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 September 30, 2007





OR





o
            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
            (I.R.S.
                Employer Identification Number)Incorporation
                or Organization)570
                Lausch LaneLancaster,
                Pennsylvania
            17601(Address
                of Principal Executive Offices)
            (Zip
                Code)




(717)
      653-1441


(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
o





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





Large
      accelerated filer oAccelerated filer oNon-accelerated filer **x**





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


Yes
oNo
**x**


Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





2,544,373
      shares of ($.25 par) common stock were outstanding as of November 13,
      2007.










**UNION
      NATIONAL FINANCIAL CORPORATION**


**FORM
      10-Q**


**INDEX**




PAGE NO.**PART
                I****-****FINANCIAL
                INFORMATION**Item
                1 -
            Financial
                Statements (Unaudited)Consolidated
                Statements of Financial Condition
            1Consolidated
                Statements of Income
            2
                -
                3Consolidated
                Statements of Comprehensive Income
            3Consolidated
                Statements of Cash Flows
            4
                -
                5Notes
                to Consolidated Financial Statements
            5
                -
                10Item
                2 -
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            11Item
                3 -
            Quantitative
                and Qualitative Disclosures About Market Risk
            23Item
                4 -
            Controls
                and Procedures
            24Item
                4T -
            Controls
                and Procedures
            24**PART
                II****-****OTHER
                INFORMATION**Item
                1 -
            Legal
                Proceedings
            25Item
                1A -
            Risk
                Factors
            25Item
                2 -
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            25Item
                3 -
            Defaults
                Upon Senior Securities
            25Item
                4 -
            Submission
                of Matters to a Vote of Security Holders
            25Item
                5 -
            Other
                Information
            25Item
                6 -
            Exhibits
            25Signature
                Page
            26Exhibit 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
            27Exhibit 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
            28Exhibit
                32 -
            Certification
                of Principal Executive Officer and Principal Financial Officer Pursuant
                to
                18 U.S.C. Section 1350 as Added by Section 906 of the Sarbanes-Oxley
                Act
                of 2002
            29





*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 data)





9/30/2007
            
            12/31/2006**ASSETS**Cash
                and Due from Banks
            
            $
            15,549
            
            $
            15,129Interest-Bearing
                Deposits in Other Banks
            
            
            52
            
            
            333Fed
                Funds Sold
            
            
            16,380
            
            
            -Total
                Cash and Cash Equivalents
            
            
            31,981
            
            
            15,462Investment
                Securities Available for Sale
            
            
            71,108
            
            
            129,810Loans
                Held for Sale
            
            
            531
            
            
            1,662Loans
                and Leases, Net of Unearned Income
            
            
            362,967
            
            
            341,113Less:
                Allowance for Loan and Lease Losses
            
            
            (3,651
            )
            
            (3,070
            )Net
                Loans and Leases
            
            
            359,316
            
            
            338,043Premises
                and Equipment, Net
            
            
            9,318
            
            
            9,580Restricted
                Investment in Bank Stocks
            
            
            3,621
            
            
            5,994Bank-Owned
                Life Insurance
            
            
            10,560
            
            
            10,243Other
                Assets
            
            
            6,249
            
            
            6,803TOTAL
                ASSETS
            
            $
            492,684
            
            $
            517,597**LIABILITIES**Deposits:Noninterest-Bearing
            
            $
            45,179
            
            $
            48,311Interest-Bearing
            
            
            322,056
            
            
            291,764Total
                Deposits
            
            
            367,235
            
            
            340,075Short-Term
                Borrowings
            
            
            6,594
            
            
            10,544Long-Term
                Debt
            
            
            68,816
            
            
            117,571Junior
                Subordinated Debentures
            
            
            17,341
            
            
            17,341Other
                Liabilities
            
            
            4,003
            
            
            3,443TOTAL
                LIABILITIES
            
            
            463,989
            
            
            488,974Minority
                Interest in Consolidated Subsidiaries
            
            
            5
            
            
            75**STOCKHOLDERS’EQUITY**Common
                Stock (Par Value $.25 per share)
            
            
            741
            
            
            735Shares:
                Authorized - 20,000,000;Issued–2,962,562 and 2,941,808 shares at September 30, 2007 and December
                31,
                2006, respectivelyOutstanding–2,544,373 and 2,523,983 shares at September 30, 2007 and December
                31,
                2006, respectivelySurplus
            
            
            13,284
            
            
            12,918Retained
                Earnings
            
            
            23,278
            
            
            23,460Accumulated
                Other Comprehensive Loss
            
            
            (284
            )
            
            (242
            )Treasury
                Stock, at cost–418,189 and 417,825 shares at September 30, 2007 and December 31,
                2006,
                respectively
            
            
            (8,329
            )
            
            (8,323
            )TOTAL
                STOCKHOLDERS’EQUITY
            
            
            28,690
            
            
            28,548TOTAL
                LIABILITIES and STOCKHOLDERS’EQUITY
            
            $
            492,684
            
            $
            517,597





See
      notes
      to consolidated financial statements.




1


**Union
      National Financial Corporation**


**Consolidated
      Statements of Income (Unaudited)**


(Dollars
      in thousands, except per share data)





Three Months Ended September 30,
            
            Nine Months Ended September 30,2007
            
            2006
            
            2007
            
            2006**INTEREST
                INCOME**Interest
                and Fees on Loans and Leases
            
            $
            6,864
            
            $
            6,170
            
            $
            20,078
            
            $
            17,245Investment
                Securities:Taxable
                Interest
            
            
            908
            
            
            1,306
            
            
            2,526
            
            
            3,470Tax-Exempt
                Interest
            
            
            -
            
            
            351
            
            
            404
            
            
            1,070Dividends
            
            
            65
            
            
            91
            
            
            216
            
            
            267Other
            
            
            199
            
            
            19
            
            
            316
            
            
            28Total
                Interest Income
            
            
            8,036
            
            
            7,937
            
            
            23,540
            
            
            22,080**INTEREST
                EXPENSE**Deposits
            
            
            2,901
            
            
            2,347
            
            
            7,871
            
            
            5,948Short-Term
                Borrowings
            
            
            66
            
            
            98
            
            
            229
            
            
            286Long-Term
                Debt
            
            
            867
            
            
            1,537
            
            
            2,789
            
            
            4,204Junior
                Subordinated Debentures
            
            
            315
            
            
            293
            
            
            954
            
            
            690Total
                Interest Expense
            
            
            4,149
            
            
            4,275
            
            
            11,843
            
            
            11,128Net
                Interest Income
            
            
            3,887
            
            
            3,662
            
            
            11,697
            
            
            10,952**PROVISION
                for LOAN and LEASE LOSSES**
            
            
            230
            
            
            104
            
            
            707
            
            
            441Net
                Interest Income after Provision for Loan and Lease Losses
            
            
            3,657
            
            
            3,558
            
            
            10,990
            
            
            10,511**OTHER
                OPERATING INCOME**Income
                from Fiduciary Activities
            
            
            59
            
            
            58
            
            
            269
            
            
            201Service
                Charges on Deposit Accounts
            
            
            478
            
            
            427
            
            
            1,344
            
            
            1,232Other
                Service Charges, Commissions, Fees
            
            
            253
            
            
            234
            
            
            789
            
            
            697Alternative
                Investment Sales Commissions
            
            
            226
            
            
            161
            
            
            642
            
            
            514Net
                Investment Securities Gains
            
            
            -
            
            
            24
            
            
            78
            
            
            65Impairment
                Charge on Investment Security
            
            
            -
            
            
            -
            
            
            (450
            )
            
            -Mortgage
                Banking/Brokerage Activities
            
            
            452
            
            
            714
            
            
            1,857
            
            
            2,228Title
                Insurance/Settlement Income
            
            
            78
            
            
            148
            
            
            301
            
            
            438Earnings
                from Bank-Owned Life Insurance
            
            
            108
            
            
            99
            
            
            317
            
            
            280Other
                Income
            
            
            94
            
            
            97
            
            
            379
            
            
            297Total
                Other Operating Income
            
            
            1,748
            
            
            1,962
            
            
            5,526
            
            
            5,952**OTHER
                OPERATING EXPENSES**Salaries
                and Wages
            
            
            1,839
            
            
            2,068
            
            
            6,090
            
            
            6,043Retirement
                Plan and Other Employee Benefits
            
            
            436
            
            
            495
            
            
            1,549
            
            
            1,604Net
                Occupancy
            
            
            452
            
            
            381
            
            
            1,743
            
            
            1,080Furniture
                and Equipment
            
            
            256
            
            
            228
            
            
            788
            
            
            636Professional
                Fees
            
            
            308
            
            
            211
            
            
            1,176
            
            
            559Data
                Processing Services
            
            
            222
            
            
            212
            
            
            661
            
            
            623Pennsylvania
                Shares Tax
            
            
            -
            
            
            86
            
            
            156
            
            
            194Advertising
                and Marketing
            
            
            143
            
            
            318
            
            
            578
            
            
            1,033ATM
                Processing
            
            
            90
            
            
            109
            
            
            263
            
            
            310Minority
                Interest in Earnings (Losses) of Subsidiaries
            
            
            (140
            )
            
            (78
            )
            
            (207
            )
            
            52Restructuring
                Charge
            
            
            -
            
            
            -
            
            
            717
            
            
            -Other
                Expenses
            
            
            1,289
            
            
            804
            
            
            2,895
            
            
            2,363Total
                Other Operating Expenses
            
            
            4,895
            
            
            4,834
            
            
            16,409
            
            
            14,497Income
                Before Income Taxes
            
            
            510
            
            
            686
            
            
            107
            
            
            1,966**PROVISION
                (BENEFIT) for INCOME TAXES**
            
            
            117
            
            
            46
            
            
            (267
            )
            
            84**NET
                INCOME**
            
            $
            393
            
            $
            640
            
            $
            374
            
            $
            1,882




See
      notes
      to consolidated financial
      statements.




