with
other Pennsylvania banks.  The purpose of the consortium is to pool the
risks of covered groups of employees, and to provide effective claims-based
expense management, administrative efficiencies, and use of high-dollar claim
stop loss insurance coverage, to reduce the overall health care costs to the
consortium member banks, while maintaining high quality coverage for
employees.  Through March 31, 2010, the Bank’s payments to the consortium
to cover estimated claims expenses, administrative expenses, and stop loss
insurance premiums exceeded the actual processed expenses by $280,000. 
However, the Bank reduced the amount of this prepaid benefit by a contingent
reserve of $63,000 reflecting an actuarial estimate by the consortium of the
Bank’s unpaid claim liability as of March 31, 2010 to include potential (i)
unreported claims, (ii) reported but unprocessed claims, and (iii) processed but
unpaid claims, related to both medical and drug coverage.





Note
11 – Stock-Based Compensation





In
accordance with ASC Topic 718, “Compensation – Stock Compensation”, Union
National recognizes compensation expense for share-based awards based upon an
assessment of the fair value on the grant date.  The fair value of
each option is estimated on the date of grant using the Black-Scholes
option-pricing model.  Stock compensation expense is recognized on a
straight-line basis over the vesting period of the award.


16


Union
National had two plans with stock options outstanding as of March 31, 2010: (i)
the Employee Stock Incentive Plan (“SIP”); and, (ii) the Independent Directors’
Stock Option Plan (“IDSOP”).  Neither of these plans had remaining
options available for grant as of March 31, 2010.  Options granted
under the SIP are incentive stock options with terms up to 10 years and option
prices equal to the fair value of the shares on the date of the
grant.  SIP options vest over six months, become exercisable nine
months after the grant date, and generally lapse 90 days after termination of
employment.  Options granted under the IDSOP consist of non-qualified
stock options with terms up to 10 years.  IDSOP options have exercise
prices equal to the fair value of the shares on the date of the grant and expire
one year after departure from the Board of Directors.  It is Union
National’s policy to issue new shares from its authorized shares upon the
exercise of stock options.





No
share-based awards were granted or vested during the three months ended March
31, 2010 and 2009; accordingly, no compensation expense was recorded for these
periods.  For the three months ended March 31, 2010, there were no
stock options exercised, forfeited or expired.  As such, there were
78,674 stock options outstanding at both March 31, 2010 and December 31, 2009,
with exercise prices ranging from $11.52 to $22.14.





All stock
options outstanding at March 31, 2010, had no intrinsic value (the amount by
which the market price exceeds the exercise price) and were fully vested and
exercisable, and consisted of the following:





Number
      of options
                  
                  
                  78,674Weighted-average
      contractual remaining term
                  
                  4.2
      YearsWeighted-average
      exercise price
                  
                  $
                  18.83Aggregate
      intrinsic value
                  
                  $
                  –





Note
12 – Fair Value Measurement of Assets and Liabilities and Fair Value of
Financial Instruments





ASC Topic
820, “Fair Value Measurements and Disclosures” defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value
measurements.  This guidance defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. A fair value measurement assumes that a
transaction to sell an asset or transfer a liability occurs in the principal
market for the asset or liability or, in the absence of a principal market, the
most advantageous market for the asset or liability.  The price in the
principal (or most advantageous) market used to measure the fair value of the
asset or liability shall not be adjusted for transaction costs.  An
orderly transaction is not a forced transaction, but rather a transaction that
assumes exposure to the market for a period prior to the measurement date to
allow for marketing activities that are usual and customary for transactions
involving such assets and liabilities.





Market
participants are buyers and sellers in the principal market that are (i)
independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to
transact.  ASC Topic 820 requires the use of valuation techniques that
are consistent with the market approach, the income approach and/or the cost
approach.  The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets and liabilities.  The income approach uses valuation techniques
to convert future amounts such as cash flows or earnings, to a single present
amount on a discounted basis.  The cost approach is based on the
amount that currently would be required to replace the service capacity of an
asset (replacement cost).  Valuation techniques should be consistently
applied.  Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or
liability.  Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity’s own assumptions
about the assumptions market participants would use in pricing the asset or
liability based upon the best information available in the
circumstances.  In that regard, ASC Topic 820 establishes a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs.





17




The fair
value hierarchy is as follows:





Level
      1
            -
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities;Level
      2
            -
            Quoted
      prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the
      asset or liability;Level
      3
            -
            Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (i.e., supported by little or
      no market activity).





ASC Topic
820 provides a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has been a
significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with fair value measurement and disclosure
guidance.  Further, ASC Topic 820 clarifies that when there has been a
significant decrease in the volume and level of activity for the asset or
liability, some transactions may not be orderly, and Union National must
evaluate the weight of evidence to determine whether the transactions are
orderly. It provides a list of circumstances that may indicate that a
transaction is not orderly. A transaction price that is not associated with an
orderly transaction is given little, if any, weight when estimating fair
value.





A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.  The valuation methodologies
were applied to all of Union National’s financial assets and financial
liabilities carried at fair value, effective January 1, 2008.  In
addition, Union National adopted fair value measurement and disclosure guidance
for non-financial assets and non-financial liabilities on January 1,
2009.





Securities Available for
Sale


Equity
securities, comprised mostly of financial institutions, traded on a national
securities exchange are reported at fair value using the Level 1 valuation
hierarchy because these securities tend to trade frequently, and quoted prices
are considered active.  Other equity securities, comprised mostly of
smaller financial institutions, traded on the OTC Bulletin Board (“OTCBB”) or
privately are reported at fair value using the Level 2 valuation hierarchy
because these securities tend to trade infrequently, and quoted prices are not
considered active.  Debt securities classified as available for sale
are generally reported at fair value utilizing Level 2 inputs.  For
these securities, Union National obtained fair value measurements from an
independent pricing service.  The fair value measurements consider
observable data that may include dealer quotes, market spreads, cash flows, the
U.S. Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information and the bond’s terms and
conditions, among other things.





Level 3
inputs are for certain corporate investment security positions that are not
traded in active markets or are subject to transfer restrictions, and/or where
valuations are adjusted to reflect illiquidity and/or
non-transferability.  Such adjustments are generally based on
available market evidence.  In the absence of such evidence,
management’s best estimate is used.  Management’s best estimate
consists of both internal and external support on certain Level 3
investments.  Management only changes Level 3 inputs and assumptions
when corroborated by evidence such as transactions in similar instruments,
completed or pending third-party transactions in the underlying investment or
comparable entities, subsequent transactions or rounds of financing,
recapitalizations and other transactions across the capital structure, offerings
in the equity or debt markets, and changes in financial ratios or cash
flows.  At March 31, 2010, the fair value of securities valued using
Level 3 inputs was determined by calculating the net present value of the
expected future cash flows of each security, with qualitative risk-adjusted
discounting for potential credit risks and nonperformance in the underlying
issuers, and market sector illiquidity concerns.


18


The
following tables present available-for-sale investment securities measured at
fair value on a recurring basis as of March 31, 2010 and December 31, 2009,
segregated by the level of the valuation inputs within the hierarchy utilized to
measure fair value (in thousands).  There were no transfers of assets
between fair value Level 1 and Level 2 for the three months ended March 31,
2010.





At March 31, 2010Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalU.S.
      Agency Mortgage-Backed Securities
                  
                  $
                  –
                  
                  
                  $
                  45,262
                  
                  
                  $
                  –
                  
                  
                  $
                  45,262U.S.
      Agency Bonds and Structured Notes
                  
                  
                  –
                  
                  
                  
                  12,531
                  
                  
                  
                  –
                  
                  
                  
                  12,531Private
      Issuer Mortgage-Backed Securities
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  2,582
                  
                  
                  
                  2,582Corporate
      Securities
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  315
                  
                  
                  
                  315Equity
      Securities
                  
                  
                  12
                  
                  
                  
                  55
                  
                  
                  
                  –
                  
                  
                  
                  67Total
      Investment Securities
                  
                  $
                  12
                  
                  
                  $
                  57,848
                  
                  
                  $
                  2,897
                  
                  
                  $
                  60,757





At December 31, 2009Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalU.S.
      Agency Mortgage-Backed Securities
                  
                  $
                  –
                  
                  
                  $
                  53,394
                  
                  
                  $
                  –
                  
                  
                  $
                  53,394Private
      Issuer Mortgage-Backed Securities
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  2,638
                  
                  
                  
                  2,638Obligations
      of State and Political Subdivisions
                  
                  
                  –
                  
                  
                  
                  3,815
                  
                  
                  
                  –
                  
                  
                  
                  3,815Corporate
      Securities
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  631
                  
                  
                  
                  631Equity
      Securities
                  
                  
                  13
                  
                  
                  
                  55
                  
                  
                  
                  –
                  
                  
                  
                  68Total
      Investment Securities
                  
                  $
                  13
                  
                  
                  $
                  57,264
                  
                  
                  $
                  3,269
                  
                  
                  $
                  60,546





The
following is a reconciliation of the beginning and ending balances of recurring
fair value measurements of certain available-for-sale securities using
significant unobservable (Level 3) inputs (in thousands):





Available-For-
                    Sale
                    SecuritiesBeginning
      Balance at January 1, 2010
                  
                  $
                  3,269Payments
      received (applied to principal), net of accretion
                  
                  
                  (172
                  )Proceeds
      received on sale of impaired security
                  
                  
                  (277
                  )Total
      realized and unrealized gainsIncluded
      in net income
                  
                  
                  5Included
      in other comprehensive income
                  
                  
                  72Ending
      Balance at March 31, 2010
                  
                  $
                  2,897





Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis, but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment).


19


Impaired Loans.Certain impaired loans
are reported at the fair value of the underlying collateral if repayment is
expected solely from the collateral.  Collateral values are estimated
using Level 3 inputs based upon customized discounting criteria. The valuation
allowance (allowance for credit losses) associated with impaired loans was
$1,199,000 and $1,458,000 at March 31, 2010 and December 31, 2009,
respectively.





The
balance of loans and leases that were considered to be impaired under GAAP was
$6,174,000 and $8,715,000, which consisted of eight and ten loan and lease
relationships to unrelated borrowers, at March 31, 2010 and December 31, 2009,
respectively.  At March 31, 2010, three of the relationships
represented 84% of the total impaired loans and leases of
$6,174,000.  The decrease in impaired loans and leases primarily
resulted from several loans, with a related allowance, that were foreclosed on
and transferred into other real estate owned at March 31,
2010.  Management continues to diligently monitor and evaluate the
existing portfolio, and identify credit concerns and risks, including those
resulting from the current weak economy.The
measure of impairment is based primarily on the fair value of collateral
securing these loans, which is primarily real estate and equipment.