2


**Union
      National Financial Corporation**


**Consolidated
      Statements of Income (Unaudited) – Continued**





Three Months Ended September 30,
            
            Nine Months Ended September 30,(Dollars
                in thousands, except per share data)
            
            2007
            
            2006
            
            2007
            
            2006**PER
                SHARE INFORMATION**Net
                Income–Basic
            
            $
            0.15
            
            $
            0.25
            
            $
            0.15
            
            $
            0.75Net
                Income–Assuming Dilution
            
            
            0.15
            
            
            0.25
            
            
            0.15
            
            
            0.74Cash
                Dividends
            
            
            0.06
            
            
            0.16
            
            
            0.22
            
            
            0.48






**Consolidated
      Statements of Comprehensive Income (Unaudited)**





Three Months Ended September 30,
            
            Nine Months Ended September 30,2007
            
            2006
            
            2007
            
            2006(Dollars
                in thousands)**Net
                Income**
            
            $
            393
            
            $
            640
            
            $
            374
            
            $
            1,882**Other
                Comprehensive Income:**Unrealized
                holding gains (losses) on available-for- sale investment securities
                arising during the period, net of tax benefit (expense) of ($13)
                and
                ($1,210) for the three months ended and $177 and ($525) for the nine
                months ended September 30, 2007 and 2006, respectively
            
            
            25
            
            
            2,349
            
            
            (344
            )
            
            1,019Reclassification
                adjustment for (gains) losses included in Net Income, net of tax
                (benefit)
                expense of $1 and $8 for the three months ended and ($126) and $22
                for the
                nine months ended September 30, 2007 and 2006,
                respectively
            
            
            1
            
            
            (16
            )
            
            246
            
            
            (43
            )Unrealized
                 gains (losses) on cash flow hedges arising during the period, net
                of tax
                benefit (expense) of ($8) for the three months ended and $12 for
                the nine
                months ended September 30, 2006
            
            
            -
            
            
            17
            
            
            -
            
            
            (24
            )Reclassification
                adjustment for hedging losses included in Net Income, net of tax
                benefit
                of $1 for the three months ended and $29 for the nine months ended
                September 30, 2007
            
            
            2
            
            
            -
            
            
            56
            
            
            -**Total
                Other Comprehensive Income (Loss)**
            
            
            28
            
            
            2,350
            
            
            (42
            )
            
            952**TOTAL
                COMPREHENSIVE INCOME**
            
            $
            421
            
            $
            2,990
            
            $
            332
            
            $
            2,834





See
      notes
      to consolidated financial statements.




3




**Union
      National Financial Corporation**


**Consolidated
      Statements of Cash Flows (Unaudited)**


(Dollars
      in thousands)





Nine Months Ended September 30,**2007**
            
            **2006****CASH
                FLOWS from OPERATING ACTIVITIES**Net
                Income
            
            $
            374
            
            $
            1,882Adjustments
                to Reconcile Net Income to Net CashProvided
                by Operating Activities:Depreciation
                and Amortization
            
            
            797
            
            
            822Provision
                for Loan and Lease Losses
            
            
            707
            
            
            441Restructuring
                Charge, Net of Cash Payments
            
            
            347
            
            
            -Impairment
                Charge on Investment Security
            
            
            450
            
            
            -Stock-Based
                Compensation Expense
            
            
            81
            
            
            -Net
                Amortization of Investment Securities’ Premiums
            
            
            224
            
            
            379Net
                Investment Securities Gains
            
            
            (78
            )
            
            (65
            )Benefit
                From Deferred Income Taxes
            
            
            (59
            )
            
            (116
            )Decrease
                in Minority Interest in Consolidated Subsidiaries
            
            
            (70
            )
            
            (59
            )Earnings
                from Bank-Owned Life Insurance
            
            
            (317
            )
            
            (280
            )Gains
                on Loans Sold
            
            
            (1,338
            )
            
            (1,489
            )Net
                Gain on Sale of Foreclosed Real Estate
            
            
            (128
            )
            
            -Proceeds
                from Sales of Loans
            
            
            51,885
            
            
            53,735Loans
                Originated for Sale
            
            
            (49,416
            )
            
            (51,218
            )Decrease
                (Increase) in Accrued Interest Receivable
            
            
            171
            
            
            (317
            )Decrease
                (Increase) in Other Assets
            
            
            67
            
            
            (355
            )Increase
                (Decrease) in Other Liabilities
            
            
            213
            
            
            (233
            )Net
                Cash Provided by Operating Activities
            
            
            3,910
            
            
            3,127**CASH
                FLOWS from INVESTING ACTIVITIES**Proceeds
                from Sales of Available-for-Sale Securities
            
            
            81,885
            
            
            7,562Proceeds
                from Maturities of Available-for-Sale Securities
            
            
            6,597
            
            
            12,149Purchases
                of Available-for-Sale Securities
            
            
            (30,227
            )
            
            (35,907
            )Net
                Sales (Purchases) of Restricted Investments in Bank Stocks
            
            
            2,373
            
            
            (615
            )Proceeds
                from Sale of Foreclosed Real Estate, Net
            
            
            314
            
            
            -Net
                Loans and Leases Made to Customers
            
            
            (21,980
            )
            
            (29,127
            )Purchases
                of Premises, Equipment and Software
            
            
            (535
            )
            
            (4,325
            )Net
                Cash Provided by (Used in) Investing Activities
            
            
            38,427
            
            
            (50,263
            )**CASH
                FLOWS from FINANCING ACTIVITIES**Net
                Decrease in Demand Deposits and Savings Accounts
            
            
            (3,133
            )
            
            (1,446
            )Net
                Increase in Time Deposits
            
            
            30,293
            
            
            36,675Net
                Decrease in Short-Term Borrowings
            
            
            (3,950
            )
            
            (13,535
            )Proceeds
                from Issuance of Long-Term Debt
            
            
            4,254
            
            
            36,981Payments
                on Long-Term Debt
            
            
            (53,009
            )
            
            (17,318
            )Proceeds
                from Issuance of Junior Subordinated Debentures
            
            
            -
            
            
            6,000Acquisition
                of Treasury Stock
            
            
            (6
            )
            
            (108
            )Issuance
                of Common Stock
            
            
            289
            
            
            320Cash
                Dividends Paid
            
            
            (556
            )
            
            (1,207
            )Net
                Cash (Used in) Provided by Financing Activities
            
            
            (25,818
            )
            
            46,362**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            16,519
            
            
            (774
            )CASH
                and CASH EQUIVALENTS – Beginning of Period
            
            
            15,462
            
            
            14,501**CASH
                and CASH EQUIVALENTS**–**End of
                Period**
            
            $
            31,981
            
            $
            13,727





See
      notes
      to consolidated financial statements.




4


**Supplemental
      Disclosures of Cash Flow Information**





Nine Months Ended September 30,(Dollars
                in thousands)
            
            2007
            
            2006Cash
                Payments (Refunds) for:Interest
            
            $
            11,894
            
            $
            10,810Income
                Taxes
            
            
            (200
            )
            
            800Noncash
                TransactionsRetirement
                of Treasury Stock (17,000 shares in 2006)
            
            
            -
            
            
            339Impairment
                of Goodwill and Minority Interest
            
            
            326
            
            
            -





See
      notes
      to consolidated financial statements.




**Union
      National Financial Corporation**


**Notes
      to Consolidated Financial Statements (Unaudited)**




***1.
      Financial Statements***





The
      consolidated financial statements have been prepared pursuant to the rules
      and
      regulations of the Securities and Exchange Commission (“SEC”), and certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America have been condensed or omitted. We believe the
      information presented is not misleading and the disclosures are adequate. In
      our
      opinion, the consolidated financial statements contain all adjustments
      (consisting only of normal recurring accruals and adjustments) necessary to
      present fairly our financial position as of September 30, 2007 and December
      31,
      2006, and results of operations and cash flows for the three-month and
      nine-month periods ended September 30, 2007 and 2006. Our results of operations
      for interim periods are not necessarily indicative of results expected for
      the
      full year. These interim financial statements should be read in conjunction
      with
      notes to the consolidated financial statements contained in the 2006 Annual
      Report to Stockholders, the 2006 Form 10-K, and Forms 10-Q and 8-K that were
      filed during 2007.




***2.
      Basis of Presentation***





The
      consolidated financial statements include the accounts of Union National
      Financial Corporation (“Union National”), its subsidiary Union National
      Community Bank (the “Bank”), and Bank subsidiaries Union National Insurance
      Agency, and Home Team Financial, LLC and its subsidiary TA of Lancaster, LLC
      (together, “Home Team”). 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 for the purpose of issuing $11,000,000 of trust capital securities
      during 2003 and 2004, are not consolidated.




5




***3.
      Earnings Per Share***





Net
      income as set forth in the consolidated statements of income is used in the
      computation of basic and diluted earnings per share information. Reconciliations
      of shares used in the computations of earnings per share are as
      follows:





Three Months Ended Sept. 30,
            
            Nine Months Ended Sept. 30,2007
            
            2006
            
            2007
            
            2006Weighted-average
                common shares outstanding used in the computation of basic earnings
                per
                share
            
            
            2,543,141
            
            
            2,520,174
            
            
            2,532,499
            
            
            2,515,858Effect
                of dilutive stock options
            
            
            20,315
            
            
            18,643
            
            
            20,315
            
            
            19,436Weighted-average
                common shares and equivalents used in the computation of diluted
                earnings
                per share
            
            
            2,563,456
            
            
            2,538,817
            
            
            2,552,814
            
            
            2,535,294Stock
                options not included in the earnings per share computation as their
                effect
                would have been anti- dilutive
            
            
            117,288
            
            
            78,132
            
            
            117,288
            
            
            82,074




***4.
      Share-Based Payments***





Union
      National has three stock option plans: the Employee Stock Purchase Plan
      (“ESPP”); the Employee Stock Incentive Plan (“SIP”); and the Independent
      Directors’ Stock Option Plan (“IDSOP”). None of these plans have remaining
      options available for grant as of September 30, 2007. Options granted under
      the
      ESPP have a five-year term and can be exercised at 85% of the fair market value
      of the stock on the date of exercise. ESPP options lapse immediately upon
      termination of employment. 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. 31,900 options were granted under the
      SIP
      during January 2007, 7,200 of which were forfeited during the second quarter
      of
      2007 due to employee terminations. These options vested over six months, became
      exercisable six months after the grant date, and generally lapse 90 days after
      termination of employment. The IDSOP consists of non-qualified stock options
      with terms up to 10 years. These 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
      upon the exercise of stock options.





On
      January 1, 2006, Union National adopted Statement of Financial Accounting
      Standards No. 123(R), “Share-Based Payments” (“SFAS 123(R)”) which requires
      compensation expense to be recognized for share-based awards based upon an
      assessment of the grant date fair value. Union National is using the modified
      prospective method of adoption, which permits application of SFAS 123(R) on
      a
      going-forward basis rather than restating prior periods. Stock compensation
      expense for share-based awards after January 1, 2006 is recognized on a
      straight-line basis over the vesting period of the award, and is adjusted for
      expected forfeitures. The fair value of each option is estimated on the date
      of
      grant using the Black-Scholes option-pricing model. No options were granted
      or
      vested during the nine months ended September 30, 2006. The per-share
      weighted-average fair value of stock options granted during the nine months
      ended September 30, 2007 was $3.41, computed using the following
      weighted-average assumptions:





Expected
                Dividend Yield
            
            
            3.45
            %Risk-Free
                Interest Rate
            
            
            5.02
            %Expected
                Life (Years)
            
            
            8.0Expected
                Volatility
            
            
            17.11
            %




6


The
      following table summarizes Union National’s share-based compensation
      expense:





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,(Dollars
                in thousands)
            
            2007
            
            2006
            
            2007
            
            2006Pre-tax
                compensation expense
            
            $
            14
            
            $
            -
            
            $
            81
            
            $
            -Tax
                benefit
            
            
            -
            
            
            -
            
            
            -
            
            
            -Stock
                option expense, net of tax
            
            $
            14
            
            $
            -
            
            $
            81
            
            $
            -





No
      tax
      benefit was recorded in connection with the options expensed during 2007 because
      they are qualified stock options that have no tax benefit to the issuer unless
      there is a disqualifying disposition of the shares obtained upon exercise of
      the
      options. Union National records a tax benefit and associated deferred tax asset
      realized on the exercise of non-qualified stock options and disqualifying
      dispositions of incentive stock options and the Employee Stock Purchase Plan.
      No
      tax benefit was recorded during the nine months ended September 30, 2007 or
      2006
      as there were no such exercises, and we have been informed of no such
      dispositions, during the periods then ended. Stock option transactions for
      the
      nine months ended September 30, 2007 are summarized below:





Stock
              Options
            
            Weighted
              Average
              Exercise
                PriceOptions
                Outstanding at December 31, 2006(Prices
                range from $11.52 to $22.14)
            
            
            177,330
            
            $
            18.14Options
                Granted
            
            
            31,900
            
            
            18.50Options
                Exercised
            
            
            (13,272
            )
            
            12.92Options
                Forfeited
            
            
            (55,802
            )
            
            18.67Options
                Expired
            
            
            (2,553
            )
            
            20.10Options
                Outstanding at September 30, 2007(Prices
                range from $11.52 to $22.14)
            
            
            137,603
            
            $
            18.32Weighted-average
                contractual remaining term
            
            
            
            
            
            5.3
                YearsAggregate
                intrinsic value–in-the-money options
            
            
            
            
            $
            34,000





All
      options outstanding as of September 30, 2007 were exercisable. During the nine
      months ended September 30, 2007 and 2006, Union National received proceeds
      of
      $171,000 and $41,000, respectively, for the exercise of options with an
      intrinsic value of $25,000 and $16,000, respectively. Aggregate intrinsic value
      represents the amount by which the market price of the stock on the measurement
      date exceeded the exercise price of the option, multiplied by the number of
      in-the-money options.




***5.
      Guarantees***





Union
      National 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. Union National generally holds collateral and/or
      personal guarantees supporting these commitments. Union National had $8,563,000
      and $8,694,000 of standby letters of credit outstanding as of September 30,
      2007
      and December 31, 2006, 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 guarantees. The current amount of the liability as
      of
      September 30, 2007 and December 31, 2006, for guarantees under standby letters
      of credit issued is not material.




7




***6.
      Deleveraging and Restructuring Initiatives***





During
      January 2007, Union National engaged the consulting firm of S.R. Snodgrass,
      A.C.
      (“Snodgrass”) to undertake a profit enhancement project to assist management in
      developing and implementing strategies for achieving higher profitability.
      In
      January 2007, in conjunction with Snodgrass’ engagement, Union National decided
      to deleverage its Balance Sheet in order to strengthen the Bank’s equity
      position, enhance its income tax effectiveness, and facilitate its future core
      banking growth strategies for loans and deposits. Consequently, the Bank reduced
      the size of its securities portfolio by $66,000,000 while paying down Federal
      Home Loan Bank debt and other short-term borrowings, thereby reducing its
      overall capital needs and improving its interest rate risk profile. Union
      National realized net losses on the sale of securities of $519,000 on a pre-tax
      basis and incurred prepayment penalties of $31,000 on a pre-tax basis, which
      are
      included in Net Investment Securities Gains and Other Expenses, respectively,
      in
      the accompanying Consolidated Statement of Income for the nine months ended
      September 30, 2007. In the aggregate, 2007 first quarter earnings were adversely
      impacted by $363,000 after tax or $0.14 per share due to the net losses and
      prepayment penalties incurred in the deleveraging transaction.





Also
      in
      conjunction with the Snodgrass engagement, management performed an evaluation
      of
      the Bank’s operations in order to identify efficiencies and appropriate staffing
      levels. The first stage of this initiative was completed during the first
      quarter of 2007. On March 29, 2007, three senior-level executives were
      terminated, resulting in a restructuring charge consisting of severance and
      related costs in the amount of $536,000 ($354,000 after tax or $0.14 per share).
      During April 2007, the second stage of the initiative was completed, resulting
      in additional severance and related charges of $181,000 ($119,000 or $0.05
      per
      share after tax) under the restructuring program during the second quarter
      of
      2007.




***7.
      Impairment Charge on Investment Security***





During
      the second quarter of 2007, management determined that impairment in the value
      of a security in the Bank’s investment portfolio was “other than temporary,” and
      recorded the related loss in the consolidated statement of income. In order
      to
      determine that the unrealized loss on the security was other than temporary,
      management primarily considered the amount by which, and the length of time
      for
      which, the market value had been less than cost. The investment had an amortized
      cost (book value) of $1,000,000 while the market value was $550,000, resulting
      in an impairment charge of $450,000 ($297,000 or $0.12 per share after tax).
      The
      recognition of this loss in the consolidated statement of income resulted in
      a
      reclassification adjustment of $297,000 from Other Comprehensive Income
      (Loss).




***8.
      Memorandum of Understanding***





On
      June
      20, 2007, the Bank entered into a Memorandum of Understanding ("MOU") with
      the
      Comptroller of the


Currency
      ("OCC"). Specifically, the MOU requires the Bank to (1) implement a three-year
      strategic plan in accordance with specific guidelines set forth in the MOU,
      (2)
      develop and implement a three-year capital plan, in accordance with specific
      guidelines set forth in the MOU, including a dividend policy for the payment
      of
      dividends provided the Bank is in compliance with the capital plan, and
      applicable laws and regulations, (3) review and revise a written program to
      improve the Bank's loan portfolio management, (4) review and revise the Bank's
      funds management reports to ensure that they reflect current and projected
      funding needs, (5) develop and implement a risk based audit program to determine
      weaknesses or deficiencies in the Bank's consumer compliance program, (6) ensure
      the Bank's interest rate risk ("IRR") measurement tool or model conforms to
      OCC
      guidelines and, if necessary, develop an action plan to address the need for
      a
      more acceptable IRR measurement model, and (7) furnish written quarterly
      progress reports to the OCC detailing the form and manner of actions taken
      to
      comply with the MOU. Each provision of the MOU is subject to OCC approval,
      non-objection and/or review.





Management
      has fully complied with the terms of the MOU and has sent to the OCC the
      documentation and progress reports as required under the MOU to be submitted
      through the third quarter of 2007.