Impaired Loans With a
Related Allowance.  Union National had $3,498,000 and
$5,916,000 of impaired loans and leases with a related allowance for credit
losses at March 31, 2010 and December 31, 2009, respectively. These consisted of
four and five loan and lease relationships to unrelated borrowers, with a
related allowance for credit losses of $1,199,000 and $1,458,000 at March 31,
2010 and December 31, 2009, respectively.  This group of impaired
loans and leases has a related allowance due to the probability that the
borrower is not able to continue to make principal and interest payments due
under the contractual terms of the loan or lease.  These loans and
leases appear to have insufficient collateral and Union National’s principal may
be at risk; as a result, a related allowance is necessary to cover future
potential principal losses.





Repossessed
Assets.Assets included
in repossessed assets are reported at fair value on a non-recurring basis.
Values are estimated using Level 3 inputs, based on appraisals that consider the
sales prices of similar assets.





Other Real Estate
Owned.Assets included
in other real estate owned are reported at fair value on a non-recurring
basis.  Values are estimated using Level 3 inputs, based on appraisals
that consider the sales prices of properties in the proximate vicinity, and
estimated liquidation costs.





The
following table summarizes financial assets and financial liabilities measured
at fair value on a nonrecurring basis as of March 31, 2010 and December 31,
2009, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value (in thousands):





March 31, 2010Assets:
                  
                  Level 1
                    Inputs
                  
                  
                  Level 2
                    Inputs
                  
                  
                  Level 3
                    Inputs
                  
                  
                  Total Fair
                    ValueImpaired
      Loans
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  2,299
                  
                  
                  $
                  2,299Repossessed
      Assets
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  190
                  
                  
                  
                  190Other
      Real Estate Owned
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  8,170
                  
                  
                  
                  8,170Total
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  10,659
                  
                  
                  $
                  10,659





December 31, 2009Assets:
                  
                  Level 1
                    Inputs
                  
                  
                  Level 2
                    Inputs
                  
                  
                  Level 3
                    Inputs
                  
                  
                  Total Fair
                    ValueImpaired
      Loans
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  4,458
                  
                  
                  $
                  4,458Repossessed
      Assets
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  436
                  
                  
                  
                  436Other
      Real Estate Owned
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  5,383
                  
                  
                  
                  5,383Total
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  10,277
                  
                  
                  $
                  10,277


20


ASC Topic
825, “Financial Instruments” requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements.  The estimated fair values of
financial instruments as of March 31, 2010 and December 31, 2009, are set forth
in the table below (in thousands).  The information in the table
should not be interpreted as an estimate of the fair value of Union National in
its entirety since a fair value calculation is only provided for a limited
portion of Union National’s assets and liabilities.  Due to a wide
range of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between Union National’s disclosures and those of other
companies may not be meaningful.





March 31, 2010
                  
                  
                  December 31, 2009Carrying
                    Amount
                  
                  
                  Fair
                    Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Fair
                    ValueAssets:Cash
      and Cash Equivalents
                  
                  $
                  59,730
                  
                  
                  $
                  59,730
                  
                  
                  $
                  43,340
                  
                  
                  $
                  43,340Interest-Bearing
      Time Deposits in Other Banks
                  
                  
                  7,024
                  
                  
                  
                  7,048
                  
                  
                  
                  9,229
                  
                  
                  
                  9,252Investment
      Securities Available for Sale
                  
                  
                  60,757
                  
                  
                  
                  60,757
                  
                  
                  
                  60,546
                  
                  
                  
                  60,546Loans
      and Leases, Net
                  
                  
                  327,033
                  
                  
                  
                  313,550
                  
                  
                  
                  333,416
                  
                  
                  
                  317,459Restricted
      Investment in Bank Stocks
                  
                  
                  3,727
                  
                  
                  
                  3,727
                  
                  
                  
                  3,727
                  
                  
                  
                  3,727Accrued
      Interest Receivable
                  
                  
                  1,607
                  
                  
                  
                  1,607
                  
                  
                  
                  1,569
                  
                  
                  
                  1,569Mortgage
      Servicing Assets and Credit Enhancement Fees Receivable
                  
                  
                  48
                  
                  
                  
                  251
                  
                  
                  
                  48
                  
                  
                  
                  267Liabilities:Demand
      and Savings Deposits
                  
                  
                  211,454
                  
                  
                  
                  211,454
                  
                  
                  
                  212,457
                  
                  
                  
                  212,457Time
      Deposits
                  
                  
                  205,471
                  
                  
                  
                  205,944
                  
                  
                  
                  192,308
                  
                  
                  
                  194,218Long-Term
      Debt
                  
                  
                  30,834
                  
                  
                  
                  32,075
                  
                  
                  
                  33,334
                  
                  
                  
                  34,798Junior
      Subordinated Debentures
                  
                  
                  17,341
                  
                  
                  
                  17,038
                  
                  
                  
                  17,341
                  
                  
                  
                  17,017Accrued
      Interest Payable
                  
                  
                  880
                  
                  
                  
                  880
                  
                  
                  
                  938
                  
                  
                  
                  938Off-balance-sheet
      Items:Commitments
      to Extend Credit and Standby Letters of Credit
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –





The
following methods and assumptions were used by Union National to estimate the
fair value of its financial instruments at March 31, 2010 and December 31,
2009:





Cash and
cash equivalents:
The carrying amounts of cash and short-term investments (U.S. Treasury Bills
with a maturity of less than 60 days) approximate their fair
values.





Interest-bearing
time deposits in other banks:The carrying amounts of
interest-bearing time deposits in other banks approximate their fair
values.  The Bank generally purchases amounts below the insured limit,
limiting the amount of credit risk on these time deposits.





Investment
securities: The
carrying values of securities available for sale (carried at fair value) are
determined by obtaining quoted market prices on nationally recognized securities
exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical
technique used widely in the industry to value debt securities without relying
exclusively on quoted market prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted
prices.  For certain securities which are not traded in active markets
or are subject to transfer restrictions, valuations are adjusted to reflect
illiquidity and/or non-transferability, and such adjustments are generally based
on available market evidence (Level 3).  In the absence of such
evidence, management’s best estimate is used.  Management’s best
estimate consists of both internal and external support on certain Level 3
investments.  Internal cash flow models using a present value formula
that includes assumptions market participants would use along with indicative
exit pricing obtained from broker/dealers (where available) were used to support
fair values of certain Level 3 investments.


21


Loans and
leases: For variable-rate loans that reprice frequently and which entail
no significant changes in credit risk, carrying value approximates fair
value.  The fair value of other loans and leases are estimated by
calculating the present value of future cash flows, discounted at the interest
rates currently being offered for loans with similar terms to borrowers with
similar credit quality.





Restricted
investment in bank stocks: The carrying amounts
reported in the consolidated statements of financial condition for restricted
investment in bank stocks approximate their fair values.





Accrued
interest receivable: The carrying amount of
accrued interest receivable approximates its fair value.





Mortgage
servicing assets and credit enhancement fees receivable: The fair value of servicing
assets and credit enhancement fees receivable is based on the present value of
estimated future cash flows on pools of mortgages stratified by rate and
maturity date.





Deposit
liabilities: The
fair values of deposits with no stated maturities, such as demand deposits,
savings accounts, NOW and money market deposits, equal their carrying amounts,
which represent the amount payable on demand.  Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time
deposits.





Long-term
debt: The fair
values of long-term debt are estimated using discounted cash flow analyses,
based on Union National's incremental borrowing rates for similar types of
borrowing arrangements.





Junior
subordinated debentures: For floating-rate
debentures, fair value is based on the difference between current interest rates
for similar types of borrowing arrangements and the current coupon
rate.  For debentures that are at a fixed rate for a period of time,
the fair value is determined using discounted cash flow analyses, based on
current interest rates for similar types of borrowing arrangements.





Accrued
interest payable:
The carrying amount of accrued interest payable approximates its fair
value.





Off-balance-sheet
instruments:
Union National's off-balance-sheet instruments consist of commitments to extend
credit, and financial and performance standby letters of credit.  The
estimated fair value is based on fees currently charged to enter into similar
agreements, taking into account the remaining term of the agreements and the
present creditworthiness of the counterparties.  For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates.


22


Note
13 – Comprehensive Income





U.S.
generally accepted accounting principles require that recognized revenue,
expenses, gains, and losses be included in net income (loss). Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the consolidated statements of financial condition, such
items, along with net income (loss), are components of comprehensive
income.   The components of comprehensive income and related tax
effects are as follows (in thousands):





Three Months Ended March 31,
      2010
                  
                  
                  Three Months Ended March 31,
      2009Before
                    Tax
                    Amount
                  
                  
                  Tax
                    Impact
                  
                  
                  Net-of-
                    Tax
                    Amount
                  
                  
                  Before
                    Tax
                    Amount
                  
                  
                  Tax
                    Impact
                  
                  
                  Net-of-
                    Tax
                    AmountNet
      (Loss) Income
                  
                  $
                  (79
                  )
                  
                  $
                  (82
                  )
                  
                  $
                  3
                  
                  
                  $
                  (837
                  )
                  
                  $
                  (328
                  )
                  
                  $
                  (509
                  )Other
      Comprehensive Income:Unrealized
      Gains on Available-for-Sale Securities Arising During the
      Period
                  
                  
                  684
                  
                  
                  
                  232
                  
                  
                  
                  452
                  
                  
                  
                  541
                  
                  
                  
                  184
                  
                  
                  
                  357Reclassification
      Adjustment for Securities Gains included in Net Income
    (Loss)
                  
                  
                  (77
                  )
                  
                  
                  (26
                  )
                  
                  
                  (51
                  )
                  
                  
                  (411
                  )
                  
                  
                  (140
                  )
                  
                  
                  (271
                  )Reclassification
      Adjustment for Impairment Charges on Investment Securities
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  839
                  
                  
                  
                  285
                  
                  
                  
                  554Other
      Comprehensive Income
                  
                  
                  607
                  
                  
                  
                  206
                  
                  
                  
                  401
                  
                  
                  
                  969
                  
                  
                  
                  329
                  
                  
                  
                  640Total
      Comprehensive Income
                  
                  $
                  528
                  
                  
                  $
                  124
                  
                  
                  $
                  404
                  
                  
                  $
                  132
                  
                  
                  $
                  1
                  
                  
                  $
                  131





Note
14 – Subsequent Event





On April
19, 2010, Union National, the parent company of Union National Community Bank
(“UNCB”), entered into an Agreement and Plan of Merger (the “Merger Agreement”)
with Donegal Financial Services Corporation (“DFSC”), the parent company of
Province Bank FSB (“Province”), and certain affiliated entities of DFSC,
pursuant to which Union National will merge with and into DFSC.  DFSC
is wholly owned by Donegal Mutual Insurance Company (“DMIC”) and Donegal Group
Inc. (“DGI”).





As part
of the transaction, UNCB will merge with and into Province (the “Bank
Merger”).  The merged bank will operate as a federally-chartered
savings association under a new bank name to be mutually determined by UNCB and
Province and will continue to operate the UNCB offices.