8


***9.
      Recent Accounting Pronouncements***





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an
      interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies
      the accounting for uncertainty in tax positions. This interpretation requires
      that companies recognize in their financial statements the impact of a tax
      position, if that position is more likely than not of being sustained on audit,
      based on the technical merits of the position. The provisions of FIN 48 are
      effective for fiscal years beginning after December 15, 2006, with the
      cumulative effect of the change in accounting principle recorded as an
      adjustment to opening retained earnings. The adoption of FIN 48 did not have
      a
      material effect on the consolidated financial statements. ****





In
      May
      2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, “Definition of
      Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides
      guidance on how to determine whether a tax position is effectively settled
      for
      the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is
      effective retroactively to January 1, 2007. The implementation of this standard
      did not have a material impact on our consolidated financial position or results
      of operations.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies the principle
      that fair value should be based on assumptions market participants would use
      when pricing an asset or liability and establishes a fair value hierarchy that
      prioritizes information used to develop those assumptions. Under the standard,
      fair value measurements would be separately disclosed by level within the fair
      value hierarchy. SFAS 157 is effective for Union National beginning January
      1,
      2008. Management is evaluating the potential impact, if any, of the adoption
      of
      SFAS 157 on Union National’s consolidated financial position and results of
      operations.





On
      September 13, 2006, the Securities and Exchange Commission (“SEC”) issued
      Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 provides
      interpretive guidance on how the effects of the carryover or reversal of prior
      year misstatements should be considered in quantifying a potential current
      year
      misstatement. Prior to SAB 108, companies might evaluate the materiality of
      financial-statement misstatements using either the income statement or balance
      sheet approach, with the income statement approach  focusing on new
      misstatements added in the current year, and the balance sheet approach focusing
      on the cumulative amount of misstatement present in a company’s balance sheet.
      Misstatements that would be material under one approach could be viewed as
      immaterial under another approach, and not be corrected. SAB 108 now requires
      that companies view financial statement misstatements as material if they are
      material according to either the income statement or balance sheet approach.
      Union National’s adoption of the provisions of SAB 108 beginning January 1, 2007
      had no impact on its consolidated financial position and results of
      operations.





In
      September 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue
      No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit
      Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”).
      EITF 06-4 requires the recognition of a liability related to the postretirement
      benefits covered by an endorsement split-dollar life insurance arrangement.
      The
      consensus highlights that the employer (who is also the policyholder) has a
      liability for the benefit it is providing to its employee. As such, if the
      policyholder has agreed to maintain the insurance policy in force for the
      employee’s benefit during his or her retirement, then the liability recognized
      during the employee’s active service period should be based on the future cost
      of insurance to be incurred during the employee’s retirement. Alternatively, if
      the policyholder has agreed to provide the employee with a death benefit, then
      the liability for the future death benefit should be recognized by following
      the
      guidance in SFAS No. 106 or Accounting Principles Board Opinion No. 12, as
      appropriate. For transition, an entity can choose to apply the guidance using
      either of the following approaches: (a) a change in accounting principle through
      retrospective application to all periods presented or (b) a change in accounting
      principle through a cumulative-effect adjustment to the balance in retained
      earnings at the beginning of the year of adoption. EITF 06-4 is effective in
      fiscal years beginning after December 15, 2007, with early adoption permitted.
      Management is evaluating the impact that the adoption of EITF 06-4 will have
      on
      its consolidated financial statements.





9


In
      September 2006, the EITF reached a conclusion on EITF Issue No. 06-5,
“Accounting for Purchases of Life Insurance – Determining the Amount That
      Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
      Accounting for Purchases of Life Insurance” (“EITF 06-5”). The scope of EITF
      06-5 consists of six separate issues relating to accounting for life insurance
      policies purchased by entities protecting against the loss of “key persons.” The
      six issues are clarifications of previously issued guidance on FASB Technical
      Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after
      December 15, 2006. The EITF did not have a material impact on Union
      National’s consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities-Including an amendment of FASB
      Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
      accounting but does not affect existing standards which require assets and
      liabilities to be carried at fair value. Under SFAS 159, a company may elect
      to
      use fair value to measure accounts and loans receivable, available-for-sale
      and
      held-to-maturity securities, accounts payable, guarantees, issued debt and
      other
      eligible financial instruments. SFAS 159 is effective for fiscal years beginning
      after November 15, 2007. Management is evaluating the potential impact, if
      any,
      of the adoption of SFAS 159 on Union National’s consolidated financial position
      and results of operations.





In
      March
      2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10, “Accounting
      for Collateral Assignment Split-Dollar Life Insurance Agreements” (“EITF
      06-10”). EITF 06-10 provides guidance for determining a liability for the
      postretirement benefit obligation as well as recognition and measurement of
      the
      associated asset on the basis of the terms of the collateral assignment
      agreement. EITF 06-10 is effective for fiscal years beginning after December
      15,
      2007. Management is evaluating the impact that the adoption of EITF 06-10 will
      have on its consolidated financial position and results of
      operations.




10


**ITEM
      2 – MANAGEMENT’S DISCUSSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
      OF OPERATIONS**





Management’s
      discussion and analysis represents an overview of the results of ope rations
      and financial condition, and highlights
      the significant changes in the results of operations and financial condition,
      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”) for the
      three-and nine-month periods ended September 30, 2007. 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. Home Team Financial, LLC, a subsidiary of
      the
      Bank, and its subsidiary, TA of Lancaster, LLC (together, “Home Team”) began
      operations in July 2005. Home Team operates a mortgage banking and brokerage
      business and also offers title insurance and settlement services. In accordance
      with agreements between the Bank and the minority interest owners, the Bank’s
      ownership interest in Home Team is 98%, and the Bank’s interest in Home Team’s
      net profits and losses increased from 30% to 62.31% effective July 1,
      2007.





This
      discussion should be read in conjunction with the financial tables, statistics,
      financial statements and notes to financial statements appearing in the 2006
      Annual Report to Stockholders, the 2006 Form 10-K, and Forms 10-Q and 8-K that
      were filed during 2007. Current performance does not guarantee, assure or
      indicate similar performance in the future.





We
      have
      made forward-looking statements in this document, and in documents that we
      incorporate by reference, that are subject to risks and uncertainties.
      Forward-looking statements include information concerning possible or assumed
      future results of operations of Union National, the Bank or the combined
      company. When we use words such as “believes,” “expects,” “anticipates” or
      similar expressions, we are making forward-looking statements.





Stockholders
      should note that many factors, some of which are discussed elsewhere in this
      document, the 2006 annual report, the 2006 Form 10-K, Forms 10-Q and 8-K that
      were filed during 2007, and in the documents that are incorporated by reference,
      could affect the future financial results of Union National, the Bank or the
      combined company and could cause those results to differ materially from those
      expressed in the forward-looking statements contained or incorporated by
      reference in this document. These factors include but are not limited to the
      following:




•
            Operating,
                legal and regulatory risks;


•
            Economic,
                political and competitive forces;


•
            Rapidly
                changing technology; and


•
                The
                    risk that our analyses of these risks and forces could be incorrect
                    and/or
                    that the strategies developed to address them could be
                    unsuccessful.





We
      undertake 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 other
      documents that we periodically file with the Securities and Exchange Commission,
      including our Form 10-K for the year ended December 31, 2006.




***Critical
      Accounting Policies***





The
      reporting of Union National’s 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.





The
      provision for loan 1  losses
      and the level of the allowance for loan losses involve significant estimates
      by
      management. In evaluating the adequacy of the allowance for loan losses,
      management considers 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 factors. While we use available information to make such
      evaluations, future adjustments to the allowance for loan losses and the
      provision for loan losses may be necessary if economic conditions or loan credit
      quality differ substantially from the factors and assumptions used in making
      the
      evaluation.





1  Loans
        include leases that meet the criteria for direct financing leases under SFAS
        No.
        13. Loans and lease financing receivables are, throughout the remainder of
        Management’s Discussion and Analysis, together referred to as
“loans.”


11




All
      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. If management determines that impairment in the value of
      an investment security is “other than temporary,” the related loss is recorded
      in the consolidated income statement. In order to determine whether such
      unrealized losses are other than temporary, management regularly reviews
      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 market value has been less than cost, and
      independent analysts’ opinions about circumstances that could affect the
      performance of the investment. 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.




***Results
      of Operations*********





**Overview**





Third
      quarter 2007 net income was $393,000, compared to net income for the third
      quarter of 2006 of $640,000, a decrease of 39%. Third quarter 2007 basic and
      diluted earnings per share was $0.15 compared to basic and diluted earnings
      per
      share of $0.25 for the third quarter of 2006. For the nine months ended
      September 30, 2007, Union National reported net income of $374,000, compared
      to
      net income of $1,882,000 reported for the nine months ended September 30, 2006.
      Basic and diluted earnings per share for the nine months ended September 30,
      2007 was $0.15, compared to basic and diluted earnings per share of $0.75 and
      $0.74, respectively, for the nine months ended September 30, 2006.





Net
      income as a percent of average stockholders' equity (return on average equity
      or
“ROE”), and net income as a percent of average realized stockholders’ equity,
      which excludes the impact of accumulated other comprehensive income (loss),
      were
      as follows on an annualized basis:





Three Months Ended September 30,
            
            Nine Months Ended September 30,2007
            
            2006
            
            2007
            
            2006ROE
            
            
            5.41
            %
            
            9.22
            %
            
            1.75
            %
            
            9.19
            %ROE
                (Realized Equity)
            
            
            5.35
            %
            
            8.69
            %
            
            1.74
            %
            
            8.85
            %





Accumulated
      other comprehensive income (loss) consists primarily of the amount of net
      unrealized losses on available-for-sale investment securities, net of tax.





For
      the
      nine months ended September 30, 2007, Union National’s taxable-equivalent net
      interest margin was 3.62%, an increase compared to taxable-equivalent net
      interest margin of 3.51% for the nine months ended September 30, 2006. Net
      interest margin for the three months ended September 30, 2007 was 3.34% on
      a
      taxable-equivalent basis, similar to the 3.35% for the third quarter of 2006.
      The year-to-date improvement in net interest margin reflects loan growth, a
      strategic shift toward funding through retail deposit growth versus wholesale
      funding, pricing improvement initiatives, the impacts of deleveraging of our
      balance sheet and an investment impairment charge (see Notes 6 and 7 to the
      Financial Statements, above).





Despite
      the year-to-date improvement in net interest margin, net income for the three
      months and nine months ended September 30, 2007 declined from net income
      recognized for the same periods in 2006. Results for 2007 reflect certain
      increased operating expenses related to several actions undertaken by Union
      National to improve efficiency and profitability, and to emphasize its core
      banking operation. In addition, 2007 earnings reflect certain non-interest
      income reductions and increased operating expenses resulting from the
      considerable slowdown in the residential mortgage industry, which negatively
      impacted Union National’s subsidiary, Home Team Financial, LLC (“Home Team”).
      Home Team generates a majority of its income through brokerage of residential
      mortgage loans. Other income from mortgage banking and brokerage activities
      decreased by $371,000 for the nine months ended September 30, 2007 as compared
      to the nine months ended September 30, 2006, with $262,000 of this reduction
      being realized in the third quarter of 2007. Even with significant operating
      expense reductions implemented at Home Team during the third quarter of 2007,
      the reduction in brokered residential mortgage loan volume has continued,
      resulting in Union National’s decision to cease operations at Home Team after
      October 2007. As a result of this decision, Union National recorded other
      expenses in the third quarter of 2007 of $326,000 related to the impairment
      of
      previously recorded goodwill and minority interest assets associated with Union
      National’s ownership of Home Team.




12




Previously
      disclosed actions undertaken by Union National that continue to negatively
      affect profitability through the third quarter of 2007 include the following
      (amounts reflect pre-tax):





·
            Restructuring
                charges of $717,000 consisting of severance and related benefits
                resulting
                from staff reductions that were completed during March and April
                to adjust
                the size and makeup of staff to be more efficient and
                competitive;





·
            An
                increase in professional fees expense of $617,000 for the nine months
                ended September 30, 2007, and $97,000 for the three months ended
                September
                30, 2007, as compared to the same periods of 2006, primarily incurred
                in
                connection with regulatory matters, legal services regarding employee
                severance, and the previously announced engagement of the Snodgrass
                consulting firm to undertake a profit enhancement
                project;





·
            A
                loss of $450,000 recognized during the second quarter for an
                other-than-temporary impairment in the value of an available-for-sale
                investment debt security;





·
            Net
                losses on the sale of approximately $67 million of investment securities,
                and prepayment penalties on debt, amounting to $519,000 and $31,000,
                respectively, during the first quarter, in conjunction with the previously
                announced deleveraging strategy;





·
            A
                charge of $259,000 for a commitment on a parcel of real estate which
                was
                to be used for a future retail branch site. Management has decided
                not to
                pursue the expansion at this time.





**Outlook**





The
      economy in the Bank’s market may be positively or negatively impacted by
      national events and may be subject to overall national economic trends. The
      overall effects of economic conditions, as well as other factors, can be seen
      by
      a mild lessening of certain borrowers' financial strength, a decline in the
      housing market and residential mortgage activity, and declining interest rates.
      We are monitoring these general and specific trends closely. Their various
      effects are discussed later under the section on Loan Quality and Credit Risk.
      Due to adverse conditions in the housing market that reduced the number of
      loan
      originations, and the willingness of investors to purchase loans originated
      by
      Union National’s Home Team Financial subsidiary, management decided **** to
      cease
      operations at Home Team after October 2007 (as discussed in the “Overview”
section, above).





We
      expect
      continued growth in loans and deposits for 2007, driven largely by our continued
      emphasis on developing new commercial business relationships and promoting
      our
      retail deposit products through marketing and pricing initiatives. We expect
      this growth to have a positive impact on net interest income and other operating
      income for the remainder of 2007.





Our
      engagement of the Snodgrass consulting firm relative to the profit enhancement
      project is nearing completion. Snodgrass utilizes a unique diagnostic
      methodology to aggressively locate opportunities for profit improvement, coupled
      with a detailed implementation plan and change management techniques to build
      an
      ongoing process for innovation and efficiency with sustainable results. This
      engagement contributed to higher professional fees expenses during the first
      nine months of 2007. We believe this engagement’s costs will be more than offset
      by implementing the identified profit improvement opportunities.




On
      June
      20, 2007, the Bank entered into a Memorandum of Understanding ("MOU") with
      the
      Comptroller of the Currency
      ("OCC"), as described in Note 8 to the Financial Statements. We believe that
      the
      MOU will have no material impact on our operating results or financial condition
      and that the MOU will not constrain our business. We believe we have already
      made substantial progress in satisfying the MOU, and have complied with the
      terms of the MOU through the third quarter of 2007. We are committed to
      addressing and resolving the issues presented in the MOU.




13




Union
      National is analyzing various capital-enhancing options including but not
      limited to issuance of common stock; however, no option has been chosen as
      of
      the date of this report.




**Net
      Interest Income/Funding Sources**





Net
      interest income is the amount by which interest income on loans and investments
      exceeds interest incurred on deposits and borrowings. Net interest income is
      our
      primary source of revenue. 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%.





During
      the three previous calendar years, we experienced growth in assets that outpaced
      growth in deposits, requiring the increased use of alternative sources of
      funding. As of December 31, 2006, approximately $130 million of total assets
      consisted of available-for-sale investment securities, while Union National
      also
      had approximately $117 million of higher-cost borrowings from the Federal Home
      Loan Bank of Pittsburgh (“FHLB”). During January 2007, we deleveraged our
      balance sheet by reducing the size of our investment portfolio and using the
      proceeds to pay down certain FHLB debt and other short-term borrowings (see
      Note
      6 to the Consolidated Financial Statements, above). As of September 30, 2007,
      our outstanding long-term FHLB advances were $68,816,000 with an average
      interest rate of 4.90%, as compared to borrowings of $117,571,000 and
      $125,478,000 with average interest rates of 5.03% and 4.94% as of December
      31
      and September 30, 2006, respectively. The long-term debt has maturities that
      range from October 2008 to December 2013. Prior to the deleveraging, we had
      also
      obtained funding through the use of brokered CDs, which can be obtained by
      bidding for funds through various sources. As of September 30, 2007 and December
      31, 2006, we had $25,319,000 and $31,975,000 in brokered CDs outstanding with
      average interest rates of 5.05% and 4.96%, respectively, compared to $26,964,000
      with an average interest rate of 4.93% as of September 30, 2006.





During
      2004 and 2003, we obtained net funding of $11,000,000 from the issuance of
      junior subordinated debentures to trust subsidiaries that then issued trust
      capital securities. In December 2003, $8,000,000 of net funding was obtained
      through the issuance of floating-rate debentures that provide for quarterly
      distributions at a variable annual coupon rate that is reset quarterly, based
      on
      three-month London Interbank Offered Rate (“LIBOR”) plus 2.85%. The coupon rate
      was 8.21% at
      September 30, 2007, 8.23% at December 31, 2006, and 8.34% at September 30,
      2006.
      In October 2004, $3,000,000 of net funding was obtained through the issuance
      of
      debentures that are at a fixed rate of 5.28% for an initial period through
      November 2007, and then at an annual coupon rate, reset quarterly, based on
      three-month LIBOR plus 2.0%. On July 28, 2006, the Bank issued $6,000,000 of
      subordinated debentures with a five-year initial fixed rate of 7.17% that will
      remain in effect through July 2011, and then an annual coupon rate, reset
      quarterly, based on three-month LIBOR plus 1.65%. All of the above debentures
      are callable at our option five years after issuance.





The
      terms
      and amounts of outstanding FHLB borrowings, brokered CDs, and junior
      subordinated debentures, when evaluated with our overall balance sheet
      structure, are within Union National’s interest rate risk policies.





For
      the
      nine months ended September 30, 2007, Union National’s taxable-equivalent net
      interest margin was 3.62%, an increase compared to taxable-equivalent net
      interest margin of 3.51% for the nine months ended September 30, 2006. Net
      interest margin for the three months ended September 30, 2007 was 3.34% on
      a
      taxable-equivalent basis, similar to the 3.35% for the third quarter of 2006.
      The year-to-date improvement in net interest margin reflects loan growth, a
      strategic shift toward funding through retail deposit growth versus wholesale
      funding, loan and deposit pricing improvement initiatives, and the impact of
      deleveraging which involved using proceeds from the sale of investment
      securities to reduce higher-cost borrowings. The net effect of the above factors
      was an increase of $745,000 on net interest income for the nine months ended
      September 30, 2007 when compared to the same period of 2006.




14




For
      the
      remainder of 2007, we anticipate that our net interest margin percentage will
      continue to show modest improvement over prior year levels. Current year
      expected growth in earning assets and the impact of the shift from wholesale
      funding to core deposit growth should improve our net interest margin for 2007,
      as will the positive effects of changes in the mix of earning assets and funding
      sources described above. Our net interest income may be impacted by future
      actions of the Federal Reserve Bank.