Under the
terms of the Merger Agreement, each share of Union National common stock (OTC
Bulletin Board: “UNNF.OB”), other than shares held by DMIC and any dissenting
shares, will convert into the right to receive $5.05 in cash and 0.2134 of a
share of DGI Class A common stock (NASDAQ Global Select: “DGICA”).





Following
the consummation of the transactions, the executive officers of the merged
entities will include: Donald H. Nikolaus, currently the President of DFSC and
the Chairman of Province, will continue as President of DFSC and Chairman of the
merged bank; Mark D. Gainer, currently Chairman, President and Chief Executive
Officer of Union National and UNCB, will become a Senior Vice President of DFSC
and President and Chief Executive Officer of the merged bank; Gregory J. Diehl,
currently President of Province, will become Executive Vice President and Chief
Operating Officer of the merged bank; and Michael D. Peduzzi, Treasurer and
Chief Financial Officer of Union National and Executive Vice President and Chief
Financial Officer of UNCB, will become a Vice President of DFSC and Executive
Vice President and Chief Financial Officer of the merged bank.  The
directors of DFSC immediately after the merger will be the directors of DFSC
immediately prior to the merger plus Mark D. Gainer and two other current
members of Union National’s board of directors.  In addition, the
directors of the merged bank immediately after the Bank Merger will consist of
six current directors of Province and five current directors of
UNCB.


23





The
transaction is subject to customary closing conditions, including the receipt of
regulatory approvals and approval of the merger by the holders of at least 80%
of the outstanding common shares of Union National.  If the merger is
not consummated under certain circumstances, Union National has agreed to pay
DFSC a termination fee of $800,000.  Currently, the merger is expected
to be completed in the third quarter of 2010.





The
foregoing summary of the Merger Agreement is not complete and is qualified in
its entirety by reference to the complete text of the definitive agreement,
which was filed as Exhibit 2.1 to Form 8-K that was filed by Union National on
April 23, 2010.





Through
April 30, 2010, Union National has incurred merger and acquisition related
expenses of $319,000.





ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Overview.Management’s
discussion and analysis represents an overview of the financial condition and
results of operations, and highlights the significant changes in the financial
condition and  results of operations, as presented in the accompanying
consolidated financial statements for Union National Financial Corporation
(“Union National”), a bank holding company, and its wholly-owned subsidiary,
Union National Community Bank (the “Bank”).  Union National’s
consolidated financial condition and results of operations consist primarily of
the Bank’s financial condition and results of operations.  Union
National’s trust subsidiaries, Union National Capital Trust I and Union National
Capital Trust II, were established for the purpose of issuing $11,000,000 of
trust capital securities during 2003 and 2004.





Forward Looking
Statements.  This quarterly report contains forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
Actual results and trends of Union National Financial Corporation (“Union
National”) and Union National Community Bank (the “Bank”) could differ
materially from those set forth in such statements due to various risks,
uncertainties and other factors. Such risks, uncertainties and other factors
that could cause actual results and experience to differ include, but are not
limited to, the following: strategic initiatives and business plans, including
prospective business combinations, may not be satisfactorily completed or
executed, if at all; increased demand or prices for the Bank’s financial
services and products may not occur; changing economic and competitive
conditions; technological developments; the effectiveness of Union National’s
business strategy due to changes in current or future market conditions; actions
of the U.S. government, the Federal Reserve, the Office of the Comptroller of
the Currency (“OCC”) and other governmental and regulatory bodies for the
purpose of stabilizing the financial markets; enforcement actions with bank
regulatory agencies restricting certain transactions of Union National and the
Bank; effects of deterioration of economic conditions on customers, specifically
the effect on loan customers to repay loans; inability of Union National to
raise or achieve desired or required levels of regulatory capital; paying
significantly higher Federal Deposit Insurance Corporation (“FDIC”) premiums in
the future; the effects of competition, and of changes in laws and regulations,
including industry consolidation and development of competing financial products
and services; interest rate movements; relationships with customers and
employees; challenges in establishing and maintaining operations; volatilities
in the securities markets and related potential impairments of investment
securities; deteriorating economic conditions and declines in housing prices and
real estate values; and other risks and uncertainties, including those detailed
in Union National’s filings with the Securities and Exchange
Commission.   When we use words such as “believes”, “expects”,
“anticipates”, or similar expressions, we are making forward-looking
statements.  Union National undertakes no obligation to publicly
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this report.





Readers
should carefully review the risk factors described in the Annual Report and
other documents that we periodically file with the Securities and Exchange
Commission, including our Form 10-K for the year ended December 31, 2009, Union
National’s Forms 8-K, and other reports, that were filed during 2010 with the
SEC.


24


Critical Accounting
Policies.Union National’s
consolidated financial statements are prepared based upon the application of
U.S. generally accepted accounting principles (“GAAP”).   The
reporting of our financial condition and results of operations is impacted by
the application of accounting policies by management, some of which are
particularly sensitive and require significant judgments, estimates and
assumptions to be made in matters that are inherently
uncertain.  These accounting policies, along with the disclosures
presented in other financial statement notes and in this financial review,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.  Management
views critical accounting policies to be those which are highly dependent on
subjective or complex judgments, estimates and assumptions, and where changes in
those estimates and assumptions could have a significant impact on the
consolidated financial statements.  Management currently views the
determination of the allowance for credit losses, the fair value of investment
securities and the fair value of other real estate owned to be critical
accounting policies.





Determination of the
Allowance for Credit Losses. The provision for credit losses and the
level of the allowance for credit losses involve significant estimates by
management.  In evaluating the adequacy of the allowance for credit
losses, management considers the specific collectability of impaired and
nonperforming loans, past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect borrowers ability to repay
(including the timing of future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and
other relevant qualitative factors. While we use available information to make
such evaluations, future adjustments to the allowance for credit losses and the
provision for credit losses may be necessary if economic conditions, loan credit
quality, or collateral issues differ substantially from the factors and
assumptions used in making the evaluation.





Fair Value of Investment
Securities. Investments are carried at fair value with any unrealized
gains and losses, considered to be temporary, reported net of tax as an
adjustment to stockholders’ equity.  In order to determine whether
unrealized losses in the fair value of investment securities reflect
other-than-temporary impairment (“OTTI”), management regularly reviews the
entire portfolio of investment securities for possible impairment, analyzing
factors including, but not limited to, the underlying creditworthiness of the
issuing organization, the length of time for which the fair value of the
investment securities may be less than cost, and independent analysts’ opinions
about circumstances that could affect the performance of the investment
securities.  In assessing potential OTTI for debt securities with fair
values less than cost, other considerations include (i) whether management
intends to sell the security, or (ii) if it is more likely than not that
management will be required to sell the security before recovery, or (iii) if
management does not expect to recover the entire amortized cost basis. In
assessing potential OTTI for equity securities with fair values less than cost,
consideration is given to management’s intention and ability to hold the
securities until recovery of any unrealized losses.    After
considering such factors, it is a matter of judgment on the part of management
to make the determination of whether or not the decline in market value is
other-than-temporary.





Fair Value of Other Real
Estate Owned.    Other Real Estate Owned (“OREO”)
includes property acquired through foreclosure, deed in-lieu of foreclosure, and
an in-substance foreclosure.  OREO is held for sale. The carrying
value of the property is recorded at the fair value of the property as
determined based upon an independent appraisal, less estimated costs to sell at
the time of acquisition.  Any excess of the loan balance over the
carrying value of the property at the time of transfer from loans to OREO is
charged to the allowance for credit losses.  Subsequent to the
transfer to OREO, if the sales price of the property less actual costs to sell
is less than the carrying value of the property, the deficiency is charged
against income as a loss on sale. Due to changing market conditions, there are
inherent uncertainties upon liquidation with respect to determining the fair
value of OREO.  Therefore, the amount ultimately realized upon
liquidation may differ from the carrying value reflected in the accompanying
consolidated financial statements.


25


FINANCIAL
CONDITION


Total
assets increased by $10,287,000 or 2% to $499,931,000 at March 31, 2010, from
$489,644,000 at December 31, 2009. The increase was primarily the result of
strong retail deposit generation, which further strengthened Union National’s
liquidity position.  Total deposits grew by $12,160,000 or 3% to
$416,925,000 at March 31, 2010 from $404,765,000 at December 31,
2009.





Investment Securities.Investment securities were $60,757,000 at March 31, 2010, as compared to
$60,546,000 at December 31, 2009.  All of Union National’s investment
securities were classified as available for sale at March 31, 2010 and December
31, 2009.  Investment securities classified as available for sale are
marketable equity securities, and those debt securities that we intend to hold
for an undefined period of time, but not necessarily to maturity.  In
addition to the investment portfolio generating interest income, it serves other
primary financial management functions such as a reliable source of liquidity
and a tool to manage interest rate risk.  In order to support these
functions, the entire investment securities portfolio has been designated as
being available for sale.  Any decision to sell an available-for-sale
investment security would be based on various factors, including significant
movements in interest rates, changes in maturity mix of assets and liabilities,
liquidity needs, regulatory capital considerations, reasonable gain realization,
changes in the creditworthiness of the issuing entity, changes in investment
strategy and portfolio mix, and other similar factors. Changes in unrealized
gains or losses on available-for-sale investment securities, net of taxes, are
recorded as other comprehensive (loss) income, a component of stockholders’
equity.





Certain
types of mortgage-backed and asset-backed securities are purchased to better
position the investment securities portfolio for a subsequent increase or
decrease in interest rates, as aligned with our interest rate risk
position.  These investment securities may be purchased at premiums or
discounts, with short, mid, or long-term average expected lives or
maturities.  Overall yields on these investment securities will
increase or decrease based on changes in prepayment speeds and subsequent cash
flow reinvestments.





Investment
security purchases and sales generally occur to manage the Bank’s liquidity
requirements, pledging requirements, interest rate risk, and to enhance net
interest margin and capital management.  The investment securities
portfolio is evaluated regularly for possible opportunities to increase earnings
through potential sales or portfolio repositioning.  In the first
three months of 2010, proceeds of $16,479,000 were received on sales, and
$77,000 was recognized in net gains, while $18,644,000 of investment securities
were purchased.  Investment securities of $57,793,000 and $57,209,000
were pledged to secure public, trust, and government deposits and for other
purposes at March 31, 2010 and December 31, 2009, respectively.





In
addition to the credit risk present in the loan portfolio, we also have credit
risk associated with our investment security holdings.  Based on
recent national economic trends and other factors, the private issuer
mortgage-backed securities and corporate debt securities credit ratings as
published by national statistical rating organizations are being monitored
closely.





Investment
securities consisted of the following at of March 31, 2010 and December 31,
2009, (in thousands):





March 31,
                    2010
                  
                  
                  December 31,
                    2009Market
      Value of Debt Securities
                  
                  $
                  60,690
                  
                  
                  $
                  60,478Market
      Value of Equity Securities
                  
                  
                  67
                  
                  
                  
                  68Total
      Market Value of Investment Securities
                  
                  $
                  60,757
                  
                  
                  $
                  60,546





Debt
securities include mortgage-backed securities, obligations of state and
political subdivisions, obligations of U.S. government agencies, structured
notes and corporate securities.  At March 31, 2010, there were fifteen
debt securities with unrealized losses of $153,000 that amounted to 0.4% of
their amortized cost, as compared to December 31, 2009, when there were
twenty-seven debt securities with unrealized losses of $585,000 that amounted to
1.3% of their amortized cost.  Management believes that the unrealized
losses reflect temporary declines primarily due to changes in interest rates
subsequent to the acquisition of specific securities.  These temporary
declines have been provided for in other comprehensive income
(loss).  All of the obligations of state and political subdivisions
outstanding at December 31, 2009, were sold in 2010, and as a result of positive
market movements, no losses were recognized on the sale of these
securities.


26





Equity
securities held are comprised primarily of common stock holdings in other
financial institutions.  There were nine and ten equity securities
with unrealized losses of $11,000, at both March 31, 2010 and December 31, 2009,
respectively.  Union National has the ability and intent to hold these
investments for a reasonable period of time sufficient for the fair value of
each equity security to increase to Union National’s cost.  Management
does not consider the equity securities to be other-than-temporarily impaired at
March 31, 2010.





As of
March 31, 2010, $12,000 of the fair value of the total investment securities
portfolio was measured using Level 1 inputs as defined by fair value measurement
and disclosure guidance, $57,848,000 or 95% of the fair value of total
investment securities was measured using Level 2 inputs, and $2,897,000 or 5% of
the fair value of total investment securities was measured using Level 3 inputs
(for additional information, refer to Note 12 – Fair Value Measurement of
Assets and Liabilities and Fair Value of Financial Instruments to the
consolidated financial statements).





The fair
value of Level 3 investment securities decreased to $2,897,000 at March 31,
2010, as compared to $3,269,000 at December 31, 2009. Of the decrease in value,
$272,000 was related to net proceeds received on the sale of an impaired
security, $172,000 was related to principal and interest payments received and
fully applied to principal, offset by $72,000 of net unrealized gains (with a
corresponding after-tax increase to stockholders’ equity of $48,000 recorded as
other comprehensive income).





In order
to determine whether unrealized losses in the fair value of investment
securities are OTTI, management regularly reviews the entire portfolio of
investment securities for possible impairment, analyzing factors including but
not limited to the underlying creditworthiness of the issuing organization, the
length of time for which the fair value of the investment securities has been
less than cost, and independent analysts’ opinions about circumstances that
could affect the performance of the investment securities. In assessing
potential OTTI for debt securities, other considerations include (i) whether
management intends to sell the security, or (ii) if it is more likely than not
that management will be required to sell the security before recovery, or (iii)
if management does not expect to recover the entire amortized cost
basis.  In assessing potential OTTI for equity securities,
consideration is given to management’s intention and ability to hold the
securities until recovery of any unrealized losses.





As of
March 31, 2010, Union National’s recorded investment balances include three
securities with previously recorded impairments.  The fair value of
these impaired investments was $2,897,000 at March 31, 2010, as compared to an
original amortized cost of $6,950,000. All principal and interest payments
received on impaired investment securities are fully applied to
principal.





Accounting
Standards Codification (“ASC”) Topic 320, “Investments – Debt and Equity
Securities” provides a list of factors that a reporting entity should evaluate
to determine whether there has been a significant decrease in the volume and
level of activity for the asset or liability in relation to normal market
activity for the asset or liability. When the reporting entity concludes there
has been a significant decrease in the volume and level of activity for the
asset or liability, further analysis of the information from that market is
needed and significant adjustments to the related prices may be necessary to
estimate fair value in accordance with fair value measurement and disclosure
guidance.  Further, fair value measurement and disclosure guidance
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly, and the Corporation must evaluate the weight of evidence to determine
whether the transactions are orderly. The guidance provides a list of
circumstances that may indicate that a transaction is not orderly. A transaction
price that is not associated with an orderly transaction is given little, if
any, weight when estimating fair value.


27





As discussed more thoroughly inNote
12 – Fair Value of Assets and Liabilities and Fair Value of Financial
Instrumentsto the
consolidated financial statements, the fair value of these investment securities
was determined by calculating the net present value of the expected future cash
flows of each security, with qualitative risk-adjusted discounting for potential
credit risks and nonperformance in the underlying issuers, and market sector
illiquidity concerns. In accordance with ASC Topic 820, when an active market
for a security does not exist, the use of management estimates that incorporate
current market participant expectations of future cash flows, and include
appropriate risk premiums, is acceptable.  Management’s judgment was
that, as of March 31, 2010 and December 31, 2009, the facts and circumstances
indicated significant illiquidity and an inactive market for these types of
investments when other relevant observable inputs were not available; therefore,
expected cash flows were used as a reasonable basis in determining the fair
value of the corporate investment securities.





During
2009, four of the Bank’s five private issuer securities were downgraded to below
investment grade (one private issuer mortgage-backed security was downgraded to
below investment grade in 2008).  Accordingly, the Bank recorded
$1,504,000 of other-than-temporary impairment charges in 2009 including (i)
$859,000 related to three corporate securities supported primarily by
obligations from other financial industry entities, and (ii) $645,000 related to
two private issuer mortgage-backed securities not guaranteed by the U.S.
government.  During 2008, Union National recorded $1,290,000 of
other-than-temporary investment impairment charges related to two securities,
including the private-issuer security that was downgraded to
below-investment-grade in 2008, and a corporate security.  Management
determined that, due to severe illiquidity and distress in the financial
markets, the unrealized declines in the value of these investments were
other-than-temporary and credit related, requiring the write-down and related
impairment charge to earnings.  For the securities with impairment
charges recorded, interest income payments received subsequent to impairment are
fully applied to principal further reducing the amortized cost of these
investments.





During
2009, one of the previously impaired corporate securities (USCap Funding V) was
fully impaired, completely written-off and declared as a worthless asset for tax
purposes. This impaired corporate security had a cumulative credit related OTTI
of $936,000 at December 31, 2009.  During 2010, another one of the
previously impaired corporate securities (InCaps Funding II Senior Note) was
sold for $277,000, leaving the Bank with a total of three impaired investment
securities remaining at March 31, 2010. At the time of the sale, the InCaps
Funding II Senior Note security had $631,000 of previously recorded impairments
and an adjusted  amortized cost of $272,000, which resulted in a
$5,000 gain that was recorded on the sale.





Management
determined that further impairments as of March 31, 2010 were not warranted on
the three remaining impaired investment securities based upon the following
considerations:





·
            All
      three impaired investment securities were current, as of March 31, 2010,
      for scheduled investment payments.  Based upon the information
      reviewed by management in preparing the financial statements, the
      financial condition and near-term prospects of the issuers do not reflect
      any specific events which may have influenced the operations of the
      issuers, such as changes in technology or a discontinuance of a business
      segment that may have further impaired the earnings potential of the
      investments.


·
            The
      securities experienced very limited trading activity during the last 12
      months being in a market sector with a high degree of illiquidity and
      dislocation; therefore, determining fair value based upon discounted cash
      flows is considered reasonable.


·
            Management
      does not intend to sell the securities, and it is not likely that
      management will be required to sell the securities before recovery to
      their adjusted amortized cost, and though management does not expect to
      recover the original amortized cost of the securities, management expects
      to hold the securities until a reasonable recovery towards the current
      carrying value.


28


Loans and Leases, Credit Quality and
Credit Risk. Loans and leases at March 31, 2010 were $333,028,000 as
compared to $339,274,000 at December 31, 2009.  Outstanding loans
decreased by $6,246,000 from December 31, 2009 to March 31, 2010, primarily due
to reduced loan demand from creditworthy borrowers and the impact of certain
loans at December 31, 2009, that subsequently involved collateral foreclosure
and were classified as other real estate owned (“OREO”) at March 31, 2010, in
the Consolidated Statements of Financial Condition (for additional information,
refer to the discussion on “Non-Performing Assets” on page 31).  Union
National continues to focus lending on creditworthy consumers and businesses,
with necessary consideration given to increased credit risks posed by the weak
economy and the housing market.  The economy and housing market, and
increased unemployment, could affect some of Union National’s borrowers, and may
result in increased nonperforming loans and credit losses.





At March
31, 2010, the Bank had $68,708,000 of loans specifically pledged to the FHLB for
providing collateral on FHLB long-term debt, as compared to $72,287,000 of
pledged loans at December 31, 2009.





Allowance for Credit
Losses.In accordance with GAAP, the allowance for credit
losses is maintained at a level believed by management to be adequate to absorb
estimated probable loan and lease principal losses.  The allowance for
credit losses is established through provisions charged against net interest
income.  The uncollectible principal portion of impaired loans and
leases is charged against the allowance for credit losses, and subsequent
principal recoveries are credited to the allowance for credit
losses.





Management’s
evaluation of the adequacy of the allowance is based on the Bank’s past loan and
lease loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower’s ability to repay (including the timing
of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant qualitative factors. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future cash
flows expected to be received on impaired loans and leases that may be
susceptible to significant change.





The
allowance for credit losses is evaluated based on an assessment of the losses
inherent in the loan and lease portfolio.  This assessment results in an
allowance that consists of specific, general and unallocated components. 
The specific component relates to loans and leases that are classified as
impaired.  For such loans and leases, an allowance is established when (i)
the discounted cash flows, or (ii) collateral value, or (iii) observable market
price of the impaired loan or lease is lower than the carrying value.  The
general component covers all other loans and leases, including criticized loans
that are not impaired, and is based on historical loss experience adjusted for
relevant qualitative factors.  Separate qualitative adjustments are made
for higher-risk criticized loans that are not impaired.  An
unallocated component is maintained to cover uncertainties that could affect our
estimate of probable losses.  The unallocated component of the allowance
reflects the margin of imprecision inherent in the underlying assumptions used
in the methodologies for estimating specific and general losses in the loan and
lease portfolio.





Union
National continues to closely monitor the loan portfolio, and the underlying
borrower financial performance and collateral values, identifying credit
concerns and risks, including those resulting from the uncertain and weakened
economy.  Future adjustments may be necessary to the allowance for
credit losses, and consequently the provision for credit losses, if economic
conditions or loan credit quality differ substantially from the assumptions
management used in the evaluation of the level of the allowance as compared to
the balance of outstanding loans and leases.





The
allowance for credit losses was $5,995,000 at March 31, 2010, as compared to
$5,858,000 at December 31, 2009.  A provision for credit losses of
$496,000 was made for the three months ended March 31, 2010, as compared to
$313,000 for the same period in 2009.  The provision for credit losses
for the three months ended March 31, 2010, was significantly higher than the
provision for credit losses for the three months ended March 31, 2009 (for
additional information, refer to the related discussion on “Provision for Credit
Losses” on page 36) given the increased credit risks in the loan portfolio,
including those resulting from the current weak economy and real estate
market.  With the higher provision exceeding net loan charge-offs of
$359,000 as well as the decrease to the loan and lease portfolio in the first
quarter of 2010, the allowance for credit losses increased to 1.80% of loans at
March 31, 2010 as compared to 1.73% of loans at December 31,
2009.  Management believes, based on information then currently
available, that the allowance for credit losses as of March 31, 2010, was
adequate to meet probable credit losses at that date.