**Provision
      for Loan Losses**





The
      loan
      loss provision is an estimated expense charged to earnings to provide for losses
      attributable to uncollectible loans, based on our analysis of the adequacy
      of
      the allowance for loan losses. For the three months ended September 30, 2007,
      the provision for loan losses was $230,000, as compared to $104,000 during
      the
      three months ended September 30, 2006. For the nine-month periods ended
      September 30, 2007 and 2006, the provision for loan losses was $707,000 and
      $441,000, respectively. The higher provision in 2007 is attributable to both
      loan growth and increased delinquencies in the Bank’s lease portfolio.
      Management may need to make future adjustments to the allowance, and
      consequently the provision for loan 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 loan losses as compared to the
      balance of outstanding loans. See the discussion following on Loans, Credit
      Quality and Credit Risk, and the Allowance for Loan Losses.




**Other
      Operating Income**





Other
      Operating Income was $1,748,000, a decrease of $214,000 or 10.9% during the
      third quarter of 2007 versus the third quarter of 2006. For the nine months
      ended September 30, 2007, Other Operating Income decreased by $426,000 or 7.2%
      to $5,526,000 as compared to the first nine months of 2006. Increases
      (decreases) in the components of Other Operating Income when comparing the
      three-month and nine-month periods ended September 30, 2007 and 2006, are as
      follows:





Three Months Ended
            
            Nine Months Ended(Dollars
                in thousands)
            
            
            Sept. 30, 2007 vs. 2006
            
            
            Sept. 30, 2007 vs. 2006Income
                from Fiduciary Activities
            
            $
            1
            
            $
            68Service
                Charges on Deposit Accounts
            
            
            51
            
            
            112Other
                Service Charges, Commissions, and Fees
            
            
            19
            
            
            92Alternative
                Investment Sales Commissions
            
            
            65
            
            
            128Net
                Investment Securities Gains (Losses)
            
            
            (24
            )
            
            13Impairment
                Charge on Investment Security
            
            
            -
            
            
            (450
            )Mortgage
                Banking/Brokerage Activities
            
            
            (262
            )
            
            (371
            )Title
                Insurance/Settlement Income
            
            
            (70
            )
            
            (137
            )Earnings
                from Bank-Owned Life Insurance
            
            
            9
            
            
            37Other
            
            
            (3
            )
            
            82Total
                Decrease in Other Operating Income
            
            $
            (214
            )
            $
            (426
            )





As
      previously discussed, the considerable slowdown in the residential mortgage
      industry negatively impacted Union National’s Home Team Financial subsidiary,
      contributing to a reduction in other income from mortgage banking and brokerage
      activities of $371,000 for the nine months ended September 30, 2007 as compared
      to the nine months ended September 30, 2006, with $262,000 of this reduction
      being realized in the third quarter of 2007. The residential mortgage volume
      slowdown also contributed to a reduction in other income from title
      insurance/settlement activities of $137,000 for the nine months ended September
      30, 2007 as compared to the nine months ended September 30, 2006, with $70,000
      of this reduction being realized in the third quarter of 2007.




During
      the second quarter of 2007, we realized gains of $597,000 on the liquidation
      of
      our portfolio of municipal securities. These gains offset net losses from sales
      of investment securities of $519,000 incurred during the first quarter of 2007
      related to the deleveraging transaction as described in Note 6 to the
      Consolidated Financial Statements. We also recognized a pre-tax loss of $450,000
      during the second quarter of 2007 for an other-than-temporary impairment in
      the
      value of an available-for-sale investment debt security, as described in Note
      7
      to the Consolidated Financial Statements.





15





**Other
      Operating Expenses**





Other
      Operating Expenses totaled $4,895,000, a modest increase of $61,000 or 1.3%
      during the third quarter of 2007 versus the third quarter of 2006. For the
      nine
      months ended September 30, 2007, Other Operating Expenses increased by
      $1,912,000 or 13.2% to $16,409,000 as compared to the nine months ended
      September 30, 2006. Increases (decreases) in the components of Other Operating
      Expenses when comparing the three-month and nine-month periods ended September
      30, 2007 and 2006, are as follows:





Three Months Ended
            
            Nine Months Ended(Dollars
                in thousands)
            
            
            Sept. 30, 2007 vs. 2006
            
            
            Sept. 30, 2007 vs. 2006Salaries
                and Wages
            
            $
            (229
            )
            $
            47Retirement
                Plan and Other Employee Benefits
            
            
            (59
            )
            
            (55
            )Net
                Occupancy
            
            
            71
            
            
            663Furniture
                and Equipment
            
            
            28
            
            
            152Professional
                Fees
            
            
            97
            
            
            617Data
                Processing Services
            
            
            10
            
            
            38Pennsylvania
                Shares Tax
            
            
            (86
            )
            
            (38
            )Advertising
                and Marketing
            
            
            (175
            )
            
            (455
            )ATM
                Processing
            
            
            (19
            )
            
            (47
            )Minority
                Interest in Losses of Subsidiaries
            
            
            (62
            )
            
            (259
            )Restructuring
                Charge
            
            
            -
            
            
            717Other
                Expenses
            
            
            485
            
            
            532Total
                Increase in Other Operating Expenses
            
            $
            61
            
            $
            1,912





Net
      Occupancy increased primarily due to a charge of $259,000 for a commitment
      on a parcel of real estate described in the “Overview” section above. Additionally, occupancy expense
      increases, and furniture and equipment expense increases, resulted as Union
      National’s Lausch Lane office facility and two Gold Café retail branch offices
      were occupied for the entire nine months ended September 30, 2007. These
      facilities were first occupied during 2006, but not for the entire nine months
      ended September 30, 2006. Advertising and Marketing expenses were higher in
      2006
      primarily due to branding costs related to the two Gold Café retail branch
      offices.





Professional
      fees increased primarily in connection with legal services related to
      restructuring and regulatory matters, and consulting costs related to the
      Snodgrass engagement as described in the “Outlook” section above.





Minority
      Interest in Losses of Subsidiaries reflect minority owners’ interest in the
      losses of Union National’s Home Team Financial subsidiary, and Home Team’s
      subsidiary TA of Lancaster, LLC. These losses have increased due to the
      significant slow down in Home Team’s residential mortgage brokerage activities
      as previously discussed in the “Overview” section above.





The
      Restructuring Charge, as described in Note 6 to the Consolidated Financial
      Statements, consisted of severance and related costs.





Other
      expenses increased primarily due to management’s decision to cease operations at
      Home Team. As result of this decision, Union National recorded other expenses
      in
      the third quarter of 2007 of $326,000 related to the impairment of previously
      recorded goodwill and minority interest assets associated with Union National’s
      ownership of Home Team.





16


**Income
      Taxes**





The
      provision for income taxes was $117,000 and $46,000 for the three months ended
      September 30, 2007 and 2006, respectively. For the nine months ended September
      30, 2007, Union National recorded a benefit from income taxes of $267,000 as
      compared to a provision of $84,000 the same period of last year. Union
      National’s net tax benefit for the first nine months of 2007 relates to (1)
      reduced net income from expenses incurred in connection with the deleveraging,
      restructuring, professional fees expenses, losses at Home Team, the impairment
      charge on an investment security, and the recognition of a commitment on a parcel of real estate, and (2) the offsetting tax
      benefits generated from tax-exempt earnings on investments, loans and bank-owned
      life insurance, and the impact of tax credits. These same tax benefits
      contributed to the relatively low tax provision for the first nine months of
      2006. The realization of the resulting deferred tax assets is dependent on
      future earnings, which we anticipate will be adequate to fully utilize deferred
      tax assets.




***Financial
      Condition***





**Loans,
      Credit Quality and Credit Risk**





During
      the third quarter of 2007, overall loan balances increased by $4,414,000 over
      loans outstanding at the preceding quarter-end, equating to an annual loan
      growth rate of 4.92%. This growth primarily resulted from an increase in
      commercial real estate loans and leases. The annualized rate of loan growth
      for
      the third quarter of 2007 was below the annualized loan growth rate of 10.2%
      that we experienced during the first six months of 2007.





Other
      than as described herein, we do not believe there are any trends, events or
      uncertainties affecting loans that are reasonably expected to have a material
      impact on future results of operations, liquidity or capital resources. Further,
      based on known information, we believe 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. We continue to
      closely monitor these borrowers' financial strength. At September 30, 2007,
      total nonperforming loans amounted to $3,217,000, or 0.9% of net loans, as
      compared to a level of $2,533,000, or 0.7%, at December 31, 2006. Historically,
      the percentage of nonperforming loans to net loans as of December 31 for the
      previous five-year period was an average of 0.7%.