29





The
following table summarizes the changes in the allowance for credit losses for of
the three months ended March 31, 2010 and 2009 (dollars in
thousands):





Three Months Ended
                    March 31,2010
                  
                  
                  2009Allowance
      for Credit Losses, Beginning of Period
                  
                  $
                  5,858
                  
                  
                  $
                  4,358Charge-Offs
                  
                  
                  (360
                  )
                  
                  
                  (363
                  )Recoveries
                  
                  
                  1
                  
                  
                  
                  11Net
      Charge-Offs
                  
                  
                  (359
                  )
                  
                  
                  (352
                  )Addition
      to Provision for Credit Losses
                  
                  
                  496
                  
                  
                  
                  313Allowance
      for Credit Losses, End of Period
                  
                  $
                  5,995
                  
                  
                  $
                  4,319Loans
      and Leases – Average
                  
                  $
                  338,341
                  
                  
                  $
                  356,118Gross
      Loans and Leases – Actual
                  
                  $
                  333,028
                  
                  
                  $
                  356,289Ratio
      of Gross Loans and Leases Charged Off to Average Loans and Leases
      (Annualized)
                  
                  
                  0.43
                  %
                  
                  
                  0.41
                  %Ratio
      of The Allowance for Credit Losses to Gross Loans and
    Leases
                  
                  
                  1.80
                  %
                  
                  
                  1.21
                  %





Impaired Loans. Other
than as described herein, management does not believe there are any significant
trends, events or uncertainties that are reasonably expected to have a material
impact on our loan and lease portfolio to affect future results of operations,
liquidity or capital resources.  However, based on known information,
management believes that the effects of current and past economic conditions and
other unfavorable business conditions may impact certain borrowers’ abilities to
comply with their repayment terms and therefore may have an adverse effect on
future results of operations, liquidity, or capital
resources.  Management continues to closely monitor economic and
business conditions and the impact on borrowers’ financial
strength.  For certain loans and leases, management has determined
that it is probable that all principal and interest payments due according to
the contractual terms of the loan agreements will not be collected. These loans
are considered to be impaired as defined by GAAP.





The
balance of loans and leases that were considered to be impaired under GAAP was
$6,174,000 and $8,715,000, which consisted of eight and ten separate loan and
lease relationships to unrelated borrowers, at March 31, 2010 and December 31,
2009, respectively.  At March 31, 2010, three of the relationships
represented 84% of the total impaired loans and leases of
$6,174,000.  The decrease in impaired loans and leases from December
31, 2009 to March 31, 2010, primarily resulted from several loans, with a
related allowance, that were foreclosed on and transferred into other real
estate owned at March 31, 2010 (for additional information, refer to the
discussion on “Non-Performing Assets” on page 31). Management continues to
diligently monitor and evaluate the impaired loan portfolio, and identify new
credit concerns and collectability risks, including those resulting from the
current uncertain and weakened economy.The
measure of impairment is based primarily on the fair value of collateral
securing these loans, which is primarily real estate and
equipment.


30


Impaired Loans With a
Related Allowance.  Union National had $3,498,000 and
$5,916,000 of impaired loans and leases with a related allowance for credit
losses at March 31, 2010 and December 31, 2009, respectively. These consisted of
four and five separate loan and lease relationships to unrelated borrowers, with
a related allowance for credit losses of $1,199,000 and $1,458,000 at March 31,
2010 and December 31, 2009, respectively.  This group of impaired
loans and leases has a related allowance due to the probability of the borrower
not being able to continue to make principal and interest payments due under the
contractual terms of the loan or lease.  These loans and leases appear
to have insufficient collateral and Union National’s principal may be at risk;
as a result, a related allowance is necessary to cover future probable
losses.





Impaired Loans without a
Related Allowance.  Union National had $2,676,000 and
$2,799,000 of impaired loans and leases without a related allowance at March 31,
2010 and December 31, 2009, respectively.  These consisted of four and
five separate loan and lease relationships at March 31, 2010 and December 31,
2009, respectively.  This group of impaired loans and leases is
considered impaired due to the likelihood of the borrower not being able to
continue to make principal and interest payments due under the contractual terms
of the loan or lease.  However, these loans and leases appear to have
sufficient collateral and Union National’s principal does not appear to be at
risk of probable principal losses; as a result, management believes a related
allowance is not necessary.





Substandard Loans and
Leases.  Under the Bank’s current internal risk rating system,
loans and leases with a rating of “substandard” that were performing, and not
determined to be impaired, amounted to $30,885,000 and $32,410,000 at March 31,
2010 and December 31, 2009, respectively.  Despite these credits not
being impaired, management believes these substandard credits reflect increased
risks to the loan portfolio, including risks resulting from the current weak
economy and real estate markets.  Management considered such increased
risks in determining the provision for credit losses (refer to the related
discussion on “Provision
for Credit Losses”on page 36).Management continues to
closely monitor the loan portfolio, and the underlying borrower financial
performance and collateral values, identifying credit concerns and risks,
including those resulting from the current weak economy.  Management
considers both impaired and these substandard loans to be potential problem
loans, and believes that the current persisting and weakened economic conditions
may result in additional loans being classified or nonperforming in future
periods.





Non-Performing
Assets.  Nonperforming assets consist of nonperforming loans
and leases, other real estate owned (“OREO”), and repossessed
assets.  The following table provides a summary of nonperforming
assets at March 31, 2010 and December 31, 2009 (dollars in
thousands):





March 31,
                    2010
                  
                  
                  December 31,
                    2009Nonaccruing
      Loans
                  
                  $
                  5,255
                  
                  
                  $
                  8,034Accruing
      Loans – 90 days or more past due
                  
                  
                  1,236
                  
                  
                  
                  506Total
      Nonperforming Loans and Leases
                  
                  
                  6,491
                  
                  
                  
                  8,540Other
      Real Estate Owned
                  
                  
                  8,170
                  
                  
                  
                  5,383Repossessed
      Assets
                  
                  
                  190
                  
                  
                  
                  436Total
      Nonperforming Assets
                  
                  $
                  14,851
                  
                  
                  $
                  14,359Gross
      Loans and Leases
                  
                  $
                  333,028
                  
                  
                  $
                  339,274Allowance
      for Credit Losses
                  
                  $
                  5,995
                  
                  
                  $
                  5,858Nonperforming
      Loans and Leases as a % of Gross Loans and Leases
                  
                  
                  1.9
                  %
                  
                  
                  2.5
                  %Nonperforming
      Assets as a % of Total Assets
                  
                  
                  3.0
                  %
                  
                  
                  2.9
                  %Allowance
      for Credit Losses as a % of Nonperforming Loans and Leases
                  
                  
                  92
                  %
                  
                  
                  69
                  %


31


Nonperforming
loans and leases consist of loans and leases that are nonaccruing, and those
that are 90 days or more past due.  Nonaccruing loans and leases are
no longer accruing interest income because of apparent financial difficulties of
the borrower.  Interest received on nonaccruing loans and leases is
recorded as income only after the past due principal is brought current and
deemed collectible in full. Total nonperforming loans and leases decreased to
$6,491,000, or 1.9%, of gross loans and leases at March 31, 2010, as compared to
$8,540,000, or 2.5% of gross loans and leases, at December 31,
2009.  The decrease in nonperforming loans and leases primarily
resulted from several loans being foreclosed on in 2010 and are reported as OREO
in the Consolidated Statements of Financial Condition at March 31,
2010.  Historically, the percentage of nonperforming loans to gross
loans for the five year-end periods ended December 31, 2009, was an average of
1.2%.





OREO
includes assets acquired through foreclosure, deed in-lieu of foreclosure, and
loans identified as in-substance foreclosures.  A loan is classified
as an in-substance foreclosure when effective control of the collateral has been
taken prior to completion of formal foreclosure proceedings.  OREO is
held for sale and is recorded at fair value less estimated costs to
sell.  Costs to maintain OREO and subsequent gains and losses
attributable to OREO liquidation are included in the Consolidated Statements of
Operations in other income and other expense as realized.  No
depreciation or amortization expense is recognized. OREO was $8,170,000 and
$5,383,000 at March 31, 2010 and December 31, 2009, respectively.  The
increase was primarily the result of foreclosing on two commercial mortgages in
2010. At March 31, 2010, $7,375,000, or 90% of the total OREO balance, consisted
of two commercial properties in Lancaster, PA.  The remaining
$795,000, or 10% of the total OREO balance, was comprised of five smaller
commercial and residential properties.





Repossessed
assets consist of (i) vehicles and other equipment acquired from lessees, who
defaulted on their contractual lease obligation, and (ii) mobile homes where the
Bank does not own the underlying real estate.  Repossessed assets were
$190,000 and $436,000 at March 31, 2010 and December 31, 2009,
respectively.  The decrease resulted primarily from the write-down of
certain repossessed leased assets to fair market value,  which
amounted to $144,000.





Stockholders’ Equity.Stockholders’ equity increased by $392,000 to $31,728,000 at March 31,
2010, as compared to $31,336,000 at December 31, 2009.  The increase
in stockholders’ equity was primarily the result of other comprehensive income
during the period, proceeds received through the Dividend Reinvestment Plan
(“DRIP”), and increases to retained earnings resulting from year-to-date net
income, which was offset by scheduled dividends paid to preferred
stockholders.





Union
National’s regulatory capital position at March 31, 2010, exceeds the current
regulatory required minimums as disclosed below.





Regulatory
Capital.Bank
regulatory authorities in the United States issue risk-based capital
standards.  These capital standards relate a bank’s capital to the
risk profile of its assets and provide the basis by which all banks are
evaluated in terms of its capital adequacy.  Union National and the
Bank are subject to various regulatory capital requirements administered by the
federal banking agencies.  Failure to meet the minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on our consolidated financial statements.  Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Union National and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices.  The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.





Quantitative
measures established by regulation to ensure capital adequacy require Union
National and the Bank to maintain minimum amounts and ratios of Tier 1 capital
to average assets and of total capital (as defined in the regulations) to
risk-weighted assets.


32





As of
March 31, 2010 and December 31, 2009, Union National and the Bank exceeded the
current regulatory requirements to be considered a quantitatively “well
capitalized” financial institution, i.e. a leverage ratio exceeding 5%, Tier 1
risk-based capital exceeding 6%, and total risk-based capital exceeding
10%.





In
addition to the above regulatory capital standards, effective September 30,
2009, the OCC established individual minimum capital requirements for the Bank
(for additional information, refer to Note 9 – Enforcement Actions with
Bank Regulatory Agenciesto the consolidated financial statements). The
specific capital requirements established for the Bank were 8% for Tier 1
capital to average total assets, 9.5% for Tier 1 capital to risk-based assets,
and 12% for total capital to risk-based assets.  At March 31, 2010,
the Bank’s measure of Tier I capital to average Total assets was 8.34%, Tier 1
capital to risk-based assets of 10.00% and total capital to risk-based assets of
12.72%. At March 31, 2010, all three ratios exceeded the respective individual
minimum capital requirements established by the OCC.





Union
National and the Bank’s regulatory capital levels as of March 31, 2010 and
December 31, 2009, are as follows (dollars in thousands):




Actual
                      
                      
                      Minimum Required
                        For Capital
                        Adequacy Purposes
                      
                      
                      To Be Well-
                        Capitalized Under
                        Prompt Corrective
                        Action ProvisionsAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio (1)
                      
                      
                      Amount
                      
                      
                      RatioUnion National Financial
      CorporationMarch
      31, 2010:Tier
      1 (leverage) capital
                      
                      $
                      42,024
                      
                      
                      
                      8.52
                      %
                      
                      $
                      19,733
                      
                      
                      
                      4.00
                      %
                      
                      
                      N/A
                      
                      
                      
                      N/ATier
      1 risk-based capital
                      
                      
                      42,024
                      
                      
                      
                      10.22
                      
                      
                      
                      16,449
                      
                      
                      
                      4.00
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ATotal
      risk-based capital
                      
                      
                      53,669
                      
                      
                      
                      13.05
                      
                      
                      
                      32,898
                      
                      
                      
                      8.00
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ADecember
      31, 2009:Tier
      1 (leverage) capital
                      
                      $
                      42,036
                      
                      
                      
                      8.52
                      %
                      
                      $
                      19,744
                      
                      
                      
                      4.00
                      %
                      
                      
                      N/A
                      
                      
                      
                      N/ATier
      1 risk-based capital
                      
                      
                      42,036
                      
                      
                      
                      9.93
                      
                      
                      
                      16,929
                      
                      
                      
                      4.00
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ATotal
      risk-based capital
                      
                      
                      53,825
                      
                      
                      
                      12.72
                      
                      
                      
                      33,858
                      
                      
                      
                      8.00
                      
                      
                      
                      N/A
                      
                      
                      
                      N/AUnion National Community
    BankMarch
      31, 2010:Tier
      1 (leverage) capital
                      
                      $
                      41,004
                      
                      
                      
                      8.34
                      %
                      
                      $
                      19,671
                      
                      
                      
                      4.00
                      %
                      
                      $
                      24,589
                      
                      
                      
                      5.00
                      %Tier
      1 risk-based capital
                      
                      
                      41,004
                      
                      
                      
                      10.00
                      
                      
                      
                      16,400
                      
                      
                      
                      4.00
                      
                      
                      
                      24,599
                      
                      
                      
                      6.00Total
      risk-based capital
                      
                      
                      52,141
                      
                      
                      
                      12.72
                      
                      
                      
                      32,799
                      
                      
                      
                      8.00
                      
                      
                      
                      40,999
                      
                      
                      
                      10.00December
      31, 2009:Tier
      1 (leverage) capital
                      
                      $
                      40,910
                      
                      
                      
                      8.31
                      %
                      
                      $
                      19,686
                      
                      
                      
                      4.00
                      %
                      
                      $
                      24,608
                      
                      
                      
                      5.00
                      %Tier
      1 risk-based capital
                      
                      
                      40,910
                      
                      
                      
                      9.69
                      
                      
                      
                      16,881
                      
                      
                      
                      4.00
                      
                      
                      
                      25,322
                      
                      
                      
                      6.00Total
      risk-based capital
                      
                      
                      52,194
                      
                      
                      
                      12.37
                      
                      
                      
                      33,762
                      
                      
                      
                      8.00
                      
                      
                      
                      42,203
                      
                      
                      
                      10.00





(1)
            The
      OCC requires the Bank to meet higher individual minimum capital ratios
      effective September 30, 2009 (for additional information, refer to Note 9 – Enforcement Actions
      with Bank Regulatory
Agencies).





Included
in Tier 1 regulatory capital of Union National is $10,507,000 of trust capital
securities issued through the UNCT I  and UNCT II subsidiaries of
Union National.  The balance of these trust capital securities,
$493,000, is included in Tier 2 regulatory capital of Union
National.  Additionally, included in Tier 2 regulatory capital of the
Bank and Union National is $6,000,000 of junior subordinated debentures issued
by the Bank.  These securities would become callable if the Federal
Reserve makes a determination that trust capital securities can no longer be
considered in regulatory capital.





Regulatory
capital requirements may be increased in the future.  Union National
will closely monitor and evaluate its capital position as the regulatory capital
environment changes, and if regulatory capital requirements are
changed.


33





Restrictions. Banking
regulations limit the amount of investments, loans, extensions of credit and
advances the Bank can make to Union National at any time to 10% of the Bank’s
total regulatory capital.  At March 31, 2010, this limitation amounted
to approximately $5,214,000. These regulations also require any such investment,
loan, extension of credit or advance to be secured by securities having a market
value in excess of the amount thereof.





The Bank
is subject to certain restrictions in connection with the payment of
dividends.  National banking laws require the approval of the Office
of the Comptroller of the Currency if the total of all dividends declared by a
national bank in any calendar year exceeds the net profits of the Bank for that
year (as defined)  combined with the Bank’s retained net operating
results for the preceding two calendar years.  Under this formula, the
Bank’s retained net operating results for the preceding two calendar years was
($189,000).  As a result, in 2010, the Bank may declare dividends to
the parent company, Union National, in an amount equal to the net profits of the
Bank in 2010 less $189,000, up to the date of any such dividend
declaration.   The Bank’s net income for the three months ended
March 31, 2010 was $94,000, restricting the Bank from declaring or making any
dividend payment to Union National at March 31, 2010.





On
January 28, 2010, Union National entered into an informal Memorandum of
Understanding with the Federal Reserve Bank (“FRB”) of
Philadelphia.  The Memorandum of Understanding, which is not a
“written agreement” for purposes of Section 8 of the Federal Deposit Insurance
Act, requires, among other things, Union National to seek prior approval by the
FRB before Union National (i) declares or pays dividends to shareholders, (ii)
distributes interest, principal or other sums on UNCT I and UNCT II junior
subordinated debentures, and (iii) incurs, increases or guarantees any
additional debt.  Subsequent to March 31, 2010, the FRB did approve
the quarterly interest payments for the second quarter of 2010 on the UNCT I and
UNCT II junior subordinated debentures and the preferred stock dividend
payments.


34


RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





Overview. Union National
reported a net loss available to common stockholders of ($15,000) or a basic and
diluted loss per share of ($0.01) for the first quarter of 2010, as compared to
a net loss available to common stockholders of ($509,000) or a basic and diluted
loss per share of ($0.19) for the same period in 2009.  The
year-over-year first quarter results improved primarily due to an increased net
interest margin for the first quarter of 2010, as compared to the same period in
2009, and the first quarter of 2010 not having any impairment charges on
investment securities similar to those that occurred in the first quarter
2009.





Union
National’s net interest income as adjusted for tax-exempt financial instruments
increased $363,000, or 12%, to $3,296,000 for the first quarter of 2010, as
compared to $2,933,000 for the same period in 2009.  The cost of
interest-bearing deposits decreased to 1.92% for the first quarter of 2010, as
compared to 2.65% for same period in 2009, which significantly improved the
taxable-equivalent net interest margin percentage to 2.96% for the first quarter
of 2010, as compared to 2.58% for same period in 2009.





The
operating results for the first quarter of 2009 reflected $839,000 in
other-than-temporary investment impairment charges related to three pooled trust
preferred debt securities that were downgraded to below-investment-grade in
2009.  These other-than-temporary investment impairment charges were
offset by $411,000 of realized net gains on the sale of investment securities
during the first quarter of 2009, resulting in $428,000 of net investment
losses.  For the first quarter of 2010, gains of $77,000 were realized
on the sale of investment securities and the Bank incurred no additional
other-than-temporary impairment charges.





The
discussion that follows further explains the changes in the components of the
operating results when comparing the three months ended March 31, 2010 to the
same period in 2009.





Net Interest
Income.Net interest income, our primary source of revenue, is
the amount by which interest income on loans and investments exceeds interest
incurred on deposits and borrowings.  The amount of net interest
income is affected by changes in interest rates and by changes in the volume and
mix of interest-sensitive assets and liabilities.  Net interest income
and corresponding yields are presented in the discussion and analysis below on a
taxable-equivalent basis.  Income from tax-exempt assets, primarily
loans to or securities issued by state and local governments, is adjusted by an
amount equivalent to the federal income taxes which would have been paid if the
income received on these assets was taxable at the statutory rate of
34%.





Although
the effective interest rate impact on earning assets and funding sources can be
reasonably estimated at current interest rate levels, the options selected by
customers, and the future mix of the loan, investment and deposit products in
the Bank’s portfolios, may significantly change the estimates used in the
simulation models. In addition, our net interest income may be impacted by
further interest rate actions of the Federal Reserve Bank and movements in the
London Interbank Offered Rate (“LIBOR”) upon which certain variable rate loans
are priced.





Net
interest income as adjusted for tax-exempt financial instruments was $3,296,000
for the three months ended March 31, 2010, as compared to $2,933,000 for the
same period in 2009.  The yield on interest-earning assets decreased
by 39 basis points to 4.99% for the first quarter of 2010, as compared to 5.38%
for the same period in 2009.  The interest rate paid on average
interest-bearing liabilities decreased by 80 basis points to 2.27% for the first
quarter of 2010, as compared to 3.07% for the same period in
2009.  The decrease in the interest rate paid on average
interest-bearing liabilities more than offset the decrease in the yield on
interest-earning assets, which resulted in a higher net interest margin for the
first quarter of 2010, as compared to the same period in 2009.  The
taxable-equivalent net interest margin percentage for the first quarter of 2010
was 2.96%, as compared to 2.58% for the same period in
2009.


35


Interest
and fees on loans and leases on a taxable-equivalent basis decreased by
$385,000, or 7%, to $5,047,000 for the three months ended March 31, 2010, as
compared to $5,432,000 for the same period in 2009.  The average yield
decreased by 14 basis points to 6.05% for the first quarter of 2010, as compared
to 6.19% for the same period in 2009.  The variable rate structure of
many of Union National’s loans reduced the overall yield due to the persistent
low market interest rates.  The average balance of loans and leases
decreased by $17,777,000 for the first quarter of 2010, as compared to the same
period in 2009 due to reduced loan demand from creditworthy borrowers, the
impact of nearly $10 million of loan participations sold for capital and risk
management purposes in the third quarter of 2009, and the impact of
approximately $8 million of loans that were foreclosed on and transferred to
OREO since December 2009.  The decrease in interest and fees on loans
and leases primarily resulted from the decrease in loans
outstanding.