Schedule
      of Nonperforming Assets:





(Dollars
                in thousands)
            
            September 30, 2007
            
            December 31, 2006Nonaccruing
                Loans
            
            $
            3,121
            
            $
            2,280Accruing
                Loans–90
                days or more past due
            
            
            96
            
            
            253Total
                Nonperforming Loans
            
            
            3,217
            
            
            2,533Foreclosed
                Real Estate
            
            
            -
            
            
            186Foreclosed
                Purchased Loans
            
            
            106
            
            
            134Total
                Nonperforming Assets
            
            $
            3,323
            
            $
            2,853Nonperforming
                  Loans as a % of Net Loans
            
            
            0.9
            %
            
            0.7
            %Allowance
                  for Loan Losses as a % of Nonperforming
                  Loans
            
            
            113
            %
            
            121
            %




17




**Allowance
      for Loan Losses**





We
      maintain the allowance for loan losses at a level that we believe adequate
      to
      absorb estimated probable loan losses. We are responsible for the adequacy
      of
      the allowance for loan losses, which is formally reviewed on a quarterly basis.
      The allowance is increased by provisions charged to operating expense and
      reduced by net charge-offs. Our evaluation of the adequacy of the allowance
      is
      based on our past loan 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 factors. While we use available information to make such
      evaluations, future adjustments to the allowance may be necessary if economic
      conditions differ substantially from the assumptions we used in making the
      evaluation. In addition, various regulatory agencies, as an integral part of
      their examination process, review the Bank's allowance for loan losses. Such
      agencies may require us to recognize additions to the allowance based on their
      judgment of information available to them at the time of their examination.
      We
      determined that no adjustment to the allowance for loan losses was necessary
      as
      a result of the Office of the Comptroller of the Currency’s (“OCC”) most recent
      examination. We believe, based on information currently available, that the
      current allowance for loan losses of $3,651,000 is adequate to meet potential
      loan losses. An analysis of Allowance for Loan Losses follows:




Three
                  Months Ended
                Sept.
                  30,
              
              Nine
                  Months Ended
                Sept.
                  30,(Dollars
                  in thousands)
              
              
              2007
              
              
              2006
              
              
              2007
              
              
              2006Average
                  Total Loans Outstanding (Net of Unearned Income)
              
              $
              362,508
              
              $
              326,227
              
              $
              354,008
              
              $
              312,205Allowance
                  for Loan Losses, Beginning of Period
              
              $
              3,449
              
              $
              2,817
              
              $
              3,070
              
              $
              2,675Loans
                  Charged Off During Period
              
              
              29
              
              
              10
              
              
              128
              
              
              255Recoveries
                  of Loans Previously Charged Off
              
              
              (1
              )
              
              (3
              )
              
              (2
              )
              
              (53
              )Net
                  Loans Charged Off (Recovered)
              
              
              28
              
              
              7
              
              
              126
              
              
              202Addition
                  to Provision for Loan Losses Charged to Operations
              
              
              230
              
              
              104
              
              
              707
              
              
              441Allowance
                  for Loan Losses, End of Period
              
              $
              3,651
              
              $
              2,914
              
              $
              3,651
              
              $
              2,914Ratio
                  of Net Loans Charged Off (Recovered) to Average Loans Outstanding
                  (Annualized)
              
              
              0.03
              %
              
              0.01
              %
              
              0.05
              %
              
              0.09
              %Ratio
                  of Allowance for Loan Losses to Net Loans at End of Period
              
              
              
              
              
              
              
              
              1.01
              %
              
              0.89
              %





**Investment
      Securities**





In
      addition to the credit risk present in the loan portfolio, we also have credit
      risk associated with our investment holdings. As of September 30, 2007, Union
      National had a portfolio of investment securities with a market value of
      $71,108,000. The portfolio is comprised primarily of debt securities with a
      market value of $70,589,000 including government agencies, mortgage-backed
      securities, collateralized mortgage obligations, and corporate securities.
      The
      value of these debt securities included aggregated unrealized losses, pre-tax,
      of $579,000 that amounted to 0.8% of the amortized cost basis of the debt
      securities. One corporate debt security in this portfolio with an amortized
      cost
      of $1,000,000 was determined by management to have an “other than temporary”
impairment. In order to determine that the unrealized loss on this security
      was
      other than temporary, management primarily considered both the amount, and
      the
      length of time by which the market value of the security had been less than
      cost. In the second quarter of 2007, management recorded a separate impairment
      charge of $450,000 in the consolidated statement of income related to this
      security. Based on our assessment of the total investment portfolio as of
      September 30, 2007, we did not hold any other security that had a fair value
      decline that is currently expected to be other than temporary. Consequently,
      any
      declines in other securities’ fair values below amortized cost have been
      provided for in other comprehensive income (loss). In addition, there are no
      significant concentrations of investments (greater than 10% of stockholders’
equity) in any individual security issuer.


18


**Liquidity**





Our
      objective is to maintain adequate liquidity to meet, at a reasonable cost,
      funding needs including providing for credit needs of borrowers, providing
      for
      depositor withdrawals, and funding corporate operations at a reasonable cost.
      We
      also maintain contingent liquidity plans to meet unanticipated funding needs.
      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;
 ·
              Correspondent
                  bank borrowings on various credit lines and borrowing capacity
                  available
                  from the FHLB; and
 ·
              Acquisition
                  of wholesale and brokered certificates of deposit
                  (“CDs”).





We
      believe that our core deposits are fairly stable even in periods of changing
      interest rates. Liquidity management is governed by policies and is measured
      on
      a quarterly basis. These measurements indicate that liquidity generally remains
      stable and exceeds our minimum defined levels. There are no known trends, except
      the anticipated loan and deposit growth previously discussed in the Results
      of
      Operations section, or any 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. We are analyzing various
      capital-enhancing options including but not limited to issuance of common stock;
      however, no option has been chosen as of the date of this report.





During
      January 2007, we deleveraged our balance sheet by reducing the size of our
      investment portfolio by $66 million while paying down FHLB debt and other
      short-term borrowings, thereby reducing our overall capital needs and improving
      our interest rate risk profile. See Note 6 to the Consolidated Financial
      Statements, above. We expect the deleveraging transaction to have a positive
      impact on our net interest margin for 2007 and future periods.





We
      have
      obtained funding through FHLB advances and through the use of brokered CDs,
      as
      well as the issuance of junior subordinated debentures. These items are
      described under Net Interest Income/Funding Sources, above.





**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 $127,218,000 at
      September 30, 2007 as compared to $132,977,000 at December 31, 2006. Total
      standby letters of credit amounted to $8,563,000 at September 30, 2007 as
      compared to $8,694,000 at December 31, 2006.





In
      addition, in the conduct 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. Formerly, the majority of this contract expired
      in
      November 2008; however, the contract renegotiation resulted in a new maturity
      date of November 2013. Any early termination will require the payment of a
      substantial penalty. The renegotiation and extension of this contract will
      result in a substantial savings of approximately $100,000 in data processing
      and
      ATM processing expenses for 2007 as compared to the costs we would have incurred
      without the renegotiation. Except as noted above, there has been no material
      change in contracts for services since December 2006.





**Stockholders'
      Equity**





Union
      National and the Bank maintain capital ratios that are above the minimum total
      capital levels required by federal regulatory authorities. There are no other
      known trends or uncertainties, including regulatory matters, that are expected
      to have a material adverse impact on our capital resources for 2007. We are
      analyzing various capital-enhancing options including but not limited to
      issuance of common stock; however, no option has been chosen as of the date
      of
      this report.


19




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 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 (set forth below)
      of Tier 1 capital to average assets and of total capital (as defined in the
      regulations) to risk-weighted assets. As of September 30, 2007, Union National
      and the Bank meet all capital adequacy requirements to which they are subject,
      and the Bank is considered “well-capitalized” under the regulatory framework for
      prompt corrective action. There are no conditions or events since that
      notification that management believes have changed the Bank’s
      category.




Union
      National and the Bank maintained the following regulatory capital levels and
      leverage and risk-based capital ratios as of September 30, 2007, and December
      31, 2006, as follows (dollars in thousands):





September
                30, 2007
            
            December
                31, 2006Amount
            
            %
            
            Amount
            
            %**Union
                National Financial Corporation**Leverage
                Ratio:Tier
                I Capital to Average Total Assets
            
            $
            38,622
            
            
            8.00
            %
            $
            38,091
            
            
            7.39
            %Minimum
                Required for Capital Adequacy Purposes
            
            
            19,319
            
            
            4.00
            
            
            20,611
            
            
            4.00Risk-Based
                Capital Ratios:Tier
                I Capital Ratio –Actual
            
            
            38,622
            
            
            8.96
            
            
            38,091
            
            
            8.97Minimum
                Required for Capital Adequacy Purposes
            
            
            17,247
            
            
            4.00
            
            
            16,991
            
            
            4.00Total
                Capital Ratio –Actual
            
            
            55,681
            
            
            12.91
            
            
            54,786
            
            
            12.90Minimum
                Required for Capital Adequacy Purposes
            
            
            34,494
            
            
            8.00
            
            
            33,983
            
            
            8.00





September
                30, 2007
            
            December
                31, 2006Amount
            
            %
            
            Amount
            
            %**Union
                National Community Bank**Leverage
                Ratio:Tier
                I Capital to Average Total Assets
            
            $
            38,857
            
            
            8.05
            %
            $
            38,048
            
            
            7.45
            %Minimum
                Required for Capital Adequacy Purposes
            
            
            19,319
            
            
            4.00
            
            
            20,611
            
            
            4.00To
                Be Well-Capitalized Under Prompt CorrectiveAction
                Provisions
            
            
            24,148
            
            
            5.00
            
            
            25,764
            
            
            5.00Risk-Based
                Capital Ratios:Tier
                I Capital Ratio –Actual
            
            
            38,857
            
            
            9.04
            
            
            38,048
            
            
            9.08Minimum
                Required for Capital Adequacy Purposes
            
            
            17,192
            
            
            4.00
            
            
            16,925
            
            
            4.00To
                Be Well-Capitalized Under Prompt CorrectiveAction
                Provisions
            
            
            25,789
            
            
            6.00
            
            
            25,387
            
            
            6.00Total
                Capital Ratio –Actual
            
            
            48,508
            
            
            11.29
            
            
            47,473
            
            
            11.22Minimum
                Required for Capital Adequacy Purposes
            
            
            34,385
            
            
            8.00
            
            
            33,849
            
            
            8.00To
                Be Well-Capitalized Under Prompt CorrectiveAction
                Provisions
            
            
            42,981
            
            
            10.00
            
            
            42,312
            
            
            10.00




20





Additionally,
      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 September 30, 2007, this limitation amounted
      to approximately $4,851,000. These regulations also require that any such
      investment, loan, extension of credit or advance be secured by securities having
      a market value in excess of the amount thereof.