Interest
and dividends earned on investment securities on a taxable-equivalent basis
decreased by $191,000, or 30%, to $438,000 for the three months ended March 31,
2010, as compared to $629,000 for the same period in 2009.  The
decrease in interest and dividends earned on investment securities primarily
resulted from a decrease in the average balance of investment securities, which
decreased by $10,638,000 for the first quarter of 2010, as compared to the same
period in 2009.  A lack of income from impaired and non-accruing
investments, and reduced yields on re-invested proceeds from investment
maturities and sales, also contributed to lower investment interest income for
the first quarter of 2010.  As a result, the average yield decreased
by 66 basis points to 3.12% for the first quarter of 2010, as compared to 3.78%
for the same period in 2009.





Interest
expense on deposits decreased by $621,000, or 27%, to $1,681,000 for the three
months ended March 31, 2010, as compared to $2,302,000 for the same period in
2009.  The decrease in interest expense on deposits was primarily
driven by a decrease of 73 basis points in average rate paid on
deposits.  The average rate paid on deposits was 1.92% for the first
quarter of 2010, as compared to 2.65% for the same period in 2009.





Interest
expense on long-term debt decreased by $252,000, or 39%, to $393,000 for the
three months ended March 31, 2010, as compared to $645,000 for the same period
in 2009.  Union National continued to take measures to reduce its cost
of borrowings, prepaying $2,500,000 and $17,000,000 of higher-cost long-term
debt in the first quarter of 2010 and for the full year of 2009, respectively,
which resulted in a $18,917,000 decrease in the average balance of long-term
debt for the first quarter of 2010, as compared to the same period in
2009.





Provision for Credit
Losses.  The provision for credit losses is an expense charged
against net interest income to provide for estimated losses attributable to
uncollectible loans and leases.  The provision is based on
management’s analysis of the adequacy of the allowance for credit
losses.  The provision for credit losses was $496,000 for the three
months ended March 31, 2010, as compared to $313,000 for the same period in
2009.  The increased provision was the result of increased credit risk
related to the loan portfolio  at March 31, 2010, as compared to March
31, 2009 (refer to the related discussions on the “Allowance for Credit Losses”
on page 29 and “Substandard Loans and Leases” on page 31).  Management
continues to closely monitor the loan portfolio and the adequacy of the
allowance for credit loss reserve considering underlying borrower financial
performance and collateral values, and increasing credit
risks.  Future adjustments may be necessary to the provision for
credit losses, and consequently the allowance for credit losses, if economic
conditions or loan credit quality differ substantially from the assumptions we
used in making our evaluation of the level of the allowance for credit losses as
compared to the balance of outstanding loans and leases.


36


Non-Interest
Income.  Non-interest income increased by $561,000, or 91%, to
$1,180,000 for the three months ended March 31, 2010, as compared to $619,000
for the same period in 2009.   Increases (decreases) in the
components of non-interest income when comparing the three months ended March
31, 2010 to the same period in 2009, are as follows (in thousands):





Three Months Ended March
31,
                
                
                IncreaseNon-Interest Income
                
                2010
                
                
                2009
                
                
                (Decrease)Service
      Charges on Deposit Accounts
                
                $
                458
                
                
                $
                473
                
                
                $
                (15
                )Other
      Service Charges, Commissions, Fees
                
                
                288
                
                
                
                267
                
                
                
                21Alternative
      Investment Sales Commissions
                
                
                167
                
                
                
                110
                
                
                
                57Income
      from Fiduciary Activities
                
                
                47
                
                
                
                46
                
                
                
                1Earnings
      from Bank-Owned Life Insurance
                
                
                102
                
                
                
                108
                
                
                
                (6
                )Other
      Income
                
                
                41
                
                
                
                43
                
                
                
                (2
                )Net
      Gain on Sale of Investment Securities
                
                
                77
                
                
                
                411
                
                
                
                (334
                )Other-than-temporary
      Impairments (“OTTI”) of Securities
                
                
                –
                
                
                
                (839
                )
                
                
                839Portion
      of OTTI Recognized in Other Comprehensive Income
                
                
                –
                
                
                
                –
                
                
                
                –Net
      OTTI Losses on Securities
                
                
                –
                
                
                
                (839
                )
                
                
                839Total
      Non-Interest Income
                
                $
                1,180
                
                
                $
                619
                
                
                $
                561





A
significant portion of the $561,000 increase in non-interest income was related
to investment securities activities.  The operating results for the
first quarter of 2009 reflected $839,000 in other-than-temporary investment
impairment charges related to three pooled trust preferred debt securities that
were downgraded to below-investment-grade in 2009.  These
other-than-temporary investment impairment charges were offset by $411,000 of
realized net gains on the sale of investment securities during the first quarter
of 2009, resulting in $428,000 of net investment losses.  For the
first quarter of 2010, gains of $77,000 were realized on the sale of investment
securities and the Bank incurred no additional other-than-temporary impairment
charges.





Non-Interest
Expense.  Non-interest expense was $4,022,000 for the three
months ended March 31, 2010, as compared to $4,014,000 for the same period in
2009.  Increases (decreases) in the components of non-interest expense
when comparing the three months ended March 31, 2010, to the same period in
2009, are as follows (in thousands):





Three Months Ended March
31,
                  
                  
                  IncreaseNon-Interest Expense
                  
                  2010
                  
                  
                  2009
                  
                  
                  (Decrease)Salaries,
      Wages, and Employee Benefits
                  
                  $
                  1,798
                  
                  
                  $
                  1,946
                  
                  
                  $
                  (148
                  )Net
      Occupancy
                  
                  
                  462
                  
                  
                  
                  478
                  
                  
                  
                  (16
                  )Data
      and ATM Processing
                  
                  
                  406
                  
                  
                  
                  404
                  
                  
                  
                  2Professional
      Fees and Regulatory Assessments
                  
                  
                  206
                  
                  
                  
                  257
                  
                  
                  
                  (51
                  )Furniture
      and Equipment
                  
                  
                  218
                  
                  
                  
                  246
                  
                  
                  
                  (28
                  )FDIC
      Insurance
                  
                  
                  228
                  
                  
                  
                  120
                  
                  
                  
                  108Pennsylvania
      Shares Tax
                  
                  
                  95
                  
                  
                  
                  89
                  
                  
                  
                  6Advertising
      and Marketing
                  
                  
                  38
                  
                  
                  
                  67
                  
                  
                  
                  (29
                  )Supplies
      and Postage
                  
                  
                  60
                  
                  
                  
                  74
                  
                  
                  
                  (14
                  )Other
      Expense
                  
                  
                  511
                  
                  
                  
                  333
                  
                  
                  
                  178Total
      Non-Interest Expense
                  
                  $
                  4,022
                  
                  
                  $
                  4,014
                  
                  
                  $
                  8


37


The
discussion that follows explains the significant changes in the components of
non-interest expense when comparing the three months ended March 31, 2010 to the
same period in 2009.





Salaries,
wages and employee benefits decreased by $148,000 for the three months ended
March 31, 2010, as compared to the same period in 2009.  The decrease
was related to positions that were eliminated in the first quarter of 2009,
savings in health care costs due to the Bank’s beneficial participation in a
healthcare consortium and savings from the suspension of the company 401-K match
which began during the second quarter of 2009 and remained suspended through
March 31, 2010.





Due to
recent changes in deposit premium assessments by the FDIC, FDIC insurance
assessments amounted to $228,000 for the three months ended March 31, 2010,
representing a $108,000 or 90% increase over the three months ended March 31,
2009.  The increase in FDIC insurance premiums was primarily the
result of increased base assessment rates, as determined by the
FDIC.





The
increase in other expense was primarily the result of several repossessed assets
being written-down by $144,000 to fair market value.  These
repossessed assets consisted of vehicles acquired from lessees, who defaulted on
their contractual lease obligation, and the write-downs reflect recent
significant market devaluations for the types of assets held as repossessed by
the Bank.  Additionally, during the three months ended March 31, 2010,
the Bank prepaid $2,500,000 of FHLB advances to further de-leverage the Bank and
reduce current and future borrowing costs.  In conjunction with the
prepayments, the Bank incurred $89,000 of prepayment penalties, which also
contributed to the increase in other expense for the three months ended March
31, 2010.  The Bank did not prepay any FHLB advances in the first
quarter of 2009, and therefore, did not incur any prepayment penalties for the
three months ended March 31, 2009.





Income Taxes.An
income tax benefit of $82,000 and $328,000 was recorded for the three months
ended March 31, 2010 and 2009, respectively.  For both of these
periods, the benefit resulted from tax-exempt earnings as well as from a pre-tax
loss.  Generally, Union National’s effective tax rate is below the
statutory rate due to tax-exempt earnings on loans, investments, and bank-owned
life insurance, and the impact of tax credits.  The realization of
deferred tax assets is dependent upon future
earnings.   Management anticipates that future earnings will be
adequate to fully utilize deferred tax assets.


38


LIQUIDITY


Our
objective is to maintain adequate liquidity to meet funding needs at a
reasonable cost and to provide contingency plans to meet unanticipated funding
needs or a loss of funding sources, while minimizing interest rate
risk.  Adequate liquidity provides resources for credit needs of
borrowers, for depositor withdrawals and for funding corporate
operations.  Sources of liquidity are as follows:





·
            A
      growing core retail deposit base;


·
            Proceeds
      from the sale or maturity of investment
  securities;


·
            Payments
      received on loans and mortgage-backed securities;
  and,


·
            Overnight
      correspondent bank borrowings credit lines, and borrowing capacity
      available from the Federal Reserve
Bank.





Management
believes that the Bank’s core deposits remain fairly
stable.  Liquidity and funds management is governed by policies and
measured on a daily basis, with supplementary weekly and monthly
analyses.  These measurements indicate that liquidity generally
remains stable and exceeds our minimum defined levels of adequacy. Other than
the trends of continued competitive pressures and volatile interest rates, there
are no known demands, commitments, events or uncertainties that will result in,
or that are reasonably likely to result in, liquidity increasing or decreasing
in any material way.





OFF-BALANCE
SHEET COMMITMENTS


In the
normal course of business, we are party to financial instruments with
off-balance sheet risk to meet the financing needs of our
customers.  These financial instruments include commitments to extend
credit and standby letters of credit.  Total commitments to extend
credit amounted to $106,597,000 at March 31, 2010 as compared to $110,791,000 at
December 31, 2009.  Total standby letters of credit amounted to
$5,725,000 at March 31, 2010 as compared to $6,199,000 at December 31,
2009.





In
addition, in the normal course of business operations, we routinely enter into
contracts for services. These contracts may require payment for services to be
provided in the future and may also contain penalty clauses for the early
termination of the contracts. In January 2007, the contract with our core data
processor was renegotiated, resulting in a new maturity date of November
2013.  Any early termination will require the payment of a substantial
penalty.  For the three months ended March 31, 2010, there has been no
material change in contracts for services since this contract was
renegotiated.





REGULATORY
MATTERS


From time
to time, various types of federal and state legislation have been proposed that
could result in additional regulation of, and restrictions on, the business of
Union National and the Bank.  As a consequence of the extensive
regulation of commercial banking activities in the United States, Union
National’s and the Bank’s business is particularly susceptible to being affected
by federal and state legislation and regulations that may increase the cost of
doing business.  Also, Union National is susceptible to changes in tax
law that may increase the cost of doing business or impact Union National’s
ability to realize the value of deferred tax assets. Further, the business of
Union National is affected by the state of the financial services industry in
general.  Please refer to Note 9 – Enforcement Actions with
Bank Regulatory Agencies to the consolidated financial statements for a
discussion on specific regulatory matters impacting Union
National.


39





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
required for smaller reporting companies.





ITEM
4.  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and
Procedures.  Union National maintains controls and procedures
designed to ensure that information required to be disclosed in the reports that
Union National files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Based upon
their evaluation of those controls and procedures as of March 31, 2010, Union
National’s Chief Executive Officer and Chief Financial Officer concluded that
the disclosure controls and procedures were adequate.





Changes in Internal
Controls.  There were no changes during the quarter ended March
31, 2010 in our internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, these
controls.





PART II - OTHER
INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





Management
is not aware of any litigation that would have a material adverse effect on the
consolidated financial position of Union National.  There are no
proceedings pending other than the ordinary routine litigation incident to the
business of Union National and its subsidiary, Union National Community
Bank.





ITEM
1A.  RISK FACTORS





For the
three months ended March 31, 2010, and through the date of this report, there
have been no known material changes to the risk factors described in our Annual
Report on Form 10-K for the year ended December 31, 2009.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





None





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





None





ITEM
4.  (REMOVED AND RESERVED)








ITEM
5.  OTHER INFORMATION





None


40





ITEM
6.  EXHIBITS





3.  The
following Exhibits are filed herewith, or incorporated by reference as a part of
this Report:





3(i)
                          
                          Union
      National Financial Corporation’s Amended and Restated Articles of
      Incorporation. (Incorporated by reference to Exhibit 3.1 to Union National
      Financial Corporation’s current report on Form 8-K, filed with the
      Commission on May 13, 2009.)3(ii)
                          
                          Union
      National Financial Corporation’s Amended and Restated
      By-laws.   (Incorporated by reference to Exhibit 3(ii) to
      Union National Financial Corporation’s current report on Form 8-K, filed
      with the Commission on February 27, 2009.)4.1
                          
                          Rights
      Agreement, dated August 27, 2007, between Registrar and Transfer Company
      and Union National Financial Corporation.  (Incorporated by
      reference to Exhibit 4 to Union National Financial Corporation’s current
      report on Form 8-K, filed August 30, 2007.)4.2
                          
                          Certificate
      of Designations of the Series A Preferred Stock (Incorporated by reference
      to Exhibit 3.1 to Union National’s Current Report on Form 8-K dated
      September 15, 2009).10.1
                          **
                          Union
      National Financial Corporation 1988 Stock Incentive Plan. (Incorporated by
      reference to Exhibit 4.3 to Union National Financial Corporation’s
      Registration Statement No. 333-27837 on Form S-8, filed with the
      Commission on May 27, 1997.)10.2
                          **
                          Union
      National Financial Corporation 1997 Stock Incentive
      Plan.  (Incorporated by reference to Exhibit 4.5 to Union
      National Financial Corporation’s Registration Statement No. 333-27837 on
      Form S-8, filed with the Commission on May 27, 1997 and incorporated by
      reference to Amendment 1 to Union National Financial Corporation’s
      Registration Statement No. 333-107326 on Form S-8 filed with the
      commission on July 25, 2003.)10.3
                          **
                          Union
      National Financial Corporation’s Employee Stock Purchase Plan
      (Incorporated by Reference to Exhibit 4.4 to Union National Financial
      Corporation’s Registration Statement No. 333-27837 on Form S-8, filed with
      the Commission on May 27, 1997).10.4
                          *
                          Group
      Term Replacement Plan for Certain Officers, CEO, dated January 1, 2004
      between Mark D. Gainer and Union National Community Bank. 
      (Incorporated by reference to Exhibit 10.12 to Union National Financial
      Corporation’s Annual Report on Form 10-K, filed with the Commission on
      March 30, 2004.)10.5
                          **
                          Union
      National Financial Corporation, 1999 Independent Directors Stock Option
      Plan.  (Incorporated by Reference to Exhibit 4.3 to Union
      National Financial Corporation’s Registration Statement No. 333-80739 on
      Form S-8, filed with the Commission on June 15, 1999.)10.6
                          
                          Office
      Lease between Lausch Lane Associates LP as Landlord and
      Union  National Community Bank as Tenant for 570 Lausch Lane,
      Lancaster,  PA 17601. (Incorporated by reference to Exhibit 99.1
      to Union National Financial Corporation’s Current Report of Form 8-K,
      filed with the Commission on May 17,
2005.)


41





10.7
              *
              Amended
      and Restated Employment Agreement and Amended and Restated Executive
      Salary Continuation Agreement dated as of December 29, 2006, with Mark D.
      Gainer, Chairman, President and Chief Executive
      Officer.  (Incorporated by reference to Exhibit 10.15 to Union
      National Financial Corporation’s 2006 Annual Report on Form 10-K, filed
      with the Commission on March 28, 2007.)10.8
              
              Amended
      and Restated Declaration of Trust of Union National Capital Trust II,
      dated as of October 14, 2004, among Union National Financial Corporation,
      as sponsor, the Delaware and institutional trustee named therein, and the
      administrators named therein.  (Incorporated by reference to
      Exhibit 10.17 to Union National Financial Corporation’s 2006 Annual Report
      on Form 10-K, filed with the Commission on March 28,
  2007.)10.9
              
              Indenture,
      dated as of October 14, 2004, between Union National Financial
      Corporation, as issuer, and the trustee named therein, relating to the
      Junior Subordinated Debt Securities due 2034.  (Incorporated by
      reference to Exhibit 10.18 to Union National Financial Corporation’s 2006
      Annual Report on Form 10-K, filed with the Commission on March 28,
      2007.)10.10
              
              Guarantee
      Agreement, dated as of October 14, 2004, between Union National Financial
      Corporation and the guarantee trustee named
      therein.  (Incorporated by reference to Exhibit 10.19 to Union
      National Financial Corporation’s 2006 Annual Report on Form 10-K, filed
      with the Commission on March 28, 2007.)10.11
              
              Indenture,
      dated as of July 27, 2006, between Union National Community Bank, as
      issuer, and the trustee named therein, relating to the Junior Subordinated
      Debt Securities due 2036.  (Incorporated by reference to Exhibit
      4.1 to Union National Financial Corporation’s quarterly  report
      on Form 10-Q, filed with the Commission on August 14,
    2006.)10.12
              *
              Employment
      Agreement, dated March 8, 2007 (with an expiration date of March 7, 2010),
      between Stephen D. Staman, Executive Vice President and Chief Revenue
      Officer and Union National Financial Corporation and its subsidiary, Union
      National Community Bank.  (Incorporated by reference to Exhibit
      10.16 to Union National Financial Corporation’s 2007 Annual Report on Form
      10-K, filed with the Commission on April 1, 2008.)10.13
              *
              Change
      of Control Agreement, dated September 4, 2007, between Michael D. Peduzzi,
      Executive Vice President, Chief Financial Officer and Union National
      Financial Corporation and its subsidiary, Union National Community
      Bank.  (Incorporated by reference to Exhibit 99.1 to Union
      National Financial Corporation’s current report on Form 8-K, filed with
      the Commission on September 6, 2007.)10.14
              *
              Change
      of Control Agreement among Union National Financial Corporation, Union
      National Community Bank and each of the following officers: Michael L.
      Maurer and Bradley A. Willow, filed August 13, 2008, as Item 10.18 to
      Form 10-Q for the fiscal quarter ended June 30, 2008
      (No. 0-19214) and incorporated herein by
  reference.


42





10.15
              *
              Change
      of Control Agreement among Union National Financial Corporation, Union
      National Community Bank and each of the following officers: R. Michael
      Mohn, Steve D. Garber and Kevin Hersh, filed August 13, 2008, as
      Item 10.19 to Form 10-Q for the fiscal quarter ended June 30,
      2008 (No. 0-19214) and incorporated herein by
    reference.10.16
              ***
              Stock
      Bonus Plan and the 2009 Stock Purchase Plan, filed December 3, 2008, and
      incorporated by reference to Exhibit 99.1 to Union National Financial
      Corporation’s current report on Form 8-K.10.17
              
              Formal
      agreement with the Comptroller of the Currency (“OCC”) and Union National
      Community Bank, filed August 31, 2009, as Item 8.01 to Form 8-K and
      incorporated by reference.10.18
              
              Form
      of stock subscription agreement for Series A Preferred Stock (Incorporated
      by reference to Exhibit 10.1 to Union National Financial Corporation’s
      current report on Form 8-K, filed with the Commission on October 1,
      2009).10.19
              
              On
      April 19, 2010, Union National Financial Corporation, the parent company
      of Union National Community Bank (“UNCB”), entered into an Agreement and
      Plan of Merger (the “Merger Agreement”) with Donegal Financial Services
      Corporation (“DFSC”), the parent company of Province Bank FSB
      (“Province”), and certain affiliated entities of DFSC, pursuant to which
      Union National will merge with and into DFSC.  DFSC is wholly
      owned by Donegal Mutual Insurance Company (“DMIC”) and Donegal Group Inc.
      (“DGI”) (Incorporated by reference to Exhibit 2.1 to Union National
      Financial Corporation’s current report on Form 8-K, filed with the
      Commission on April 23, 2010).14
              
              Union
      National Financial Corporation Directors and Senior Management Code of
      Ethics. (Incorporated by reference to Exhibit 14 to Union National
      Financial Corporation’s 2009 Annual Report on Form 10-K, filed with the
      Commission on March 31, 2010.)31.1
              
              Certification
      of Principal Executive Officer Pursuant to Exchange Act Rules
      13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of
      2002, filed herewith.31.2
              
              Certification
      of Principal Financial Officer Pursuant to Exchange Act Rules
      13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of
      2002, filed herewith.32
              
              Certification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of
      2002, filed herewith.





*
            Management
      contract or compensatory plan
arrangement.




**
            Stockholder
      approved compensatory plan pursuant to which the Registrant’s Common Stock
      may be issued to employees of the
Corporation.




***
            Non-stockholder
      approved compensatory plan pursuant to which the Registrant's Common Stock
      may be issued to employees of the
Corporation.


43





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.





Union
      National Financial Corporation
                (Registrant)Date:
      May 13, 2010
              By
              /s/
      Mark D. GainerMark
      D. Gainer
                Chairman,
      CEO and President
                (Principal
      Executive Officer)Date:
      May 13, 2010
              By
              /s/
      Michael D. PeduzziMichael
      D. Peduzzi
                Executive
      Vice President and Chief Financial Officer (Principal Financial
      Officer)


44