Included
      in Tier 1 regulatory capital of Union National Financial Corporation detailed
      above is $9,660,000 of trust capital securities issued through Union National
      Capital Trust I and Union National Capital Trust II, wholly-owned subsidiaries
      of Union National. The balance of the trust capital securities, $1,340,000,
      is
      included in Tier II regulatory capital of Union National Financial Corporation
      above. Additionally, included in Tier II regulatory capital of the Bank and
      Union National Financial Corporation 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
      Activity***





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.
      Specifically, 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.





On
      June
      20, 2007, the Bank entered into an MOU with the OCC. Specifically, the MOU
      requires the Bank to (1) implement a three-year strategic plan in accordance
      with specific guidelines set forth in the MOU, (2) develop and implement a
      three-year capital plan, in accordance with specific guidelines set forth in
      the
      MOU, including a dividend policy for the payment of dividends provided the
      Bank
      is in compliance with the capital plan, and applicable laws and regulations,
      (3)
      review and revise a written program to improve the Bank's loan portfolio
      management, (4) review and revise the Bank's funds management reports to ensure
      that they reflect current and projected funding needs, (5) develop and implement
      a risk based audit program to determine weaknesses or deficiencies in the Bank's
      consumer compliance program, (6) ensure the Bank's interest rate risk ("IRR")
      measurement tool or model conforms to OCC guidelines and, if necessary, develop
      an action plan to address the need for a more acceptable IRR measurement model,
      and (7) furnish written quarterly progress reports to the OCC detailing the
      form
      and manner of actions taken to comply with the MOU. Each provision of the MOU
      is
      subject to OCC approval, non-objection and/or review.





Management
      has fully complied with the terms of the MOU and has sent to the OCC the
      documentation and progress reports as required under the MOU to be submitted
      through the third quarter of 2007. We believe that the MOU will have no material
      impact on our operating results or financial condition and that the MOU will
      not
      constrain our business. We believe we have already made substantial progress
      in
      satisfying the MOU, and we are committed to addressing and resolving the
      issues.





The
      Sarbanes-Oxley Act, enacted in July 2002, represents a comprehensive revision
      of
      laws affecting corporate governance, accounting obligations and corporate
      reporting. Many of the provisions of this act have already been implemented
      by
      Union National and Union National will need to comply with the provisions of
      Section 404 of the Sarbanes-Oxley Act during 2007. In accordance with Section
      404, we will be required to report on our internal control over financial
      reporting as of December 31, 2007. To allow for proper reporting on the internal
      control over financial reporting, we are in the process of identifying,
      documenting and testing key controls over the financial reporting process.
      There
      will be significant external and internal costs associated with complying with
      the provisions of Section 404. We currently expect an increase in outside
      professional fees of approximately $125,000 pre-tax for complying with Section
      404 in 2007.





21




The
      Federal Deposit Insurance Reform Act of 2005 (“the Act”) allows eligible insured
      depository institutions to share in a one-time assessment credit, which we
      estimate to be approximately $228,000 for the Bank. In addition, the Act amends
      its regulations to create a new risk differentiation system, to establish a
      new
      base assessment rate schedule, and to set assessment rates effective January
      1,
      2007. Based on the Act’s new regulations and the resulting available credit
      amount, we currently expect an immaterial impact on our results of operations
      for 2007 as compared to 2006.





The
      business of Union National is affected by the state of the financial services
      industry in general. The last Community Reinvestment Act performance evaluation
      by the OCC resulted in a “satisfactory” rating of the Bank’s record of meeting
      the credit needs of its entire community.


22


**ITEM
      3**–**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





***Market
      Risk - Interest Rate Risk***





As
      a
      financial institution, our primary component of market risk is interest rate
      volatility. Fluctuations in interest rates will ultimately impact the level
      of
      income and expense recorded on a large portion of our assets and liabilities.
      The nature of our current operations is such that we are not subject to foreign
      currency exchange or commodity price risk. We do not own any trading assets.





The
      objectives of interest rate risk management are to maintain or increase net
      interest income over a broad range of market interest rate movements. The Asset
      and Liability Management Committee is responsible for managing interest rate
      risk using policies approved by Union National’s Board of Directors. We manage
      interest rate risk by changing the mix or repricing characteristics of our
      investment securities portfolio and borrowings from the FHLB and by the
      promotion or development of specific loan and deposit products. We retain an
      outside consulting group to assist in monitoring our interest rate risk using
      a
      net interest income simulation model on a quarterly basis. The simulation model
      measures the sensitivity of future net interest income to hypothetical changes
      in market interest rates. In an effort to assess market risk, we utilize the
      simulation model to determine the effect of gradual increases or decreases
      in
      market interest rates on net interest income and net income. The aforementioned
      assumptions are revised based on defined scenarios of assumed speed and
      direction changes of market interest rates. These assumptions are inherently
      uncertain due to the timing, magnitude and frequency of rate changes and changes
      in market conditions, as well as management strategies, among other factors.
      Because it is difficult to accurately quantify into assumptions the reaction
      of
      depositors and borrowers to market interest rate changes, the actual net
      interest income and net income results may differ from simulated results. While
      assumptions are developed based upon current economic and local market
      conditions, management cannot make any assurances as to the predictive nature
      of
      these assumptions.





The
      simulation model assumes a hypothetical gradual shift in market interest rates
      over a twelve-month period. This is based on a review of historical changes
      in
      market interest rates and the level and curve of current interest rates. The
      simulated results represent the hypothetical effects to our net interest income
      and net income. Projections for loan and deposit growth were ignored in the
      simulation model. The simulation model includes all of our earning assets and
      interest-bearing liabilities and assumes a parallel and prorated shift in
      interest rates over a twelve-month period. The results of the simulation model
      could change significantly if there was not a parallel shift in interest rates,
      therefore causing a change in the assumed shape of the interest rate yield
      curve.





The
      simulation model currently indicates that a hypothetical two-percent general
      decline in prevailing market interest rates over a one-year period would cause
      the Bank's net interest income over the next twelve months to decline by
      approximately 2% as compared to the constant rate scenario. In addition, a
      hypothetical two-percent general rise in rates would have an insignificant
      effect on the Bank's net interest income over the next twelve months. These
      computations do not contemplate any actions management or the Asset Liability
      Management Committee could undertake in response to changes in market conditions
      or market interest rates.




We
      have
      been managing our interest rate risk position in 2007 by the following:


·
            Deleveraging
                our balance sheet by selling investment securities and using the
                proceeds
                to pay down borrowings;


·
            Managing
                the use of adjustable- and floating-rate loans in comparison to fixed-rate
                loans for new or refinanced commercial and agricultural
                loans;


·
            Managing
                and expanding the Bank's core deposit base including deposits obtained
                in
                our commercial cash management programs and premium money market
                accounts;


·
            Limiting
                our use of fixed-rate and floating-rate advances from the
                FHLB;


·
            Gradually
                repositioning our investment portfolio, through sales and purchase
                activities, to have a lower interest rate risk profile, and to establish
                a
                shorter overall duration.





The
      above
      strategies and actions impact interest rate risk and are all included in our
      quarterly simulation models in order to determine future asset and liability
      management strategies. See related discussions in the section on Net Interest
      Income/Funding Sources, above.


23





**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 the company 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 September 30, 2007, Union National’s Chief
      Executive Officer and Chief Financial Officer concluded that the disclosure
      controls and procedures were adequate.





***Changes
      in Internal Controls***





During
      the three months ended September 30, 2007, there were no changes in our internal
      controls over financial reporting that have materially affected, or are
      reasonable likely to materially affect, these controls.





**ITEM
      4T**–**CONTROLS AND PROCEDURES**





The
      information set forth in Item 4 is incorporated herein by
      reference.


24


**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. Other than
      the
      MOU with the OCC and the effects thereof, as discussed earlier on page 8 and
      page 21 of this report, no material proceedings are pending or are known to
      be
      threatened or contemplated against Union National and the Bank by government
      authorities.





**ITEM
      1A**–**RISK FACTORS**





During
      the nine months ended September 30, 2007 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, 2006.





**ITEM
      2**–**UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





None.





**ITEM
      3**–**DEFAULTS UPON SENIOR SECURITIES**





None.





**ITEM
      4**–**SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None.





**ITEM
      5**–**OTHER INFORMATION**





None.





**ITEM
      6 - EXHIBITS**





(a)
            Exhibits





Exhibit
      No. 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





Exhibit
      No. 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





Exhibit
      No. 32 – Certification of Principal Executive Officer and Principal Financial
      Officer Pursuant to 18 U.S.C. Section 1350 as Added by Section 906 of
      the
      Sarbanes-Oxley Act of 2002


25


**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)By
            /s/
                Mark D. GainerMark
                D. Gainer
                Chairman/President/Chief
                  Executive Officer
                  (Principal
                    Executive Officer)Date:
                November 14, 2007







By
            /s/
                Michael D. PeduzziMichael
                D. Peduzzi
                Senior
                  Vice President, Chief Financial Officer
                (Principal
                    Financial and
                  Accounting
                    Officer)Date:
                November 14, 2007




26